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Venezuela

Police officers spot a group of graduate students sitting outside of an apartment complex and decide to ask them of their recent whereabouts. What they say does not matter. The students are taken away on suspicion of participating in acts against the state, without evidence, to a place unknown. Elsewhere, a group of people climb the fences of the local zoo to kill and steal various animals. It was the only option left to stop their hunger as it’s impossible to steal food off empty store shelves. Money has lost most of its value, and some bank vaults now serve as make-shift prison cells. These examples offer a vivid glimpse into Venezuela’s current reality and the desperation that is part of many of its citizen’s lives.

In recent months, an increasing number of videos have surfaced depicting Venezuela’s rising poverty and desperation. With large-scale protests mounting in the streets of Caracas, current President Nicolas Maduro now faces a fervent opposition. How did this happen? An economy too dependent on oil, growing income disparity, and excessive debt are among the multiple factors explaining how one of the Americas more-affluent countries collapsed. However, one theme that is constant in examining Venezuela’s history since the 1970s is the erosion of the rule of law.

Carlos Andrés Peréz

  Carlos Andrés Peréz

Carlos Andrés Peréz

Corruption in today’s Venezuela had its roots starting with the Presidency of Carlos Andrés Peréz (1974-1979 and 1989-1993). Referred to as “El Gocho” (loosely: from the mountains), Peréz was a representative of the “Acción Democrática,” a social democratic party. In his first term, he rode the oil price boom:

“Flash, energetic, full of sound political instincts but economically challenged, Mr Pérez rode the oil boom like an old-fashioned populist caudillo. His proudest stroke was to nationalise the oil industry in 1976, buying up the foreign companies for $1 billion and signing the papers with a showy gold pen. Huge public works were started, at a cost of $53 billion: housing projects, industrial parks, a subway in Caracas and El Sistema, a music-teaching programme for the poor. Venezuela Saudita (Saudi Venezuela) seemed to be doing so well that in 1989, even with oil prices dipping, Mr Pérez invited 27 heads of state and 800 foreign dignitaries to dine on lobster and bubbly at his second inauguration…. An investment fund was set up, too. But Mr Pérez never thought to pay off Venezuela’s external debt, which rose from $0.7 billion in 1974 to $6.1 billion in 1978, or to stem the flight of $35 billion in capital out of the country. A man of ambitions as big as his sideburns, Mr Peréz seemed to think the oil price would never go down.”
Economist

Amidst this economic backdrop, allegations of corruption in the government began to surface. There were rumors that Peréz protected the Mafiosi Cuntrera brothers, the leaders of the Cosa Nostra in Venezuela. The brothers played a central role in international drug trafficking and drug laundering, with a network that extended from their interests in Europe to Venezuela. (After the Cuntrera brothers ordered the assassination of Italian Judge Giovanni Falcone, INTERPOL and the United States military were reported to have planned a covert operation to remove them from country. [1])

           The growing dissatisfaction towards the political establishment emboldened Hugo Chávez and the MBR (Revolutionary Bolivarian Movement) to attempt a coup d’etat in February and then later in November of 1992. Although both failed, Venezuela’s “forgotten man” came to see Chávez as a living symbol of their struggles, so much so that many people referred to him as the “Savior of the Poor.”  In March of 1993, Venezuela’s attorney general brought forth action against the president for the embezzlement of $250 million worth of public funds. It was found that President Perez had used at least $17 million of the public funds to pay for his campaign debts and extravagant inauguration in 1989, and that a material amount of the $250 million was used to finance and influence elections in Nicaragua. After almost two years of house arrest and legal proceedings, the Venezuelan Supreme Court found Peréz guilty of mismanaging public funds in 1996 and sentenced him to 28 months in federal prison. For many suffering Venezuelans, this was a lenient sentence, proving to them that the rule of law did not apply equally to all of the country’s citizens.

Hugo Chávez and the Fifth Republic

  Hugo Chávez

Hugo Chávez

Peréz’ corruption led the way for Hugo Chávez. In the 1998 election, Chávez publicly distanced himself from his revolutionary association and reorganized his MBR movement into an official political party referred to as the MVR—Fifth Republic Movement. In the 1998 election, he ran on a populist-style platform whose central message was that the establishment did not serve the people and that the rampant corruption needed to be uprooted. The platform advocated rewriting the constitution.  On the campaign trail, Chávez assured the public that he would not consider radical actions such as nationalizing industries. His campaign message resonated strongly with the masses. Hugo Chávez was easily elected President with over 56% of the vote.

           The 1998 election of Hugo Chávez was a significant turning point in Venezuela’s history. Honoring his campaign pledge, Chávez called for and won snap elections to summon a constitutional assembly that would draft a new constitution and curtail the influence of Congress (controlled by the opposition) and the judiciary.[2] After taking control over the military, Chávez dispatched thousands of soldiers to build infrastructures, promoted 34 senior military officers without congressional approval, and gave oversight powers to regional army commanders over local-elected officials.[3] In his first year, Chávez was successful on delivering his campaign promise to rid the Venezuelan government of its previous corruption. However, the means to this end would amount to Chávez replacing elements of the corrupt opposition in favor of having corrupt political allies in their place:

“Generals were appointed to senior posts such as presidential chief of staff, head of the secret police, and head of the internal revenue service. In July, 1999, Chávez supporters, including his wife and erstwhile fellow coup plotters, won 121 of the new constituent assembly’s 131 seats.”

What followed in the ensuing year was the further erosion of the rule of law in Venezuela, and with that, the erosion of both the people’s freedoms and their civil servants’ accountability. Chávez’s Constituent Assembly removed checks and balances, approving as many as 47 articles per day that strengthen the power of the Presidency (by the end of 1999 there were more than 400 new articles). The judiciary would also undergo significant changes. With a nominally independent supreme court already corrupted by Peréz and drug traffickers and a judiciary that was “unresponsive to charges of rights abuses,”[4] Chávez was able to expend the political capital needed to remove a great number of judges, subordinating the legal and judicial system to the executive branch of Venezuela’s government. In August of 1999, the President of the Supreme Court, Cecilia Sosa, resigned in protest after the Court backed the Constitutional Assembly’s decision granting it the authority to dismiss judges and overhaul the country’s judicial system. Upon resigning, Sosa commented: “the court simply committed suicide to avoid being assassinated …. But the result is the same—it is dead.”[5]

           Chávez’ swift consolidation of power and restructuring of the government in the first year of his presidency set the foundation for Chávez’s totalitarian reign. Over the following decade, Chávez’s corrupt establishment replaced Peréz’s corrupt political establishment. Personnel in various agencies were replaced with like-minded Chávez allies and new agencies, ministries, and organizations were created to oversee existing ones—it was a political inquisition of the opposition. The result was restlessness among the people of Venezuela that would have considered themselves centrists or to the right of the current administration. In 2002, a coup d’etat overthrew Chávez, but it lasted only forty-seven hours before a group of military loyalists regained power and reinstated him.

           In December 2002, the opposition organized a general strike that paralyzed PDVSA (Petróleos de Venezuela, S.A. was created when the country’s oil industry was nationalized in 1976) and the country’s oil industry in an attempt to force Chávez to resign and call for general elections. In response, Chávez was able to end the strike by promoting loyal internal employees and those who opposed the opposition using the state oil company for political purposes. At the strike’s conclusion in February of 2003, Chávez fired seven executives along with 18,000 employees—40% of the state-owned oil company’s personnel. In the first four months of 2003, Venezuela’s real GDP dropped 27% (real GDP declined 8.85% in 2002 and 7.76% in 2003) and its unemployment rate increased from 13.40% to 15.80% (Exhibit 2).

   Bloomberg

Bloomberg

   Bloomberg

Bloomberg

   Bloomberg

Bloomberg

In the aftermath of the strike, an emboldened Chávez intensified his efforts to establish his ideological beliefs in more of Venezuela’s social and economic fabric:  nationalization of business entities, arbitrary seizure of land and property, and introducing changes to the education system’s curriculum with the goal of changing the culture to be more sympathetic towards far-left views.

Property Seizure

In 2005, Chávez began putting into practice a 2001 law that allowed the state to expropriate unproductive land or seize land if it did not have proper titles.[6] Chávez stated publicly that private property was not an absolute right, and in tune with his populist base, proclaimed that the land belonged to the people of Venezuela collectively. The result was a redistribution of claims and ownership on a vague basis; the rules were not the same for all participants:

“In Venezuela, however, the government of Hugo Chávez and his successor, Nicolás Maduro, has given land reform an additional, polarizing dimension—it has used it to selectively dispense patronage to its supporters and punish its enemies. Two important tactics undergird this strategy. First, the regime has undermined private property rights, making a vast pool of land available for redistribution. Secondly, it has created an environment of deliberate legal ambiguity, enabling bureaucrats to pick and choose winners and losers for political rather than technical reasons.” [7]

Chávez’s land reform did contribute to reducing wealth inequality and poverty in rural areas. However, like the impacts of state-controlled agriculture programs implemented in USSR controlled Ukraine, the former breadbasket of Europe, the redistribution created inefficiency that, in turn, increased Venezuela’s dependency on food imports:

“Venezuela’s current land reform process is the most important reform of its kind in Latin America in the early 21st Century. Land reform in Venezuela, which attempts to incorporate lessons from earlier such reforms in the region, has thus far reduced land inequality by providing over 180,000 families with land. However, gradual increases in agricultural production have not been able to overcome Venezuela’s dependency on food imports, which have increased rapidly due to growth of the population and consumption. Also, in the effort to provide a comprehensive land reform that pays attention to credit, training, and technical support, a vast array of institutions have been created, a process that has led to inefficiency, bureaucratic confusion, and opportunities for corruption. Other challenges include the resistance from large landowners, who are said to have instigated the assassination of over 200 land reform leaders.” [7.2]

While Chávez’ land reform contributed to reducing wealth inequality and poverty in rural areas, albeit at the expense of inefficiency, it did not address the earlier roots of the country’s problems, namely bureaucratic corruption. Chávez openly rewarded citizens for their connections and political affiliations over their actual ability to contribute towards Venezuela’s agricultural output. Like in communist nations, Chávez was creating a culture where people saw it foolish to try to succeed through an investment of one’s work and effort when more could be gained through corrupt connections and by embracing nepotism.

           In the 2006 elections for the national assembly, Chávez’s party was able to win a significant majority of the seats. This victory was, in part, due to a tactical error by the opposition that imprudently called for voters to abstain at the ballot box in response to allegations of voter fraud. Nevertheless, the election moved the country further to the left.

Nationalizing Businesses

With global financial concerns, Chávez began nationalizing many domestic companies, as well as, foreign direct investments. In 2007, Movilnet (a cell phone provider owned by Verizon) and four heavy crude oil extraction projects in the Orinoco belt were nationalized. The majority of the extraction projects belonged to ExxonMobil and ConocoPhillips and were estimated to be worth $30 billion. The government also expropriated assets from U.S. based AES Corporation Electricidad de Caracas, which was the nation’s largest private power producer.[8] In 2008, the major cement producers (Holcim, Lafarge, and CEMEX) were also taken over by the government. The next year Chávez nationalized a rice mill that was operated and owned by U.S. based Cargill, as well as Ternium Sidor, which was the largest steel producer in the country. (At the time of this writing, Ternium Sidor’s assets were not producing steel, but instead were being used to grow sunflower seeds.)  In 2010, Chávez’ government seized eleven oil rigs from Helmerich & Payne Inc., nationalized Fertinitro, which was one of the world’s largest producers of nitrogen based fertilizer, and Owen-Illinois’s assets in Venezuela, a packaging and glass making company. In 2011, the government nationalized Conferry, a Venezuela firm responsible for freighting and oceanic cargo transport.

           The loss of property rights and the nationalizing of business were not only a loss of the ownership of assets and businesses but also the loss of freedom: freedom to take risks, to disagree, and to influence. The seizure of property rights, justified in the name of the welfare of the state, in effect silenced the voices of those who would disagree. Many of the societal safeguards taken for granted in the West were fundamentally stripped from the people of Venezuela. By the time Hugo Chávez was diagnosed with terminal colon cancer in June of 2011, Venezuela’s course had been charted and altered in an irreversible way.

Nicolas Maduro

Amongst Chávez’s inner circle, Nicolas Maduro, the Minister of Foreign Affairs, was considered the most-able politician capable of continuing Chávez’s policies and ensuring his legacy.[9]  Chávez set the stage for his rise to the presidency by running for president again in the 2012 general elections with Maduro as his vice presidential running mate. Chávez and Maduro, representing the United Socialist Party of Venezuela, won the election against Henrique Capriles with 55.07% of the vote. In March of 2013, Hugo Chávez passed away with Nicolas Maduro succeeding him as the acting president. In a snap election one month later, Maduro would defeat Henrique Capriles to become president amidst widespread allegations of voter fraud and election rigging.[10] 

   Nicolas Maduro

Nicolas Maduro

Capital Controls

Upon assuming the presidency, Maduro was faced with not only the economic problems of unemployment, stagnant wage growth, and inflation, but also an increase in capital outflows. With business confiscations and asset seizures, many Venezuelan business owners and investors were moving their money and liquid wealth out of the country. To avert this, Maduro implemented stricter capital controls with mountains of bureaucratic red tape. Absurd restrictions were repeatedly put into place to track consumption and keep money circulating in the country. In 2011, a report from BBC News described some of the restrictions:

“Some form of identification is required for even the smallest purchases. I have to give my passport number every time I buy a pack of gum or a carton of milk in the local store. But the biggest chores are banking ones. Cash machines have strict daily limits on the amount of cash that can be withdrawn, but taking out money over the counter is no easy task. It requires two signatures, fingerprints and in some cases a photograph. So it is not unusual to queue for more than two hours in a bank for a simple transaction. Imagine then, the challenges to businesses based here.”

With cash and financial capital shortages, manufacturers often were not able to purchase the necessary raw materials to produce goods, stores found themselves struggling to find ways to purchase food from suppliers, and hospitals noticed that their inventories of simple medicines like antibiotics were falling below desired levels. Such capital flow restrictions resulted in businesses facing choices between following the law and dying out, or circumventing the system.[11] Accordingly, the black market for United States Dollars grew, and precipitated the catastrophic decline of the Venezuelan Bolivar’s value.

           These impediments to commerce augmented Venezuela’s problems. Shortages in food and medication, combined with many other issues, precipitated growing unrest among Venezuela’s people. In the capital of Caracas, the murder rate was now one of the highest in the world and growing. Venezuelan’s growing dissatisfaction with the government was on full display on “Youth Day, ” February 12, 2014— a national holiday commemorating the teenagers who died in the Battle of La Victoria during the Venezuelan War of Independence in 1814.[12]  On this “Youth Day,” students gathered near government buildings in a protest that turned into a deadly clash between the “Chavistas” and themselves, with three people dying in the streets of Caracas.[13]

Collapse of Crude Oil Prices—The Final Blow

The final blow to an already devastated economy came when crude oil prices began to plummet in June of 2014, going from $107.89 on 6/30/2014 to $44.38 on 1/31/15. For a country in which oil exports comprised roughly 90% of the country’s exports, the decline in oil prices led to a dramatic drop in Venezuela’s dollar reserves, going from a peak of $33.098 billion in 2009 to $6.324 billion in 2015. Moreover, the loss of dollars made it increasingly difficult for this import dependent nation to get basic supplies.

           The decline in oil prices and exports, coupled with strict capital controls, led to a collapse of the Bolivar, exponential increases in the money supply, and staggering inflation—akin to the hyperinflation that beset Germany in the 1920’s (Exhibit 3). Inflation quickly eroded the people’s purchasing power, with the rate reaching 274% in 2016 and recent IMF forecasts projecting it to reach 1,660% in 2017 and 2,880% in 2018—store shelves soon became empty.

   Bloomberg

Bloomberg

   Bloomberg, IMF Statistics

Bloomberg, IMF Statistics

   Bloomberg, IMF Statistics

Bloomberg, IMF Statistics

   Bloomberg, IMF Statistics

Bloomberg, IMF Statistics

   Bloomberg, IMF Statistics

Bloomberg, IMF Statistics

Totalitarianism and Anarchy

In late March of 2017, the Supreme Tribunal of Justice (judiciary)—a tribunal stacked with President Maduro’s allies—stripped the National Assembly of its powers and rescinded the immunity safeguards granted to assembly members who were part of the opposition.[14]  An action that would be equivalent to a U.S. President and a U.S. Supreme Court aligning to strip Congress’ ability to enact legislation. Maduro’s action, in turn, completely subordinated the government to the president and created a constitutional crisis. The initial public and international outcry was sufficient that only a few days later the Supreme Tribunal reinstated the National Assembly’s powers. However, the reversal was not enough to stop the massive protests that had been forming. Theses protests escalated over the month of April and resulted in the deaths of a confirmed 29 individuals (there may be more) and hundreds injured.

           In response, President Maduro, on May 1, invoked Article 347, which calls for a Constituent Assembly to rewrite the 1999 Constitution, with the delegates of Constituent Assembly to be selected from various social groups (i.e., to be those loyal to Maduro).[15]  By invoking this article, Maduro in effect made the National Assembly obsolete until the Constituent Assembly had completed its task. During this period, referred to as an interregnum, the 2018 scheduled election was suspended, allowing Maduro to stay in power. Most experts see Maduro actions as only intensifying the unrest rather than alleviating them— the parallels to Hugo Chávez’ actions in 1999 are daunting. His actions certainly give credence to the idea that institutions, when faced with a crisis, will tend to enact the same policies as before but with greater velocity and magnitude

           Protests, riots, violence, hunger, corruption, and little hope are all words that describe the desperate state of Venezuela. An underlying theme for the current state of the country’s problems is the absence of the rule of law rooted in corruption that first took place in the Peréz presidency and then carried to an even higher level by Chávez and now by Maduro. Unfortunately, with the current totalitarian regime of Maduro, Venezuela’s suffering will only continue, and without the rule of law, such misery and suffering will only lead to anarchy.