A Review of Venezuela Before Chavez: Anatomy of an Economic Collapse

by | Mar 16, 2014

Venezuela Before Chavez: Anatomy of an Economic Collapse Edited by Ricardo Hausmann and Francisco Rodriguez University Park: Pennsylvania State University Press, 2013, 445 pages

In early 1999, in an event organized by the Inter-American Dialogue in Washington D.C., Venezuelan president Hugo Chávez addressed the U.S. policy community for the first and last time of his 14-year rule. A notably agile Chávez displayed the charm that would help account for his popularity and longevity in office. At a private session before the event, Chávez engaged in banter with some he would surely regard as representatives of the so-called “Washington Consensus” associated with orthodox economic recipes that had been the target of attacks that resonated with most Venezuelans in his successful campaign for the presidency.

Few foresaw what was to come: Chávez’s increasing radicalization and belligerence and his grandiose ambitions on the regional and global stages. At the height of his influence, around 2006, no scenario contemplated that Chávez would die while in office, of cancer, on March 5, 2013.

Among those present at the Washington D.C. event was Ricardo Hausmann, then chief economist at the Inter-American Development Bank and now a professor at Harvard University. Hausmann, who served as Venezuela’s Minister of Planning in the early 1990s, joined with Francisco Rodríguez, another Venezuelan economist currently at Bank of America Merrill Lynch, to assemble a respected group of economists and political scientists to explain in this lengthy book the country’s unrelenting crisis in the 1990s and how, as they put it, “Chávez became possible.” Readers looking for an assessment of the Chávez period, or—of far keener interest today—the likely denouement of Venezuela’s descent into economic and political chaos, will have to look elsewhere. The authors are chiefly concerned with the underlying factors that propelled Chávez to the presidency and that ultimately enabled him to consolidate control over one of the world’s largest oil reserves.

The volume reflects a worthy and systematic exercise, carried out with impressive methodological and analytical rigor. Each chapter discusses a particular dimension of Venezuela’s growth collapse. The editors are commendably parsimonious, attach appropriate weight to different pieces of the puzzle, and carefully distinguish the causes of Venezuela’s implosion from its consequences. One chapter, for example, focuses on the severe lack of human capital—a serious problem, no doubt—during the pre-Chávez period, but found no evidence that it contributed to the decline of output. Another essay highlights Venezuela’s highly skewed income distribution but concludes that it was not among the most relevant causes of the system’s meltdown. Yet another, an examination of the impact of immigration on native-born employment in Venezuela, sheds new light on the phenomenon and is interesting in many respects but less germane to the volume’s core focus.

In their introductory chapter, Hausmann and Rodriguez offer a sophisticated version of the most commonly held explanation for Venezuela’s collapse in the 1980s and 1990s. Their interpretation emphasizes variants on the “resource curse” formulation and the deleterious and distorting effects of ample rents on the economy. In the context of a shifting international oil market, the authors focus on declining oil production and falling non-oil productivity. They are particularly struck by the incapacity of the economy to move resources into alternative export industries. The chapter is a contribution to the “Dutch disease” or resource curse literature that goes beyond problems in growth performance, fruitfully delving into the question of why it is so difficult to recover from such sharp drops in oil revenue.

Hausmann and Rodríguez further suggest that “institutional quality” cannot adequately explain Venezuela’s growth performance because the “same institutions” were “compatible with the highest growth in the region for the half century starting in 1920.” Yet in their chapter, Francisco Monaldi and Michael Penfold of the Instituto de Estudios Superiores de Administración (IESA) in Caracas, Venezuela, adopt a political economy perspective in their chapter and argue persuasively that institutional variables are in fact a crucial part of the story of Venezuela’s collapse in the 1980s and 1990s.

To be sure, Monaldi and Penfold recognize that the country’s initial decline resulted from a dramatic reduction in per capita oil income, the volatility of oil prices, and soaring debt. But, especially since 1989—the decade before Chávez came to power—the “weakening of democratic governance, poor and declining institutional quality, and increase in political stability” were fundamental in accounting for the country’s inability to adapt and respond effectively to deepening economic challenges.

Venezuela’s Punto Fijo two-party political system, established in 1958, had for several decades been held up as a model of democratic effectiveness and stability in Latin America. The pact between the two parties, the Democratic Action, with more social democratic leanings, and the Christian Democratic COPEI, functioned reasonably well in the context of significant oil revenues. But with the beginning of the economic crisis in the late 1970s and increasingly scarce resources later on, cracks in the system became more pronounced, resulting in what the authors call the “deconsolidation of the Venezuelan political system.” High levels of corruption, coupled with the activation of federalism and modification of the country’s electoral system, led to increased party fragmentation, volatility and turnover. The discipline that had been the hallmark of the political system—and the envy of many in Latin America—utterly broke down.

In another instructive chapter, Javier Corrales of Amherst College provides a nuanced view of the theory that Venezuela’s political parties became ossified in the 1980s and 1990s. Indeed, part of the story of “what made Chávez possible” was not just profound discontent with the prevailing political order and the demand for alternatives, but also the emergence of “small opposition forces” in such institutions as the military and universities that were amenable to radical discourse. Corrales offers a more complete picture of the political parties that, as other political scientists have pointed out, suffered both “representational” and “technical-expertise” deficits in the pre-Chávez period. In other words, politicians were disconnected from the citizens they were supposed to represent, and there were few good “policy wonks.”

Although the volume understandably concentrates on economic factors and includes some important, original research, it is considerably enriched by the essays that highlight political and institutional variables. Indeed, Venezuela’s rigidities that have proved so costly are evident in both spheres. In the face of plummeting oil revenues, a succession of governments in the 1980s and 1990s was incapable of fashioning sensible policies to promote alternative export industries. And the political party structures—actually quite dynamic in the 1960s—proved disappointingly inflexible when forced to deal with declining resources.

Those were the conditions that explain the emergence of Hugo Chávez, whose seductive rhetoric and charismatic personality helped catapult him to the residency. When Chávez assumed office, oil was less than $8 dollars a barrel—the lowest in three decades. What followed was an unprecedented bonanza that gave some plausibility to Chávez’s ambitious schemes. From 1998 to 2001, Venezuela’s terms of trade grew almost seven times more rapidly than the regional average. Chávez collected a huge rental income that would have been the envy of previous Venezuelan governments.

Chávez’s resources and personal magnetism gave Venezuela a rare opportunity to undertake a profound structural transformation that was desperately needed. The country had endured not one but two “lost decades” and it had a chance to reverse the deterioration. And Chávez put his finger on a legitimate grievance—lack of social justice—that many Venezuelans understandably felt.

Yet, what is striking about the Chávez period, as Hausmann and Rodríguez stress, is that many of the same problems that afflicted Venezuela in the 1980s and 1990s, under conditions of economic crisis, were just as present—and as corrosive—during the years of economic boom. The underlying problem was the governance model that Chávez put in place that relied on one-man rule and a monopoly on all decision-making.

Venezuela before Chávez is not just a product of scrupulous academic research. It is also, as the authors understand—and as present circumstances in the country attest—a helpful and coherent guide for those who devise policies and make decisions in a country so reliant on oil. It is not clear how much longer a situation characterized by spreading shortages, rampant inflation, political disorder and unchecked crime can be sustained. What few doubt, however, is that even under the most sanguine scenario, such deep problems will persist for many years to come.

Spring 2014Volume XIII, Number 3

Michael Shifter is president of the Inter-American Dialogue, a policy forum on Western Hemisphere affairs based in Washington D.C. He is also adjunct professor of Latin American politics at Georgetown University’s School of Foreign Service. With Jorge Domínguez, Shifter has co-edited three editions (2003, 2008, and 2013) of Constructing Democratic Governance in Latin America, published by Johns Hopkins University Press.

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