Venezuela at a Crossroads?

Venezuela’s recent parliamentary elections yielded results that were astonishing and unsurprising at the same time.

Astonishing because it was the first time since the late Hugo Chávez was elected president exactly 17 years ago that his party, the socialist PSUV, lost. Moreover, the opposition, the Mesa de la Unidad Democrática (MUD), even gained a two-thirds supermajority that could amend the constitution or remove the president, which could make for some extended political instability.

But the MUD victory, apart from its scale, was also unsurprising simply because of the country’s massive macroeconomic mismanagement.

While Chávez’s rather bland successor Nicolás Maduro was never able to match the populist appeal of his predecessor and the end of the undisputed reign of the PSUV was only a matter of time, the collapse in oil prices greatly accelerated the inevitable.

But before Western pundits celebrate in triumphalism a return to normality Venezuela, a return to true democracy, an end to leftist demagoguery and Cuban alliance, we should not forget what that democracy looked like before Hugo Chávez was elected President in late 1998.

To understand pre-Chávez Venezuela, we have to go back to the source — the gift and the curse of oil.

Oil, boon or bane

Venezuela like many of its Latin American neighbors is a very resource-rich nation, only more so. Venezuela has the largest proven oil reserves in the world – greater even than those of Saudi Arabia.

By 1922, less than a decade into production, oil had become Venezuela’s largest source of export revenue. For a time, Venezuela was the world’s largest oil exporter.

Already in 1929, Venezuela had caught what would later be known as “Dutch disease,” named after the natural gas boom in the Netherlands during the 1960s.

The phenomenon has been found, in advanced and developing countries alike. A sudden natural resource boom has a very destabilizing effect on economic balance.

In Venezuela’s case, the massive wealth to be made in oil disrupted the diverse agricultural sector of the 1920s and deterred subsequent industrialization.

This debilitating economic effect was further enhanced by Venezuela’s adoption of the terribly-flawed policies of import-substituting industrialization (ISI) in the 1960s and 1970s and the resulting uncompetitive state-owned enterprises occupying every stage of production.

Political musical chairs

Some of this failure was masked in Venezuela, unlike in the rest of Latin America, by the tremendous increase in oil prices in the 1970s. In 1973, OPEC, of which Venezuela is a member, increased oil prices by 70%. Between 1972 and 1974, Venezuela’s government revenue quadrupled as a result.

Throughout those decades of ISI, the oil boom and rising public spending, the country was governed by two large parties which pretty much alternated in holding the presidency, Copei, the Christian Democratic Party, and Acción Democrática (AD).

These parties claimed ideological differences (AD was slightly more statist), but for four decades (1958-1998) they really were the personal playgrounds of Rafael Caldera and Carlos Andrés Pérez, their relatives and their friends.

There was personal animosity between the two camps, but they were united in their ambition to line their pockets and those of their closest friends and allies. Meanwhile, the Venezuelan people saw little to no progress.

Wealth inequalities

In one of my many visits to Venezuela as an analyst in the 1990s, I had one meeting with the country’s Minister of Finance that struck me like a lightning-bolt of things to come.

After the usual exchange of pleasantries, I broached an important subject. How, I asked, would the government achieve greater equity of Venezuela’s inherent wealth, which had been enshrined in the government’s electoral platform “growth with equity”.

The Minister paused and then he began: “You know, every Sunday when I go to the country club, I make a point of sitting in front, next to my driver.”

I must have had a very confounded expression on my face. So, the Minister thought he should add some levity to his statement.

He said: “But you know, it’s actually a pretty good idea to sit in front, just in case there is an assassination attempt.” Assassins aim at the back of a government car, because this was where the important people sat.

It was at that moment and in that office that I knew that Venezuela was doomed, that the country was ripe for revolution. Heck, if I had been born Venezuelan I might have become a revolutionary right on the spot.

Revolutionary failure

Unfortunately, almost all revolutions make things worse and turn out people as leaders who are shockingly more incompetent than those they justifiably replaced.

And so, Hugo Chávez’s Bolivarian Revolution went. In a mixture of well-meaning populism, confused historical parallels and anti-establishment sentiment, Chávez created the Bolivarian Republic, following his interpretation Simón Bolívar’s ideals of nearly 200 years ago.

Chávez also oppressed freedom of speech and further weakened the country’s poor institutions. He created his own left-wing version of kleptocracy and nepotism.

Most importantly and within months of his presidency, Chávez undermined one of the core enterprises of the country, state-owned PdVSA.

With all their flaws, his predecessors had allowed PdVSA to develop into one of the best-managed oil companies at the time. All of Venezuela’s top talent was gathered there.

Indeed, during my pre-Chávez-era visits as an analyst, my meetings with the company were not only important to assess the country’s oil sector, but to get a full 360 of Venezuela’s economic, social and political prospects.

Chávez and the PSUV changed all of this. He robbed the company of its relative independence and its professionalism. Today, the company’s resources have been diverted to finance expansive government projects.

Consequently, PdVSA has failed to invest which resulted in a drop in oil production to the tune of 800,000 barrels per day when compared to 1998.

Combined with dramatically falling oil prices since June 2014, this has driven the Venezuelan economy into a depression-like state. That brought about the astonishing and yet unsurprising election results of December 6.

What the new majority must do

And so, the new majority in the country’s National Assembly faces six key challenges and they seem insurmountable:

1) The political challenge

With a two-thirds supermajority, the MUD can even overrule the country’s very powerful presidency. But although the MUD holds a sufficient number of seats to remove members of the cabinet or even to change the constitution and remove President Maduro, it must be careful so that its actions are not interpreted as revanchist.

2) The PdVSA challenge

The MUD must restore the professional capacity of PdVSA. In the past, the elite was able to set aside its own narrow material interests – at least in part – and allowed PdVSA to act fairly independently. It should be able to replicate that.

3) Economic Depression

Venezuela’s economy will collapse by 10% in 2015 and inflation will reach at least 200%. This requires painful action by the parliamentary majority to introduce prudent macroeconomic policies.

But these policies will make things worse in the short term by increasing unemployment and further depressing the economy. It is doubtful that the majority’s mandate will be able to absorb the popular backlash.

4) Institution-building

The importance of this challenge cannot be overstated. The PSUV and its “Bolivarian” revolution have created institutions that by their nature are very undemocratic and critically influenced by the powerful presidency.

The traditional parties themselves have a long and “stellar” record of building weak institutions filled with cronies eager to enrich themselves. Therefore, good governance and the rule of law are simply a novelty to Venezuela.

5) Domestic security

Venezuela has the highest homicide rate per capita in the world. This is not something that is changed overnight. But a more effective, trustworthy security apparatus must be built. Without such change, domestic and foreign investment will simply stay away.

6) Long-term economic program

While it is important to stop the short-term economic bleeding through prudent macroeconomic management, it is equally as important to develop and implement a long-term economic program that addresses the many structural weaknesses of the economy.

Increasing the country’s competitiveness, diversification as well as eliminating state-interventionism is key. However, such plan must be socially inclusive. This is no time for the elite to show its solidarity in the form of sitting next to their drivers. This is the time to empower those drivers to choose the route for the country.

Balancing approaches

For all their flaws, the social programs of Chávez and the PSUV were intended to right the very real wrongs of Venezuela. The new majority must incorporate this intent into its agenda.

In spite of Brazil’s current problems, that country is exemplary in achieving large-scale poverty reduction through targeted and means-tested programs. These cost the government less than 1% of GDP per annum.

None of this is easy and all of it must be done with the greatest transparency possible so that the Venezuelan people know what to expect. It might be delusional to believe that one election may change the course of economic and social development in Venezuela after almost a century of mismanagement.

But following a quote that has been attributed to many and most recently been used by President Obama in 2010, the MUD might ask itself this:

“When is the right time? If not now, when? If not us, who?”