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A Recipe for Economic Collapse in Venezuela: Hugo Chavez's ...
... away those who are most economically productive. A Recipe for Economic Collapse
in Venezuela: Hugo Chavez's Anti-Capitalist Philosophy By Andrew West, CFA ...
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A Recipe for Economic Collapse
Chavez' dictatorial tendencies and anti-business rhetoric are likely to frighten away
those who are most economically productive.
A Recipe for Economic Collapse in Venezuela: Hugo Chavez's Anti-Capitalist Philosophy
By Andrew West, CFA
[CAPITALISMMAGAZINE.COM] One of the perennial complaints made of investment analysts
is "why didn't you warn me about this before the crash?" While difficult, it is
sometimes possible to identify the makings of a country's downfall beforehand, while
the news about it is still positive. One such situation is Venezuela.
Right now Venezuela is riding high on a wave of high oil prices. With approximately
70% of the country's net exports coming from state-owned oil production, and oil near
ten-year highs, the government's revenue has substantially increased. GDP growth and
economic indicators are positive.
Venezuela's external debt represents only about 30% of GDP, lowest among the major
Latin American economies. Furthermore, Venezuela's economy is experiencing the only
current account surplus among the major Latin American economies. All of these factors
are considered positive, yet I will argue that a major decline in Venezuela's economy
is becoming increasingly likely.
In the longer term, it is ideas, and the social, political, and economic environment
that ideas produce that determine a country's economic results. Right now, the
greatest threat to Venezuela's economic future lies within its ideological direction,
specifically the anticapitalist and statist philosophy espoused by its popular
president, Hugo Chavez.
Chavez took power in December 1998, promising to reform a corrupt government. Since
then, he has instead led a "political revolution" designed to elevate his personal
power within the government, and of the government over its citizens. Chavez has
removed the checks against his power held by Congress and the Supreme Court. And
Chavez' ultimate goal appears to be ruling Venezuela by personal decree - i.e.
dictatorship.
Chavez gravitates towards the dictatorial left, and has explicitly struck out against
America's dominant status in the world and the "savage capitalism" it promotes. He has
gone out of his way to visit and praise Fidel Castro, Jiang Zemin, and Saddam Hussein,
and has cited the government of Libya's Col. Muammar Qaddafi as a model of democracy.
Regarding Cuba and Venezuela, Chavez stated that both countries were "swimming
together towards the same sea of happiness."
There are ominous parallels between Castro and his admirer Chavez. Like Castro, Chavez
was a failed baseball player, and like Castro, came to power as a "reformer." Both
were originally hailed as "reformers" and "pragmatists." Now, like Castro and numerous
past revolutionaries, Chavez erects massive posters of himself, and lectures the
country for hours on the wickedness of capitalists, the necessity of class warfare,
land redistribution, and the delights of delivering a "knockout punch to the
counterrevolution."
Those productive and wealthy Venezuelans on the receiving end of Chavez' abuse aren't
waiting around for his "knockout punch." They appear to be voting with their feet and
checkbooks. Capital flight is substantial, estimated to be about US$1 billion per
month.
Despite his anti-capitalist rhetoric, Chavez is hoping to raise money from foreign and
private investors by partially privatizing the telecommunications and energy
industries. So far investors have been distrustful of Chavez' contradictory policies,
and incoming investment has slowed, with foreign investors reluctant to invest even in
oil ventures, let alone non-export industries.
With state oil revenues generating a windfall of government funds, Chavez is expanding
government spending at an even faster pace. Chavez recently announced plans to spend
additional billions this year to inaugurate a new stage of "economic revolution."
Though details are lacking, given Chavez' background, his economic revolution is
likely to entail confiscation and redistribution of wealth, and an increase in
government interference in the economy.
Even with $30 oil, Chavez is spending beyond the government's means, given that
government expenditures are expected to reach 20% of GDP. This has led Chavez to raid
$2 billion from the central bank, crushing its façade of independence. To further
compound the problem, the central bank's currency policy is the same as was once
pursued by Indonesia and Thailand: a "controlled" devaluation, with a weaker currency
each month, devaluing 9.9% in 1999, and over 6% so far in 2000. The combination of
government spending and devaluation has resulted in inflation of over 15%.
Venezuela's situation is unlikely to lead to immediate collapse, but the situation
looks quite negative for coming years. Chavez' dictatorial tendencies and
anti-business rhetoric are likely to frighten away those who are most economically
productive, gradually leading the economy to become increasingly dependent upon
government, and the government increasingly dependent on oil revenues. Given oil's
volatility, an expected medium-term downturn in the price of oil could leave Venezuela
with an expensive bureaucracy, an absence of productive entrepreneurs, an unproductive
economy, and a scarcity of revenues. ( Is that what happened in Libya ? ) That's a
recipe for collapse - someday.
Andrew West is a Contributing Economics Editor for Capitalism Magazine. He is Senior
Portfolio Manager and Senior Vice President at Global Assets Advisors Inc., a
subsidiary of International Assets Holding Corp. He is currently working at the firm's
New York City branch. Mr. West has worked in the field of global investing over eight
years as both equity analyst and portfolio manager. Mr. West graduated Summa Cum Laude
with a Bachelor's degree in Finance from the University of Central Florida. In 1997 he
received the Chartered Financial Analyst designation from the Association for
Investment Management and Research.
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