Caracas Chronicles

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.