24 January 2019

The world must rescue Venezuela from its nightmare


President Maduro of Venezuela is fat. This isn’t a puerile jibe. It’s a factual observation that provides an insight into the plight of a proud nation with 30 million people and two centuries of independence behind it. Venezuela is a country blessed with abundant natural resources, yet nine out of ten households say they lack sufficient money to buy food.

Survey evidence compiled by three leading universities suggests that Venezuelans between the ages of 20 and 65 lost an average of 24 lbs in weight in 2017. A quarter of the population is eating two meals or less a day. Meanwhile, the enduring image of Maduro’s misrule is a video of him and his wife being theatrically served slabs of steak by a celebrity chef during a visit to Istanbul in September. In a nation on a fast track to penury and want, the regime manages to support itself through corruption and theft. It’s not even a conventional autocracy any longer, but a kleptocracy of a type more typical of the regimes of Vladimir Putin in Russia, Slobodan Milosevic in Serbia or Ferdinand Marcos in the Philippines.

The Venezuelan catastrophe (a noun phrase that makes more sense now than “crisis”) is often seen in Britain through the prism of domestic politics. Because the people now in charge of the Labour Party, notably Jeremy Corbyn, long hailed the revolutionary regime in Caracas as an instrument of social progress and economic development, it’s tempting to press them on the undeniable evidence of Venezuela’s immiseration and mass discontent. It’s a fair question too, but it’s trivial compared with the sufferings and repression that Venezuela’s people are enduring. It’s the duty of democratic governments in the Americas and in the European Union to now stand by Venezuelans and give support to the only legitimate authority now governing the country, the National Assembly.

In an article last month for Project Syndicate, Ricardo Hausmann, a Harvard economist and former Venezuelan planning minister, urged coordination between Venezuela’s democratic forces and the international community. He wrote: “The logical solution is for the National Assembly, elected in December 2015 with a two-thirds opposition majority, to resolve the constitutional impasse by designating a new interim government and a new military high command that can organise the return to democracy and end the crisis.”

Yesterday the international community, in part, did its democratic duty by recognising the opposition leader Juan Guaidó as Venezuela’s rightful interim president. President Trump, for all his bluster and ignorance, was at least right in tweeting: “The citizens of Venezuela have suffered too long at the hands of the illegitimate Maduro regime.”

Indeed, Maduro does not head a legitimate constitutional authority. His electoral mandate ran out on January 10. His election to a second term took place last May and it was a charade. It was based on force and repression, in which the main opposition parties were prevented from standing. Hence the US, Canada, the EU, Japan and many Latin American states refused to recognise the fraudulent result. On the concluding day of Maduro’s first term, the permanent council of the Organisation of American States passed a resolution agreeing “to not recognise the legitimacy of Nicolas Maduro’s new term as of the 10th of January 2019”.

It’s crucial that democratic nations and parties follow suit, not only out of principle and in solidarity with a suffering people, but because doing nothing will result in humanitarian disaster. In November the United Nations refugee and migration agencies announced that the number of refugees and migrants from Venezuela worldwide had reached three million. Venezuela under Maduro is a repressive state that is well on the way to being a failed state, sparking a flight of refugees throughout the region.

Venezuela’s collapse is a humanitarian disaster but not a natural catastrophe. This is why economists and political scientists – informed ones, who know the region, rather than ideologues – need to be listened to on quelling the crisis and rebuilding a functioning polity. So far from being a casualty of US sanctions and periodically weaker oil prices, Venezuela is a victim of destructive domestic policies enforced by severe repression. All of it was predictable from what economists know of the effects of, among other things, administered prices, exchange controls and inflationary public financing.

The economists Rudiger Dornbusch and Sebastian Edwards wrote a paper for the World Bank in 1989 that was later expanded into a book titled The Macroeconomics of Populism in Latin America. They hypothesised a cycle of populism in four stages. First, the government adopts expansionary policies that boost output and real wages, with price controls for basic goods keeping inflation in check. Where shortages arise, the gaps are filled by imports, paid for with international reserves.

Second, the expansion of demand and the depletion of foreign-exchange reserves creates bottlenecks in production. The regime resorts to currency devaluation, import controls and capital controls. These create a surge in inflation and result in a black market for hard currencies (principally the world’s leading reserve currency, the dollar). Third, shortages become endemic. Consumers spend so much time queueing that productive activity collapses and the economy contracts. The currency becomes worthless and capital flees the country. Living standards collapse and hyperinflation destroys the value of savings.

That’s where Venezuela now stands. The regime of Hugo Chavez and Nicolas Maduro was able to get away with it for so long because of the boom in world oil prices in the 2000s. That was pure accident, driven by an expansion of global demand (especially from China) and tight supply constraints in leading oil producers (notably Nigeria and war-ravaged Iraq).

Nor was the regime’s vaunted social progress in poverty-reduction genuine. Francisco Rodriguez left US academia in 2000, excited by the prospect of serving as chief economist of the Venezuelan National Assembly and helping in the fight against poverty and inequality. He served four years, during which he observed that the regime ignored legal provisions to allocate oil revenues to anti-poverty programmes, and indeed directed resources away from the poor. Writing in Foreign Policy in 2008, he noted that “there is remarkably little data supporting the claim that the Chavez administration has acted any differently from previous Venezuelan governments – or, for that matter, from those of other developing and Latin American nations – in redistributing the gains from economic growth to the poor”.

The anti-poverty programmes were a mirage. Incensed by the very notion of independent analysis, the regime closed Rodriguez’s office in 2004. It suspended national accounts data altogether in 2015 though the central bank is belatedly now trying to construct indicators for the IMF to avoid sanctions and possible expulsion. The IMF estimates that Venezuela’s economy contracted by 18 per cent last year, the third straight year of double-digit declines.

And what about the fourth stage in the cycle of populism? That’s the one still to come. The mismanagement, hyperinflation and poverty that characterise the regime will give way to crushing austerity and severe constraints on real wages. This too makes it urgent that the international community come to Venezuela’s aid, not to bail out a corrupt and brutal regime but to provide a Marshall Plan for a looted nation. This will be far more cost-effective, as well as more humane, than allowing the country to implode. But its first requirement is to support the constitutional forces of Venezuela.

Longer-term, there is an important lesson that applies well beyond Latin America. Combating poverty and reducing inequality are vital goals of economic and welfare policy. But not all goals and values are compatible with each other. They require trade-offs. The constitutional left understands the limits as well as the vital role of the state in economic intervention and redistribution. The populist left, which recognises no constraints on its authority, forgoes that potential for incremental social improvement and instead creates a wasteland.

Oliver Kamm writes for the Times.