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How big a threat is Venezuela's Hugo Chávez?

From The Economist

Originally published on May 12th 2005 | Hugo Chavez's brand of revolution has delivered some social gains--but at a heavy cost to democracy and economic development.

TO GET a glimpse of what Hugo Chavez, Venezuela's president, hopes is the future of his country, go to Catia, a gritty district to the west of the city centre of Caracas. There, a defunct petrol-distribution depot has been transformed into what Mr Chavez calls "a nucleus of endogenous development". To anyone not versed in the vocabulary of Mr Chavez's "Bolivarian revolution", that means a series of workers' co-operatives and social programmes, all bankrolled by Petroleos de Venezuela (PDVSA), the state oil monopoly.

Three spanking new buildings have gone up round a central meeting area. One houses a well-equipped health clinic. In a second, the government has installed scores of sewing machines. After eight months' training, the 180 women in the Venezuela Advances clothing co-op have started out in business. Their first contract was to make red T-shirts and caps for Venezuela's diplomats to wear on May Day. The third building is a co-operative making shoes. The hillside above has been planted with maize by another co-op of urban market gardeners. Some 1,200 work in the "nucleus", which cost $6.6m. A planned second phase, costing $8m, will include a "Bolivarian" school, a diagnostic centre and a day nursery.

Across the road stands a small supermarket, similarly new and clean. It is run by Mercal, a state company set up by Mr Chavez to provide cheap food for the poor. Mercal operates on largely commercial lines, but some of its prices are subsidised, at a cost of $25m a month to the government. Brazilian frozen chicken, for example, sells at 1,900 bolivares a kilo (90 American cents at the official exchange rate). On a weekday afternoon, the place is thronged with appreciative shoppers. Mercal has grabbed 40% of the market for staple foodstuffs.

Nearby is a centre for education outreach programmes set up by Mr Chavez. One programme, officially completed, taught adult illiterates to read. Two others allow people to finish their primary or secondary education, and a fourth is giving cramming courses--and the promise of a place in an expanded university system--to 286,000 teenagers who failed to complete secondary school.

Across the city and the country, such scenes are repeated. At 23 de Enero, a vast housing complex, Angel Sosa conducts a surgery each weekday morning in a converted primary school. He is one of 16,000 doctors lent by Fidel Castro, Cuba's communist president, to Mr Chavez in return for oil. Dr Sosa gives out a range of Cuban medicines, free, to his patients. In the afternoon, he does home visits.

Many Venezuelans are impressed by these "missions", as the social programmes are called. "If Chavez wasn't there, this wouldn't have happened. He's with the people," says Yolanda Mendes, an elderly resident, as she waits to see Dr Sosa. Venezuela's opposition sees the Cuban doctors and sports trainers as political cadres spreading communism. "In a way it supports the government," Dr Sosa says. "But it is really just social work." And that is how his patients see it.

Mr Chavez, a burly former army officer, owes his survival in power in large part to the "missions"--and to the oil windfall that has made them possible. Ever since 1992, when he staged an unsuccessful military coup against a democratic government, many poorer Venezuelans have seen him as their champion in an impoverished and failing country. They first voted him in as president in 1998, backed him when he rewrote the constitution, and voted for him again under this new charter in 2000.

To many other Venezuelans, especially from the country's fast-shrinking middle class, Mr Chavez is an altogether more sinister figure. They see him as replacing democracy with autocracy, and a mixed economy with something close to communism. Armed with oil wealth, Mr Chavez is said to be doing his best to spread revolution and instability across Latin America.

UNTRAMMELLED POWER

Mr Chavez's opponents, who include political parties of both right and left as well as trade unions, businessmen and NGOs, have done their best to get rid of him, by fair means and foul. In 2002, they briefly ousted him in a coup. Later they mounted a two-month strike-cum-lockout which paralysed the economy.

In August last year, they lost a recall referendum on his presidency. They cried fraud, though without proof. But certainly the government unfairly mobilised all the resources of the state. Before the vote, it registered some 2m new voters. And it deployed the "missions". At Catia, "we worked with a political target to be ready for August 2004, before the referendum," says Alejandra Espina, one of the co-ordinators of the "nucleus". Two months later, the opposition lost key positions in local government. The president's supporters now run all but two of the country's 23 states, and won Caracas, the capital.

The outcome of these battles is that today Mr Chavez enjoys untrammelled power, while the opposition has all but disappeared as an organised force. The president's popularity rating in polls has soared to 70%. Since the referendum, Mr Chavez has begun to steer the Bolivarian revolution, named after South America's independence hero, in a more radical direction. "We're starting to build our own socialist model," he said last month.

Mr Chavez now exercises complete control over all the institutions of state. In December, he clinched the judiciary, when the pro-government majority in the National Assembly named 12 extra judges to the Supreme Court and replaced others seen as disloyal. The electoral authority, too, has a CHAVISTA majority (of four to one). In disgust, some opposition supporters boycotted the local elections, tipping the balance in certain states.

"It's a dictatorship with a legal and democratic face," says Pedro Palma, a businessman and economics professor. That is not how Mr Chavez's people see it. "We have more democracy than before," says Andres Izarra, the information minister, pointing to referendums and community participation in budgets.

Certainly Venezuela still has many of democracy's outward trappings. The press is lively and plural, for example. But, little by little, freedoms are being chipped away. A new media law has prompted some self-censorship at opposition radio and television stations, according to Teodoro Petkoff, a newspaper editor. Last month, a public prosecutor charged Carlos Ayala, Venezuela's best-known human-rights lawyer, with involvement in the coup against Mr Chavez. The charge is specious: Mr Ayala not only opposed the coup but, during it, secured the release of a detained CHAVISTA legislator. Opposition supporters who signed the petition calling for last year's referendum complain of subsequent discrimination, such as being fired from public-sector jobs or being denied passports.

Some Venezuelans fear that a new force of army reserves, supposed to be 1.5m strong, will also be used to harass the opposition. The reserve's ostensible task is to defend the revolution against invasion by the United States (which Mr Chavez says is likely, though American officials pour scorn on that). A proposed purchase of 100,000 Kalashnikovs is needed, Venezuelan officials say, to replace older rifles going to the reserve--and not for Colombia's guerrillas, as some in Washington fear.

SPENDING THE OIL WINDFALL

The government has stepped up intervention in the economy, too. In outward appearance Caracas is the most "Americanised" of Latin American capitals, its freeways clogged with big Fords and Chevrolets and girded by billboards for Coca-Cola. Yet the state is steadily increasing its economic presence and control.

Since the referendum, Mr Chavez has set up a new state airline, a phone company, a cement firm and a television news channel to spread his message across Latin America. But the government's main economic effort is the workers' co-ops. Private business faces more curbs. The government long ago imposed exchange controls and price controls on staples. Banks have been ordered to earmark 29% of their total loans for farming and housing, at subsidised rates. With inflation running at 16%, the central bank has decreed a cap on bank-lending rates of 28%.

In the countryside, Mr Chavez has launched a noisy "war on the LATIFUNDIO", or large estate. So far, only two big estates, one of them belonging to Britain's Vestey Group, have been partly expropriated; hundreds more are under scrutiny. Mr Chavez says that only ranchers with "unproductive" holdings or improper title have anything to fear. But some Venezuelans say the government is acting illegally. They fear wider infringement of property rights. The government's National Lands Institute has ordered hundreds of industrial firms in Valencia, west of Caracas, to produce title back to 1848.

Even so, the economy grew strongly last year (see chart), as it bounced back from the strike. The growth is fuelled by high oil prices, which have been turned into a massive increase in public spending. Under Mr Chavez, spending by the central government has risen from 19% of GDP in 1999 to 31% of GDP last year. Many businessmen "are making money as never before", says Roberto Bottome of VenEconomy, a consultancy. But, outside the oil industry, there is little new investment. "Everyone is scared," says Oscar Garcia Mendoza, a banker.

More than ever, what sustains Venezuela is oil. Last year, oil exports brought in $29 billion (85% of total exports), up from $22 billion in 2001. In the past, when oil prices were high, the government saved some of the windfall, to spend when they fell. But Mr Chavez scrapped that arrangement. He is spending as if there were no tomorrow. Last year, oil provided 52% of government revenue--some $25 billion. On top of that, PDVSA provided another $3.7 billion, off the books, for social programmes. Even so, last year the government ran a fiscal deficit of 2.8% of GDP. Under Mr Chavez, public debt has risen from 29% of GDP to 39% last year.

Thanks to high prices, oil revenue is rising even as output declines. Officially, Venezuela is producing its OPEC quota of 3.1m barrels per day. But industry sources say output is in fact just 2.7m bpd. Of that, multinationals account for 1.2m bpd (up from 300,000 in 1998). PDVSA's production has halved over that period, to 1.5m bpd. It may fall further. After the strike, Mr Chavez sacked 18,000 of PDVSA's 32,000 workers, replacing some of them with loyalists. Officials argue, not without reason, that the firm had become an all-powerful state within a state. But opponents counter that an efficient firm, run on technical not political lines, has been destroyed.

The government has an ambitious plan to expand oil output to 5m bpd by 2009, mainly by bringing in foreign state-owned oil firms. Meanwhile, it is trying to extract as much revenue as possible. In April, it gave its multinational partners, which include ChevronTexaco of the United States, Brazil's Petrobras, Britain's BP and Royal Dutch/Shell, six months to switch to new contracts. These would turn their operations into joint-ventures in which the government would have a 51% stake, as well as increasing the income tax they pay. High oil prices mean that the multinationals may acquiesce.

The government's spending binge means that the economy is "extraordinarily vulnerable" to any fall in oil prices or in production, according to Orlando Ochoa, an economist at the Catholic University. Even so, Mr Chavez has cards up his sleeve. He appears set on selling Citgo, a big refiner and marketer of gasoline in the United States and a subsidiary of PDVSA. Second, officials have proposed that the government should be able to spend the central bank's "excess" reserves.

Sooner or later, the spending binge risks a monumental hangover. Venezuela is spending part of its capital. If and when oil revenues fall, the economy would descend into an inferno of recession and inflation. But that is highly unlikely to happen before a presidential election in December 2006, at which Mr Chavez looks sure to win another six-year term.

Worrying as many of these trends are, they do not remotely add up to Cuban communism. So what exactly is the nature and destination of Mr Chavez's revolution? And how has a country which was once the most prosperous in Latin America, with a seemingly stable democracy, come under the thrall of such a regime?

FROM RICHES TO RAGS

From 1913-50, Venezuela's economy grew faster than any other in the world. The overthrow of a dictatorship in 1958 ushered in what many came to see as the most solid democracy in Latin America, with a growing middle class. It was based on a power-sharing pact between two parties, one social democratic and the other Christian democratic. But this regime was less solid than it seemed.

From its peak in the mid-1970s, the ratio of oil revenue to population moved against Venezuela, partly because migrants flooded in from poorer neighbouring countries. The obvious solution was to use oil money to diversify the economy. In the 1970s, Carlos Andres Perez, a social democrat, nationalised the oil industry and used its revenues to create new heavy industries run by the state. As oil prices sank and debt spiralled, Venezuela's long boom came to a painful end. On "Black Friday", in February 1983, the bolivar was devalued. Since then, Venezuela has grown steadily poorer.

Poverty exposed the weakness of Venezuelan democracy, and made political corruption harder to tolerate. By late 1993, when Andres Velasquez, a left-wing trade union leader who might have been a democratic reformer, was narrowly defeated in an election marred by fraud, most Venezuelans agreed with Mr Chavez that the system (the "fourth republic", as he called it) was wholly discredited.

What, then, of Mr Chavez's "fifth republic"? For all its faults, governments of the fourth republic were more accountable than that of Mr Chavez. At least until the referendum, the president conformed rather closely to a classic Latin American type--that of the populist CAUDILLO or strongman. Such populists granted benefits to the middle class and urban workers, mobilising them against opponents symbolic or real--usually the landed "oligarchy" and its foreign backers, such as the United States. They claimed to be revolutionaries, but wanted to re-arrange capitalism rather than destroy it. They fulfilled their social promises by borrowing or printing money, and thus left their countries poorer than when they found them.

In Venezuela's case, since Mr Chavez took office, poverty has certainly risen: in 1999, 54% of households were poor, rising to 60% last year, according to official figures. But much of the historical agenda of populism, such as agrarian reform and oil nationalisation, had already been carried out by the governments of the fourth republic. So, at least until recently, Mr Chavez spouted against the "oligarchy", but changed little.

Since the referendum, however, the "process", as its supporters call it, appears to be moving into a new stage. Mr Chavez now says the goal is "21st-century socialism". His meaning is unclear. At a meeting in November of his senior officials, Mr Chavez said the revolution's long-term objective was to "transcend the capitalist model". The alternative, he said, is not communism (or at least "it is not proposed at the moment") but "the social, humanist, egalitarian economy".

Rather than the 21st century, the "process", as it is evolving, looks similar to the left-wing military government that ran Peru in the 1970s under General Juan Velasco, a hero of Mr Chavez's. Velasco hugely expanded the state's economic role, and formed thousands of co-operatives. This experiment collapsed in debt and inflationary stagnation. Today, no more than a handful of the co-ops survive.

The armed forces are certainly one of the props of CHAVISMO. Alfredo Keller, a political consultant, reckons that more than 500 senior government jobs, including nine state governorships, are held by military officers. The other prop is an assortment of small far-left parties. There is constant friction between and within the two props, and no overall revolutionary command. "The novelty of CHAVISMO", says Alberto Garrido, a political analyst, "is that it represents the underclass. This is the revolution of the excluded. But they are invertebrate. How do you organise them?" Not coincidentally, the iconic institution of the Bolivarian revolution is not a party but a television programme. Every Sunday, for four hours or so, Mr Chavez holds court in "ALo PRESIDENTE". It is the revolution as chat show, and it is a role for which he has no understudy.

Unlike General Velasco or Mr Castro, Mr Chavez took power in an election. That has given his regime an ambivalence which, says Mr Petkoff, the newspaper editor, is its trademark. "It has one foot in democracy, obliged by the democratic culture and tradition of the country...[But] the other foot is in authoritarianism and autocracy." Venezuelans must decide which foot they prefer to amputate.



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