Democracy Lab

The House That Chavez Built

Hugo Chávez subordinated the needs of Venezuela’s economy to the imperative of keeping himself in power. Now the job of cleaning up falls to his successor.

Love him or hate him, Hugo Chávez was a savvy politician -- a point that one might see as ironically confirmed by the timing of his death. For the Venezuelan president leaves the scene at the peak of his political career, but just in time to miss what is likely to be a severe economic downturn. This downturn might have permanently blackened his legacy had he remained alive. It is, in any case, entirely of his making. 

Politically, Chávez died at a moment of sky-high popularity among his supporters, in part because of his own ability to portray himself, over the last two years, as a true martyr, a man willing to sacrifice his health and his life for his country, his movement, and his people. At the same time he bolstered his reputation abroad through his lavish dispensation of foreign aid and trade. The Chávez administration's spending on South-to-South aid in proportion to gross national income, for example, is second only to that of Saudi Arabia. Within Latin America, he learned late in his career that he could develop good relations even with countries on the opposite side of the political spectrum (Colombia, Chile, and Mexico) simply by becoming a leading importer of their goods. Learning to contain his criticisms of other Latin American leaders, as he did also late in his career, also helped. 

So should his designated successor, Vice President Nicolás Maduro, actually manage to assume the presidency, he will find himself commanding a remarkable store of political capital. Yet Maduro (or whoever else ends up following in Chávez's wake) will also inherit one of the most dysfunctional economies in the Americas -- and just as the bill for the deceased leader's policies comes due. 

By now it's widely understood that excessive dependence on commodity exports can distort an economy in fundamental ways. One manifestation of this principle is what has come to be known as "Dutch Disease" (named after the problems faced by the Netherlands as it reaped a windfall from North Sea oil in the 1970s). Dutch Disease occurs when a country that is excessively dependent on commodity exports experiences a price boom. The sudden inflow of foreign currency raises the demand for local currency, yielding an uncompetitive exchange rate. This overvalued exchange rate, if unaddressed, can kill the country's other exports as well as stimulating an avalanche of imports, which can hurt domestic producers. 

There is no question that Venezuela under Chávez came to experience one of the worst cases of Dutch Disease in the world. The Chávez government deliberately maintained an overvalued exchange rate during the oil boom that began at the end of 2003. Although there have been periodic devaluations (five in the last nine years), these were never deep enough. Because of this persistent overvaluation, Venezuela's trading sector became increasingly distorted. Exports of fuels boomed, but by 2008 exports of everything else had collapsed. Meanwhile, imports have flooded the country on an unprecedented scale, to a greater extent than even during the free-trade years of the early 1990s. 

All this would have been bad enough on its own. But Chávez's response to Dutch Disease exacerbated Venezuela's economic ills. Instead of, for example, squirreling away some of the country's oil windfall profits in a rainy day fund, as a way of minimizing their impact on the rest of the economy, Chávez chose instead to spend lavishly on his constituents, creating the basis for the broad electoral coalition that kept him in power for so long. To the poor, he gave a vast array of social services, spanning doctors from Cuba, college degrees at newly created universities, free appliances, and even new homes. To the rich, he gave preferential access to exchange rates and hefty government contracts, all of which multiplied the fortunes of many wealthy Venezuelans. This overspending had a clear electoral bent. For the 2012 presidential election, according to the Venezuelan think tank Ecoanalítica, the government spent twice as much than it did for the 2006 presidential election. 

This lavish spending wrecked Venezuela's fiscal health. According to Barclay's, Venezuela's fiscal deficit went from 2.8 percent of GDP in 2007 to almost 16 percent in 2012. In addition, public sector debt has ballooned. Even the state-owned oil company, awash with cash, has increased its debt.

All of this stands in stark contrast to other petro-states around the world, who during the same boom period registered either huge fiscal surpluses or small deficits. Even the worst-performing economies of Europe (Greece, Spain, and Iceland) have deficits no higher than 7-8 percent of GDP, which look quite moderate in comparison to Venezuela's. The resulting situation is so extraordinary, indeed, that we might be better off referring to this set of phenomena as a uniquely Venezuelan syndrome: "Venezuelan Disease." 

Overspending has two predictable effects. The first, a positive one, is to stimulate job creation. Today, Venezuela's unemployment rate is an impressive 5.9 percent, lower even than that of Germany. The second, more negative, is inflation. In Venezuela, the inflation rate at the end of 2012 surpassed 25 percent, possibly the third-highest in the world (even loftier than that of Zimbabwe and Turkey, to mention just two of the worst inflation-offenders in recent memory). This inflation rate is all the more unusual given the high levels of imports, which tend to put downward pressure on prices. 

Venezuelan Disease involves more than just fiscal profligacy. It also involves misguided responses to inflation. Populist governments tend to make their worst mistakes in dealing with inflation. Governments today, unlike in the 1960s, have learned to worry about inflation because it is one of the quickest ways to expand poverty. Inflation acts as a form of consumption tax that falls heavily on low-income, salaried groups, lowering their purchasing power dramatically. Populist governments in particular panic about inflation precisely because it hurts the very same group they want to court -- namely, low-income workers. But rather than cutting back on spending and introducing productivity-boosting reforms (in order to increase the number of goods that currency units are chasing), populist governments respond to inflation by imposing microeconomic controls. 

They tend to favor three types. Foreign exchange controls try to lower the demand for dollars by restricting access to them. Retail price controls make raising prices illegal. And labor market controls, which aim to protect low-income salaried workers, can range from raising the minimum wage to making it harder for employers to fire employees. Venezuela under Chávez saw all three forms of controls. 

The problem is that these controls end up exacerbating the very same problems they are meant to address. For instance, exchange rate controls accentuate rather than alleviate the demand for dollars; those who hold increasingly undervalued bolívars, the Venezuelan currency, become desperate to get rid of them. 

Price controls, in turn, precipitate a supply crisis. Producers facing price controls for their products, in a country with galloping inflation, soon discover that their costs exceed their allowable retail prices. At this point, production is no longer profitable. Producers must either discontinue that product (which yields scarcity) or switch to importing (which stimulates the demand for dollars, offsetting the government's effort). 

And labor controls produce more inflation and labor scarcity. By imposing an excessive increase in minimum wages, the government is actually increasing rather than decreasing the inflationary pressures on the private sector. And by creating restrictions on firing labor, the government creates labor scarcity. 

This is a vital point. When workers cannot get fired easily based on job performance, they begin to underperform. In Venezuela under Hugo Chávez, the government increasingly restricted the ability of the private sector to fire workers. The latest labor code, for instance, makes it virtually illegal to fire workers for missing work. Venezuela is unusual in that firms need permission from the state to fire workers.  Consequently, absenteeism in the workplace is booming. In February, El Nacional, a Caracas daily, reported from various business chambers that absenteeism is on the rise, currently ranging from 5 to 46 percent depending on sector and firm. 

The key point is that the excessively populist approach of relying on controls results in a microeconomic collapse. The entire economy, whether public or private, experiences a productivity crisis. In the Venezuelan public sector, the most embarrassing example is the oil industry, the government's most important source of cash. The Venezuelan oil industry is in the midst of a schizophrenic episode. On the one hand, levels of proven oil reserves and export prices are at historical highs. But productivity has plummeted. So dismal is the oil sector's situation that Venezuela now needs to import gasoline, and has a hard time finding creditors for its oil company (again, a remarkable thing for a petro-state). 

If oil, the regime's most important milk cow, is in trouble, the rest of the less vital state-owned enterprise is approaching a state of collapse. Ricardo Obuchi and colleagues at the Institute for Advanced Studies in Administration (IESA) in Caracas have been tracking the performance of state-owned companies, with alarming reports. For instance, cement production, whose sector was nationalized in 2008, is producing scarcity levels of up to 70 percent. Ten states thus far have reported severe electricity blackouts this year. 

In the private sector, the most conspicuous sign of microeconomic ailments is consumer goods scarcity. This problem is so acute that the Central Bank even keeps tabs on the issue by publishing a scarcity index. In January 2013, the index indicated the highest level of scarcity in four years, with "critical scarcity" in eight basic food products, such as sugar and sunflower oil, and "serious scarcity" in nine others. 

Declining productivity and rising scarcity in consumer goods seem to have taken many chavistas by surprise. But they have nonetheless been quick to name a culprit: the private sector. For them, this productivity slump is a sign that the private sector is conspiring against a popular government. This analysis prompts the government to become more belligerent toward the private sector, which in turn, leads to the worst effect of all: capital flight. According to Barclay's, Venezuela has experienced capital flight ranging from 15 to 40 percent of exports every year since 2004, also unusual for petro-states which are, if anything, trying to cope with capital inflows. 

Nicolás Maduro, Venezuela's foreign minister under Chávez's previous term and caretaker of the government during Chávez's last medical leave, has pursued a similar approach. In January he lambasted the private sector for the economic crisis, denouncing "the hate that they have for the Venezuelan people." In the few months that Maduro has been in charge, he has increased price controls on 50 items, and threatened firms and "hoarders" with more audits, more sanctions, more jail terms, and more nationalizations. 

A reader might ask: Given all these ailments, why doesn't the Venezuelan government ease up on populism rather than going for a "deepening" of the model, as Maduro has promised? Many factors account for the persistence of the status quo, but it is worth emphasizing both the economic and political factors sustaining the current policies. 

The economic factor is the combination of large oil export revenues, which provides the cash, and the prospects of occasional devaluations, which can expand the government's revenues. With each devaluation, the government has discovered that, when things get rough financially, there is always a chance of respite, with the stroke of a pen. The government can simply decree a change in the value of the bolívar, and fiscal problems ease for a while. For instance, Venezuela's latest devaluation of 31 percent in February (from 4.30 to 6.30 bolívars to a dollar) is likely to give the government between 3 and 6 percent of GDP in bolívars that it didn't have before. The devaluation will increase inflation significantly, no doubt, but it will ease (though not solve) the state's financing needs, and this helps the government stay its course -- even while deepening the economy's weaknesses and hurting the poor over the medium term. 

The political factor is even more pernicious. It has to do with who gets the blame. In an economy beset by scarcity, inflation, labor absenteeism, capital flight, and under-investment, many citizens attribute these problems to the private sector, rather than the state. They see the state as the only actor that can bring relief, in the form of welfare and more sanctions on businesses. The worse consequence of Venezuelan Disease is how easily it lends itself to misdiagnosis. 

All this confronts the opposition with a difficult predicament. To beat Venezuelan Disease, the opposition faces two challenges: disrupting the economic basis of populist policies (the high oil prices with occasional devaluations), and redirecting blame for mistaken policies to the government, where it belongs. The former challenge is completely beyond the opposition's capacity to influence, while the latter is extremely hard to shape. The opposition must not only point toward the problems in the country, which is easy, but it must also convince the majority that the problem is the state rather than the private sector. Good luck with that. 

And yet, despite this combination of impossible and semi-impossible challenges, the Venezuelan opposition has not done as badly as one would think. Though the opposition suffered a serious defeat of 11 points in the October 7 presidential elections, its candidate, Henrique Capriles, did relatively well. Of the 20 elections that have taken place in Latin America against sitting presidents, only two have been won by the opposition. Among the rest, Capriles has been the largest vote-getter. Electorally speaking, Capriles has been able to mount the most successful opposition force in all of Latin America among politicians running against sitting presidents. 

The reason for this relative success was twofold. First, the opposition maintained unity. Second, Capriles was successful in pinning blame for Venezuelan Disease on the government's policies, though he failed to convince a majority. 

The failure to defeat Chávez is still reverberating through the ranks of the opposition today. Up until 2010, the greatest challenge confronting the anti-Chávez forces was the tendency of their followers to abstain. The opposition fought that challenge successfully, managing to increase its share of the vote in absolute terms. Now the biggest task it faces is to contain its internal frustration. This frustration is fueling arguments for a more hard-line, unforgiving, and ideological approach toward the government. 

The main risk of a more hard-line opposition approach is, of course, contagion. When one side digs in its heels, the other side will do the same. This is a strategy that could easily backfire for the opposition. In an electorate that is dominated by moderates leaning to the left, a situation of extreme belligerence between the poles will likely benefit the pole that is on the left. 

Venezuelans are worrying today about a future without Chávez. But they should worry about the other things that are also missing from their country: price stability, labor productivity, economic diversification, and capital investments. These are the effects of Venezuelan Disease, a perfect example of how too much of a good thing (government overspending and regulation) can produce shortages of many other good things. Hugo Chávez did not get to witness the full effect of Venezuelan Disease. His successor will not be able to escape it. 

Photo by JUAN BARRETO/AFP/Getty Images

Democracy Lab

The Kenya Puzzle

In Kenya, progress and dysfunction go hand in hand.

Late last year Nairobi audiences were enthralled by the movie Nairobi Half Life. A German and Kenyan co-production, the film is a rare but successful attempt to break the stranglehold of Bollywood, Hollywood and Nollywood on audiences in East Africa. Received rapturously in Nairobi movie theaters and then at international film festivals, Nairobi Half Life is now doing a brisk trade in the small market stalls selling bootleg DVDs that thrive in towns and cities around the country.

The film's plot is a familiar one. It follows Mwas (Joseph Wairimu) as he leaves his rural home and job -- ironically as one the countless hawkers now selling the film -- to find work as an actor in Nairobi. He subsequently falls into a life of crime while simultaneously playing a criminal on the stage. In its depictions of corruption, violence and crime, the movie offers an unvarnished view of contemporary Kenya. Nairobi is, after all, ranked by the Economist Intelligence Unit as better only than Tehran in its most recent index of major capitals and Kenya is only a better place for a child to be born in 2013 than Nigeria. But Nairobi Half Life also warns against binary depictions of what is a dynamic and fluid society.

The audience see Mwas and the city's residents moving across the invisible but all too real boundaries that divide Kenya's capital. They cross the barriers between the informal and formal economies, legitimate trade and criminal activity, and those between the aspiring middle class and the poor. As the film's director, Tosh Gitonga, told journalists, Nairobi Half Life "is the story of a city. We did not exaggerate. It is not about a positive or negative view. It is simply Nairobi."

Fine detail of the sort depicted by Gitonga is inevitably lost when viewed from afar. Seen from the West, Kenya, like so many other countries in the region, seems to veer from boom to bust; in one era it earns praise for a thriving economy, while in the next it's cited for poverty and corruption. In the 1960s and 1970s it was frequently held up as a shining example of growth and political stability in a volatile region. On the back of a calm transition in 2002, when outgoing president, Daniel arap Moi, gave way to his successor, Mwai Kibaki, and a peaceful constitutional referendum in 2005, Kenya was briefly a poster child of the African Renaissance. Just as common as these moments in the sun have been the periods in which Kenya has been seen as an example of all that is bad about contemporary African politics. The 1980s witnessed increased authoritarianism and the 1990s gross corruption and state-sanctioned ethnic violence. The democratic gains of the half decade to 2007 gave way to the violence that followed the last presidential election in 2007 that claimed the lives of more than 1,100 people.

Even at moments of great optimism and deep despair, however, Kenyan politics have always been best listened to in stereo. That has, perhaps, never been truer than today. In one sense, Kenyans have never had it so good. Investment in infrastructure, prudent economic policies, and private ingenuity have set the country on course towards middle-income status in the next two decades. Oil and gas finds promise to consolidate that trend. The country is well-positioned to make economic and political gains from processes of regional integration that are tying together North Eastern and Eastern Africa to an unprecedented degree. Kenya's technology sector is the envy of the region it serves so well and its banks demonstrate creative ways of aiding commerce. Add in a vibrant cultural sphere, a robust free press, a progressive constitution, and a reinvigorated judiciary determined to flex its muscle, and there is much to be optimistic about.

But this dynamism is not reflected in the upcoming presidential election. Standing on the threshold of a brighter future, the country is confronted with the choice of two main candidates who are products of a troubled past. Fifty years after independence, the 2013 presidential election will be contested by two princelings of the nationalist generation: Raila Odinga and Uhuru Kenyatta. Kenyatta's father, Jomo, was the country's first president until his death in 1978. Odinga's father, Oginga, was the elder Kenyatta's greatest rival and critic. The two differed greatly on a wide range of issues, from land polices through to the pro-Western stance adopted by Jomo Kenyatta and his successor, Daniel arap Moi.

By contrast, there are many more similarities than differences between Raila Odinga and Uhuru Kenyatta. Both were born into power and have worked together in the past. They shared a platform as recently as the 2010 constitutional referendum. There is little disagreement between them about the need for foreign investment and economic policies designed to produce growth. In terms of foreign policy, both support continued regional integration, Kenya's military intervention in Somalia, and the measures taken to counter the threat of domestic terrorism by al-shabaab sympathizers. Both have pledged to implement reforms promised by a new constitution introduced in 2010, including the devolution of substantial powers from central government to new county authorities led by elected governors.

So what divides the two candidates? Both have good personal reasons to contest the presidential election that preclude compromise. Odinga is 68 years old and there will be few better opportunities to fulfill his ambition to be president. A distant third in the 1997 election, Odinga stood aside in 2002 to allow Kibaki to take victory. He was then narrowly but dubiously defeated by Kibaki in the 2007 election. Kenyatta has even more pressing concerns. Facing charges of committing crimes against humanity, he is due to stand trial at the International Criminal Court. He may well be in prison by the time of the next election.

His case, and that of three other Kenyans accused of crimes against humanity, have dominated this election. Kenyatta, his running mate William Ruto, the former head of the civil service Francis Muthaura, and the broadcaster Joshua Sang will be tried in pairs for their alleged role in perpetrating crimes against humanity during the violence that followed the dispute 2007 election. Many commentators have warned that Kenya faces the prospect of a Sudan-style isolation should Kenyatta be elected and try to use his new status as head of state to escape prosecution. If Kenyatta and Ruto travel to The Hague to face trial as president and deputy president, as they have promised to do, other commentators worry simply about how they will manage to run the country while also mounting their defense.

The ICC cases have split the country in two. Odinga is commonly believed to be supportive of the ICC process, but Kenyatta's supporters accuse Odinga of encouraging the prosecutions in order to remove his main rival from the presidential ballot. Moreover, the ICC and Odinga are depicted by Kenyatta's supporters as vessels for Western interference in Kenyan politics. Such claims are groundless. For their part, critics of Kenyatta and Ruto think that they are standing for election in order to gain some sort of democratic mandate which can be later used as either leverage in negotiations aimed at seeing the charges against them dropped or as justification for ignoring any summonses that may be issued by The Hague.

These are bitter arguments because the election is so close. Although Odinga is the frontrunner, he is unlikely to win an outright majority in the first round of voting. A second round will probably be necessary and the outcome of that run-off is unpredictable. What is clear is that ethnicity will determine voting patterns to a great degree. There are always anomalies, but Kenyatta will have the backing of his own Kikuyu community. His running mate, William Ruto, will bring Kenyatta the votes of the Kalenjin in the Rift Valley. Odinga will be supported by his own Luo community and by Kamba supporters of his deputy, Kalonzo Musyoka. Between them then, the two main candidates have carved up the support of four of the five largest ethnic groups in the country. The unpredictable variable in this is the Luhya voters of Western Kenya. The community is renowned for its unwillingness to vote as a bloc. The main Luhya candidate, Musalia Mudavadi, will almost certainly be eliminated in the first round of voting. Where the votes of his supporters and those of the other minor candidates go in the second round of voting will determine the outcome of the 2013 election. Muddying the waters still further, the ICC trials were meant to begin the day before the run-off -- although the prosecutor, Fatou Bensouda, has  now admitted that an adjournment until later in the year may be necessary.

The story so far of the 2013 elections will seem familiar to the casual observer of African politics. It is being contested by two perennial candidates who owe their prominence as much to their fathers as to their own records in government. Ethnicity will be extremely important. Taken together, the experience of significant electoral violence around the 1992, 1997, and 2007 elections, as well as incidents of localized violence stretching back to last year, suggest that the election will not pass off peacefully. Militant secessionists along Kenya's seaboard and the country's own ethnic Somali population, disgruntled by the Kenyan mission in Somalia, both promise to further disrupt the election campaigns. Moreover, the chaotic conduct of the recent primaries points to the institutional weakness of political parties and the electoral commission. These are all reasons for concern.

But there is some good news too. Kenyans are not just voting in the presidential election. As usual, they will vote also for their representatives in the national assembly. But under the 2010 constitution, significant power is being devolved from central government to local authorities. County assemblies with significant powers will be filled by representatives selected in the forthcoming election. Voters will also choose county governors and senators who are to sit in a reconstituted upper house of parliament charged with protecting the interests of the counties. The collective effect of these new institutions will be measurable once they begin work after the election. They may, as critics fear with good reason, increase corruption, drive up the costs of government, and further encourage ethnic competition. But what is clear is that these new elected positions are provoking new sorts of conversations about the suitability of particular candidates.

Writing in The Nation newspaper, the human rights activist, Maina Kiai, argues that devolution has led "to deeper thinking about the qualities required for various positions." The effects have already been seen in party primaries where supporters of all the major parties rejected potential candidates they saw as being too close to the party leadership. Clumsy attempts to impose unpopular candidates were the subjects of protest across the country. In many cases, candidates that secured their party's nomination present choices quite different from those that normally confront voters on election day. According to Kiai, the post of county governors in particular has attracted "a preponderance of professionals, managers, and non-traditional types."

This change to the substance of political debate has come too late to shape the presidential vote, but it is influencing other races. The election for governor in Nairobi has developed into a remarkable contest between Ferdinand Waititu, the former Member of Parliament for one of the city's poorest constituencies, and Evans Kidero, CEO of one of the country's biggest companies. It pits the street against the boardroom as debates about class have escaped from inside the ethnic box into which they are usually crammed. And those debates are taking place on an unprecedented number of platforms. Cheap cell phones have brought the internet to the Kenyan masses and with it an unfathomable amount of information and misinformation about politics.

The penetration of social media, the reach of existing newspapers and broadcasters, and an entrenched history of free speech mean that this will not be an election decided by ignorance. With the ICC cases and the risk of international isolation hanging over the country, the temptation for well-meaning outsiders to preach to Kenyans about the perils of voting for particular candidates is great, but it will prove fruitless. Voters understand the issues confronting their country and the flaws of their candidates. They worry about the instability and uncertainty that a victory for Kenyatta will produce and the relationships with foreign governments and investors that may be jeopardized as a result. And there are many good reasons to vote for Odinga besides the simple fact that he is not about to stand trial for crimes against humanity.

However, the tendency to dismiss those that vote for Kenyatta as simply ethnically driven or deluded is, to be frank, wrong. Kenyatta's supporters are skeptical of the vague promises of reform made by Odinga, who has, after all, spent most of the past decade in government. Furthermore, they have reason to doubt the sincerity of their foreign friends who talk of democracy, human rights, and international cooperation when discussing the suitability of the presidential candidates. They remember that during the Cold War positions of principle adopted by American and European governments tended to be dropped when they jeopardized more important strategic matters. With good reason, Kenyans can look around them and ask what has changed. Kenyan troops are critical to on-going efforts to stabilize Somalia, a task that is prioritized by the same Western governments that champion the ICC Kenyans know too that their country is at the heart of East African integration and part of a new frontier of energy exploration that will make any diplomatic isolation a serious problem for neighboring states and foreign investors. And if they need to find a current example where the state's half-hearted commitments to democracy and human rights can be tolerated by international partners more worried about stability, growth and security, they only have to look across the western border to Uganda to find one.

Kenyans know that theirs is an imperfect country. The marketing material for Nairobi Half Life poses the question "Have we chosen to be the way we are?" The answer is (of course) no, but it is only Kenyans that can fix the situation that they find themselves in. From Nairobi Half Life, through the novels of the likes of Ngugi wa Thiong'o, to journalism, social media, and music, a sense of energetic agency runs through much of Kenyan popular culture produced over the past fifty years. But that agency is hard to find in much of the reporting or analysis of the country. Kenyans find a way of getting by, of getting things done, of thriving in difficult circumstances. Although the country's politics seems set to enter another bout of crisis, Kenya will survive. 

Photo by PHIL MOORE/AFP/Getty Images