Body
The Venezuelan debacle presents too many lessons to distill, and the consequences of the sovereign default that will inevitably follow the regime's complete implosion are uncertain. Nonetheless, what Venezuela's plight does not leave in doubt is that macroeconomic populism—a set of unsustainable policies to boost growth, employment, and promote income redistribution—sows the seed of its ultimate demise, both economically and politically. May that lesson be heeded across the globe.
After nearly two decades of “Chavismo”—the populist policies followed by Hugo Chávez, who came to power in 1999 and died in 2013 leaving Venezuela to his successor, Nicolas Maduro—Venezuela is crumbling under the weight of its own macroeconomic imprudence. Chavismo rode the oil boom of the 2000s, building up ever greater imbalances that now threaten to crack the regime. That it was able to last so long is no small feat in view of the devastation it has wreaked on Venezuela’s economy.
Up until recently, Venezuela was one of only two countries in South America that had largely bypassed the frequent boom-bust cycles accompanied by hyperinflation seen across the region throughout the 1980s and 1990s—the other country was Colombia. Although growth in Venezuela has always been volatile, a reflection of the country’s overreliance on oil revenues and its long-standing problems in diversifying its export base, between 1980 and 1993 inflation averaged 26 percent annually, nowhere near the three- and four-digit inflation rates seen elsewhere in South America at that time. Venezuela did default on its sovereign debt in the early 1980s during the Latin American debt crisis, unlike Colombia, but recovered relatively quickly—there was no “lost decade.”
In their famous 1991 book, The Macroeconomics of Populism in Latin America, Rudiger Dornbusch and Sebastian Edwards delve into the boom-bust cycles of Brazil, Argentina, Peru, Chile, Mexico, and Nicaragua. The authors also document the absence of economic populism in Colombia but make no mention of Venezuela, which, when the book was published, had also not suffered through these experiences. Dornbusch and Edward’s book remains the reference for populism understood from an economic perspective, even though it lacks new cases from the 2000s. It is therefore a useful starting point for an analysis of Chavismo.
The authors lay out a useful paradigm for macroeconomic populism:
- Initial conditions: Populist policymakers and the population more broadly are generally deeply dissatisfied with economic performance. Indeed, in 1998, when Chávez was elected, the economy was in recession and had been stagnant the year before. Unemployment had reached 14.5 percent, and exports of goods and services were falling by more than 10 percent. Analyses of Chávez’s election showed that his voters were mainly the poor and the disenchanted middle class.
- No constraints: Populist policymakers reject the existence of any type of constraint on macroeconomic policies, setting the stage for boom-bust cycles to erupt. Between 2004 and 2012, Venezuela grew on average by about 6.5 percent annually, on the backdrop of rising oil prices and lax fiscal, monetary, and credit policies. Between 1980 and 2000, the country's annual growth rates were about five times the regional average of some 1.1 percent, while during much of the 1990s, it expanded at an average pace of 3.4 percent, closer to Mexico and Brazil.
- Policy prescriptions: Populist programs typically emphasize redistributing income and restructuring the economy. In Venezuela’s case, Chávez put in place the “Bolivarian Missions,” policies aimed at redistributing wealth, promoting land reform, and creating worker-owned cooperatives, among other initiatives. To advance his policies, Chávez promoted a dramatic increase in government spending backed by then rising oil revenues. Ignoring the mismanagement of state-owned oil company PDVSA, budget constraints, and the detrimental impact of overspending on the economy were key tenets of Chavismo.
- Bust: As budget constraints start to impose themselves, the economy runs into bottlenecks. Inflation rises, capital may start to flow out of the economy, and the budget deficit worsens. At this point, populist policymakers may double down on their initial policies, borrowing abroad to spend even more rather than correcting budget overruns through appropriate fiscal policy, instituting price and foreign exchange controls to prevent inflation from rising too fast and external crises from erupting, and intervening in markets to stave off the inevitable economic bust. Shortly before his death in 2013, Chávez tried to keep the economy afloat by turning to China and taking advantage of its willingness to lend to Venezuela in exchange for oil. The economy was already suffering from all of the aforementioned bust symptoms.
Chávez’s successor, Nicolas Maduro, inherited the fallout from a full-blown macroeconomic populist experiment. Venezuela’s terrible legacy was further damaged by the sharp drop in oil prices in 2014 and 2015, leading to a complete collapse of the economy. Without adequate official data—Venezuela has long ceased to report official data on GDP, inflation, exchange rates, and the state of the fiscal accounts—the International Monetary Fund (IMF) estimates that the economy has been contracting since 2014, with a cumulative decline in GDP over the last three years of about 20 percent. This figure, however, may well underestimate the extent of Venezuela’s disarray. According to the IMF, the country has been experiencing three-digit annual inflation since 2014, and the situation is rapidly devolving into uncontrollable hyperinflation—projections suggest that 2017 inflation will exceed 1,600 percent.
It was with this background that Maduro tried, but seemingly failed, to shut down the country’s opposition-dominated Congress in recent days. Venezuela’s opposition—a fragmented group of dissenters from Chavismo—won a parliamentary majority in 2016 for the first time in nearly 20 years, exposing the first cracks of the regime. Maduro’s attempt to scrap Congress and replace it with the judiciary branch, where he was thought to enjoy sufficient support, backfired as Venezuela’s attorney general broke ranks and declared the parliamentary shutdown unconstitutional. Meanwhile, the Organization of American States has called for a special ministerial meeting on Venezuela, which could be the first step in suspending or even expelling the country from the organization. Mercosur, the trade bloc formed by Argentina, Brazil, Uruguay, and Paraguay, which Venezuela joined in 2012, suspended the country in 2016, and has recently stated that Maduro’s attempt to shut down Congress violated the Democratic Clause of the agreement. Violation of this clause could also constitute grounds for expelling Venezuela from the trade bloc.
In a recent podcast for the Financial Times’ Alphaville blog, Sebastian Edwards discussed The Macroeconomics of Populism in Latin America and his own fascination with the complete disregard for sound economic policymaking that characterizes much of the history of Latin America. Venezuela is perhaps the most dramatic example the region has to offer of how unsustainable policies end not with a whimper but with a deafening bang.
