The success of the populist promise

December 26, 2006

Reading this piece in yesterdays New York Times, reminded me of how successful populism can be in our region of the world. Argentina has suffered horrendously in the last 16 years under 14 years of populist Peronista leaders and in the end, voters reelect the same party to get them out of trouble. What is even worse is that much like in Venezuela, the disparity between the rich and the poor gets wider in time, little progress is made and there seems to be no end to it.

When I first started working, I was paid minimum salary to be trained. At the time, a tenured University professor would make 12 times more and a member of the Cabinet, which made the highest salary possible in Government besides the President, would make 14 times the minimum salary. I thought that was definitely too much of a difference. Well, under Chavez that ratio has stayed constant with respect to the minimum salary for professors, maybe a little lower at around 10 or 11, but it did rise dramatically for higher positions, with CNE or Central Bank Directors, Presidents of state companies and even Assembly Deputies making from 34 to even 80 times the minimum salary.

Thus, the same people that preach helping the poor, the redistribution of wealth and the like, when it comes down to it; seem to do exactly the opposite. Let me clarify, that I am not criticizing this Government in particular; this has been a continuous trend in the last 40 years, with only a few minor bumps on the way.

The problem is that populist Governments, and I consider Chavez to be simply the most populist we have ever had, tend to over promise but in the end have no clue about what to do to redistribute wealth, make contry’s economies stable or plan for the future.

It always begins with blaming someone else for our problems. The truth is that nobody is going to come and solve them for us. But scaring away investment, relying on commodities and being unproductive will certainly not solve our problems. We have done that and apparently will continue to do it for the foreseeble future.

The last few years have been terrible for investing in Venezuela. The Government does exactly the opposite, sending inconsistent and threatening messages to investment. Venezuela has lost half its factories since 1998 and while 2006 was good year, production rising 10%, it barely makes a dent on the lost ground. (See graph here from the series I have been posting about). The Government seems to believe that it can do it all, investing in all sorts of industries, declaring them strategic, but in the end spreading itself too thin. Thus, while China is planning to privatize over one hundred thousand companies in the next five years, Chvez starts companies almost weekly both in Venezuela and abroad, which are heavily subsidized and run by people who have never run any enterprise in their lives, guaranteeing their failure.

Construction also had a banner year in 2006, but when you look at the detail, what you see is that a large fraction of that construction is focused on building shopping centers and commercial centers to take advantage of the liquidity and credit boom backed by the oil windfall.

But in the end we always seem to go back to commodities, which have also enjoyed a nice run in the last few years, but they are subject to strong cycles that will not go away and can not be depended on unless you add value to the products.

In the early 1970s Venezuelan politicians had paid little attention to technology as a way of generating growth or employment. PDVSA did not even spend much on development, let alone research. With the nationalization of the oil industry, a research and technology center was created and it seemed like a new era was upon us. That center barely exists today, as over 1,000 scientists and engineers were fired in 2003 and PDVSA has gone back to a model of concentrating on production. Just a commodity seller in a business which generates few jobs. Not pretty!

It is not easy to develop a knowledge based economy, but the cycles in the Venezuelan economy have been cruel to most efforts. In the mid seventies, as part of the Governments program to send people abroad, many people got degrees in electrical engineering and similar areas. When they returned, many of them started a thriving electronic industry, which was massacred by the devaluation in 1982. People forget that less than two years after the first IBM PC came to market, you could buy Venezuelan made PCs under the brand name Xynertech.

The problem is regional. Most countries in Latin America, with the relative exceptions of Brazil and Chile, continue to be focused on commodities and some basic products derived from them.

Asia has been going the other way, looking for the growth needed to improve the life of their populations, China, India, Korea, Malaysia and other countries in the region have bent over to attract foreign investment and create friendly atmospheres for them. Some like India had excellent educational systems in place. Others decided to invest not only in education, but in high quality education at all levels and staring from the bottom.

In Venezuela emphasis has been made for too long at the highest levels of education, with quality not being as important as politics and getting promotions being the most important factors that motivate teachers. The word excellence is seldom used, even at the highest levels of education.

The same thing happens with productivity, even the tax office SENIAT penalizes formal errors in record keeping by companies by shutting them down, sometimes for days at a time, as if the country could afford to waste the money and the time (or the taxes).

But somehow it does not matter, people prefer populism and to be told the wealth is being redistributed and the poor are being taken care of. But much like in Argentina today and Venezuela before, it is the rich getting richer and politicians filling their pockets at record levels.

The problem is not the now; the problem is twenty years from today when people realize that they have been running in place for two decades. Unfortunately, I feel that way about the last thirty years; we have been running in place for the last thirty years as a country. Thirty years ago Venezuela had promise; there were initiatives all over the place to change it. It all began to die slowly, most likely at the devaluation of 1982. The promises were the same. From CAP to Luis Herrera, through Lusinchi and Caldera and now Chavez, they were all going to take care of the poor, redistribute wealth and make Venezuela a wonderful place to live.

They all failed and are failing today.

The problem is actually simple. Mathematically for Venezuela to stay where it is, you have oil prices and population growth, even if oil goes up, they would have to keep up with population growth. It’s just not happening.

And that is only to stay in place!

Thus, if you want to improve you have to plan for stability plus something more, but there has not been and there is no such stability even planned for in our country. The politicians hope for higher prices and cross their fingers, that is almost as much planning as there is here. A “Hail Mary” economy in american foottbal terms!

It is perhaps ironic that the current period in Venezuelan modern history is quite similar to that of the much-hated Carlos Andres Perez, a wave of consumerism, where the economy is dominated by commerce and retail. But you dont build an economy on consumption; you also need production and investment. CAP could say that at least he invested, even if there was a lot of waste, but he built hundreds of schools, a few dozen hospitals, quite a few roads and part of the current electric infrastructure. Chavez cant say the same with a bigger windfall and three years more than CAP had in the 70s.

And thus the politicians are getting ric
her than ever, so are the bankers, lets not talk about the corrupt, as the Government subsidizes the purchase of 330,000 cars in 2006, which are not exactly purchased by the poor and run on the 15 cents a gallon gasoline which we all love and enjoy.

Thus, inequality grows, apparently hand in hand with populism, and promises which are harder and harder to fulfill and screwed up economics are hidden under the new mystery name of XXIst. Socialism, which apparently aspires to make us all equal by destroying the economy. And when the blow-up comes, the rich will still be well off, while the poor will pay the cost of the adjustments.

And a bigger and more irresponsible populist will come around and promise more of the same under a new name or slogan and people will buy it and the cycle will start again by blaming someone else first.

I have seen the same movie many times in the last forty years.

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