Thereis no doubting that Venezuela’s President Hugh Chavez is a charismatic leader who is intensely popular among his country’s poor. Since his election in 1998 this former army officer has pursued populist policies, rooted in a desire to reverse the long-standing disparity in income distribution in this resource-rich state.
Unfortunately, in seeking to redress a long-standing economic wrong, Chavez has relied on confrontation rather than compromise with his political opponents among the middle class and the small, elite group of super-rich. His supporters would argue that following his landslide election victory 12 years ago, his defeated rivals have sought consistently to undermine his administration — to the extent that in 2002, he was forced from office briefly, by a military coup.
Even though this is clearly true to a certain extent, Chavez himself has contributed generously to his own troubles. His nationalization program has had a predictable economic impact. In the energy sector, the takeover, particularly of US-owned firms led to the widespread loss of the managers and technicians essential to run these companies efficiently. Venezuela’s hydrocarbon income, not least from its abundant supply of heavy crude has, therefore, suffered not simply from lower oil prices but also from mismanagement. As a result government finances have come under pressure and inflation has hit 25 percent, the highest in Latin America.
This week, the administration devalued the currency, the Bolivar, against the US dollar in a bizarre multitiered change, in which the Bolivar was halved in value for the purchase of “nonessential” goods but reduced much less for essential goods. In an attempt to forestall the inevitable price rises in shops, Chavez announced that any retailer caught marking up goods would be fined and their premises closed because they were “looters”. The country’s National Guard has been called out to police this new ruling.
In the short-term, the devaluation will boost the president’s social welfare campaign. However, as his determination to control prices demonstrates, his administration clearly fear the gains to the government’s finances will quickly be destroyed by further inflation, at a time when Venezuela’s economy is already bowing under the weight of recession.
It is hard to see how this is going to end well. After a dozen years in office, the president has not created real prosperity for the poor. Simply putting supporters on the state or on local government payroll is no substitute for creating jobs, which generate positive returns for the economy. And the government’s economic shortcomings are now also being seen in a more dramatic form. Low rainfall has impacted on hydropower generation, so that this highly urbanized country is now suffering regular power outages. Chavez’s opponents claim with justice that he has failed to invest in new power generation. It is indeed astonishing that a leading oil producer and a founder member of OPEC should find itself with power shortages. Failing electricity supplies will hit business and are only likely to deepen the recession. Closing down shops that increase prices, however, looks like a disturbingly desperate measure.
