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The data which proves socialism – not foreign meddling – is behind Venezuela's crisis

    This article was published on the Telegraph Online on 6th September 2017

    This week Parliament debated the deepening chaos in Venezuela. Even today, many Labour MPs, including Jeremy Corbyn himself, continue to apologise for the legacy of Hugo Chavez. Some on the British Left blame the current crisis on meddling by Western powers; others say it is the work of Chavez's successor President Maduro. 

    If either of these things is true, then those who supported Chavez when he was alive need not apologise or rethink their position. But as we at the Centre for Policy Studies have laid out in a report this week, Chavez's reform agenda was always doomed to disaster – and so, by extension, would Corbynism. Here's how.

    During the 14 years that Chavez was president of Venezuela, mass nationalisations and widespread price controls led to Venezuela going from average in terms of economic freedom to having one of the most repressive systems in the world. Chavez apologists argue that these interventions were justified as poverty fell over his term. World Bank figures do indeed show that absolute poverty fell from 50 per cent to 30 per cent from 1998 to 2013.

    However, this was only achieved because Venezuela – which has the largest proven oil reserves in the world – saw its oil export revenue increase by 600 per cent over this period. These booming oil revenues came not from any increases in productivity or output, but from an exponential growth in global oil prices. The drop in poverty over the Chavez era therefore masked a series of structural problems that were emerging in Venezuela.

    As early as 2006, price controls were producing food shortages as wholesalers stopped deliveries. Chavez was forced to increase imports nearly 100 per cent to fill the gap – a strange policy for someone that advocated the exproporiation of farmland "to end dependence on food imports". Price controls were also giving perverse incentives to government officials and private individuals to game the system and siphon off public money for private gain. Subsidies for food created a thriving smuggling economy, whereby goods would be bought in Venezuela under the controlled prices and sold in neighbouring countries for an easy profit. Even President Maduro conceded in 2014 that nearly 30-40 per cent of domestic goods were being smuggled to Colombia.

     

    Venezuela's unrestrained spending was also evident since 2006. Ricardo Hausmann, a professor at Harvard Kennedy School, commented that Venezuela's government "were spending as if the price of oil was $200 a barrel". This is supported by the evidence. In 1999, Venezuela ran a budget surplus. By the end of President Chavez's tenure in 2013, Venezuela's budget deficit hit a whopping 14.3 per cent of GDP (compared to Britain's 2.6 per cent in March 2017). This was despite the 600 per cent growth in oil export revenues. Some defenders of the regime point to the recent fall in Venezuela's debt to GDP ratio, but this is only occurring due large sell offs of foreign reserves and, more recently, gold reserves.

    Mass nationalisation and expropriation has also been hugely problematic, often coming at a big cost to Venezuela. The Arbitration Tribunal of International Centre Disputes has ordered a succession of compensation agreements from the Venezuelan government. Productivity has collapsed in the oil industry and there is now no accurate record of the amount of income flowing into the Treasury. Steel production has fallen by 92 per cent following the nationalisation of the leading producer. A similar story is observed in the sugar industry: in 2006, Chavez nationalised ten of the 16 privately owned sugar refineries, and since then production has collapsed by two thirds.

    Then, of course, there is the rampant corruption arising from the reforms. Skilled technicians and managers in the oil industry were sacked and replaced with Chavez's supporters. Specific examples of foul play are numerous. For instance, it was reported that $500m from the state-run oil company found its way into a pyramid scheme run by government-linked financiers, none of whom were faced prosecution.

    It did not have to be this way. Venezuela’s regional competitor Chile – sometimes referred to as "the lonely success story" – is now Latin America's wealthiest country, and its poverty headcount has plunged over the past decade. This is particularly impressive given that demand for copper, which is Chile's largest export, has recently dampened. The OECD attributes the extraordinary success to economic reforms such as trade and investment liberalisation and sound macroeconomic policies.

     

    So, will Venezuela reverse the tragedy of the Chavez era? Quite the opposite. Unable to pay for the array of subsidies and welfare programes, President Maduro is doubling down. In response to the crisis he printed more money, which inevitably led to extraordinary inflationary pressures. Further price and currency controls have made imports even more expensive, causing them to slump by 34 per cent from 2013 to 2015. A vicious cycle is in the making.

    Apologists for the Chavez regime argue that, along with "external influences", Venezuela's over-reliance on oil is the major cause of the current crisis. While it is a cause, it is not the only one. Price controls, mass nationalisation, profligate fiscal policy and ever-growing corruption under the Chavez era – followed on by Maduro – have sown the seeds of the current major economic and political calamity.

    This makes Corbyn’s pronouncement that President Chavez "showed us a better way of doing things" deeply disturbing, particularly given that all of his key allies have been lavishing praise on the regime. Chillingly, it could be an insight into some of the plans that a Corbyn government would have for the UK.

    Daniel joined the Centre for Policy Studies as Head of Economic Research in November 2015. He was promoted to Deputy Director in March 2017. Prior to joining the CPS, he worked in research roles for a number of parliamentarians.

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    Comments

    Anonymous - About 78 days ago

    What are Daniel Mahoney's economic qualifications?

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