Figure 1.--.

Venezuela had since the 1960s a long history of democratic government. Those democratic governments failed to make real progress in building a vibrant modern economy. Rather the country lived off its oil wealth. The failure of the democratic governents brought Populist President Hugo Chávez to power. President Chávez is persuing what he calls the New Socialism in Venezuela. There does not seem to have been any real assessment as to why the policies of the democratic parties failed. Rather President Chávez has simply accepted basic Marxist doctrine that Capitalism is rapacious and that Socialism will provide a bright future. Such ideas despite the abject failure of Socialism around the world are still very popular at Latin American universities. President Chávez has not explained just what is new about his socialist policies. It appears to be a mixture of the same kind of policies that have failed in other Communist countries, an end to free elections and an independent judiciary, closing media that he cannot control, creating a police state, and nationalizing private industry. Venezuela unlike Cuba has large oil reserves to subsidize Chávez's program. Chavez believes his social reforms and state involvement in the economy will crreate a vibrant, growing economy. This has not worked in other countries. It seems unlikely to work in Venezuela. Venezuela's oil income and Chavez's control of the media and expanding police state as well as lavish social spending is likely to keep him in power for the forseeable future. The iron laws of economics, however, mean that Venezuela is headed for a very difficult future.

Failure of Democratic Government

Venezuela had since the 1960s a long history of democratic government. Those democratic governments failed to make real progress in building a vibrant modern economy. Rather the country lived off its oil wealth.

President Chávez

The failure of the democratic governents brought Populist President Hugo Chávez to power.

The New Socialism

President Chávez is persuing what he calls the New Socialism in Venezuela. There does not seem to have been any real assessment as to why the policies of the democratic parties failed. Rather President Chávez has simply accepted basic Marxist doctrine that Capitalism is rapacious and that Socialism will provide a bright future. Chávez uses the term "savage capitalism". (One might look at the Soviet Union for an example of what savage economic policies are really like, but we doubt if that fits into Chávez's mind set.) Such ideas despite the abject failure of Socialism around the world are still very popular at Latin American universities. President Chávez has not explained just what is new about his socialist policies. It appears to be a mixture of the same kind of policies that have failed in other Communist countries, an end to free elections and an independent judiciary, closing media that he cannot control, creating a police state, and nationalizing private industry. The Government has released a 6-Year Plan in a kinf of blue print for the future. Key elements of the plan are worker cooperatives, joint ventures (private-state enterprises), and state enterprises.

Cooperatives

One element of Chávez's New Socialism is worker cooperatives. Chavez's New Socialism appears to include thousands of state run cooperatives. A journalist in 2007 visited one of these cooperatives--a shoe factory. A worker there, Gustavo Zuńiga explained tat thereare no chiefs and managers and that a worker's assembly makes the major decesions. That all sounds nice. The only problem is that this kind of economic model has not proved very productive in the many places it has been tried. And the long-run outlook for this cooperative does not seem very optimistic. The production is basic black shoes. When asked where they were sold, the answer was Venezuelan government orders for Cuba. [Forero, p. A12.] It is not even clear if the shoes could be sold in Venezuela. This means that the cooperative does not have to operate profitably. It is being financed with oil revenue and shipped to Cuba, a country where consumer goods are so scarce that virtually any shoe could be sold. This is not building profitable enterprises, but rather simply using oil money to sustain uneconomic operations. This sounds very similar to the now defunct Soviet economy. The idea as expressed by Venezuelan planners is to "put workers ahead of the bottom line". Again that sounds nice, but the bottom line is essentially wealth creation. Unless wealth is being created, Venezuelan wirkers are simply living off the oil revenue. And not only does Venezuela not have enough oil to provide Venezuelans with adecent sandard of living, mismanaging that oil revenue in inefficent enterprises means that investments n Venezuela's future are being sqandered.

Joint ventures

Stae eterprises

The Goverment plans to build factories to produce a range of consumer products, agricultural goods, cellular telephones, bicycles, and a range of other products. One of the largest plans is being preoared by Petroleros de Venezuela, the country's large state oil coropration. Therecare plans to grow soybeans, build ships, and manufacture clothing ans appliances. [Forero, p. A12.]

Profits

Governmentb planners explain in the 6 Year Plan that "The productive model will principally respond to human necesities and be less sunordinate to the production of capital. The creation of wealth will be destinedcto satisfy the basic needs of the population." This is a key statement and shows a total misunderstanding of baic economics. What Venezuelan officials do not seem to understand is that the generation of capital is the creation of wealth. Unless companies are generating capital, they are not crearing wealth. Production is not as became obvuous in the Soviet Union is not creating wealth. If the inpits cost more than the production, the enterprises involved are destroying capital or weakth. Venezuelan planners are essentially saying without realising it, is that they have no plans to create wealth. Unless cooperartives or state enterprises produce a product worth more than the capital and labor inputs they are simply using the country's oil revenue to subsidize operations. A good indicator that this is happening is that President Chávez is tryinf to build economic ties to a variety of countries with which Venezuela has had only limited ties before. Cuba is only one example, others are Iran and Belarus. Many of these countries are faile states where economic condiions are poor and that Venezuelan products that are not competive can be marketed.

Oil

Venezuela unlike Cuba has large oil reserves to subsidize Chávez's program. The country is the largest oil producer uin Latin America. And the increases in oil prizes since he rose to power have provided massive funds to expand social progams and to persue arange of new projects. The increased oil revene has allowed the Government to incrrase the budget from $20 billion in 1999 to $59 billion in 2006. A great deal of this has gone to popular social programs which help go explain the President's popularity.

Venezuelan Economy

Chavez believes his social reforms and state involvement in the economy will crreate a vibrant, growing economy. The increased oil revenue and expandong government spending has resulted in an expanding economy. Economic out put has according to Government statistics increased from $103 billion in 1999 to $174 billion in 2006. I am not sure how to assess those statisics are just how sustaiable such growth is.

Prognosis

The policies that President Chávez is persuing have not worked in other countries. They seem unlikely to work in Venezuela. Venezuela's oil income and Chavez's control of the media and expanding police state as well as lavish social spending is likely to keep him in power for the forseeable future. The iron laws of economics, however, mean that Venezuela is headed for a very difficult future.

Sources

Forero, Juan. "Venezuela ries to create its own kind od socialism," Washington Post (August 6, 2007), p. A12.

Created: 8:23 PM 6/7/2007
Last updated: 8:23 PM 6/7/2007