Useful lessons from Venezuela's crumbling populist economy: Don Pittis

Political parties may move us left or right, but Venezuela is a reminder that institutions — including those of both capitalism and socialism — make a country strong.

Not ideology but, rather, destruction of institutions led to country's current hopeless state

On the move. A Venezuelan boy surrounded by his family's belongings makes friends with a dog in Pacaraima, northern Brazil, the main entry point for people escaping Venezuelan chaos. (Edmar Barros/Associated Press)

In an era of polarized politics, the reaction last week when Canada's Special Envoy to Myanmar Bob Rae tweeted about Venezuela, should not have been a surprise.

On the face of it, the tweet by Rae, who was interim leader of the federal Liberals and the only provincial New Democratic Party leader to ever become premier of Ontario, reflected the kind of humanitarian concern he has expressed throughout his career.

"Crisis in Venezuela has created over two million refugees, unparalleled economic chaos and great hardship for the people of a country that seemed to have everything going for it," he wrote in the tweet

"Need to learn how this happened."

Blame socialism

Twitter's verdict was instant and mocking and, at my last check, the responses nearly universal: the thing that brought Venezuela to its knees, declared Twitter, was socialism.

And Twitter is not alone in this popular view. Opinion columns and even straight news stories repeatedly blame socialism for creating what is indisputably one of the world's worst human-caused humanitarian declines outside a war zone. 

As an article in Britain's Spectator magazine pointed out clearly, Venezuela's political experiment to try to improve the lives of its citizens has been an abject failure. Experts I spoke to universally agree that the country's people, and especially the poor, are worse off than they were before the popular election of Venezuela's late president, Hugo Chavez.

And that's saying something.

Before what Chavez called his "Bolivarian Revolution," — named after Simon Bolivar, a hero in the battle for independence from Spain in the early 1800s — Venezuela was already one of the most poverty-stricken places in the world. And this was in spite of being a very rich country with massive oil reserves.

Jeanne Liendo, an expert in South American energy policy, has been studying Venezuela's oil industry for years, and since coming to the University of Calgary her research has been to compare its economy with neighbouring countries.

As a petroleum journalist in Caracas who watched the economic train wreck happen, she says the problem, and why it now seems impossible to fix, is not socialism but populism.

"Populism is where two different extremes meet," said Liendo in a phone interview. "People talk about ... the right and the left. But when you have a populist in office, it doesn't matter whether they are from the left or the right, it's going to have the same outcome."

The Chavez party

Liendo says that when Chavez took power in 1999 in an overwhelming popular movement of poor Venezuelans, he was able to do it outside the institutions of government. His party was just the Chavez party, without the grassroots support of a normal party system. He reported to no one but the cheering crowds.

A new constitution put power in his hands. Gradually, the power of the country's essential institutions — including market capitalism, central banking, the courts, the legislature — were eroded or actively destroyed.

At first, his plan to give the poor a share of the country's enormous oil wealth worked. The country's Gini coefficient, a measure of a society's gap between the rich and the poor, moved in favour of the poor.

While the country was rich, the divide between rich and the poor in its teeming and violent slums was among the worst in the world. (Carlos Garcia/Reuters)

But as the price of oil fell, and the economy weakened, there were no institutional checks and balances to control Chavez's, and then his successor Nicolas Maduro's, power. Instead everything worked on the basis of government by decree. Handouts were the gift of the leader, often just to loyalists, leading to corruption and a classic developing country kleptocracy where "the state is the site of enrichment."

University of Calgary historian Hendrik Kraay traces the current crisis to what came before, what he calls a brittle "oligarchic system" where power alternated between two official parties.

"As society in Venezuela becomes more urban, more and more complex, this system doesn't seem to address everybody's concerns, it doesn't include new groups, it doesn't allow the poor to get really involved," said Kraay, recalling the pre-Chavez system of democracy.

Having weakened the countries institutions, including the central bank, Venezuelan inflation was heading for 1 million per cent, and the introduction of an electronic currency, the petro, hasn't helped. (Marco Bello/Reuters)

In a prequel of more recent history, the government of the day had become dependent on oil income, and when oil crashed in the late 1980s the poor rioted in response to government austerity. In the face of insurrection then-president Carlos Andres Perez didn't have the will or the time to make needed reforms, says Kraay. 

"You get, increasingly, people like Chavez, and Chavez is not the only one who is [saying], 'We have to throw the bums out and start over,'" says Kraay. "It's in many ways a populist reaction to what is perceived as a failure of the existing government."

Catastrophic poverty 

"The level of poverty was absolutely catastrophic," says Robert Huish, a specialist in developing country health at Dalhousie University and author of the book Where No Doctor Has Gone Before.

In a world where the so called "trickle-down" theory (in which the poor benefit by making the rich richer) has been proven not to work, reforms in favour of social transfers are the only way to stop the kind of revolt that led to Venezuelan populism.

Huish says that kind of gradual socialism has been a success in other parts of South America, including Uruguay and Chile, where reforms were introduced while maintaining liberal institutions.

But by abandoning reform and taking the populist route, Venezuela has gone backward. Old diseases are resurfacing due to a lack of vaccines, lack of medicines and chronic malnutrition. The professional classes have already left and the poor are now overflowing into neighbouring countries, exporting Venezuela's problems.

And like everyone I spoke to, Huish fears that by smashing the institutions that limit the power of government and make change possible, populism has created a problem with no obvious peaceful way out.

"I'm afraid it's going to get worse before it gets better," says Huish.

Follow Don @don_pittis


Don Pittis

Business columnist

Based in Toronto, Don Pittis is a business columnist and senior producer for CBC News. Previously, he was a forest firefighter, and a ranger in Canada's High Arctic islands. After moving into journalism, he was principal business reporter for Radio Television Hong Kong before the handover to China. He has produced and reported for the CBC in Saskatchewan and Toronto and the BBC in London.


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