Mon, Jan 07, 2019 page7

• Venezuela and Bolivia teach how to do socialism — and how not to

  • By Noah Smith / Bloomberg Opinion
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  It is difficult to overstate how disastrous the reigns of late Venezuelan president Hugo Chavez and his successor Nicolas Maduro have been for Venezuela. A recent series of Bloomberg articles vividly depicted the hellish, never-ending struggle for survival in Caracas, the country’s capital.

  Hungry children roam the streets, people are fleeing the country, healthcare is almost nonexistent, violence is endemic and even water is scarce. Chavez’s so-called Bolivarian revolution took a peaceful, middle-income country and transformed it into a nightmare that puts the ruinous Soviet Union of the 1980s to shame.

  It is important for other countries — including wealthy ones such as the US — not to ignore Venezuela, but to use it as a cautionary tale. Politicians like US Senator Bernie Sanders and US Representative Alexandria Ocasio-Cortez have embraced socialism, as have many young Americans.

  However, what are the lessons of Venezuela? Why did the country become such a basket case?

  The Bolivarian revolution’s defenders often make excuses for the Chavez-Maduro regime by claiming that the country’s penury is the result of outside forces.

  Some say that it was the fall in oil prices in late 2014 and 2015 that sunk the country.

  Venezuela is a petrostate — petroleum products constituted about 95 percent of the country’s exports in 2014, so the price decline was naturally a blow.

  However, although lower oil prices undoubtedly made things harder for Venezuela, they cannot be the primary culprit in the collapse. While other petrostates — Saudi Arabia, Russia, Nigeria, Angola and Kuwait — saw their incomes stagnate or even fall after 2014, they did not experience anything remotely like the devastation that has hit Venezuela.

  Nor did the country come under attack by capitalist powers. In 201, under then-US president Barack Obama, the US imposed sanctions against a few of the country’s officials and former US president George W. Bush refused to sell arms to Venezuela, but these were not broad sanctions that had the power to seriously affect the country’s economy.

  Venezuela’s critics can also be too sloppy. It is easy to wave one’s hands and declare that socialism always fails, but Bolivia, another resource-dependent Latin American country, in 2006 elected socialist Bolivian President Evo Morales. And Bolivia has been doing great. The country’s living standards, which had stagnated for 30 years, have grown rapidly and steadily since Morales took power.

  Bolivia has managed to reduce inequality dramatically, with its GINI coefficient declining 15.5 percent from 2002 to 2012, according to a World Bank report titled Deconstructing the Decline in Inequality in Latin America.

  Despite ominous signs that Morales is becoming more authoritarian, Bolivia has not yet experienced anything like the devastation that has afflicted its ideological fellow traveler to the north.

  So if it was not oil prices, external pressures or the inevitable tendencies of socialism, what did sink Venezuela? It is hard to identify the exact mistakes that Chavez and Maduro made, but three failures loom large: macroeconomic mismanagement, nationalization of industries and interference in the state-owned oil company.

  The worst scourge of Venezuela’s economy has been hyperinflation: The IMF forecast that the Venezuelan bolivar would see 13,000 percent inflation by the end of last year.

  This level of price increases makes it impossible to save money. It is also very difficult for companies, even state-owned ones, to plan their investments when the price of those investments is highly uncertain.

  Meanwhile, hyperinflation has led the government — predictably — to impose price controls. Those have created shortages of basic necessities and have made people turn to the much less-efficient and corrupt black market.

  It is not clear how hyperinflation gets started — price controls, currency depreciation and fiscal deficits can help start it, but once it gets started it is very difficult to stop. Venezuela should have seen this menace coming, as its inflation rate steadily crept up year after year, but its leaders just made the problem worse. Bolivia, meanwhile, has managed to keep inflation very low.

  Another big mistake was large-scale nationalization of industries and expropriation of private property. Chavez was very fond of nationalizing foreign, as well as local businesses. This is a sure way to wreck the private sector: If local business owners and foreign investors do not think their property is secure, they will not invest and output will languish. This can cause a spiral in which the government is forced to nationalize ever more of the economy as the private sector pulls back.

  Morales, in contrast, has been much more careful with nationalizations in Bolivia, mostly limiting them to the oil and gas industry and the electric grid — centralized, stable industries where government ownership is common around the world.

  Finally, Venezuela’s leaders interfered with the smooth operation of an industry that was already government-run — Petroleos de Venezuela SA (PDVSA), the state-owned oil company.

  The unsurprising result is that Venezuelan petroleum investment has collapsed, oil infrastructure is falling apart and production is in free fall — all this in the country with the world’s largest proven crude oil reserves.

  Socialists in the US should take note: If there is a right way to do socialism, this is not it. Instead of cautious policies like those of Bolivia, Venezuela’s leaders chose to ignore the menace of hyperinflation, nationalize private businesses across the economy and muck up the smooth operations of PDVSA. The result was predictable: one of the worst self-inflicted economic catastrophes of the century.
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