Prodigality as state policy: The case of Hugo Chavez

First Published: 2008-03-08

Reprinted with the kind permission of the author.

This article was first published at PetroleumWorld.

During the nine years of his regime Hugo Chavez has received over $600 billion. Half of this money comes from the sale of petroleum, while the other half comes from taxes and from a national debt that has tripled during the period. This is a significant inflow of money for a country with only 26 million inhabitants and could have been utilized to finance structural programs of alleviation of poverty. However, unemployment is the highest in Latin America, poverty still affects 46% of the population and inequality has been increasing, says Venezuelan economist Francisco Rodriguez, a professor at Wesleyan University.

Why has this happened? Because Hugo Chavez has established a policy of direct subsidies and handouts, both in Venezuela and abroad. Such a policy has provided him with substantial political popularity at home and with a reputation as a defender of the poor in the region. However, the increasing perception among many Venezuelans, even those who follow him, is that he has become more prodigal than generous, that he is giving away precious financial resources to ideological friends in the hemisphere and to the not so poor in the U.S. and Europe, resources that could have been better utilized in improving the lot of his countrymen and women.

Close to $50 billion of Venezuelan money have been given or promised by Chavez to foreign countries. This includes about $5 billion to Argentina, some $300 million to Bolivia, about $8-10 billion to Cuba, a promise of a $500 million refinery for Ecuador and a $4 billion refinery for Brazil, a $25 billion gas line project across the Amazon to Brazil and Argentina, $100 million in cash and oil to Nicaragua, promises of refineries to Nicaragua, Paraguay and Jamaica, $1 billion in oil subsidies to the Caribbean states, the offer to subsidize oil supplies and to buy a bankrupt airline in Uruguay, about $150 million in oil discounts to segments of the U.S. population, some $50 million in fuel subsidies to the London poor and, even, an offer to Belarus of some $400 million so that this country could pay its debts to Russia. The list of Chavez’s donations and promises is longer but these examples will suffice to show the extent to which he is giving away Venezuelan resources to other countries. Within Venezuela he has spent even more money in social programs that do not answer the structural social and economic problems of the population but, rather, serve as palliatives that provide temporary feelings of social well-being among the poor: free primary medical attention in marginal areas, free or highly subsidized food distribution centers, subsidized public transport, free education. These programs, called Misiones, provide the poorer segments of the population with a fish a day but are not teaching them how to fish. For some years they have served to keep Chavez firmly in power while becoming a classic example of a populist leader, in the model of Edwards and Dornbush (“The macroeconomics of populism in Latin America”, Univ. of Chicago press, 1990). In this model there is a first stage in which the leader shows disdain for economic constraints, spends freely and prefers the path of wealth redistribution to the creation of new wealth. In a second stage the country starts to show economic weakness, deterioration of basic social services and food shortages while popular frustration increases. Recent political and economic developments in Venezuela suggest that the Chavez’s regime has entered this second stage. Chavez’s grasp on political power has weakened and his image as a genuine champion of the poor appears tarnished. During 2007 he closed down the most popular TV station in the country, RCTV, watched by thousands of his own followers. He lost an important referendum in December 2, one that would have given him almost total, dictatorial control over the country. The scandal of the bag containing $800,000 that a Venezuelan connected to his government tried to introduce in Buenos Aires, reported to be for the presidential campaign of Cristina Kirchner, threatens to involve both the Argentinean and the Venezuelan heads of state in a significant scandal. The incident with the King of Spain in Santiago de Chile increased the rejection of Chavez in Spain and in other European countries. The perception of an alliance of Chavez with FARC’s Marulanda and with Piedad Cordoba, the Colombian member of Congress, to embarrass Uribe’s government in the case of the hostages has also been damaging to him. Chavez is starting to face strong challenges to his political leadership.

And yet his prodigality seems unabated. In the meeting of PetroCaribe that took place in Cuba Chavez announced that the oil debt of the Caribbean states already amounted to some $1.2 billion. He added, however, that he would allow the debtors to pay in goods and services, “in the same manner Cuba has been doing”. This would mean a significant loss to Venezuela since Cuba and, now, the other Caribbean states would be paying Venezuelan oil supplies not in hard currency but in goods such as bananas and black beans and services such as bodyguards and sport trainers.

This largesse might seem attractive but it presents serious risks to the Caribbean states and is robbing Venezuelans of hydrocarbon resources that are being liquidated in unfavorable terms for the nation. The risk to the Caribbean states lies in the rapid accumulation of debt to the Venezuelan government. It is estimated that in two more years the payments by these states should already amount to some $100 million per year. This is an amount that cannot be easily paid in bananas and black beans and there is little doubt that the real type of payment being considered by Mr. Chavez is political. Chavez is looking to put in place a system of political indenture, which would bind the Caribbean states to his regime. So far Cuba has been able to profit from the oil supply arrangement with Venezuela because Chavez is not interested in asking for payment, given his status as Castro’s heir. However, this tolerant treatment might not be present in the case of other countries in the Caribbean.

In his long speech at the PetroCaribe event Hugo Chavez spoke about how the Caribbean people should identify with Caliban. Liberally appropriating Wikipedia’s entry about this character by Shakespeare in “The Tempest”, Chavez chose to identify the Caribbean peoples with Shakespeare’s savage, probably to the displeasure of some of the attending Caribbean heads of state who take pride in being highly civilized. In “The Tempest” Caliban is a barbarian who tries to rape Prospero’s daughter Miranda. He is the opposite of Ariel’s idealism. Still, in his speech Chavez stated: “we are all Calibans”, defiantly joining the dark side.

It seems like a dangerous gamble to abuse Venezuela’s national resources in order to try to become the leader of the “Calibans”. The strategy of prodigality Chavez has used since the start of his presidency is finally producing enough frustration in Venezuelans as to seriously threaten his permanence in power. Although his term ends in 2011 an early departure is no longer only possible but probable.

Gustavo Coronel is a 28 years oil industry veteran, a member of the first board of directors (1975-1979) of Petroleos de Venezuela (PDVSA), author of several books. At the present Coronel is Petroleumworld associate editor and advisor on the opinion and editorial content of the site.

Click here… for the original article published at PetroleumWorld.

The views expressed are those of the author, and not necessarily those of the Nassau Institute (which has no corporate view), or its Advisers or Directors.

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