Hugo Chavez: International Economic Clown

If it weren’t for Hugo Chávez, my favorite Latin American dictator, life would be pretty dull. The guy is a walking, talking economics lesson. He’s so easy to pick on because he has the Sadim touch (you know, instead of turning things into gold like Midas, he turns things into crap).

Everything he has done has moved Venezuela backwards. The people who actually do something productive in the economy hate him. The have-nots love him because he promised them lots of free stuff. But lately his numbers are sinking: his policies don’t work. He’s a typical populist caudillo¹ like his hero Castro. He seeks only power and disdains concepts like individual liberty, freedom of expression, and free markets.

Chávez has no idea how the world or human nature works. He has no idea how economies work. The guy is ignorant. If all you study are socialists and populists, you will be ignorant. Ignorant of classical liberal ideas such as natural law, free markets, and limited government. I’m going to guess that his idea of Austrian economic theory has something to do with Arnold Schwarzenegger.

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In 2009 he engineered the constitution so that there are no term limits to his presidency. He’s been seizing or muzzling the opposition media. He has been beefing up the military and buying lots of arms. Other than a few rows over soccer and minor border disputes, Latin America has been a pretty peaceful continent so one must conclude his army will be directed at his fellow Venezuelans. He is spreading his poisonous ideas and oil wealth around the continent.

The government claims that they have had “robust” economic growth in recent years, but that is a lie. First, foreign and local capital has been fleeing the country. Second, no one wants to invest there because they fear nationalization. Oil is about 80% of the economy (90% of exports) and it is owned and controlled by the government. They claim GDP rose substantially in the latter part of the last decade but it was all due to rising oil prices. With declining oil prices, the economy has tanked. There is very little growth from private industry.

Most of the statistics for inflation and growth are made up by the government or the World Bank or the U.N. If you track economic growth it matches perfectly with oil prices. Inflation was officially 27% in 2009, but the free (black) market rate for the bolivar is actually much lower. So, it is my guess that the fictional growth claimed by the government is much less and inflation is higher.

Chávez continues to nationalize major industries. The oil industry was nationalized in 2002 and production has declined since then for several reasons. First he fired all the engineers and skilled workers after the 2002 protest strike (about 19,000 people fired). Second he has neglected to invest in the production infrastructure and the physical plant is degrading. He just spends.

His price controls (over 400 items are controlled) have lead to shortages of primary food products as growers and processors try to evade controls. Food production is declining and it must import two-thirds of its needs. There is power and water rationing as well. People are unhappy. He’s rigged politics so that he can perpetuate his power. He’ll be hard to get rid of unless he’s assassinated or there is a coup.

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What do you do if you are a dictator on the slide? It’s hard to just declare martial law because it’s so anti-democratic and it may backfire on him and even his friends in neighboring countries may abandon him. So you just bide your time and do it in stages.

First you devalue the currency. He just devalued the bolivar by 50% (4.3 to the dollar) and he created a two-tier system so the bolivar is slightly higher for imports (2.6 per dollar) than exports. The real (“black” market) value of the bolivar, according to the Wall Street Journal, is 6.25:1.

“They put the value of the dollar at more than 6 in an arbitrary and illegal manner,” Chávez said. “We have to organize to reduce and attack that speculative, illegal dollar that hurts the Venezuelan economy so much.”

Hugo is upset that people might want to protect their own interests rather than go down with his ship.

More from the WSJ article:

Mr. Chávez, 55 years old, is gambling that the benefits of a weaker currency will offset faster inflation. …

In Mr. Chávez’s favor, a weaker currency helps narrow a growing budget shortfall by instantly giving his oil-rich government more local currency to spend per barrel of oil exported by the state petroleum company, PDVSA. That is a key consideration with congressional elections looming in September.

Mr. Chávez has watched his popularity slide amid corruption scandals, a shrinking economy, rising crime and shortages of food and electricity. Increased spending could boost Mr. Chávez’s popularity.

Mr. Chávez also predicted a weaker currency would breathe life into a domestic economy that depends on imports for everything from beef and milk to cars. …

Devaluation isn’t enough to revive the domestic manufacturing base. Few investors are willing to brave Venezuela’s maze of price caps, currency controls and the ever-present fear of nationalization. …

What is more, by keeping a subsidized dollar rate for importing food, medicine and essential items, Mr. Chávez removes any incentive for Venezuelans to produce what they need most.

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I can write the script for Venezuela.

All this spending won’t do anything to help the economy. It doesn’t create wealth or jobs; it only redistributes the wealth created over the years from oil production. In case you haven’t seen the obvious, this is Keynesian fiscal stimulus. Give money away to those whom the government favors. Pay a supporter to dig a hole and another supporter to fill it.

Which means citizens are bailing out of the bolivar because they think it will be worthless. Another slight problem he has with human nature.

At Caracas’s middle-class Sambil shopping mall, lines at cashiers reached 50-deep. Carmen Blanco, a 28-year-old accountant, waited to buy a 42-inch flat-screen television she doesn’t need because she already has one at home.

“It doesn’t make any sense to keep my savings,” Ms. Blanco said Saturday. “I’d love to see how things work in a normal country.”

Carmen is one sharp person, although I would recommend gold jewelry or just gold instead of TVs. Which shows that even with an intelligent middle class, guys like Chávez can still succeed.

Chávez’s response:

Venezuelan President Hugo Chávez said that businesses have no reason to raise prices following the devaluation of the bolivar and that the government will seize any store that seeks to capitalize on the situation.

Chávez said he’ll create an anti-speculation committee after private businesses warned that prices would double and consumers rushed to buy household appliances and televisions. The government is the only authority able to dictate any such increases, he said.

“The bourgeois are already talking about how all prices are going to double and they’re closing their businesses,” Chávez said in comments on state television during his weekly “Alo Presidente” program. “People, don’t let them rob you, denounce it, and I’m capable of taking over that business.”

Goods will quickly disappear from the shelves, businesses will close, the offending “bourgeois” (shop owners) will be arrested, and life and commerce will grind to a halt. Demonstrations will break out. Counter-demonstrations will be orchestrated by Chavezistas. The military will be called in to repress the people (“create order”), martial law will be declared and never lifted, and Hugo will be the new Castro. More price controls, rationing, and a growing bureaucracy will be the order of the day. To divert attention to his failures he will blame the U.S., traitorous bourgeois elements, maybe invade Colombia, pay off his thugs, spend money, and  neglect oil production. A major part of our oil supply will be jeopardized.

He’ll always be looking over his shoulder for someone trying to overthrow him or kill him. He’ll create a police state with local block wardens and a powerful security service. People will try to leave. Lots of people.

All this because the guy knows nothing about economics or human nature.

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I have a suggestion how we can help Chávez along: Boycott Citgo. Yes, he owns it and they sell a lot of gasoline in the U.S. Don’t go there. Don’t support his repressive, ignorant, backward regime.

¹ A caudillo is a charismatic military leader with populist-socialist policies which aim to redistribute wealth to the poor masses, at least in the beginning of the regime. They always end up as dictators of various stripes. They control the economy through patronage to their supporters, redistribution of capital, and they rely on the military to maintain control. They promote a personality cult which is why you see huge posters of the leader. They can be leftist or kleptocratic-oligarchic. Castro is a typical modern leftist caudillo. Of course being authoritarian, it doesn’t really matter if they are “left” or “right.”