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30 years on: Hugo Chávez repeats Carlos Andrés Pérez' mistakes

By Gustavo Coronel

October 27, 2004 - In 1972 the external debt of Venezuela was less than USD $2 billion and there was no internal debt to speak of. In 1973 and 1974, a sudden and dramatic increase in oil prices brought a torrent of dollars to Venezuela. The new president of the times, Carlos Andrés Pérez, who had won the presidency with as much popularity as that of the current president, promised to manage this flood of dollars with an attitude of austerity. However, this promise was soon forgotten. Pérez's advisors convinced him to embark in a program called "The Great Venezuela," conceptually comparable to the Great Leap Forward that sunk Mao's China into economic collapse. In the Venezuela of Carlos Andrés Pérez the oil windfall opened the doors to monumental errors, such as the agricultural credit program and the industrial expansion program for the Guayana region. The first program was to promote agriculture in a country that imported the majority of its food. The second program was designed to convert the southern region of Venezuela into a new "Pittsburgh," full of factories polluting the air. The agricultural credit program developed into a classic example of clientelism. About $500 million were freely given to people close to the political system, people who knew nothing about agriculture. The list of the people receiving these credits included dentists, doctors, lawyers, the military, friends but very few farmers. Leopoldo Sucre Figarella, a brilliant and ruthless engineer who did not care about procedures but about results, sold Pérez on the industrial expansion program for the Guayana region. The problem is that when improvised strategies go wrong it is already too late to rectify and politicians do not feel like being accountable. Sucre Figarella convinced Pérez to dedicate some $2.4 billion to expand bauxite, alumina and aluminum production in southern Venezuela. The execution of this ambitious program was flawed, highly delayed and, as a result, the government ran out of money and Venezuela ended highly in debt.

The problem with backward countries is that it is not the government that gets in debt but the people. In 1974 the developing world showed a deficit of $11 billion and OPEC countries a surplus of $68 billion. But, by 1978, the financial equation had reversed showing a surplus of $32 billion for the developed world and a meager $2 billion surplus for the OPEC countries. The OPEC money was being deposited in US and European banks and was returning to the developing world as short and long term loans. Venezuela started to borrow. Most of this borrowing was short term, in order to cover the operational deficits of inefficient and corrupt government organizations. When this trend became noticeable, capital started to flee the country. And then, the price of oil fell.

The result of the "Great Venezuela" of Carlos Andrés Pérez was disaster. Venezuelans became highly indebted and this tragic situation was not reversed by the later administrations. In fact, the Lusinchi administration brought Venezuela to a new low, both in quality of life and honesty in government.

Today, three decades later, Hugo Chávez is enjoying a new oil income windfall. In spite of a dramatic decrease in Venezuelan oil production brought about by the dismissal of 20,000 oil industry technicians and managers of the Venezuelan Petroleum Company and, in spite of his chaotic management of the country, some $180 billion have been pocketed by Chávez during the last five years due to the sudden increase in world oil prices produced by geopolitical unrest and by an increasing realization that the times of plentiful world oil could be over. Chávez should definitely have the benefit of hindsight. He knows (or should know) what happened to the country when the oil windfall was used in an irrational and/or populist manner.

But, he is doing it all over again.

"We have a plan to install a new cement factory here in Guayana," he said last week. "I want a state-owned cement plant that can compete with the private sector." And he shouted to his compliant Minister of Production: "Did you hear me, Wilmar?"

Chávez is creating ministries and state-owned companies right and left. He is creating a new state-owned airline. He is creating a new state-owned telecommunications company to compete with the privately owned CANTV. He is making the banking tax permanent, an absurd tax that should only be an emergency measure. He is struggling with the Venezuelan Central Bank, that should be an autonomous organization in a democratic country, to deliver to him monies presumably obtained as "exchange profits," something that runs contrary to legal procedures. Public expenditure this New Year will jump from 25% of GDP to over 32% of GDP. But, worse, this will not be public investment but money mostly dedicated to current, ordinary expenses. In spite of the dramatic increase in world oil prices, fully 25% of the new, 2005 Venezuelan budget, will be financed by new debt. In only five years Venezuelan total debt under Chávez has increased from $22 billion to $44 billion, in spite of the oil profit windfall.

The new Venezuelan Petro-State is, therefore, in place. What has happened to the windfall oil profits? Where is the money? No wonder Transparency International ranks Venezuela among the most corrupt societies on earth. A pro-Chávez mercenary website (VHeadline) just published an article bylined by its editor in which Chávez is quoted as "denouncing corruption," as asking his followers "to give up their riches." According to this article, Chávez claims, "he had nothing to do with his brother Adan being named Ambassador to Cuba." In this article Chávez asks his followers to be austere, although he is not. How cynical can you get?

Inefficient and corrupt petro-states start in the minds of their leaders. Just as the petro-state of 1974 started in the populist mind of Carlos Andrés Pérez, the petro-state of 2004 has started in the populist mind of Hugo Chávez. The two leaders have committed, in their ignorance, the same conceptual errors. They are so similar in their myopic approach to social and economic progress that there is little doubt that history will dump them together as tragic examples of failed leadership. At least Pérez came first and had no precedent on which he could learn. He could always claim that he made an honest mistake. Chávez had a precedent and consciously chose to fall in the same waste dump.

He has no excuse.

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