The Resource Curse

A bad mix for Venezuela: oil and Chavez

Scott Tong Apr 12, 2016
Another barrio mural of Chavez.  Jorge Galino/Marketplace
The Resource Curse

A bad mix for Venezuela: oil and Chavez

Scott Tong Apr 12, 2016
Another barrio mural of Chavez.  Jorge Galino/Marketplace

In this oil price downturn, the petroleum state hit hardest is Venezuela. The country is experiencing food shortages and lines, an increasingly worthless currency, and inflation estimated at 400 percent or higher.

The collapse raises fundamental questions about the country’s longtime leftist, anti-capitalist economic model. It’s associated most directly with the late president Hugo Chavez. Is the end near for the Chavismo model?

Fading Chavez graffiti. 

As the economy crumbles, the socialist government in Venezuela is giving out vaccines — to dogs. The hounds and their owners line up for shots in the west Caracas slum of La Charanga. These are the political strongholds for a ruling party trying to survive the country’s worst shortages and inflation ever.

“It’s hard to have a pet,” said one mother in line with two children and three dogs. “Dog food really expensive and scarce. The cheapest I can buy one kilogram is 1000 bolivars. Last year it was 280.”

Much of the country’s oil money gets spent in the slums, on services aimed at the poor. State programs provide education, medicine, low-cost or free appliances, housing. Cars in Venezuelan burn the state-subsidized gasoline, the world’s cheapest.

These programs dates back to the vision of one president most Americans have heard of: socialist Hugo Chavez. 

Chavez – crooner, variety show host, global instigator — was a man of a thousand quotes: About the North American “empire.” About capitalism destroying life on Mars. About gringos “going to hell.”

Chavez supporters, or chavistas, often hold a particular economic view.

“We have an economic war taking place in Venezuela,” said La Charanga representative Raphael Fernandez Soto. “We’re being boycotted by other countries.”

That is the common framing: of economic warfare, of Venezuela the victim of foreign imperialists and hoarding business owners.

“They talk against the private sector,” said pollster and frequent government critic Luis Vicente Leon of the Caracas firm Datanalisis. “Against imperialism. Against the Martians, whatever. Never the government.”

Two men stand on the steps of a barrio in Venezuela with a painting depicting Hugo Chavez in the distance.

Hugo Chavez came to power during a previous oil bust in the late 90s. Then, like now, global supply outraced demand. The downturn hit Petrostates like Venezuela hard, particularly the poor.

Chavez came, and he delivered to this group.

“So you can imagine: if somebody who comes from the poor sectors of society, has dark skin, identifies with them, puts forward this charismatic narrative – he’s a great communicator — about why you’re suffering and how things are going to get better and then he actually does it, I think it’s very understandable,” said Caracas-based David Smilde, sociology professor at Tulane University and senior fellow at the Washington Office on Latin America.

Smilde said outside of Venezuela, Chavez supporters are often mis-portrayed by the international media and cast in “instrumental terms” suggesting they only supported Chavez because he bought them off with welfare benefits. Another misperception, he said, is that devotees have an “irrational” love for a leader they consider a messianic savior. Chavez pledged to represent this group that had long been ignored by elites, and improve their lives.

“And lo and behold, that’s what he did,” Smilde said. “He got OPEC going again. He took control over Venezuelan resources.”

Early in his first term, Chavez traveled to fellow members of OPEC and asked that they maintain discipline and control global supply. Prices rose. And so did oil revenue. His government spent it, cutting poverty and boosting college enrollment. Millions received pensions and healthcare services for the first time. 

The governing model, known as chavismo, joined a broader leftist trend in South America. But in Venezuela, the Chavez boom also went hand in hand with an oil boom.

Today in Bolivar Plaza in Caracas, the faithful still rally for Chavez even three years after his death. His image is everywhere – on city walls, murals, bumper stickers. Chavez’s signature even graces the sides of office buildings.

Hugo Chavez’ signature painted on the side of a government building in Caracas. 

“Before Commander Chavez we saw a lot of poverty,” said Susana Quintero, who said she visits the plaza regularly to sit by the fountains and think. “After Chavez, a lot of money came into our pockets we never saw before.” 

But for all the continued fervor, the chavismo economic machine ran into problems years ago. The state cut spending on drilling, and it fired striking engineers and geologists. Oil production fell, as did sales. Separately, currency and price controls choked off other domestic sectors. Venezuela relied almost entirely on oil, assuming it would remain scarce and expensive.

“We always believed oil revenue would be eternal, permanent,” said Caracas oil analyst and economist Rafael Quiroz. “We became addicts to oil money. And we never imagined high prices would take a vacation.” 

Chavez’ eyes painted on the side of a building.

Shopping Plaza in Caracas lined with Chavez banners.

Hugo Chavez died in 2013, a year before oil prices collapsed from $115 dollars a barrel to $30. His handpicked successor, President Nicolas Maduro, just boosted gas prices, but by most accounts the economic structure remains broken.

“Venezuela is in an absolutely, completely exposed position,” Smilde said. “It basically did everything you don’t want to do with an oil economy. It spent all its money. It maintained an overvalued exchange rate. That meant it became ever more dependent on this one export called oil.”

Now, despite the rallies, Chavez’s party is reeling. It’s lost a majority in parliament. And Smilde thinks it’s the beginning of the end of chavismo as a leading political force.

To be sure, Venezuela could adopt orthodox solutions from the western “imperialists” — cutting spending, diluting the currency, and printing less money. But then, it would no longer be chavismo.

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