Maduro Didn’t Start The Fire

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President Nicolás Maduro may be fighting fires with a garden hose, but he didn’t start them.

The self-proclaimed “son” of Chávez is finding it difficult to pay for his father’s mistakes as inflation and scarcity continue to plague what was once the wealthiest nation in South America.

As the old coat of patría finally starts to peel off, now is a good time to take a look under the hood of the Chavista economy and be reminded of the challenges that await the Venezuelan opposition … and who caused them.

Chekov’s Guns

Oil made Hugo Chávez possible, and the 2002 Paro Petrolero gave him command of that oil. In December 2002, a nationwide strike occurred, freezing production, particularly in the oil sector. The strike was a political protest with the aim of at worst establishing free market policies in lieu of the socialist economics proposed by Chávez and at best making the head honcho resign.

It didn’t go as planned. Eventually running out of steam in February 2003, the Paro concluded with the discharge of nearly eighteen thousand PDVSA employees who had joined in the protests; and so the new guard arrived. Ironically, the Paro served to hand Chávez a newly loaded PDVSA with the safety taken off.

Oil prices were on a near constant rise throughout Chávez’s tenure, but especially so after he took complete control of the industry. True to form, Chávez immediately began doling it out as he saw fit.

Spending controls established by Venezuela’s Central Bank (BCV) fell into the crosshairs. PDVSA’s obligation to surrender and sell foreign exchange proceeds to the BCV was lifted, and the bank was thereon required to divert its excess reserves to the National Development Fund (FONDEN). FONDEN, technically a corporation owned by the ministry of finance — more accurately, Chávez’s own red beret wearing piggy bank — evaded most disclosure agreements that befell government entities, allowing it to disburse billions of dollars without much needed explanation. Once introduced into the Chávista narrative, it was inconceivable that PDVSA and FONDEN wouldn’t be used and abused.

The Inflation/Dutch Disease Argument

The disruption caused by the Paro Petrolero planted the seeds of distrust among wealthy Venezuelans; nothing at the time —and nothing now, for that matter— was stable. The natural reaction was to move money out of the country on the not-so-off chance of economic collapse. Thus, CADIVI was born.

The Commission of Foreign Exchange Administration adopted a fixed exchange rate in an attempt to thwart capital flight. To no one’s surprise, CADIVI only worked to feed a growing black market, bolster inflation, and line the pockets of the middle and wealthy classes who could make a quick buck by taking one night vacations and cashing in upon return. Despite tremendous oil revenue, inflation continued to skyrocket.

There are some, who shall remain unnamed, that have gone as far as to praise Chávez for lowering inflation to an average of 22%, blaming it on ‘historical reasons’ citing the inflation spike in the late 80’s and then again in the mid 90’s as some sort of circular cause and consequence.

This is inflation we’re talking about, not the Great Gazoo; it doesn’t just poof out of nowhere.

What this argument overlooks is that the previous inflation spikes weren’t aligned with commodity booms. In fact, it’s just the opposite. Oil prices reached a historical zenith during Chávez’s tenure; so, explain to me again why inflation still shows no signs of slowing?

Oh yeah, that’s right, must be Dutch Disease — that other trusty crutch of Chavista apologists — the country’s over-reliance on commodities, the ultimate source of all its woes… except that it isn’t. Nobody has to stand in line for hours to buy rice in Angola, no one is expected to live off a $13 monthly minimum wage in Russia after accounting for implied inflation, and the economy in Indonesia might suck, but nobody asks for a baby’s birth certificate before they sell you diapers.

Blaming Dutch Disease for Venezuela’s problems is much like saying that it was cancer and not the car crash that killed a man.

Spending More Than You Make

El que escupe pa’rriba le cae la saliva encima, and Chávez offered one thick, dripping glob in the fiscal deficit. Often mistakenly pinned on the recent commodity price drop, the Chavista fiscal deficit actually began just before oil prices started to break records.

The problem had two heads: a drop in oil production (thanks to the oh-so-incompetent new guard brought on after the Paro Petrolero) and a surge in spending. Instead of following the doctor’s standard orders for fighting a nasty case of Dutch Disease, i.e. save during boom years (anyone remember the FIEM?), Chávez kept on with his largely ineffective social spending Misiones to keep up support. He was up to his neck with pie-in-the-sky promises.

Strangling the Private Sector

George Orwell famously wrote his magnum opus 1984 from his sick bed before dying from a long bout with tuberculosis. And Chávez… well, he wrote the Organic Law of Work and Workers (LOTTT). LOTTT was a modification of a previous law with the sole intention of neutering domestic companies; when viewed under this light, LOTTT was a masterstroke.

More working holidays were added to the calendar, hiring third-party companies became illegal, and firing any worker became near impossible. There was little incentive to work and even less incentive to produce. But the LOTTT can only be viewed as the culmination of the Chavista catalog, the last nail in the proverbial coffin, so to speak: Chávez had been tearing apart the private sector for years.

He began getting trigger happy with expropriations as early as 2005. Oil was the first domino; power, telecommunications, steel, gold, finance, transportation and tourism industries came next.

The most devastating effect of these policies? The distortion of the trading sector. Fuel exports surged, but exports of everything else crumpled by 2008; imports reached a historic zenith, even higher than during the free-trade years of the 1990s. Far from keeping his promise of lowering dependency, imports increased by 309% between Chávez’s first year in office and 2012.

The most devastated of the victims? The agricultural sector. Last year, the government claimed that it had successfully expropriated 10 million hectares with an ‘all according to plan’ smile on its face.

Chávez’s paradoxical solution to complaints over drastically reduced production were symptomatic policies such as Mercal, PDVAL, comedores populares, and casas de alimentación.

Scarcity, Obviously

A dependence on imports, CADIVI-fueled inflation, a thwarted private sector, and a gaping deficit combined in a perfect storm – here is Venezuela’s scarcity explained in three easy steps:

  1. Domestic production plummets due to land expropriations and company seizures.
  2. Thanks to the overvaluation of the Bolívar and fixed prices, it’s cheaper to import than to produce.
  3. Import dependence and reckless social spending lead to a lack of hard currency. No money, no honey… or arepas, or inputs for local production, or much of anything, really (oh, but money to pay Wall Street? Yeah, suddenly there’s plenty for that).

Add them all together and voilà! You have shortages.

Signed, Sealed, Delivered

The only thing worse than a Venezuela with an economy derailed by Chávez’s loco de bola policies is a Venezuela where Chávez went about them not only with staggering incompetence but full intention.

Insult was added to injury last June, when Chavez’s top economic planner Jorge Giordani, known as the ‘Monk’, admitted to the economy being a sacrificial lamb on the road to Chavez’s 2012 electoral victories. In a public letter, “Testimony and Accountability before History,” Giordani becomes the little bird in Chavez’s ear. He describes the odd pair going about these wrecking ball tactics knowing full well what the consequences would be, opting to review the ‘issues’ after the election.

But Chavez died and Maduro took over. The Monk has since fallen out favor, he was fired in 2014. Giordani has criticized Maduro’s response to the crisis and much of the national rhetoric:

“If the situation is bad, if the thermometer is at 40 degrees, there are those who blame the thermometer … We need to acknowledge the crisis, comrades.”

Brilliant. Duly noted. Now, how about we acknowledge where the crisis came from?

Chávez bungled what will go down as Venezuela’s best chance at establishing a more stable economy — Maduro is a bumbling fool of a consequence who has refused to face the country’s problems, but a consequence all the same. Reconstruction is sure to be a slow, painful process and one that will likely be left for the opposition to handle so long as the PSUV continues with its Sisyphean efforts and talks of economic war.

 

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Venezuelan-American and a digital nomad, Manuel Madrid covers travel, politics, international relations, and life. Rumor has it when writing failed to pay the bills, he supported himself with stints in safecracking, private investigation, and managing a Talking Heads cover band. Manuel attended Virginia Commonwealth University and has been moving around the world since.

90 COMMENTS

  1. Really good article. Opposition politicians need to stop using Chávez as a cheap rhetoric (Remember the “They’re destroying Chávez’s legacy” speeches by the likes of Freddy Guevara?) to cash votes and start tearing the issue from the root: This is Chávez’s fault, and we need to say it like it is. He’s not some untouchable god who was never wrong, but it’s soon going to become like that if we don’t tear the quasi-religion that is chavismo.

    • Amen. Literally, hopefully, all statues of Chavez should be torn down, a la Lenin in Russia, and it’s not too far-fetched to expect this, so long as the Oppo can avoid blame for the economic firestorm fast approaching.

    • I think it’s too soon, historically, to tear down the statues of Chávez, especially in a country that has long promoted delusions, even among the intellegentsia (“Verdad que Caracas es el sucursal del cielo?”).

    • “There are some, who shall remain unnamed, that have gone as far as to praise Chávez for lowering inflation to an average of 22%,”

      Do some articles in this blog serve as a teaser or as an informative snapshot of history?

      In other words: Link the URL to the “unnamed” please.

      • To compliment Chávez for this ‘feat’ during a commodity boom is preposterous and something that would only come from the keyboards of the usual “scholars” and apologists: Mark Weisbrot, Steve Ellner, Richard Gott, Gregory Wilpert — take your pick. Does it matter who said it? I think it would give them unnecessary attention and take away from the article.

        • Even using the nomenclature (widespread, foreign-based) “scholars” and apologists would help readers to better understand the breadth of inferior intellectual support for Chavez, which in turn was picked up by lazy, foreign-based journalists.and ultimately provided an oxygen tank for the ridiculous ideas that contributed to ruin an economy.

  2. Great article! The article brings together a lot of things – politics, economy, foreign trade, oil, forex, corruption, and puts them together in their interplay to create a picture that makes sense. Not a pretty one. I tried to do that, and couldn’t. I just could not dope out where the huge inflation and consequent currency depreciation came from, given oil exports and what should logically have been a large trade surplus.

    In terms of the old bolivares in the 1970’s, the “inflation” is best considered as a price multiple, e.g. “prices are 2x what they were last year, or 4x what they were the prior year.” One line of numbers I ran on a spreadsheet spit out a number that caught my eye: 186,000. The speed of light.

    Can anyone here tell me, please, if a marron grande in some cafeteria somewhere, one of those great places just off the sidewalk, sells for BF 100 these days?

    • I like the Cigarette inflation Index (my own creation), back in the early seventies a pack of “Belmont” used to about 1 Bs (VeB), now (late 2015) the same brand runs about 350 VEF, or in the same standard is 350.000 VeB or barely 35.000.000%. Not all the blame should fall on Chavez doing as Venezuela was well underway on the path of self destruction long before him.

      • Mauro – When in your estimation did things begin to go downhill? I see the same thing, I’d like to hear a bit more about your view of it. Most everyone seems to pin dates on Chavez. Chavez this, Chavez that.

        Thanks for the price points on Belmont. I get the idea from Bill Bass’s post about Coke that prices change quickly, but in the US the price per ounce is about the same as it is in Venezuela (surprising in a way, but makes sense for imported products). You can buy Coke on sale for the $$ equivalent of BF140 one week, and pay BF240 next week. The Venezuelan subsidized prices for meats is w-a-y below US, by a factor of around 50. I’d be curious as to what un-subsidized meat prices are. E.g. US prices for rib roast vary by location, but a ballpark is $9 to $13 a pound, which would be about $20 to $29 a kilo or BF17.200 to BF24.940 a kilo; ground beef probably averages to between $9 and $13 a kilo in the US.

        This is relevant to the topic post, since purchasing power parity notions are an indication of trade balances, Forex Black Label, and inflationary pressures which will have to adjust, somehow.

  3. Interesting read! All of this economic insanity has lead to a catastrophic food situation and a stunning/frightening lack of basic medical supplies. People are dying needlessly, every day, as a result. How long can this go on?

  4. Inflation is running amuck , two simple examples from my own personal experience : a 2 lt bottle of coke went for 140 Bs about a week ago, yesterday it cost 240 Bs , a loaf of sandwich bread bought at a bakery cost 140 Bs about 2 weeks ago ,now a somewhat smaller loaf costs Bs 345 . Beside coke and pepsi other kinds of cola beberages are starting to dissapear from the supermarkets. Supermarket and drug stores are taking out whole isles of shelves and suddenly you find a big open space in the middle of the store that wasnt there before. The number of items to be found are becoming more scarce every time one goes to the stores , After months of dissapearing totally some toilet paper is beggining to reappear occassionally in certain stores. The queues are long and they soon run out . Same with eggs…….!!

    Dont see the regime spokeperson even address or recognize the existence of these problems , they concentrate on blah blah big words but otherwise it seems as if they lived on mars……the only words that come out of our mouths is ….HELP.!!

  5. I predict that this article will be referred to quite a few times, as it provides a concise history of Chavista economics. Hundred dollar oil papered over a lot of mistakes. Absent hundred dollar oil. the mistakes became readily apparent to all.

  6. Chavez was extraordinarily destructive as a ruler, but the Venezuelan masses didn’t see it. The chavista intellectuals and their foreign allies covered up for him; the oil boom allowed him to keep the balls in the air till his death. And he is deeply, perhaps irrevocably identified with the economic and emotional benefits that so many Venezuelans experienced.

    They will not listen to any explanation that discredits their idol, not for at least a generation.

  7. Pérez Jiménez, Creole, Ciudad Universitaria
    Superbloque, Helicoide, Seguridad Nacional

    Leones del Caracas, Teleférico, Plebiscito,
    Llega la democracia con Larrazábal

    Cantinflas, Radio Caracas, Betancourt, Punto Fijo,
    Caldera, los Kennedy y Acción Democrática

    Trujillo, atentado, militares sublevados,
    Digepol, guerrilla y El tren del encanto

    No prendimos el peo,
    Ya había estallado
    Cuando nosotros llegamos
    No prendimos el peo
    No lo echamos
    Intentamos disiparlo

  8. Maduro didnt start the fire Chavez did , but the signs that the economy was unraveling were clear by the time Maduro came to power and he could have done a lot to douze the fire , to prevent it from burning down the country , he appeared he might do it then backtracked , he could have raised gasoline prices, made the exchange rate more rational , negotiated with the creditors a swap allowing for longer payment terms (specially when the prices hadn yet fallen so deep), he could have made price controls less sweeping more market friendly , but he did none of these things even if there appeared times when the regime might do it , announcements were made repeatedly but when on the brink of taking the measures he backed down in fright at what that might that do to his political capital , ultimately he was so afraid of the oppo taking advantage of the electoral effect from these rational measures that he didnt have the guts to go thru with them . In a way his fear of the oppo and lack of guts made him take the worst policy course ….do nothing …. continue as if nothing was happening . So sure he didnt start the fire but in the end he kept fanning its flames , so he must stand responsible for the ruin that has befallen the country …..

    • You’re right on the money: Maduro has and continues to do zilch to actually stop the situation from getting worse; someone needs to take the dagger out and he’d rather avoid a bloody mess. I tried squeezing this in the final paragraph (one article just wouldn’t enough for both Chávez and Maduro).
      My intention here is to confront the “tiptoeing around Chávez’s mistakes to appease uninformed voters” rhetoric that refuses to go away. If we come out of this mess unaware of and eager to reproduce the steps that got us into it, well…

      Thankfully, I’ve yet to hear much argument for Maduro’s competence, so until then…

      • Yes, Maduro is extremely incompetent and ill-prepared, but so was Chavez, who lucked out with a more than 10-fold increase in the price of oil. Sure, the difference was largely in charisma/communicational skills, but it was easy for Chavez to be “pragmatic” when he had the wherewithal to do so. As Syd said above, the defenestration of the Chavez myth may not be imminent, but hopefully it will happen in time with the worsening of the economic disaster, so that Venezuela can escape the deleterious effects down the line of a lingering Chavezism/Peronism. Mr. Madrid, for a roving nomad, your writing is excellent/informative, and maybe FT could put you on the payroll as “Roving Editor For World Hotspots”, such as the Sudan, that he in the past has been interested in, but now doesn’t have the time to cover? (just poking fun).

    • “In a way his fear of the oppo and lack of guts made him take the worst policy course ….do nothing …. continue as if nothing was happening .”

      Yes, and that’s what makes all of this so very weird. He just sat there, bewildered by it all, as if Chavismo economics runs by itself. Go to rallies, wear track suit, sit in front of television camera’s, go on foreign trips, accomplish nothing, pump fist in front of supporters, and on and on. One hopes that the Cubans had installed their microphones in the cabinet meeting rooms where the supposed economic meetings took place. It would be amazing to read at some date in the future what was actually said during those discussions. “Nicolas, we’re out of money. Inflation is at 150% and climbing. None of our suppliers are providing lines of credit anymore. We’ve leveraged most of the gold. What do you suggest we do?” The transcripts would be amazing to read.

  9. In a system like chavismo in which the worship and the total submision to a monumentally narcicistic personality was the primary virtue, competence wasnt as important as obsequious personal loyalty , that was what got you noticed and rewarded , that was probably why someone like Maduro got to be appointed as the dear departed leaders succesor. Submissiveness is a great quality when working for a narcicist but not so much when you are judged on the basis of your performance and efficiency in realms other than those that got you noticed and appreciated by the Worshiped leader .

    Economic management was never important for Chavez , what was important was being good at singing his praises , loud proclamation of fealty to grand revolutionary ideals , being a meek instrument to the big bosses commands . The Economy sort of took care of itself or was considered a kind of putty in the hands of the Supreme leader (specially if your are living some boom oil years) .

    A capacity for mass emotional manipulation, political intrigue and fiery oratory is probably more important to Chavismo than actual effectiveness in managing a government . Now we need people who are really good and competent at economic management but Chavismo is blind to this need , some may have an inkling but they will be summarily silenced . Example what Ali Rodriguez said in the Summit meeting of PSUV economic leaders , forget about the economic war , address the real problems , in less than 24 hours Maduro appeared before the press stating that some comrades werent still conscious of the importance of the economic war….

    Its not Maduro who is incompetent at economic management its the whole Chavista system of thought and feeling which is hobbled by its difficulty in dealing with the subject ……!! The system itself has to change in order for them to become aware of what the economic crisis implies and start dealing seriously with the challenge.!!

  10. “FONDEN, technically a corporation owned by the ministry of finance — more accurately, Chávez’s own red beret wearing piggy bank — evaded most disclosure agreements that befell government entities, allowing it to disburse billions of dollars without much needed explanation.”

    Great summary.

    “Disclosure agreements” in the above graph is a catch-all phrase for keeping records and maintaining accountability across the board, in all sectors. Basically managing and documenting what the hell is happening which is the only way to know where you stand – then transparently letting the country know in real-time where they are at. Without that mechanism in play, people are left to pimp anecdotal evidence for the lack of any hard data, and note when the healthcare system started to tank (my daughter works in a Caracas hospital and I heard the dire reports as far back as 2005) and the doctors started to sound off, the government threatened jail for whoever spoke up. Such wholesale denial has basically left a huge info void that will require a lot of close scrutiny for the incoming assembly to sort out, without which they’ll have no idea per where the country really is.

    In short, “What, exactly, is wrong” must be investigated in terms of causes, not effects (colas, etc.), and till that time that the books are combed over the institutions evaluated at depth, all we can do is talk in political circles – entertaining, but the way out I believe lies closer to what “Gringo” mentioned earlier about strictly “practical matters.” This is not very sexy work, rooting through the layers of socialismo bullshit and rhetoric to get down to the bottom line, but it surely is the starting point to rebuilding.

    • Without that mechanism in play, people are left to pimp anecdotal evidence for the lack of any hard data and note when the… system started to tank.

      Further anecdote. In 2007, CC had an article about a burned-down drilling rig. [The comments section was copious, but a software update swept the comments into the dustbin of history.] In the process of fine-tuning a comment, I e-mailed a petroleum engineering consultant, including some photos. I wanted to know if he thought that poor maintenance contributed to the rig fire and loss of the rig. He replied that poor maintenance definitely contributed. He wasn’t surprised at this, as in the more recent annual inspection tours had had made of Venezuela’s oil field, he had noticed a marked deterioration in the upkeep of oil field equipment.

      This anecdote from 2007 and your anecdote from 2005 show this problem didn’t begin yesterday. In this case, the deterioration probably began the day Chavez took over PDVSA.

  11. The piece is great not only because it very accurately describes the reasons behind the economic chaos, but also because it doesn’t fall in the political correct fallacious and maquiavelic trap that states the usual “Muhh, but they did a lot for the poor too, and “famine” was reduced too, and healthcare improved too, and education is now better too, and they distributed some economic lamps “for free” too, etc”.

    The Wall Street Journal had a similar article on Brazil’s economic chaos, yet far shorter and less detailed than yours, and one can see that the reasons are basically the same of Venezuela: hand-to-mouth-policies-because-in-the-long-run-we-are-all-dead; the typical “to review the issues after the election, or after 2020, or maybe some day, or maybe never…”.

    http://www.wsj.com/articles/what-really-sank-brazil-1450047467

    So, sorry to some people here, as it hurts me to say it, but it’s ALL about ideology, not just corruption. Actually, the corruption is what makes the ideology possible, as thousands of people inside the bureaucratic stratum and millions in the working classes must be bought in order to bring such mad dystopia into existence. You don’t do a Revolucion Bonita without massive external and internal support. A corrupt like Al Capone would have done a far better job than Chavez did because he wouldn’t have destroyed the private sector, for example. That’s why to remove Maduro and put a “honest” Marea Socialista, or some sort of “ethical” version of Podemos, or whatever like that in the the place won’t solve the problem at all, because at some point the ideology will want to make itself heard, and that’s the moment where things go to hell.

  12. The article is well written and I will of course say “I couldn´t have said it better”. However there is a piece that actually missed a very importan point that should be always highlighted if we want to find a real culprit for inflation.

    The “Scarcity, Obviously” section names imports and social spending as the causes for lack of hard currency. However, the loss of value of our currency is mostly due to the fact that the government has hold of the money printing machine.

    Chávez eliminated all obstacles for printing more money than they had in reserve. In fact, they invented the term “reservas excedentes” (as if such thing could ever exist) to let Chávez play with that money without restrictions. I believe it was Rodrigo Cabeza´s idea, correct me if I´m wrong.

    Anyway. More bills printed meant the government could hand it in the form of social spending, but it was just paper. When that money actually hit the streets, its effect was that it diluted the actual value of the money people was producing with their hard work.

    I do not know if I´m being too Austrian, but I believe that clarifying this point would serve better to understand where to look when trying to fix the inflation mess.

    Thanks

    • This would have been worth noting along with touching more on corruption. On a side note, Maduro hasn’t stopped the printing presses either — sadly, it’s now long past the point of seigniorage, rather just blind fumbling to keep up with a train speeding towards the edge of a cliff.

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