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.
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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.