[fblike]
It has been a very tumultuous year in Venezuelan politics. In March Hugo Chavez, who governed the country for fourteen years and attempted to create a vibrant socialist movement in Latin America called Bolivarian Socialism, died of cancer and his successor Nicolas Maduro, a former bus driver and union activist, barely won the presidency in a disputed April election. In the midst of high crime rates and poor economic problems, Venezuela held municipal elections for 337 mayoral seats and 2,435 city council officials on December 8th. The opposition, named the Democratic Unity alliance (MUD), called for voters to reject members of Maduro’s Unified Socialist Party of Venezuela (PSUV) and turned the election into a national referendum. The election result ended up mixed, as PSUV won a higher percentage of ballots cast for its candidates, winning 49-43%, but the MUD won control of five of the country’s most populous cities, which include the capital city of Caracas. The next round of national elections are not scheduled until 2015 and the opposition are hoping to recall Maduro from office by 2016. However, the immediate result of the municipal elections may give Maduro some breathing room to consolidate his grip on power and handle Venezuela’s looming economic problems, which could impair the advancement of Bolivarian Socialism next year.
This topic brief will provide an overview of the municipal elections, explore Venezuela’s economic problems, and how the election may impact Maduro’s handling of his political opponents and the Venezuelan economy over the next year.
Readers are also encouraged to use the links below and in the related R&D to bolster their files about this topic.
The Municipal Election Showdown
In April, Maduro, who served as Chavez’s vice-president, had to run for the Venezuelan presidency in his own name. During the campaign Maduro made a series of embarrassing gaffes, which The Latin Times chronicled on December 18th, the best of which was when he told voters that Chavez visited him as a “little birdie” and told him that he would win the presidency. Opposition parties, which had been fractured for many years of Chavez’s rule, unified around Henrique Capriles, a forty-one year old governor of the Venezuelan state of Miranda and the grandson of Holocaust survivors. The election saw Maduro defeat Capriles by 1.5% and Capriles forces allege that Maduro’s government won a fraudulent election, noting that some of Maduro’s margins in municipalities were suspect since he ran ahead of previous vote tallies won by Chavez, who was more popular than Maduro. Capriles refused to accept defeat and appealed the election result to the national Supreme Court and the national electoral authority (CNE). However, as The Economist explains on December 14th, these two bodies refused to hear his appeal and Maduro’s election was confirmed. To date, Capriles has refused to concede the election result and Venezuela’s opposition parties still dispute Maduro’s legitimacy as president.
Venezuela’s municipal elections offered the opposition a way to politically weaken Maduro’s political standing since they would be the first national test of his rule. In the months leading up to the polls, Maduro’s standing looked very weak as the Venezuelan economy has been hit with inflation rates as high as 50%, which are the highest inflation rates in the world. These inflation rates, the cause of which will be discussed in the next section, are double the rate of inflation the country experienced under Chavez’s rule. As another point of comparison, inflation rates in the United States typically average 2% or less a year. High inflation rates tend to place a larger economic burden on the poor, since inflation erodes their purchasing power and their money does not go as far it used to. Inflation tends to raise the price of basic staples like food products and high inflation also erodes consumer confidence. The country also has a crime problem, as the U.S. State Department warns American travelers to Venezuela that the country has one of the highest murder rates in the world and that the capital city of Caracas has a homicide rate of 122 per 100,000 inhabitants. Many crimes go unsolved and poor neighborhoods are singled out as especially dangerous. The opposition hoped that these problems would allow it to win a large share of the country’s mayor’s offices and city council seats.
However, Maduro quickly resorted to economic populism to bolster his status among Chavez’s old followers and among the PSUV faithful. On November 19th the Venezuelan National Assembly granted Maduro special powers that enable him to rule over the economy for one year. The Brookings Institution on December 9th reveals that PSUV politicians found the supermajority in the National Assembly to grant these powers by impeaching opposition lawmakers and sidelining them during the vote. Maduro quickly put the powers to use by targeting businesses that he blames for the high inflation rates that the country is experiencing. The Washington Post points out on November 21st that Maduro used the national guard to seize electronics stores and forcibly lower prices. The result were mobs descending on stores targeted by the government and taking away appliances like televisions at drastically reduced prices with some not paying at all. The government also went about jailing more than 100 business owners who it allege were fixing prices and gouging poorer customers. This assault on private business, while harmful in the long run, gave Maduro a short-term boost and polls showed that middle-class voters approved of Maduro’s policies.
On face, the municipal campaign was also very unfair for the opposition. The Economist article previously cited explains that in the run up to the vote Maduro appeared on live television for more than two hours a day and many media outlets, which by this time are either state-owned or adopt a pro-government position to avoid harassment, undercovered or completely ignored opposition candidates. It may not be a stretch to argue that Western readers of Venezuelan politics knew more about the opposition than some Venezuelan voters. The government is also accused of using state-owned vehicles like ambulances and power utility cars to disseminate campaign propaganda and Maduro declared the day of the vote as “Loyalty to Chavez Day” in memorial to the deceased leader. The PanAm Post also argues on December 9th that the country’s once vibrant labor movement has been beaten into submission by the government over the last decade and that opposition campaign managers face harassment and abuse from local police. The PanAm Post on December 9th in a separate article points out that the election day was marred with voting machine failures and a lack of staff at some election centers. Opposition candidates also argue that political propaganda was displayed at campaign locations, leading Capriles to argue that the vote was “the move abusive election campaign in history.” To be sure, these are not election problems limited to Venezuela and election irregularities are a common occurrence in democratic systems. However, the pro-government propaganda used in the election and the harassment of opposition candidates has made it very difficult for the Venezuelan opposition to gain ground over the years.
The election saw a 58.9% voter turnout, which was about 20% less than the presidential poll in April. As indicated in the preview to this brief, the PSUV candidates collectively won more votes than those put up by the MUD and the margin over victory was well beyond what Maduro received in the April presidential election. The Christian Science Monitor explains on December 9th that the PSUV and its allies won at least 196 of the 335 mayoral seats, while the MUD only won at least 53 (78 races were too close to call at the time that this brief was written). However, the MUD won control of five of the country’s most populous cities, which Al Jazeera explains on December 9th include the capital of Caracas, the oil-rich city of Maracaibo, and Chavez’s birthplace of Barinas. The PSUV and Maduro considered the election a victory by pointing to their popular vote victory, which they consider a new mandate to govern and as an endorsement of continued socialist policies, whereas the MUD points to its gains in the cities as evidence of discontent with the existing regime. The MUD also argues that its victory was significant because of the media advantages enjoyed by government candidates throughout the campaign.
Extempers may find it alarming that the PSUV won a 6% victory in the popular vote, but they have to consider two factors. First, the economic populism of Maduro is credited with giving him a short-term boost in the polls and the day of fiscal reckoning in the Venezuelan economy is not due until after January 1st of next year (which is discussed below). And second, targeting municipal elections may not have been the best strategy for the opposition. Just like Congressional races in the United States, politics can trend locally instead of nationally and elections can turn on very different issues than what are considered national priorities. For example, the Brookings Institution article previously cited mentions that some of the elections were impacted by local crime rates, infrastructure problems, and corruption in local government. Therefore, some of the opposition’s narrative may not have carried through the entire election campaign as they hoped. The other strategic problem is that the Venezuelan opposition is best organized in the cities because they harbor more of the country’s middle-class and wealthier voters. The poorer citizens of the country are in rural areas and these areas tend to be the strongest areas of support for Bolivarian Socialism. The election result illustrates that the opposition has not found a way to break the PSUV stronghold in these rural areas and a similar pattern has taken place in Bolivia, where socialist candidates perform well among rural, indigenous communities that have been the losers of the economic modernization programs Latin American governments implemented during the late twentieth century. Therefore, by making the municipal elections a referendum on the government the MUD played into Maduro’s hands because it was very unlikely that the PSUV would not win a popular vote victory due to its sizeable margins in rural areas. It is very plausible that Maduro and his allies do not care about losing the most populous cities in the country because they only cared about the margin of victory in the popular vote, which gave Maduro a relatively easy propaganda victory over the opposition.
2014: The Date of Economic Reckoning?
As someone who has been involved in extemp since 2000, I can tell you that extempers and coaches have been arguing that the Venezuelan economy is on the verge of collapse for more than a decade. Extempers who avidly read The Economist usually get an article every several months that describes the bad conditions of the Venezuelan economy and how nationalization programs pursued under Chavez, whereby the government seizes control of private businesses and makes them state-run, will destroy the economy. In fact, at Western Kentucky University one of the economics professors has a lecture in his global economics course on the topic “Why has the Venezuelan economy not collapsed yet?” While the Venezuelan economy has survived so far, disappointing those who hate Chavez in the extemp community, 2014 might be the year that the system collapses, so you might be in the position to actually discuss a scenario that extempers have been talking about for a long time. I decided to devote a section to the Venezuelan economy in this brief because it sets up the final section about the long-term impact of the municipal election results and since it is very likely that you may receive a question about it over the next six months. After all, Brazil, Mexico, Argentina, and Venezuela are statistically the top four Latin American countries that have the most questions written about them.
The biggest problem with the Venezuelan economy, as noted in the previous section, is a high inflation rate. Inflation is the general increase in prices and while gradual inflation that is between 2-3% is normal and happens over time, sudden inflationary spikes are harmful to a national economy. Imagine that you like to buy a soda each day after school and the price of that soda is $1. As a cash strapped teenager this might be somewhat expensive, but you can manage it if you receive a weekly allowance of $7-$10. Now imagine the next day you went to the vending machine and the price of that soda suddenly increased to $6. How likely are you to buy the soda? Not very, which could have a negative impact on the soda producer, since it might sell fewer items for that economic quarter. Let’s say that you have some type of crazy medical addiction and you have to have a soda after school. If you have to have it, then suddenly your allowance will not cover a daily soda purchase will it? So, if this happens you are likely to go to your parents and ask for a higher allowance in the neighborhood of $24-$30 to cover your daily soda purchases. This is an example of an inflationary spiral because as the cost of basic products go up people demand wage increases so that they can continue to buy what they once did, which eventually means that money loses its value. For example, your $10 used to go a lot further (meaning you could buy more of other goods) when sodas were $1 at the vending machine than when they went to $6.
The Columnist, a largely leftist source, on December 20th argues that Venezuela’s inflation rate, which stands at 54%, the highest in the world, is due to three factors: high rates of government spending, a high minimum wage, and an increased access to credit for more Venezuelans which has increased consumption. Venezuela’s government currently has a debt of 11% of its GDP and to cover some of its deficits the government has had its central bank, its version of the Federal Reserve, print more bolivars, the Venezuelan currency. This is an economic disaster in the making because when a government prints more money it floods the market with currency and creates too much supply of that currency, which eventually leads to higher prices to absorb it. This is why the Confederate States of America (CSA) suffered a virtual economic collapse during the American Civil War and it is also a contributing factor behind the hyperinflation experienced by the Weimar Republic of the 1920s and Zimbabwe’s problems in 2008. Zimbabwe’s inflation reached a peak of 6.5 sextillion PERCENT in 2008 and its currency became virtually worthless and is no longer used. The higher minimum wage and increased access to credit have also produced inflation because it has increased consumer spending on items that the Venezuelan economy does not produce a lot of domestically like electronic appliances. The result is that these goods quickly fly off the shelves on the market and businesses know these goods are in demand so they increase the prices of the goods that are left. This situation, which we call scarcity in economics, produces high prices in order to weed out the number of people who can actually purchase the good. This is why Playstation 4’s and XBox One’s are so expensive. They are products that are in demand and in some places they are sold out. This fuels an extra market on eBay where some of these products are sold at double their normal market value, but people are willing to pay if they have the money on hand.
Scarcity in consumer items has also been caused by import controls placed on the economy by the Venezuelan government. To import more consumer items and even basic staples like food, the Venezuelan government has to pay for these items with foreign currency. For example, The Washington Post previously cited reveals that Venezuela now imports 70% of its food and it has to use the currencies of the nations that it buys the food from in order to cover the purchases. Governments can obtain other currencies by exporting goods to other countries and acquiring foreign currency that way and they can also get it through other complicated economic transactions that I do not have the space to cover in this brief. The problem with Venezuela’s economy is that it has become dominated by the oil sector and that sector is in need of private investment because the government has done a poor job increasing production since Chavez nationalized many of the nation’s oil fields over the last decade. Nationalizations are not good for an economy because they create a poor investment climate. After all, if you were a foreign business owner and a government took your property would you try to invest in other properties in the country? Probably not and if anything, you would probably let other business owners know what the government did to you and get them to either take their property out of the country in question as soon as possible or never invest there. Fox Business on December 17th explains that Venezuela’s government has beaten down the private sector to such a degree that its export markets are now heavily reliant on a declining oil sector and that is drying up its foreign currency reserves. Bloomberg on December 12th points out that Venezuela’s foreign currency reserves have fallen from $29.9 billion to $20.4 billion over the last year, which is the lowest value of the country’s foreign reserves in nine years. To limit a further decline in the nation’s reserves Maduro has placed limits on the importation of foreign goods, but, as MercoPress indicates on December 7th, this has created a shortage of basic staple goods and high inflation rates for products like milk, corn meal, cooking oil, and meat. Other items like toilet paper have become impossible to find in some places (one of my favorite extemp analogies was to point out that during Peru’s hyperinflation of the 1980s toilet paper became a currency in some localities because it was in such short supply so if you had a lot of it you became rich! This illustrates that things of value in disaster-like situations do not have to be gold and silver, but can be things that some take for granted like bottled water, food, ammunition, toilet paper, etc.). These shortages have hurt the poor more than any other group and trying to satisfy the poor is why Maduro engaged in his economic populist crackdown on business interests a month before the election.
Another problem for the government is that with oil prices declining from their 2008 peak the Venezuelan government has earned less money and it has also cost itself billions of dollars by selling oil at discounted rates to allies like Cuba, China, and other socialist-like countries in Latin America. Venezuela has the largest oil reserves in Latin America, but due to nationalization programs over the last decade international businesses are less willing to invest in the country than they used to be. The government also subsidizes gas for its citizens, justifying the practice by arguing that the Venezuelan people should primarily benefit from its oil reserves. There is nothing wrong with this logic, but when the government artificially lowers the price of a good it distorts the market. Gas prices in Venezuela, according to the Bloomberg article previously cited are six cents a gallon and have not changed since 1989. By comparison, gas prices in neighboring Colombia are seventy times as expensive and the cost $4.30 a gallon. The United States average is $3.27. The gas subsidies are estimated to cost Venezuela $5.3 billion annually and the higher domestic consumption due to low prices, coupled with Venezuela selling oil at discounted rates to allies, costs the government $32.1 billion annually. This is nothing to take lightly when you compare the lost revenue, which comes in American dollars, with the dwindling foreign currency reserves that Venezuela’s government is witnessing. However, the Bloomberg article notes that if the Venezuelan government eliminated its subsidy completely that gas prices would rise by 694%, which would be a recipe for political disaster and could create more inflation in the country. Arab governments also subsidize gas for their citizens and eliminating any element of the subsidy usually produces a domestic nightmare, which Sudan witnessed this year when it moved to eliminate part of its oil subsidy. The Huffington Post on December 18th explains that Maduro’s government has looked into raising the price of gasoline, arguing that low gas prices create harmful economic externalities (the economic word for side effects) like increased pollution and largely benefit the wealthy that can afford gas guzzling, luxury vehicles. However, the last time that the Venezuelan government raised gas prices was 1989, when President Carlos Andres Perez raised prices to comply with an International Monetary Fund (IMF) directive as a condition for economic assistance. This produced riots, called Caracazo, and more than 300 people are alleged to have died. Political analysts argue that the legacy of Caracazo was the opening of Venezuelan politics to socialist forces and that it paved the way for Hugo Chavez to come to power in 1999. During his time in office, Chavez refused to raise the price of gasoline, fearing a new wave of domestic unrest, but due to the government’s foreign exchange problems and the need to tame some of the government’s deficits a gasoline price hike is long overdue.
The looming gasoline price hike and the government’s short-term deficits create conditions that may create economic disaster in 2014. Fox Business’s article previously cited explains that Standard & Poor’s, an internationally reputable credit ratings agency, recently downgraded Venezuela’s debt, which will make it more expensive for the government to borrow funds to cover its deficits. Moody’s, another credit ratings agency, recently warned that there is a “materially higher risk of an economic and financial collapse” in Venezuela due to Maduro’s policies, noting that his economic decree powers have been used unjustly against private business owners and could lead to increased scarcity of consumer products in the long-run. These agencies also fear that Maduro is moving towards a government intervention in the economy and this usually scares away private investors, who fear that their property rights will not be protected. That same article explains that although Venezuela has enough foreign currency holdings and credit leveraging options to cover its short-term debt, its debt is 85% of its reserves, which is well over the 50-60% threshold that economists consider “danger territory” for an economy. International experts also fear that Maduro’s economic policies might become more radical and unhinged when the short-term political gains of his seizures of small businesses and lowering of prices fails to solve the country’s inflation and scarcity problems. Will he intervene in the remaining private sectors of the Venezuelan economy like Fidel Castro did in the early 1960s, which turned Cuba into a state-run economy? Will this finally produce a violent political pushback by opposition forces that see that the system is rigged against them? The Bloomberg article from December 12th cited above explains that the borrowing costs on Venezuela’s debt have risen five percent points since Maduro was elected president in April and if he fails to handle Venezuela’s economy problems that these costs will continue to rise. This could create a dangerous spiral for the Venezuelan economy, which could soon find itself paying very high prices to finance its growing debt. All of this could make 2014 a very rough year for Maduro, shortening the honeymoon period that he may enjoy from the PSUV’s victory in the municipal elections.
Long-Term Consequences of the Municipal Elections
One of the dangers for Maduro is that the political opposition in Venezuela has been sidelined to such a degree by heavy handed government policies that there may not be enough forces to question and limit some of his economic policies. Reuters explains on December 18th that despite the opposition winning control of the country’s most populous areas, the government has been in the process of sidelining local governments over the last decade. Local governments are reliant on the central government for their funding and localities controlled by opposition lawmakers are not receiving needed funds from the central government. Maduro has also continued Chavez’s policy of constructing parallel institutions that carry out the functions of local government, but these institutions have officers appointed by the central government and not elected by voters. For example, Reuters notes that although MUD candidate Antonio Ledezma, who Maduro has called a “vampire,” defeated PSUV candidate Ernesto Villegas, Villegas was named to a post for “revolutionary transformation” of the capital by Maduro after losing the election. Villegas will enjoy executive powers that used to be held by the Caracas mayor and the opposition claims that this is Maduro’s nullification of the municipal election result. Maduro met with opposition officials last week, but opposition lawmakers are wary of working with the government because they have been burned by the PSUV in the past. For example, a Jimmy Carter brokered deal that ended a general strike in 2003 saw Chavez renege, move the timeline for a national election on his leadership, and strengthen his political apparatus to make the eventual election outcome a foregone conclusion. It is possible that Maduro realizes that he needs to work with the opposition to solve the political tensions that are gripping Venezuelan society, but extempers should understand why the opposition might be unwilling to work with Maduro (after all they are working to get the four million signatures needed to recall him in 2016) and look for more evidence besides rhetoric that Maduro wants to work with them. Steps Maduro could take to do this might include providing more balanced political coverage through state run media systems, relaxing the harassment of opposition candidates by local police forces, and releasing some political dissidents from prison.
The municipal election victory is likely to give Maduro a few months where he can enact some of his economic agenda without protests within the PSUV and from the opposition MUD. Prior to Maduro’s populist actions last month elements of the PSUV questioned Maduro’s commitment to Chavez’s Bolivarian Socialism. However, they now see him as following Chavez’s path and this may give him some political room to raise gasoline prices (although he says that he will discuss the issue with local communities first) and devalue the bolivar. Devaluing the bolivar would allow the government to solve some of its budget problems by increasing the amount of bolivars that it would earn from each dollar it gained by selling its oil on the international market. A devaluation sees a government reduce the value of its currency relative to other currencies and is often used by governments to reduce their debts and boost exports by making their goods cheaper in other countries. In fact, this was Italy’s traditional economic policy when it had the lira. This typically gave the Italian economy a boost despite its inefficiencies, but it can no longer pursue this policy as part of the euro zone, which is why some Italian forces want to go back to the lira so that they can revert to some of these policies. Venezuela did a devaluation in February, when it devalued the bolivar by 32%, but economists argue that the impact of this devaluation was never felt because high inflation rates eroded its impact. It is expected that Maduro will pursue the policy again, but it has the danger of creating more inflation by making foreign products even more expensive within Venezuela and it also reduces the value of people’s savings. A devaluation done by the Myanmar government in the late 1980s nearly toppled its military junta, so governments have to be careful when they pursue this policy. Nevertheless, it is expected that Maduro will use the breathing room produced by the election to pursue devaluation and a gradual relaxation of the government’s gasoline subsidy, so extempers should be prepared to discuss these two economic issues in the coming months.
The Columnist article from December 20th discussed some of the strategies that Maduro should take in order to tame Venezuela’s high inflation rate: less government interference in private businesses that are merely pricing products based on the supply and demand of the market, less government interference in the national oil sector to increase foreign investment, increase production, and open jobs, and increased taxes, higher interest rates, and a possible minimum wage reduction to take money out of the economy. Federal Reserve Chairman Paul Volcker tamed high inflation rates in the United States economy with double digit interest rates in the late 1970s. These were economically painful, produced job losses, and were a contributing factor in President Jimmy Carter’s failure to win re-election in 1980, but they were necessary to tame a problem that America had faced since the late 1960s. The problem, though, is that Maduro is unlikely to pursue any of these policies. His belief in Bolivarian Socialism and its emphasis on state-run enterprises and supports for the lower classes prevents his adoption of these policies and even if he did enact them he would face a sizeable political backlash from the PSUV’s core constituencies. It is far more likely that Maduro will pursue more price controls and possible seizures of private businesses as economic conditions deteriorate, which risks a hyperinflation scenario, especially if the Venezuelan central bank continues to print money to cover the government’s budget deficit problems. If hyperinflation does take hold it will be interesting to see how the Venezuelan opposition reacts. Traditionally it has eschewed the massive protests used by supporters of Chavez and its leaders have called for restraint, but the patience of these leaders may be flagging and they may eventually look to Egypt’s experience in the early days of the Arab Spring as a model for what a motivated citizenry can do when political and economic conditions become intolerable.
To close, I recognize that this brief has been highly critical of Maduro, the Venezuelan government, and Chavez. These views reflect some of the readings and conclusions of the author based on years of giving speeches and coaching competitors about Venezuelan politics and economic policy, but I do recommend that extempers read articles from Chavez’s supporters to get a better understanding of why the PSUV has a large body of support to pull from. Extempers need to realize that the 1980s and 1990s was a painful time for Latin American economies as governments spent their way into debt and then adopted austerity policies to receive loans from the IMF. These policies often reduced spending on healthcare, education, and anti-poverty programs and the people of these nations affiliated capitalist, free market policies with income inequality and economic chaos. The Argentinian debt default in December 2001 lent further credence to anti-IMF and anti-American/European economic policies and strengthened the hand of political figures like Chavez that argued that Latin America needed to go its own way in terms of political and economic policy. Al-Jazeera on December 1st shed light on some of Chavez and Maduro’s positive achievements, which include reducing poverty in half over the last decade and improving the state of the country’s healthcare and education systems. The socialist government has also claimed credit for reducing hunger among the country’s poor, but as we have discussed this is threatened by high inflation that is making some food staples scarce. Extempers should consult Upside Down World, a leftist Latin American think tank that is very pro-Chavez and pro-Bolivarian Socialism, for alternative views about Venezuela that usually do not make it into Western media sources. They should also look for op-eds in places like Al-Jazeera that are written from a pro-Chavez perspective so as to gain a more balanced perspective on the issue.
2014 is setting up as a very explosive year in Venezuelan politics and economics. While the opposition claims a small victory in the municipal election it needs to refine its message to appeal outside of the cities and it might need a different leader as Capriles has failed to carry a presidential election or win a decisive victory against the government at the municipal level. For Maduro and his followers, 2014 could be the year that the Bolivarian Socialist project marches on, but the economic numbers do not look good and in some cases the economy could begin to reverse some of the gains that the government has taken credit for. It is obvious that the country is in need of good economic stewardship and political reconciliation and 2014 will either be the year that these things begin to happen or a collapse that has been hinted at for a long period of time begins to unfold.