The decline and fall of political democracy and the rise of human misery in Venezuela

On May 17, 2014, Lufthansa, the flagship German airline, suspended ticket sales to Caracas, the capitol of Venezuela, joining ten other airlines that have taken similar actions due to Venezuela’s currency controls. As of April, international airlines had an equivalent of US $3.9 billion stuck in the rapidly depreciating bolivar, the Venezuelan monetary unit. The $3.9 billion cannot be taken out of Venezuela because of the Venezuelan state’s currency controls.

International companies have already recognized bolivar-denominated losses of 80% due to the world’s highest inflation rate raging in Venezuela, a rate of inflation that may accelerate to hyperinflation. In 2013 the Venezuelan bolivar  lost over 90% of its value against the U.S. dollar.

Venezuelan President Nicolas Maduro said after his election in April 2013 that he would set legal limits on business profit margins in order to prohibit price inflation—an inflation caused by the state’s monetary inflation. Price controls on chicken, rice, cooking oil and other items have driven many food companies out of business. Consequently, the state now must import 70% of all basic foods.

Price controls, combined with the effect of government takeover of hundreds of companies, farms, and ranches, have made Venezuela’s economy among the least productive in the western hemisphere.

Since the advent to power of virtual dictator Hugo Chavez, in 1999, economic life in Venezuela has deteriorated badly. The state has had to borrow heavily abroad despite collecting $750 billion in oil revenues since 1999. The state is spending far more than it takes in from taxes, and doing so not only through borrowing but through issuing money at a rapid rate, money with nothing to back it up except the promises of an already discredited state.

The problems being experienced by the people of Venezuela always occur from political actions to eliminate the ability of people  to exchange goods and services freely, including state control of prices. Free market prices are a spontaneously developed and continually changing characteristic of exchange that maximize humanity’s ability to supply human needs  through voluntary cooperation.

Political dictators try to act as though prices can be dictated by central authority, in effect trying to forbid operation of the economic law of supply and demand. Andrew Galambos, whose work inspired the website of which this blog is a part, posited that the law of supply and demand was a law of nature.

Price controls are always counter-productive because they suppress the information that prices afford to producers and consumers in making choices in production and consumption. The term price controls is a misnomer; price controls are actually people controls. Price controls cause a lower standard of living and poverty, if long maintained.

Venezuela is a country that could be rich. It is one of the largest oil producers in the world, using an industry built up by foreign oil companies then confiscated by the Venezuelan state in 1976. About 20% of Venezuela’s oil exports are to America despite the outright hatred of the U.S. expressed by former Venezuelan political boss Hugo Chavez, who died in 2013. Chavez picked his successor, Nicolas Maduro, who has continued the policies of Chavez that have brought Venezuela to the brink of ruin.

Venezuela has good agricultural land comprising at least one-fourth of the nation’s area. Much of the farm land was for a long time controlled by a relatively few families, known as “latifundistas,” a word derived from ancient Latin and in current Latin American usage meaning owners of large, semi-feudal landed estates.

In Venezuela and throughout Latin America, according to Nobel-prize winning author Alberto Vargas Llosa “. . . latifundismo, a sort of land monopoly in the hands of the state-backed elite dating back many centuries, had been responsible for exploiting peasants . . .” through semi-feudal means. 1  In the past the Venezuelan state has expropriated land of some of the latifundistas but replacing state bureaucracy for elite landowners only aggravated the problem of rural poverty.

In the past 100 years there has developed a new Latin American tradition, really based on the old one. That is,  demagogues get power through political elections by promising to confiscate large estates and divide the property among farmers who don’t own much land. Venezuela’s former dictator Hugo Chavez, who died in 2013, did this as part of his posing as benefactor to the poor, not only in respect to agricultural land redistribution but in many other ways which all amounted to the same thing: stealing wealth from foreign investors and domestic producers and transferring it to the much larger number of people who are poor.

This sort of thing does not create real and lasting prosperity. To create real and lasting prosperity requires recognizing property rights, protecting free enterprise, and minimizing state plunder. That is the message of the book Why Nations Fail: The Origins of Power, Prosperity and Poverty (2012) by Damon Acemoglu, professor of economics at the Massachusetts Institute of Technology and James A. Robinson, professor of political science and economics at Harvard University.

Political opponents and others criticized Chavez for concentrating power in the style of a classic Latin American caudillo, or military dictator. Although Chavez won every election he contested after coming into power in 1999, his victories were tainted by suppression of criticism in the media and from the political opposition and by election fraud. Chavez closed TV and radio stations critical of him, armed a civilian militia used to intimidate political opponents, and is suspected of fraud in the vote count.

It is not possible at present (in the year 2014) for the people of Venezuela to remove from power the political party of Hugo Chavez, the United Socialist Party of Venezuela, by means of a democratic election. Hugo Chavez would not permit that to happen. He was following the same plan as other dictators to self-select himself as president for life by using force, including imprisonment of opposition politicians, and control of the media of communication to prevent dissemination of criticism. His chosen successor Francisco Maduro has shown that he will use the same means to stay in power.

Via nationalization Chavez confiscated more than one million acres of farmland and scores of energy, banking and telecommunications companies. These seizures of productive property caused a steep decline in Venezuelan investment and productivity and made the nation ever more dependent on oil sales.

Despite the vast sums Venezuela collected over the last decade from its energy reserves, to finance the operation of the Venezuelan state Chavez was forced to borrow more than $38 billion from China. The loans are secured by future commitments to sell oil to China.

According to petroleum expert Ed Morse of Citigroup Global Markets, Venezuela’s wealth of oil reserves is irrelevant because the nationalized oil company has been unable to secure investment and technical expertise to manage and develop the reserves.

It’s no wonder that outside capital is now unavailable to Venezuela, given the nation’s long history of legalized theft of capital from foreign and domestic investors. Furthermore, the attacks on property within the country under Chavez and his successor have caused domestic owners of capital to move assets out of Venezuela whenever it is practicable for them to do so. 2

 

Notes:

  1. Quotation from Vargas Llosa, Alvaro, Liberty for Latin America: How to Undo Five Hundred Years of State Oppression (2005) pages 41-42. 
  2. The principal sources for this post are “Lufthansa Halts Caracas Ticket Sales, Joining Other Carriers,” by Anatoly Kurmanaev, Bloomberg, May 17, 2014, http://www.bloomberg.com/news/2014-05-17/lufthansa-halts-caracas-ticket-sales-joining-other-carriers-1-.html; “Why Venezuela’s World-Beating Oil Reserves Are ‘Irrelevant,’” by Sri Jegarajah, CNBC Asia Pacific, June 14, 2012, http://www.cnbc.com/id/47823420; “Venezuela vows to take other stores in attack on retailers,” by Girish Gupta, USA Today, November 11, 2013, http://www.usatoday.com/story/news/world/2013/11/11/venezuela-seizes-stores/3497003/; “Government-ordered price cuts spawn desperation shopping in Venezuela,” by Mery Mogollon and Chris Kraul, Los Angeles Times, November 16, 2013. http://www.latimes.com/world/la-fg-venezuela-chaos-20131116-story.html#page=1
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