Hugo Chávez against the Backdrop of Venezuelan Economic and Political History

By Faria, Hugo J. | Independent Review, Spring 2008 | Go to article overview

Hugo Chávez against the Backdrop of Venezuelan Economic and Political History


Faria, Hugo J., Independent Review


Venezuclan president Hugo Chávez is a source of irritation for the leaders of freer countries. Financed by high oil prices, Chávez 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. Chávez 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, à 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, Chávez has been a destabilizing force around the world, attempting to subvert democratic rule 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 Chávez'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 Châvez'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 Chávez's downfall, noting that prospects for ousting Chávez 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.

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