Hugo Chavez against the backdrop of Venezuelan economic and political history.

• Author: Faria, Hugo J.
• Position: Essay

Venezuelan president Hugo Chavez is a source of irritation for the leaders of freer countries. Financed by high oil prices, Chavez has meddled, sometimes successfully, in the internal politics and electoral processes of Bolivia, Ecuador, El Salvador, Mexico, and Peru, among other countries. He has established alliances with Iran and other "rogue" states of the Middle East. "An avowed Marxist, Mr. Chavez is in the process of destroying his country. Of this there is no doubt. But he is also an international menace, and a rich one at that. He has been using his oil wealth to sow revolution, a la Fidel Castro, in South and Central America. Did we mention that he's a dear friend of the Iranian government?" (O'Grady 2007).

In short, Chavez has been a destabilizing force around the world, attempting to subvert democratic role and capitalism and to establish the so-called Socialism of the Twenty-first Century in his own country and elsewhere. In Venezuela, the so-called Bolivarian Revolution in 2007 nationalized electricity companies, renationalized the largest fixed telephone company, and shut down a TV station with the broadest audience in the country.

In this article, I seek to cast light on the political-economy determinants of Chavez's advent and popularity. I show that the Venezuelan economy produced a growth miracle from 1920 to 1957, especially during the 1940s and 1950s. Starting in the late 1950s, however, political leaders acting in complicity with elements of the private sector started to undermine the institutions that protected private property. Erosion of economic freedoms continued unabated and eventually was conducive to Chavez's free election. Under his regime, economic freedom has continued to decline, and now, not surprisingly, political and civil liberties are in serious jeopardy. Thus, the Venezuelan economy went from being a growth miracle to being a growth disaster. This story of an economy that went from riches to rags features government-owned oil wealth that engendered perverse incentives and demonstrates a lack of political and entrepreneurial leadership.

In this article, I provide objective information on the performance of the Venezuelan economy for the periods from 1920 to 1957 and from 1958 to 2006, respectively. Next, I offer a brief historical account that allows a comparison of the institutions that prevailed in both of these periods. Based on evidence about the institutional environment that prevailed between 1958 and 2006, I then characterize today's Venezuelan economy as socialist and mercantilist and suggest some factors that account for its persistence. I present a public-choice perspective of the difficulties of extricating the Venezuelan economy--indeed, most Latin American economies--from the poverty trap of socialism and mercantilism. Emphasizing that private property is the foundation of freedoms, I argue that because patrimonial governments such as Venezuela's lack this foundation, their political, civil, and economic liberties are precarious. To show the importance of entrepreneurial leadership for the promotion of economic freedom, I marshal historical and contemporaneous evidence and highlight the absence of such leadership in Venezuela. Finally, I offer potential future outcomes, describing possible causes of Chavez's downfall, noting that prospects for ousting Chavez are better than prospects for firmly establishing capitalism.

Growth Miracle

In 1960, Venezuela's gross domestic product (GDP) per worker relative to the comparable measure for the United States was 0.837 (Jones 2002, 216-19). At that time, the same ratio was 0.797 for Canada, 0.825 for Switzerland, and 0.788 for Australia, which shows that each of those advanced economies was roughly equivalent to Venezuela in its average output per worker.

To reach such a high level, the Venezuelan economy must have grown rapidly during the preceding decades, and the best available evidence is consistent with this hypothesis. The Venezuelan Central Bank, established in 1939, began to produce reliable national-accounts data in 1950. According to these data, Venezuelan real output per capita grew by 5.4 percent per annum on average between 1950 and 1957, a rate similar to the growth rates of the so-called Asian Tigers from 1960 to 2000. Venezuela's 87 percent increase in real output per capita between 1950 and 1957 not only exceeded that of any other Latin American country, but surpassed West Germany's "miracle" increase of 76 percent.

Moreover, the best available data--estimates by Baptista (2006) and by Sanchez-Coviza and Olcoz (1966)--indicate that Venezuela's GDP expanded during the 1940s at an average annual rate in excess of 10 percent. These same scholars also estimate that the growth rate was high during the 1920s and 1930s.

Growth Disaster

Jones classifies Venezuela as a growth disaster between 1960 and 1997 because real income per capita grew at a rate of minus 0.13 percent (2002, 4). Of 112 countries with data for the period from 1960 to 2000, sixteen endured a negative average growth rate (Barro and Sala-i-Martin 2004, 4). Fourteen of those sixteen lie in the sub-Saharan region, and two in Latin America. Of those two, Nicaragua suffered a civil war and a socialist government, whereas the other, Venezuela--a country rich in oil, gas, coal, and iron--experienced no major internal turmoil.

Hugo Montesinos and I, using data from the World Development Indicators published by the World Bank, estimate that Venezuela's real income per capita grew on average during the 1960s by 1.46 percent per annum, during the 1970s by minus 0.76 percent, during the 1980s by minus 1.88 percent, during the 1990s by minus 0.08 percent, and under Chavez from 1999 to 2006 by minus 0.06 percent. Owing to the great increase in oil prices recently, the growth rate has exceeded 10 percent since 2004.

What Happened?

The discovery of oil in 1918 gave substantial impetus to the Venezuelan economy. Private international companies handled all aspects of the oil business, however. The Venezuelan government did not make the mistake of attempting to manage the oil business. The central bank acted as a currency board, defending an irrevocable fixed exchange rate with the dollar. The marginal tax rate on individual income was 12 percent in 1957, and the consolidated public sector absorbed 22 percent of GDP. Moreover, government consumption represented only 12 percent of GDP, and the rest was spent in building the country's basic infrastructure. The overall fiscal budget was generally in surplus. Tariffs were relatively high at 20 percent, but other impediments to trade, such as quotas and antidumping or safeguard laws, did not exist. There were few state-owned companies and virtually no price, interest-rate, or exchange-rate controls. Although political and civil liberties were tightly restricted, the judicial system administered justice impartially, particularly in the area of business and economics. The cities were safe, and corruption was concentrated at the highest level of government. Thus, corruption's drag on economic growth was not as severe as it would have been if it had pervaded the government bureaucracy.

According to Escovar and Faria (2006), the Index of Economic Freedom for Venezuela--on a scale from 1 to 5, where 1 is the freest--was 1.5 in 1950 and 1.6 in 1955. This evidence suggests that the Venezuelan miracle was not simply driven by oil. Economic institutions guarded private property and helped to channel the oil wealth efficiently. The manufacturing, construction, and service sectors grew faster than overall GDP.

During the 1950s, however, when Venezuela still enjoyed substantial economic freedoms, government decisions began to chip away those freedoms. In 1950, Marcos Perez Jimenez's dictatorial government nationalized CANTV, the telephone company. Soon afterward it founded SIDOR, a state-owned steel company, built dams to generate electricity, and established hotels across the country in hopes of developing a tourist industry. In addition, the government founded a state-owned petrochemical company called Instituto Venezolano de Petroquimica and set up numerous regional "development" banks. This formation of state-owned companies was implicitly justified by the apparent success of centrally planned economies such as the Soviet Union.

Perez Jimenez's government was overthrown in 1958, and a democracy with universal suffrage and freedom of the press was established in 1959. These events are consistent with the notion that economic freedom and the growth of wealth destabilize dictatorial regimes because citizens, having savored economic freedom, also want to enjoy political and civil liberties (Barro 1999; Glaeser et al. 2004).

Democratic leaders, however, accelerated Venezuela's descent into socialism and mercantilism. Romulo Betancourt was elected in December 1958 and assumed the presidency in 1959. One of Betancourt's first decisions as president was to undertake a land reform aimed at breaking up large landholdings (latifundia). New "owners" of the redistributed land received titles of use, but not full ownership rights. Betancourt's government established a central planning office called CORDIPLAN, adapted to a mixed economy. During his presidency, one of his cabinet members founded the Organization of Petroleum Exporting Countries (OPEC). The government also created a state-owned oil company called Corporacion Venezolana de Petroleo and barred international oil companies from new concessions. Thus, if these companies discovered new oil deposits, they were not allowed to extract the oil.

Betancourt devalued the currency, raising the bolivar price of the dollar from 3.30 to 4.50, and implemented exchange controls. He also increased overall government expenditures, especially consumption outlays. His government tripled the income tax rate, raising it from 12 percent to 36 percent, made the tax more complex, and...