Hugo Chavez’s Sad, Oil-Soaked Economic Legacy
As a politician, Hugo Chavez was a force of nature, as strangely masterful as he was polarizing. But as an economic steward, the socialist firebrand was something sadder and far more ordinary: “an awful manager,” as author Rory Carroll succinctly put it in the New York Times today, who squandered a world of opportunity after he took over Venezuela’s presidency in 1999.
It’s not that Chavez’s rule was an unqualified failure. His government made real strides towards alleviating poverty and inequality through a concentrated program of wealth redistribution. But mostly, it spent a decade drunk on easy oil profits, dolling them out on its pet causes — foreign and domestic — as the country’s petroleum industry decayed from within. Today, with Venezuela beset by high inflation and chronic food shortages, Chavez’s “socialismo” seems ever more tenuous.
As Pulitzer Prize winner and oil analyst Daniel Yergin observed yesterday, Chavez’s entire career path was in many ways paved by the oil market. Venezuela sits on the world’s largest proven crude reserves, and in the late 1990s, the dire impact of collapsing prices helped sweep the former paratrooper and failed coup-leader into democratically elected power. As prices went on tear in the 2000s, they restored the country’s footing. In fact, from 2003 through 2008, its per capita growth was faster or on par with global darling Brazil.
But crude didn’t simply help power the economy. For all intents and purposes, it became the economy. The year Chavez took office, oil made up 81 percent of Venezuela’s exports. By 2009, that figure had reached about 95 percent. By one measure — known as “oil rents” — the value of the crude coming out of Venezuela’s fields was at one point equal to 41 percent of the country’s GDP.
This happened in spite of the fact that the country’s oil industry was falling into shambles. In 2001, Chavez pushed through legislation demanding higher royalties from foreign oil companies, which may have led them to pull back investment. In 2002, the same year political opponents launched a failed coup against Chavez, 18,000 workers at the national oil company went on strike to try and pressure new elections, bringing production to a standstill. They were ultimately fired and replaced with pro-Chavez supporters. Finally, in 2006 and 2007, Chavez moved to outright nationalize the industry, leading foreign oil companies like Exxon Mobil to abandon the country.
The upshot of all this was that production plummeted, along exports, which fell from a high of more than 3 million barrels per day to around 1.7 million barrels per day (as shown in this chart from the U.S. Energy Information Agency).
A degraded oil industry was still a highly profitable oil industry, however. The Chavez government began diverting oil earnings into social programs, such as slum missions that delivered free healthcare and education, along with cheap food for the poor. Those efforts are, in many ways, the one true bright spot of Chavez’s embrace of socialism. As shown in the graph below, Venezuela’s poverty rate (in red) began a steep fall in the middle of the last decade. As the World Bank reports in its development data, the poor began to claim a slightly larger share of the national income, and overall inequality also fell.
You can also see the gains in measurements such as child mortality.
But judging Chavez’s record on poverty in isolation would be a mistake. Brazil, Peru, and Colombia also made significant progress on measures such as poverty and child death under more traditionally capitalist economies. Latin America, on the whole, was growing. It would have been hard for it not too: It’s a resource rich continent that’s reached relative political stability at a time when the world is desperate for oil, food, timber, and minerals. It was a bit like being dealt a pair of queens in Texas Hold ’em — a very good hand, which Chavez didn’t play particularly well.
One sign of that ineptitude has been the return of inflation. After falling to 12 percent by 2001 — low by Venezuela’s standards — it crept back up into the 20s and 30s, eventually reaching the region’s highest rate. Much of that may be due to the government’s free spending, and particularly Chavez’s largesse in the run-up to the 2012 election meant to secure support from the poor.
Inflation, and the haphazard efforts at combating it, have in turn led to shortages. It’s now common for long lines of shoppers to wait outside grocery stores to buy necessities like cornmeal and chicken. Though the government has blamed hoarding by unscrupulous capitalists, the real cause seems to be price controls the government has set so low that companies can no longer make a profit. As a result, they’re simply choosing not to produce. The situation is dire enough that Venezuela’s central bank felt compelled to put together a “scarcity index” of items missing from shelves, that the Wall Street Journal graphed out below.
Chavez isn’t leaving Venezuela’s as a full on economic basket case (we’re not talking about Zimbabwe circa 2001, here). But rather than helping the poor by setting his country on a path towards long-term prosperity, he attempted to resurrect a long-discredited version of state driven economics that’s led to the deterioration of the country’s most important industry and wreaked havoc with its consumer market. It’s hard to imagine who in the long run will benefit from that legacy.