An Empty Revolution
The Unfulfilled Promises of Hugo Chávez
By Francisco Rodríguez
From Foreign Affairs , March/April 2008
Summary: Even critics of Hugo Chávez tend to concede that he has made
helping the poor his top priority. But in fact, Chávez's government has
not done any more to fight poverty than past Venezuelan governments, and
his much-heralded social programs have had little effect. A close look at
the evidence reveals just how much Chávez's "revolution" has hurt
Venezuela's economy -- and that the poor are hurting most of all.
FRANCISCO RODRÍGUEZ, Assistant Professor of Economics and Latin American
Studies at Wesleyan University, was Chief Economist of the Venezuelan
National Assembly from 2000 to 2004.
On December 2, when Venezuelans delivered President Hugo Chávez his first
electoral defeat in nine years, most analysts were taken by surprise.
According to official results, 50.7 percent of voters rejected Chávez's
proposed constitutional reform, which would have expanded executive
power, gotten rid of presidential term limits, and paved the way for the
construction of a "socialist" economy. It was a major reversal for a
president who just a year earlier had won a second six-year term with
62.8 percent of the vote, and commentators scrambled to piece together an
explanation. They pointed to idiosyncratic factors, such as the birth of
a new student movement and the defection of powerful groups from Chávez's
coalition. But few went so far as to challenge the conventional wisdom
about how Chávez has managed to stay in power for so long.
Although opinions differ on whether Chávez's rule should be characterized
as authoritarian or democratic, just about everyone appears to agree
that, in contrast to his predecessors, Chávez has made the welfare of the
Venezuelan poor his top priority. His government, the thinking goes, has
provided subsidized food to low-income families, redistributed land and
wealth, and poured money from Venezuela's booming oil industry into
health and education programs. It should not be surprising, then, that in
a country where politics was long dominated by rich elites, he has earned
the lasting sup****t of the Venezuelan poor.
That story line may be compelling to many who are rightly outraged by
Latin America's deep social and economic inequalities. Unfortunately, it
is wrong. Neither official statistics nor independent estimates show any
evidence that Chávez has reoriented state priorities to benefit the poor.
Most health and human development indicators have shown no significant
improvement beyond that which is normal in the midst of an oil boom.
Indeed, some have deteriorated worryingly, and official estimates
indicate that income inequality has increased. The "Chávez is good for
the poor" hypothesis is inconsistent with the facts.
My skepticism of this notion began during my tenure as chief economist of
the Venezuelan National Assembly. In September 2000, I left American
academia to take over a research team with functions broadly similar to
those of the U.S. Congressional Budget Office. I had high expectations
for Chávez's government and was excited at the possibility of working in
an administration that promised to focus on fighting poverty and
inequality. But I quickly discovered how large the gap was between the
government's rhetoric and the reality of its political priorities.
Soon after joining the National Assembly, I clashed with the
administration over underfunding of the Consolidated Social Fund (known
by its Spanish acronym FUS), which had been created by Chávez to
coordinate the distribution of resources to antipoverty programs. The law
establi****ng the fund included a special provision to ensure that it
would benefit from rising oil revenues. But when oil revenues started to
go up, the Finance Ministry ignored the provision, allocating to the fund
in the 2001 budget only $295 million -- 15 percent less than the previous
year and less than a third of the legally mandated $1.1 billion. When my
office pointed out this inconsistency, the Finance Ministry came up with
the creative accounting gimmick of rearranging the law so that programs
not coordinated by the FUS would nevertheless appear to be receiving
resources from it. The effect was to direct resources away from the poor
even as oil profits were surging. (Hard-liners in the government,
incensed by my office's criticisms, immediately called for my ouster.
When the last moderates, who understood the need for an independent
research team to evaluate policies, left the Chávez camp in 2004, the
government finally disbanded our office.)
Chávez's political success does not stem from the achievements of his
social programs or from his effectiveness at redistributing wealth.
Rather, through a combination of luck and manipulation of the political
system, Chávez has faced elections at times of strong economic growth,
currently driven by an oil boom bigger than any since the 1970s. Like
voters everywhere, Venezuelans tend to vote their pocketbooks, and until
recently, this has meant voting for Chávez. But now, his mismanagement of
the economy and failure to live up to his pro-poor rhetoric have finally
started to catch up with him. With inflation accelerating, basic
foodstuffs increasingly scarce, and pervasive chronic failures in the
provision of basic public services, Venezuelans are starting to glimpse
the consequences of Chávez's economic policies -- and they do not like
what they see.
FAKE LEFT
From the moment he reached office in 1999, Chávez presented his economic
and social policies as a left-wing alternative to the so-called
Wa****ngton consensus and a major departure from the free-market reforms
of previous administrations. Although the differences were in fact fairly
moderate at first, the pace of change accelerated significantly after the
political and economic crisis of 2002-3, which saw a failed coup attempt
and a two-month-long national strike. Since then, the Venezuelan economy
has undergone a transformation.
The change can be broadly characterized as having four basic dimensions.
First, the size of the state has increased dramatically. Government
expenditures, which represented only 18.8 percent of GDP in 1999, now
account for 29.4 percent of GDP, and the government has nationalized key
sectors, such as electricity and telecommunications. Second, the setting
of prices and wages has become highly regulated through a web of
restrictions in place since 2002 ranging from rigid price and exchange
controls to a ban on laying off workers. Third, there has been a
significant deterioration in the security of property rights, as the
government has moved to expropriate landholdings and private firms on an
ad hoc basis, appealing to both political and economic motives. Fourth,
the government has carried out a complete overhaul of social policy,
replacing existing programs with a set of high-profile initiatives --
known as the misiones, or missions -- aimed at specific problems, such as
illiteracy or poor health provision, in poor neighborhoods.
Views differ on how desirable the consequences of many of these reforms
are, but a broad consensus appears to have emerged around the idea that
they have at least brought about a significant redistribution of the
country's wealth to its poor majority. The claim that Chávez has brought
tangible benefits to the Venezuelan poor has indeed by now become
commonplace, even among his critics. In a letter addressed to President
George W. Bush on the eve of the 2006 Venezuelan presidential elections,
Jesse Jackson, Cornel West, Dolores Huerta, and Tom Hayden wrote, "Since
1999, the citizens of Venezuela have repeatedly voted for a government
that -- unlike others in the past -- would share their country's oil
wealth with millions of poor Venezuelans." The Nobel laureate economist
Joseph Stiglitz has noted, "Venezuelan President Hugo Chávez seems to
have succeeded in bringing education and health services to the barrios
of Caracas, which previously had seen little of the benefits of that
country's rich endowment of oil." Even The Economist has written that
"Chávez's brand of revolution has delivered some social gains."
One would expect such a consensus to be backed up by an impressive array
of evidence. But in fact, there is remarkably little data sup****ting the
claim that the Chávez administration has acted any differently from
previous Venezuelan governments -- or, for that matter, from those of
other developing and Latin American nations -- in redistributing the
gains from economic growth to the poor. One oft-cited statistic is the
decline in poverty from a peak of 54 percent at the height of the
national strike in 2003 to 27.5 percent in the first half of 2007.
Although this decline may appear impressive, it is also known that
poverty reduction is strongly associated with economic growth and that
Venezuela's per capita GDP grew by nearly 50 percent during the same time
period -- thanks in great part to a tripling of oil prices. The real
question is thus not whether poverty has fallen but whether the Chávez
government has been particularly effective at converting this period of
economic growth into poverty reduction. One way to evaluate this is by
calculating the reduction in poverty for every percentage point increase
in per capita income -- in economists' lingo, the income elasticity of
poverty reduction. This calculation shows an average reduction of one
percentage point in poverty for every percentage point in per capita GDP
growth during this recovery, a ratio that compares unfavorably with those
of many other developing countries, for which studies tend to put the
figure at around two percentage points. Similarly, one would expect pro-
poor growth to be accompanied by a marked decrease in income inequality.
But according to the Venezuelan Central Bank, inequality has actually
increased during the Chávez administration, with the Gini coefficient (a
measure of economic inequality, with zero indicating perfect equality and
one indicating perfect inequality) increasing from 0.44 to 0.48 between
2000 and 2005.
Poverty and inequality statistics, of course, tell only part of the
story. There are many aspects of the well-being of the poor not captured
by measures of money income, and this is where Chávez's sup****ters claim
that the government has made the most progress -- through its misiones,
which have concentrated on the direct provision of health, education, and
other basic public services to poor communities. But again, official
statistics show no signs of a substantial improvement in the well-being
of ordinary Venezuelans, and in many cases there have been worrying
deteriorations. The percentage of underweight babies, for example,
increased from 8.4 percent to 9.1 percent between 1999 and 2006. During
the same period, the percentage of households without access to running
water rose from 7.2 percent to 9.4 percent, and the percentage of
families living in dwellings with earthen floors multiplied almost
threefold, from 2.5 percent to 6.8 percent. In Venezuela, one can see the
misiones everywhere: in government posters lining the streets of Caracas,
in the ubiquitous red ****rts issued to program participants and worn by
government sup****ters at Chávez rallies, in the bloated government budget
allocations. The only place where one will be hard-pressed to find them
is in the human development statistics.
Remarkably, given Chávez's rhetoric and reputation, official figures show
no significant change in the priority given to social spending during his
administration. The average share of the budget devoted to health,
education, and housing under Chávez in his first eight years in office
was 25.12 percent, essentially identical to the average share (25.08
percent) in the previous eight years. And it is lower today than it was
in 1992, the last year in office of the "neoliberal" administration of
Carlos Andrés Pérez -- the leader whom Chávez, then a lieutenant colonel
in the Venezuelan army, tried to overthrow in a coup, pur****tedly on
behalf of Venezuela's neglected poor majority.
In a number of recent studies, I have worked with colleagues to look more
systematically at the results of Chávez's health and education misiones.
Our findings confirm that Chávez has in fact done little for the poor.
For example, his government often claims that the influx of Cuban doctors
under the Barrio Adentro health program is responsible for a decline in
infant mortality in Venezuela. In fact, a careful analysis of trends in
infant and neonatal mortality shows that the rate of decline is not
significantly different from that of the pre-Chávez period, nor from the
rate of decline in other Latin American countries. Since 1999, the infant
mortality rate in Venezuela has declined at an annual rate of 3.4
percent, essentially identical to the 3.3 percent rate at which it had
declined during the previous nine-year period and lower than the rates of
decline for the same period in Argentina (5.5 percent), Chile (5.3
percent), and Mexico (5.2 percent).
Even more disappointing are the results of the government's Robinson
literacy program. On October 28, 2005, Chávez declared Venezuela
"illiteracy-free territory." His national literacy campaign, he
announced, had taught 1.5 million people how to read and write, and the
education minister stated that residual illiteracy stood at less than 0.1
percent of the population. The achievement received considerable
international recognition and was taken at face value by many specialists
as well as by casual observers. A recent article in the San Francisco
Chronicle, for example, re****ted that "illiteracy, formerly at 10 percent
of the population, has been completely eliminated." Spanish President
José Luis Rodríguez Zapatero and UNESCO's general director, Koďchiro
Matsuura, sent the Venezuelan government public letters of congratulation
for the achievement. (After Matsuura's statement, the Chávez's
administration claimed that its eradication of illiteracy had been
"UNESCO-verified.")
But along with Daniel Ortega of Venezuela's IESA business school, I
looked at trends in illiteracy rates based on responses to the Venezuelan
National Institute of Statistics' household surveys. (A full presentation
of our study will appear in the October 2008 issue of the journal
Economic Development and Cultural Change.) In contrast to the
government's claim, we found that there were more than one million
illiterate Venezuelans by the end of 2005, barely down from the 1.1
million illiterate persons recorded in the first half of 2003, before the
start of the Robinson program. Even this small reduction, moreover, is
accounted for by demographic trends rather than the program itself. In a
battery of statistical tests, we found little evidence that the program
had had any statistically distinguishable effect on Venezuelan
illiteracy. We also found numerous inconsistencies in the government's
story. For example, it claims to have employed 210,410 trainers in the
anti-illiteracy effort (approximately two percent of the Venezuelan labor
force), but there is no evidence in the public employment data that these
people were ever hired or evidence in the government budget statistics
that they were ever paid.
THE ECONOMIC CONSEQUENCES OF MR. Chávez
In fact, even as the conventional wisdom has taken hold outside of
Venezuela, most Venezuelans, according to opinion surveys, have long been
aware that Chávez's social policies are inadequate and ineffective. To be
sure, Venezuelans would like the government's programs -- particularly
the sale of subsidized food -- to remain in place, but that is a far cry
from believing that they have reasonably addressed the nation's poverty
problem. A survey taken by the Venezuelan polling firm Alfredo Keller y
Asociados in September 2007 showed that only 22 percent of Venezuelans
think poverty has improved under Chávez, while 50 percent think it has
worsened and 27 percent think it has stayed the same.
At the same time, however, Venezuelan voters have given Chávez credit for
the nation's strong economic growth. In polls, an overwhelming majority
have expressed sup****t for Chávez's steward****p of the economy and
re****ted that their personal situation was improving. This is, of course,
not surprising: with its economy buoyed by surging oil profits, Venezuela
had enjoyed three consecutive years of double-digit growth by 2006.
But by late 2007, Chávez's economic model had begun to unravel. For the
first time since early 2004, a majority of voters claimed that both their
personal situation and the country's situation had worsened during the
preceding year. Scarcities in basic foodstuffs, such as milk, black
beans, and sardines, were chronic, and the difference between the
official and the black-market exchange rate reached 215 percent. When the
Central Bank board received its November price re****t indicating that
monthly inflation had risen to 4.4 percent (equivalent to an annual rate
of 67.7 percent), it decided to delay publication of the re****t until
after the vote on the constitutional reform was held.
This growing economic crisis is the predictable result of the gross
mismanagement of the economy by Chávez's economic team. During the past
five years, the Venezuelan government has pursued strongly expansionary
fiscal and economic policies, increasing real spending by 137 percent and
real liquidity by 218 percent. This splurge has outstripped even the
expansion in oil revenues: the Chávez administration has managed the
admirable feat of running a budget deficit in the midst of an oil boom.
Such expansionary policies were appropriate during the deep recession
that Venezuela faced in the aftermath of the political and economic
crisis of 2002-3. But by continuing the expansion after the recession
ended, the government generated an inflationary crisis. The problem has
been compounded by efforts to address the resulting imbalances with an
increasingly complex web of price and exchange controls coupled with
routine threats of expropriation directed at producers and shopkeepers as
a warning not to raise prices. Not surprisingly, the response has been a
steep drop in food production and widening food scarcity.
A sensible solution to Venezuela's overexpansion would require reining in
spending and the growth of the money supply. But such a solution is
anathema to Chávez, who has repeatedly equated any call for spending
reductions with neoliberal dogma. Instead, the government has tried to
deal with inflation by expanding the supply of foreign currency to
domestic firms and consumers and increasing government subsidies. The
result is a highly distorted economy in which the government effectively
subsidizes two-thirds of the cost of im****ts and foreign travel for the
wealthy while the poor cannot find basic food items on store shelves. The
astounding growth of im****ts, which have nearly tripled since 2002
(im****ts of such luxury items as Hummers and 15-year-old Scotch have
grown even more dramatically), is now threatening to erase the nation's
current account surplus.
What is most distressing is how predictable all of this was. Indeed,
Cháveznomics is far from unprecedented: the gross contours of this story
follow the disastrous experiences of many Latin American countries during
the 1970s and 1980s. The economists Rudiger Dornbusch and Sebastian
Edwards have characterized such policies as "the macroeconomics of
populism." Drawing on the economic experiences of administrations as
politically diverse as Juan Perón's in Argentina, Salvador Allende's in
Chile, and Alan García's in Peru, they found stark similarities in
economic policies and in the resulting economic evolution. Populist
macroeconomics is invariably characterized by the use of expansionary
fiscal and economic policies and an overvalued currency with the
intention of accelerating growth and redistribution. These policies are
commonly implemented in the context of a disregard for fiscal and foreign
exchange constraints and are accompanied by attempts to control
inflationary pressures through price and exchange controls. The result is
by now well known to Latin American economists: the emergence of
production bottlenecks, the ac***ulation of severe fiscal and balance-of-
payments problems, galloping inflation, and plummeting real wages.
Chávez's behavior is typical of such populist economic experiments. The
initial successes tend to embolden policymakers, who increasingly believe
that they were right in dismissing the recommendations of most
economists. Rational policy formulation becomes increasingly difficult,
as leaders become convinced that conventional economic constraints do not
apply to them. Corrective measures only start to be taken when the
economy has veered out of control. But by then it is far too late.
My experience dealing with the Chávez government confirmed this pattern.
In February 2002, for example, I had the op****tunity of speaking with
Chávez at length about the state of the Venezuelan economy. At that
point, the economy had entered into a recession as a result of an
unsustainable fiscal expansion carried out during Chávez's first three
years in office. Moderates within the government had arranged the meeting
with the hope that it would spur changes in the management of the public
finances. As a colleague and I explained to Chávez, there was no way to
avoid a deepening of the country's macroeconomic crisis without a
credible effort to raise revenue and rationalize expenditures. The
president listened with interest, taking notes and asking questions over
three hours of conversation, and ended our meeting with a request that we
speak with his cabinet ministers and schedule future meetings. But as we
proceeded to meet with officials, the economic crisis was spilling over
into the political arena, with the opposition calling for street
demonstrations in response to Chávez's declining poll numbers. Soon,
workers at the state oil company, PDVSA, joined the protests.
In the ensuing debate within the government over how to handle the
political crisis, the old-guard leftists persuaded Chávez to take a hard
line. He dismissed 17,000 workers at PDVSA and sidelined moderates within
his government. When I received a call informing me that our future
meetings with Chávez had been canceled, I knew that the hard-liners had
gained the upper hand. Chávez's handling of the economy and the political
crisis had significant costs. Chávez deftly used the mistakes of the
opposition (calling for a national strike and attempting a coup) to
deflect blame for the recession. But in fact, real GDP contracted by 4.4
percent and the currency had lost more than 40 percent of its value in
the first quarter of 2002, before the start of the first PDVSA strike on
April 9. As early as January of that year, the Central Bank had already
lost more than $7 billion in a futile attempt to defend the currency. In
other words, the economic crisis had started well before the political
crisis -- a fact that would be forgotten in the aftermath of the
political tumult that followed.
The government's response to the crisis has had further consequences for
the Venezuelan economy. The takeover of PDVSA by Chávez loyalists and the
subordination of the firm's decisions to the government's political
imperatives have resulted in a dramatic decline in Venezuela's oil-
production capacity. Production has been steadily declining since the
government consolidated its control of the industry in late 2004.
According to OPEC statistics, Venezuela currently produces only three-
quarters of its quota of 3.3 million barrels a day. Chávez's government
has thus not only squandered Venezuela's largest oil boom since the
1970s; it has also killed the goose that lays the golden egg. Despite
rising oil prices, PDVSA is increasingly strained by the combination of
rising production costs, caused by the loss of technical capacity and the
demands of a growing web of political patronage, and the need to finance
numerous projects for the rest of the region, ranging from the rebuilding
of Cuban refineries to the provision of cheap fuel to Sandinista-
controlled mayoralties in Nicaragua. As a result, the capacity of oil
revenues to ease the government's fiscal constraints is becoming more and
more limited.
PLOWING THE SEA
Simón Bolívar, Venezuela's independence leader and Chávez's hero, once
said that in order to evaluate revolutions and revolutionaries, one needs
to observe them close up but judge them at a distance. Having had the
op****tunity to do both with Chávez, I have seen to what extent he has
failed to live up to his own promises and Venezuelans' expectations. Now,
voters are making the same realization -- a realization that will
ultimately lead to Chávez's demise. The problems of ensuring a peaceful
political transition will be compounded by the fact that over the past
nine years Venezuela has become an increasingly violent society. This
violence is not only reflected in skyrocketing crime rates; it also
affects the way Venezuelans resolve their political conflicts. Whether
Chávez is responsible for this or not is beside the point. What is vital
is for Venezuelans to find a way to prevent the coming economic crisis
from igniting violent political conflict. As Chávez's popularity begins
to wane, the opposition will feel increasingly emboldened to take up
initiatives to weaken Chávez's movement. The government may become
increasingly authoritarian as it starts to understand the very high costs
it will pay if it loses power. Unless a framework is forged through which
the government and the opposition can reach a settlement, there is a
significant risk that one or both sides will resort to force.
Looking back, one persistent question (in itself worthy of a potentially
fascinating study in international political economy) will be how the
Venezuelan government has been able to convince so many people of the
success of its antipoverty efforts despite the complete absence of real
evidence of their effectiveness. When such a study is written, it is
likely that the Chávez administration's strategy of actively lobbying
foreign governments and launching a high-profile public relations
campaign -- spearheaded by the Wa****ngton-based Venezuela Information
Office -- will be found to have played a vital role. The generous
disbursement of loans to cash-strapped Latin American and Caribbean
nations, the sale of cheap oil and heating gas to sup****t political
allies in the developed and developing worlds, and the covert use of
political contributions to buy the loyalty of politicians in neighboring
countries must surely form part of the explanation as well.
But perhaps an even more im****tant reason for this success is the
willingness of intellectuals and politicians in developed countries to
buy into a story according to which the dilemmas of Latin American
development are explained by the exploitation of the poor m***** by
wealthy privileged elites. The story of Chávez as a social revolutionary
finally redressing the injustices created by centuries of oppression fits
nicely into traditional stereotypes of the region, reinforcing the view
that Latin American underdevelopment is due to the vices of its predatory
governing cl*****. Once one adopts this view, it is easy to forget about
fa****oning policy initiatives that could actually help Latin America
grow, such as ending the agricultural subsidies that depress the prices
of the region's ex****ts or significantly increasing the economic aid
given to countries undertaking serious efforts to combat poverty.
The American journalist Sydney Harris once wrote that "we believe what we
want to believe, what we like to believe, what suits our prejudices and
fuels our passions." The idea that Latin American governments are
controlled by economic elites may have been true in the nineteenth
century, but is wildly at odds with reality in a world in which every
Latin American country except Cuba has regular elections with large
levels of popular participation. Much like governments everywhere, Latin
American governments try to balance the desire for wealth redistribution
with the need to generate incentives for economic growth, the realities
of limited effective state power, and the uncertainties regarding the
effectiveness of specific policy initiatives. Ignoring these truths is
not only anachronistic and misguided; it also thwarts the design of
sensible foreign policies aimed at helping the region's leaders formulate
and implement strategies for achieving sustainable and equitable
development.
It would be foolhardy to claim that what Latin America must do to lift
its population out of poverty is obvious. If there is a lesson to be
learned from other countries' experiences, it is that successful
development strategies are diverse and that what works in one place may
not work elsewhere. Nonetheless, recent experiences in countries such as
Brazil and Mexico, where programs skillfully designed to target the
weakest groups in society have had a significant effect on their well-
being, show that effective solutions are within the reach of pragmatic
policymakers willing to implement them. It is the tenacity of these
realists -- rather than the audacity of the idealists -- that holds the
greatest promise for alleviating the plight of Latin America's poor.
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