How Does Socialism Effect the Development of Venezuela
President Chvez is pushing for a different form of socialism in Venezuela, which he called socialism of the 21st century (Wilpert). This type of Venezuelan socialism is founded on the principles of equality, liberty, justice, love, fraternity, and solidarity, and its purpose is the transformation of capital towards socialism. In spite of the vague definition of Chvezs 21st century version of socialism, what is clear is that the country is radically moving towards a post-capitalist order wherein the political goal is to transfer power to the people. However, whether this Chvezs version of socialism is different from the 20th century socialism, the political direction of Venezuela is all about government control of all sectors of the economy, government intervention, more public spending, and the continued nationalization of all private companies and industries. The underlying question now is not whether this type of socialism is working or bringing the desired goods to the people, but how does socialism affect the development of Venezuela. The goal of this paper is to identify and analyze the effect of socialism on the social and economic progress of Venezuela. Among the factors to be tackled are the economic environment of the country as a whole, its trade policy, the fiscal burden of the government, the extent of state interference in the economy, monetary policy, capital flows and foreign investment, banking and finance, wages and prices, property rights, and government regulation. A number of hypotheses will also be given at the latter part of the paper based on the issues discussed in the background of the paper. Finally, this paper ends with a conclusion in light of the issues taken and the hypotheses mentioned with respect to the impact of socialism on the development of Venezuela.
Background
President Chvez brought socialism to Venezuela after his election more than ten years ago, by declaring a Bolivarian Revolution that is based on South American liberator and Venezuelan hero Simon Bolivars freedom for the oppressed and the poor and social equality (McPherson 84). The election of the Venezuelas socialist leader led to the rejection of free-market principles that paved the way for the adoption of populist policies. This political transformation resulted in the drastic expansion of government powers and regulatory policies, nationalization of oil industries and private companies, manipulation of price controls on basic goods and products, conversion of privately owned farms to social cooperatives, and exertion of a number of economic controls and regulations (Schaffer, Agusti and Earle 24).
By embracing socialism, which is all about extensive state control of all the means of production, Venezuela rejected capitalism as an economic system (Aronson 29). Capitalism, as opposed to socialism, is an economic system that is about private ownership of property and of the modes of production. Chavez himself declared war against capitalism and committed his government to the state control of private companies and corporations. In 2005, Chavez officially revealed the direction of Venezuela, as his socialist government was ready to establish a democratic socialism in the country. Chavez said, Either capitalism, which is the road to hell, or socialism, for those who want to build the kingdom of God here on Earth (Kozloff 70). This declaration suggests that Venezuela was going to embrace socialism, a socio-political system that would transform the country in the years to come and would affect not only the lives of the people, but also all sectors, including the economy, education and the private sector.
Many supporters of and advocate for socialism applauded this populist move of Chavez to transform Venezuela into a socialist economy that is primarily committed to the provision of the needs and welfare of the poor and the oppressed. The countrys ongoing Bolivarian Revolution is widely seen as an effective catalyst of change in Latin America and as an alternative to neo-liberalism and globalization (Gott 273). It is clear that the economic theory that dominates Venezuela is Karl Marxs economic structuralism, otherwise known as Marxism (Brown 97). Economic structuralism is a power-based theory whose popular practitioners in Latin America are President Chavez and Bolivias Evo Morales who both believe that economic equality can be solved by seizing all private property and the means of production and redistributing them to the poor (DAnieri 89).
Venezuelas Oil Sector
The economy of Venezuela is entirely dependent on oil, which contributes about 80 percent to the countrys total export revenue and about half of the income of the national government (Alvarez). As a result of the political shift in Venezuela, Chavez ordered the nationalization of foreign companies-operated oil fields in 2006. Government officials however argued that Venezuela was not mainly focusing on oil production, as the country has also invested in non-oil sector, which include agriculture, manufacturing and mining.
After the failed coup to remove Chavez from power in 2002, Venezuela experienced a significant economic decline. The government responded to the coup by dismissing more than 17,000 employees of Petrleos de Venezuela (PDVSA), a situation that led to a rapid decline in the countrys gross domestic product between 2002 and 2003. However, the country was able to recover in the following years thanks to the increased oil prices in the international market.
The national government economic policy when in comes to oil is based on the practice of rentismo. Rentismo or rentierism, a term derived from the Spanish word renta, which means revenue or income, is the practice whereby a state utilizes a single source of revenue as the pillar of the national economy and its primary apparatus to stimulate progress and country-wide development, rather than broaden the horizons the economy in order to establish the future of the country (Hidalgo).
There is no doubt that any economic progress in Venezuela is largely linked to its oil production. The revenue or income, which the government derived from oil production, is devoted to public spending, which cut unemployment rate and reduced poverty. One of the positive results of the Bolivarian government is the significant increase in employment rate (Weisbrot and Sandoval). There is a big difference between the period of 1998, or prior to the election of Chavez, and the period after the national government took control of the oil industry in 2003. The nationalization of the oil industry did only provide the national government with enough income or revenue, it has also increased its public spending, including spending on the areas of education, food and health care. For instance, the now state-owned oil industry provided the national government the amount of 13.3 billon for its public spending in 2006 (Petrleos de Venezuela). This means that without nationalizing or seizing the oil industry for the sake of the poor and the oppressed, the national government would not be able to provide goods and services to its more than 24 million population.
However, despite the fact that Venezuela is known as a country with the largest oil reserves, the country started to experience serious water and electricity shortages (Romero). As a result of the ongoing electricity and water crisis, President Chavez has been confronting a public protest. This water and electricity crises are mainly attributed to the deterioration of services in the country. Apart from the shortages, the national government also confronts grave economic crisis and declining oil revenues, which prompted the issuance of emergency measures, including setting caps on the price of products and goods and the importation of air-conditioning systems.
After nationalizing the oil industry, Chavez has been using the countrys vast oil reserves to win allies by selling oil to friendly countries at low prices. Of all the big costumers of Venezuela, only the United States, which Chavez openly denounced as the empire, buys oil at the full market price. Before the election of Chavez in 1998, PDVSA, the state oil company, as one of the largest producers of oil in the world, with production output of 3.2 million barrels per day. Following the establishment of socialism in Venezuela, which led to government control of the PDVSA, as well as government corruption and inefficiency, oil production has now reduced to 2.4 million barrels per day (McDermott).
The effect of socialism on the countrys petro-industry is telling. While it is true that the national government derives vast income or revenues from the state-run oil corporation, its policies hurt the company over the long run and fail to capitalize on short-term revenues. Several problems were seen that caused the current inefficiency of the PDVSA, such as the lost of substantial technical expertise of the company following the 2002-2003 strike and the inability of the new employees to sustain previous production levels. One of the main problems confronting the PDVSA is its continued politization by the socialist government. For example, the national government is using the PDVSA as a way to alleviate poverty and economic crisis by forcing it to sell to domestic market at a subsidized price, which costs at least 9 billion annually (Romero and Krauss). This shows that socialism has a negative effect on big industries like the PDVSA since the national government is mainly focus on political efforts, such as public spending, appointment of government czars to manage the company instead of technical people, and subsidizing the peoples needs, rather than purely economic matters, which may include sustainable production, diversification of the economy, and more profitable investments.
Trade policy and government intervention
Venezuelas trade policy is mainly based on socialism, that is, a system that allows the national government to exercise extensive interventionist and regulatory measures over the countrys economy. This is part of the countrys macroeconomic policy. This economic measure covers the policies on oil, which include nationalization or cessation of privatization and the establishment of new state-owned corporations. Social policies, on the other hand, include the creation of new institutional reforms, international policy, as well as the promotion of popular and social policy (Kolko 143). Since the national government operates on socialist or populist policies, it has the power to control or manipulate prices of gasoline and other basic necessities like food and medicines (Arnone and Cottrell 233).
In terms of regulation, since Venezuela is a socialist state, the national governments regulatory powers or interventionist policies can be applied arbitrarily. Both domestic and foreign investors complained of the inefficiency of government regulators, who were poorly trained and inexperienced and who based their decisions on political considerations rather than technical criteria (Views Wire). A few years after he was elected as president, Chavez used government powers in confiscating privately-owned companies like a Heinz plant that manufactures ketchup (Kozloff 70). The company protested the governments takeover and argued that it was a violation of due process, free trade and property rights. In its response, the national government declared that Heinz company had been operating illegally, had ceased operations for many years, and that at least its employees had already owned eighty percent of the company.
The national government also changed its constitution in order to pave the way for its socialist aspirations. For example, Article 115 of the new constitution created under the term of President Chavez mandates that private companies and property must serve general interest and welfare and the public good (Ellner 142). This only means that socialist or populist policies only works on the destruction of the economy and the nation as a whole. In a socialist regime, interventionist and regulatory policies are being used by the national government to control and manage the economy. Socialism is a social or economic system that disregards the rights of individuals and rejects ownership of private property and companies. Under this system, only the government can operate and manage business establishment for the promotion of public good and welfare. This was the goal of President Chavez when he nationalized the countrys oil fields previously managed and operated by foreign companies. The central government also nationalized banks and other privately-owned business institutions in the name of social welfare and public good.
However, more than ten years after he became the countrys chief executive and declared Venezuela as a socialist state, the country now suffers deepening economic crisis at a time when most countries start to recover from global recession. For instance, the countrys economic output fell 4.5 percent in the third quarter. Since the Chavez did not provide any exact data on its economic activity, most analysts presumed that the decline was even worse than expected (Crowe and Luhnow). When oil prices declined last year, the national government tried to counter this by engaging in aggressive public spending. Also, businesses that were nationalized by the government failed to perform, as they were hardly affected by the global economic downturn. The poor economic performance of the Venezuelan government also affected President Chavezs approval rating, as it slipped to 46 percent in October this year from 53 percent only in September (Crowe and Luhnow).
In this regard, socialism is not an effective tool to stimulate national and economic development. Since this system rejects the concept of property rights and ownership of private property or business, every business or property must be under the control and regulation of the national government. In most capitalist societies, businesses perform well, generate profits and produce more jobs because they are managed and operated by business people who know their functions and who acquired adequate training and expertise for their respective positions. In a socialist society like Venezuela, companies and businesses are under the control and management of bureaucrats or government-appointed people who most of the time base their judgment on political concerns rather than technical considerations.
The table above shows the GDP growth in Venezuela between 2007 and 2008.
Massive public spending
The Venezuelan government usually resorts to aggressive social spending to stimulate the economy, to counter the effects of poverty and unemployment, and to gain the trust and approval of the public. It is in essence a very effective political tool to maintain the prevailing status quo. Due to massive public spending, various sectors have dramatically improved, like the country health care sector. For instance, there were only 1,628 physicians in 1998 compared to 19,571 in 2007.
The national government also offered extensive access to subsidized food as a way to counter poverty and widespread hunger. More than 15,000 stores were put up in 2006 throughout the country to make food items at subsidized prices accessible to the public. President Chavez also focused on the area of education, as the central government made it accessible to poor students throughout the country. This move led to the increase in the number of total enrolment at all educational levels. However, the result of this aggressive public spending is increased taxes imposed on non-oil businesses.
199819992000200120022003200420052006Public Spending23.724.529.631.629.431.028.428.531.0Total social spending8.29.411.012.111.212.111.811.613.6Education3.44.14.54.84.84.64.84.15.1Health1.41.51.51.71.51.61.61.61.8Housing1.00.81.71.00.81.10.61.31.6Social Security1.4 2.02.23.42.83.43.13.03.6Social Development, Participation0.80.90.80.91.11.21.20.91.0Culture, Social Communication0.20.10.20.20.10.30.30.30.3Science and Technology0.10.10.20.30.10.10.30.30.2Social Spending ()34.738.537.338.438.239.041.440.644.0Source Sistema de Indicadores Sociales de Venezuela (SISOV) and Banco Central de Venezuela (BVC).
However, despite the fact that Venezuela currently benefits from the revenues of its state-owned oil company, the country is now faced with rising inflation and other economic perils. With the current economic situation, the populist policies of President Chavez are now under close scrutiny. Some economists and analysts observed that Venezuela is experiencing a period of stagflation (Money Morning). This economic scenario characterizes frustrating high inflation and languorous economic growth. It must be recalled that prior to the current economic situation in Venezuela, the period of 2004-2007 was characterized by rapid economic development, which was highlighted by an amazing 19.42 increase in 2004. That was the time standard of living was at its highest peak in Venezuela. However this economic fanfare did not last lost after the national government engaged in widespread nationalization of private companies and businesses, restrictive price controls, and risky social spending that all led to rapid inflation and economic crisis.
Today, President Chavez has already admitted that Venezuela, which is one of the largest oil exporting countries, is experiencing deepening recession (The Star). This shows that after almost ten years of socialism, the country, which nationalized private companies, became vulnerable to economic incidents like recession and inflation due to national governments inefficient economic policies.
Other negative consequences
After Venezuela nationalized the countrys oil companies and other private businesses, it gradually gained influence on several countries in Latin America through its benevolent petroleum industry (Sanders 455). Before 2005, there was an only flimsy trade relation between Venezuela and the Caribbean Community, inadequate transportation linkage, virtually no tourism connection and insignificant investment. After taking control of the countrys oil industry, President Chavez gradually gained the attention of most Latin American nations, which consequently became Venezuelas main trading partners.
However in the business sector, most companies had difficulties operating in the country, particularly in 2007 when the national government issued a new wave of socialist economic policies (Carroll and Buchholtz 438). These interventionist economic policies sought to undermine the autonomy of private businesses, such as power companies, telecommunication industry, and multinational oil corporations, to surrender the control of their assets to the central government. This resulted in the exodus of multinational corporations, particularly ConocoPhillips and ExxonMobil, and other global private companies.
Furthermore, a country that rejects private ownership and stifles and extensively regulates private companies can hardly attract foreign direct investment. The ongoing wave of nationalization in Venezuela worries foreign investors. One of the banks nationalized by the central government last year was the Spanish-owned Banco de Venezuela, which concerned most investors who had prospects of investing in the country (Oxford Analytica). During his first year as president in 1999, the country suffered a 42 percent loss in foreign direct investment, but it recovered in 2000. Foreign direct investment in Venezuela dropped to 800 million in 2002 due to political crisis. The nationalization campaign of the central government also drove away foreign investors. This indicates that socialism stunts economic growth and the inflow of foreign direct investments in Venezuela.
Hypothesis
It is clear that socialism has enormous impact on the development in Venezuela. Since socialism is about public or state ownership of private property and businesses, the economic and social policies of President Chavez were centered on social welfare, public good and common ownership of the means of production, which led to the governments issuance of populist laws and policies. The result of these policies and economic measures harmed a number of sectors of the Venezuelan society, particularly the business sector. After only a few years in office, President Chavez moved for the nationalization of the countrys biggest and most profitable industry, the oil sector, including other privately-owned companies like banks, manufacturing plants, among others.
There are a number of reasons why the country is experiencing deepening economic crisis in spite of its vast oil reserves. This paper came up with three hypotheses on why socialism impedes or waylays development in Venezuela. These hypotheses as follows
First, socialism impedes both economic and social development as it discourages private businesses to operate and expand.
Second, a government that controls the means of production has no technical and manpower capacity or capability to manage and operate a business enterprise that requires the skills and competence of technocrats and businesspeople.
Third, populist policies and regulatory measures that aim to undermine the autonomy of remaining private businesses dissuade the entry of foreign investors and prevent the inflow of more foreign direct investment.
The aforementioned hypotheses suggest that socialism is anathema to political, economic and evens social development. A country needs productive business enterprises that freely operate in an economic environment that is free from excessive government regulations, oppressive state interference, nationalization, and absurd and arbitrary economic policies. There is no doubt that the success of a nation lies in the willingness and effectiveness of private businesses and companies to produce goods and wealth and to generate jobs without any government intervention.
In a socialist state, economy is subservient to the will of the bureaucrats. In Venezuela, the functions of private businesses have been made subservient to the good of the people and to the will of the one who issues political policies and economic measures. This is the reason why most private businesses across the country, particularly the multi-billion-oil industry, were taken over by the state in the name of common good and social welfare. It is the ideological belief of the socialists to control and manage the means of production and to redistribute wealth to the people. This is what Venezuelan President Chavez exactly did. He used the countrys socialist legal system to seize private property and businesses and issued intrusive economic measures to regulate the economy.
Only reality can tell whether the socialist experiment of President Chavez is economically effective and necessary for Venezuela. Today despite the fact that the socialist government of President Chavez controls and manages the multi-billion dollar PDVSA, Venezuela was still hardly hit by the global economic downturn. The country is also beset with high inflation rate due to its unsustainable government spending. Furthermore, most political and economic analysts have been asking whether the countrys worsening economic crisis is the beginning of the end of President Chavezs socialism rule. What is clear is that the central government has been using its multi-billion-oil money to subsidize the peoples education, health care, housing, and social security, including basic needs like petroleum products and food items. This means that without having control of its income-generating oil industry, the central government would not be able to maintain its socialist ideals, as well as the trust and approval of the public. Thus, the current economic predicament in Venezuela only means that socialism failed to stir both economic and social development that the people really need.
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