Venezuela: economic role model or basket case?

Categories: | Author: SuperUser Account | Posted: 5/24/2011 | Views: 2288

Depending on whom you talk to, the case of Venezuela is either profiled as a best practice or a worst case. There is typically little space for lukewarm feelings in the debate: either boiling hot Chávez-filia or ice cold opposition. In fact, it is difficult to think of a country that has polarized international public opinion more in recent years.

That said, the advent of the Obama administration – though American imperialism still features strongly in the Venezuelan political rhetoric – along with Chávez’s successful attempt to abolish presidential term limits, has allowed for more nuance in the overall judging of his regime. Nonetheless, Chávez’s economic and social policies and their respective levels of success are still object of much debate. Some opinion leaders and policy makers muse if their countries – South Africa included – should emulate aspects of Chávez’s socialist revolution of the 21st century. But the question should be posed rather substantively: have Chávez’s policies made poor Venezuelans better off, or rather converted a resource-rich country into an economic basket case?

Even before being elected for the first time in 1998, Hugo Chávez’s recurring promise had been to empower the Venezuelan poor, a majority of the population that had largely been ignored in the forty years since the end of military rule. Relying on one of the world’s largest oil reserves, his government declared its intentions to strengthen control over oil revenues to benefit the general population, which was reflected in the slogan ‘now Venezuela belongs to all’.

Having been over a decade in office, Chávez has made true on his promise of tightening the government’s grip on natural resources by nationalizing key sectors of the economy, the most significant of which concern the oil sector.

The new constitution, adopted in 1999, includes various clauses that underscore the president’s intention to affirm state control over ‘strategic’ economic sectors. Article 12, for instances, states that the ‘mineral and hydrocarbon deposits of any nature that exist within the territory of the nation, beneath the territorial sea bed, within the exclusive economic zone and on the continental shelf are the property of the Republic, are of public domain, and therefore inalienable and not transferable’.

More directly, Article 303 makes explicit reference to PDVSA – the state-owned oil company since 1976 – and its role as a state-owned monopoly. For several decades, PDVSA had paradoxically operated as a “state within a state”. Largely independent of government and enjoying operating autonomy since the 1970s throughout the first years of Chavez’s tenure, PDVSA was only restructured in 2003 into a truly state-owned and government-controlled company, with almost exclusively national targets. This occurred after the failed coup against the Venezuelan President in 2002, and a crippling general strike led by PDVSA employees at the end of the same year.

Besides the Constitution, the main legal framework under which the hydrocarbon industry in Venezuela is currently functioning is the Organic Hydrocarbons Law (‘Hydrocarbons Law’) adopted in 2001 and amended in 2007. This law affects foreign investments in Venezuela and establishes that oil-related activities must be managed by the state, with the only exception of post-extractive activities such as refining processes, which are usually implemented by PDVSA-controlled joint ventures. Moreover, a number of laws and amendments enacted over the past decade, including increases in taxation, increased the government’s revenues. According to the financial analyst Daniel Johnston, the current government’s share of international oil companies’ revenues amount to approximately 91% as opposed to 60% in the 1980s and late 1990s.

In sum, in 2007-2008, when oil prices reached sky-high levels, Venezuela boasted unprecedented earnings. It is for this reason that, in the 2007 annual report, PDVSA is described as “the engine of [Venezuela’s] socio-economic development”. Indeed, PDVSA export revenues make up more than half the Venezuelan GDP and have closely followed the trends of the country’s economic growth, providing enough statistical evidence to argue that the Venezuelan economy is fully dependent on its oil exports.

But what effects has this had on the social welfare of the average Venezuelan? From the social investment perspective, what is remarkable about the 1999 constitution is that it obliges ‘[a]ny revenues generated by exploiting underground wealth and minerals to be used to finance real productive investment, education and health’ (Article 311). Most observers, irrespective of their overall opinion of Chávez’s tenure, concur that since the late 1990s and in particular after 2003, oil money has enabled Venezuela to vastly increase spending on social programmes. The government-controlled Integrated Social Indicator System for Venezuela (SISOV) claims that the overall social spending of the Venezuelan government has grown from 6% in1998 to almost 18% of GDP in 2008 (with a peak of 21,75% in 2006).

According to SISOV, education is the sector in which government’s expenditure has been more preponderant, absorbing between 3% and 6% of GDP between 1998 and 2008. Social spending on health has also increased, although at a more moderate level. Social security has been probably the sector in which government’s expenditure has registered the most significant growth, jumping from approximately 1,5% of GDP in 1998 to 4,5% in 2008 – although critics have argued that elements of expenditure on military defence are included in these figures.

Participation and social development has also seen a growing trend, which is confirmed by the governmental interest in promoting different forms of grassroots engagement in marginalized communities (the so-called ‘barrios’). At the same time, housing – a delicate sector in a country faced with thousands of informal settlements – has enjoyed a rather shaky support, with an increase in 2000 (+ 2,64%) and some ups and downs in the following years.

The preferred channels for direct social spending have been broad-scale social programmes, the so-called ‘Bolivarian Missions’, which focus on delivering basic services to the urban and rural poor. The missions were introduced in 2003 as a way to prioritize social spending on the most vulnerable and poor segments of the population nationwide. Since then, over 20 different missions have been launched.

Comparing data between 1998 and 2006, overall poverty levels have decreased by 16% (non governmental estimates place this at 3%) and inequality levels have decreased from 0,49 to 0,45 (Gini coefficient). Education has also shown moderate levels of improvement (a reduction by 2,5% in illiteracy), while unemployment has decreased by close to 4%. Neonatal and child mortalities have gone down, although the former more significantly than the latter. Yet, this positive trend has occurred notwithstanding a general worsening of maternal mortality.

Crime is one of the sectors in which the overall situation has worsened in the past decade. While official data has been embargoed since 2003 (probably because of the government’s reluctance to accept the social impact of widespread crime), anecdotal evidence and media reports testify to a dramatic increase. Estimates range around 550 murders per trimester. The consumer price index has also increased dramatically (at over 30%) for the metropolitan area of Caracas, especially for food products, adding to a generally high inflation rate, which boosts a widespread black market (where the national currency, the Bolivar, is traded at about half its nominal value).

If one compares oil revenues, which have tripled since 2003, and social welfare indicators, it is clear that most improvements have been modest even when using government’s figures (which are widely disputed by NGOs and development agencies). Thus, one wonders whether the Venezuelan model is effective and sustainable as many enthusiasts would have us believe. Interestingly, Chávez himself has acknowledged that the missions were first and foremost political instruments to strengthen his popularity among poor communities at a time of growing popular unrest. By contrast, as socio-economic tools, the missions have largely fallen short of expectations, due to bureaucratic inefficiencies and a top-down approach. They have by all accounts failed to modify the real distribution of power and resources at the local level.

Another important element to consider is that very little (if any) has been done to promote a national agricultural and industrial system capable of satisfying the needs of Venezuelan citizens. In the past few years, abundance of oil (which is subsidised for local consumers) have gone hand in hand with a widespread shortage of staple food (e.g. bread, flour, etc.) and rationing of electricity and water. Although government’s emergency measures have been adopted to enforce a responsible consumption of precarious goods, it is quite complicated to achieve results in a country where citizens have gotten used to cheap energy. Since the government has nationalized most of the energy and other key service-delivery sectors, and froze utility rates at 2002 levels, adequate infrastructure and ability to respond to increased demand by the population have not kept pace. Thus, the past two years have seen six general power outages and progressive worsening in the reliability of water and electricity supply.

So, are Chávez’s policies, such as nationalization of key economic sectors, worth emulating by countries such as South Africa? Perhaps… though it is possible that they will similarly be accompanied by a crippling combination of cronyism, lack of sustainable investment and contradictory priorities. After all, while Chávez scolds Venezuelans for taking long showers stating that he doesn’t stink although his showers take only three minutes, he failed to mention that in the past year, as published by his Ministry of Popular Power for the Economy and Finances, he spent US$ 537,000 (over ZAR 4 Million) on clothes and personal hygiene products. With similar contradictions riddling the regime’s economic and social policies, it is fair to say that it does indeed smell of foul play.

Janine Schall-Emden is Director for an International Consultancy firm, Beyond Development (, based in Bologna, Italy.

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