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Chavez and the oil curse

The story of Venezuela under his rule can be told through the career of oil giant PDVSA

Written by Sudeep Paul |
March 9, 2013 3:36:01 am

By 2008,the Pink Tide had overwhelmed nearly half of the 20-odd Latin American countries,excluding permanently red Cuba. El Salvador and Peru were conquered subsequently,in 2009 and 2011 respectively. But by 2010,Chile and Honduras had already left the fold and Brazil’s Lula da Silva had made way for his protégé Dilma Rousseff. It was believed by all,except perhaps the starry-eyed hosts of late Venezuelan President Hugo Chavez in Kolkata and Delhi’s JNU,that the Pink Tide was ebbing. One look at the suicidal path taken by Christina Fernandez de Kirchner in Argentina,and you can rest assured that the Bolivarian revolution will end with Chavez.

As the Argentine economy’s implosion escalated,Kirchner emerged as the most zealous upholder of Chavismo. But the story of Chavez-ruled Venezuela,as expropriated by Chavistas,is also the story of what happened to Petróleos de Venezuela Sociedad Anónima (PDVSA),the oil giant the country was once synonymous with. The PDVSA,owned by Exxon till end-1975,was one of the best-run oil companies in the world even after its nationalisation by Carlos Perez. For,Perez had left its professional management untouched and allowed it to function as a private firm in practice,even though the state took the dough. But nothing would ever be the same again once Chavez took office in 1999.

To understand the significance of cash cow PDVSA to Chavismo,two facts need to be put on the table. First,whether or not Latin America’s pink presidents subscribed to Chavez’s ideal of exporting the Bolivarian revolution,Chavez,especially after the failed 2002 coup against him,had embarked on cultivating anybody with tuppence worth of nasty things to say about the US. Thus alliances were forged with a veritable who’s who of America haters — Gaddafi’s Libya,North Korea,and Iran. More importantly,the Caribbean (via Petrocaribe) and left-ruled Latin American countries were flooded with subsidised oil — some of them in fact sold part of their Venezuelan quota for a profit (the US,of course,paid market price). And at the heart of this petro-politics stood Cuba,whose moribund economy was kept alive by 100,000 barrels of subsidised Venezuelan oil a day while the Brothers Castro took over Chavez’s foreign policy.

Second,while the above needed planting Rafael Ramirez,a top-notch Chavista,at the head of the PDVSA (Ramirez has also been the energy minister),the company itself became the bedrock of Chavez’s domestic redistribution programme. He was not going to use oil money the way it is best used — reinvesting in machinery and drilling,replacing and upgrading technology to sustain production and keep the economy in the pink of health (no irony intended). No,the PDVSA’s pennies would be used for politics,to undertake social engineering.

In retrospect,Chavez’s “misiones” needed a mismanaged PDVSA to pull Venezuelans out of poverty. That housing,educating and treating the poorest barrios in a terribly unequal country was an angelic thing to do is beyond question. But the central fallacy of welfare idealism is the illusion that wealth comes out of thin air,that the schemes will self-sustain and endure economic collapse. Global fans of Chavez wilfully refuse to see the clever and cynical arithmetic behind socialism a la Chavez. Clever because he was buying friends at home and abroad with PDVSA’s cash. Cynical because Chavez could not have not known that,after him,it was the deluge. Just before he became president,PDVSA was producing 3.2-3.3 million barrels a day. After a decade of Chavismo,production stood at 2.4-2.2 MBD,a near-30 per cent fall. During Chavez’s time in office,inflation averaged at 22 per cent,and net capital inflows fell from 2.9 per cent of GDP in 1999 to 1.7 per cent in 2011,coupled with rampant capital flight (data from World Bank and IMF). At his death,Venezuela’s external debt stands at $90 billion. For all that,Chavez’s socialist utopia is just an irreconcilably polarised Venezuela.

That oil states are ill-governed is a truism. It’s their “oil curse”. By distorting the economy,oil pushes up the exchange rate and throttles exports and jobs by destroying other production. By staffing the PDVSA with loyalists to fund his populism,Chavez planned to break Venezuela’s oil curse. What he did instead was bring the country back to the oil curse. At his death,oil constitutes 95 per cent of exports and Venezuela has no place else to run for revenue. Nor can China prop up the economy beyond a point.

Post-Chavez,Bolivia’s Evo Morales and Ecuador’s Rafael Correa are safely ruled out to take the helm of the Latin American left,given their tiny economies. Cashless Kirchner’s

statist populism,the Argentine model,is discredited. Now,Latin America’s left faces a Hobson’s choice — junk Chavismo for Brazil,where Lula conducted a much more successful and sustainable social engineering and also exercised fiscal discipline. Marxist Lula’s Brazil only made standard “anti-imperialist” noises,paying lip service to the Bolivarian revolution. It was never interested in leading it,and Lula’s successor has to grapple with a stagnating economy. More importantly,the rest of Latin America cannot hold a candle to Brazil. After Chavez,nobody will march with Fidel.

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