The Pandemic Depression
The Global Economy Will Never Be the Same
THE TICKING CLOCK
On December 6, 1998, Venezuelans stunned the world by electing as their president Hugo Chavez, a firebrand who six years earlier had sought to overthrow the country's long-standing democracy in a bloody but unsuccessful coup. Fifty-six percent of voters cast their ballots for the daring outsider and his promise to dislodge the thoroughly corrupt political elite. These hopeful citizens saw a political housecleaning as the way to halt the country's prolonged economic decline, restore growth, create employment, and overcome escalating social problems.
Chavez has made bold moves to overhaul politics, and for a while his actions seemed to justify his nation's hopes. In nearly three years, he has transformed Venezuela's political institutions and greatly weakened the old guard. In his first year in office, he engineered a new national constitution that significantly strengthened presidential powers. One revision, for example, allows the president to run for immediate reelection rather than wait the previously mandated ten years after leaving office. Chavez took advantage of the change by holding new elections in July 2000, this time winning 59 percent of the vote. The new constitution also abolished the Senate, creating a unicameral National Assembly with limited oversight of the president's decision-making. Chavez has used this weakening of the checks and balances of executive authority to his advantage, notably by using military promotions for political gain.
These new powers, combined with the charismatic leader's own political prowess and the current dominance of his supporting coalition, suggest that Chavez enjoys a broad mandate to govern. As of the middle of this year, he continued to command high approval ratings of between 59 and 63 percent. In the July 2000 elections, parties friendly to the president captured 60 percent of the seats in the National Assembly. Opposition parties and movements are now divided and confused, having failed to contain Chavez's advances. Meanwhile, Chavez is in the process of debilitating, marginalizing, or taking over major interest groups that might otherwise oppose him, notably trade unions and business associations.
And yet, strong as his current position seems, Chavez is standing on political quicksand. He has failed to fulfill the hopes of economic rejuvenation that his election raised. The economy's meager growth since 1999 has been a particularly noteworthy disappointment, having coincided with high international oil prices that should have given Venezuela -- the world's fourth-largest net petroleum exporter in 2000 -- a big economic boost. The state has sought to compensate for the limited private investment in the stagnant economy by spending wildly, but its programs are poorly designed and contribute little to long-term development. Such spendthrift tactics are also short-sighted: the government's ability to prime the pumps depends on its highly volatile income from oil exports, and this flow of stimulus spending will dry up once petroleum prices drop substantially. Compounding the damage caused by misguided policies, Chavez's "revolutionary" efforts to restructure the public administration and purge the old political elite have further impaired the already feeble public sector. So the economic malaise continues, unemployment and crime rates rise, and the chances of effective government action grow dimmer.
These economic and social troubles will soon pose a serious political problem. The president lacks an organized base of political support and has tense relations with many of the powers that be, especially business, the Catholic Church, and sectors of the military. He therefore depends on strong, widespread backing from the Venezuelan masses. Yet how long will citizens wait before insisting that Chavez deliver on his promises of economic and social improvement? And how will Chavez produce these improvements while many businesspeople continue to distrust his intentions and remain unwilling to commit their capital?
THE RISE AND FALL OF THE GREAT POPULISTS
Chavez is the most recent exemplar of the charismatic, populist leadership that emerged from the severe crises of the past two decades in a number of Latin American countries, notably Argentina, Brazil, Ecuador, and Peru. Figures such as Argentina's Carlos Menem and Peru's Alberto Fujimori won office by appealing to the lower-status masses with promises to purge the political elite (labeled the "political class" in Latin America) and save their nations from prolonged economic, social, or political chaos. These neopopulists based their governments on largely unmediated, personal relationships with the population, shunning institutional links and bypassing existing political parties and interest groups. In the process, they tagged party politicians and government officials as the source of their nations' misfortunes. In fact, these leaders needed their countries to be suffering, since they derived their charisma from a supposedly "magical" capacity to stem economic decline and bring back progress and prosperity.
Such charismatic personalities can rise to power meteorically, ushered in by a severe crisis. But as Menem and Fujimori eventually discovered, they can tumble just as quickly if they fail to answer the most urgent national concerns or to keep providing benefits to their followers. A neopopulist's political success requires resolving a country's problems with a few quick, bold steps that yield tangible improvements for a majority of the population. The revered figure must engineer reforms that first avert whatever catastrophe was imminent, then ensure continued economic and social progress. The followers of a charismatic leader expect their belief in his or her "supernatural" capacities to be confirmed by actual performance, and they will quickly abandon an unsuccessful neopopulist in the absence of such results.
Several previous Latin American neopopulists toppled in just this way. Fernando Collor in Brazil, Abdala Bucaram in Ecuador, Carlos Andres Perez in Venezuela -- each of them depended on a support base among ordinary citizens that, lacking firm organization, remained fickle and dissipated once the leader failed to fulfill popular expectations. Menem and Fujimori each sustained successful regimes over many years, seeming to have broken the pattern. But in July, a judge in Argentina charged Menem with engineering an illegal arms-shipping conspiracy while in office, provoking widespread public outrage against the former president that would not have been possible during his glory days. And later in the summer, a Peruvian judge issued a warrant for the arrest of Fujimori, now in self-imposed exile in Japan after making an ignominious exit from power.
Notwithstanding their ultimate disgrace, however, a neopopulist with aspirations of establishing an enduring regime could look to Menem and Fujimori for lessons on how a leader can remain powerful and respected for years. Each of them maintained great popularity for about a decade; both won reelection in 1995 and managed to avoid answering for the corruption of their regimes until recently. Two steps were key to their political success: first, they resolved catastrophic problems, especially hyperinflation (and, in Peru, large-scale insurrectionary violence); and second, they restored economic growth and brought some social improvements to their peoples. The economic recoveries they engineered lowered poverty and gave government the funds to create new social programs. In short, these two leaders not only raised their subjects' hopes but also delivered the goods.
AFTER THE "REVOLUTION"
Since 1998, Chavez's popular support has derived largely from his predecessors' lack of legitimacy and his ability to dislodge them. The old political class was composed mostly of two parties: the social democratic Accion Democratica (AD) and the Christian democratic COPEI. They enjoyed unchallenged political predominance in the 1970s and 1980s, usually alternating in government. But over time, their public reputations grew increasingly sullied. The oil price boom of the early 1970s gave Venezuelans dreams of national prosperity, but the government's mismanagement and increasingly corrupt exploitation of the oil revenues gradually undermined people's faith in their leaders. In the 1980s, the country's economic deterioration was widely attributed to government incompetence and graft. Caracas finally acted to stem the economic decline in the late 1980s and 1990s, but it did so by enacting unsuccessful adjustment policies that further enraged the population, which was forced to shoulder tough austerity measures while seeing few of the promised benefits.
The taint of these political failures and dirty dealings deepened until the late 1990s, by which time an overwhelming majority of Venezuelans had come to hold AD and COPEI responsible for the preceding two decades of striking economic decline. In their view, Venezuela's place among the world's leading oil exporters should have made it a tremendously rich country; if only the oil resources had been properly handled and the revenues fairly distributed, the common people could have been reasonably well off. But a striking 70 to 80 percent of the population lived below the official poverty line. This paradox existed, many Venezuelans surmised, because the political class and its allies among business and labor had squandered and stolen the country's wealth.
It was this wave of popular anger that Chavez rode to the presidency. Who could better embody the deep-seated resentment against AD and COPEI than a man who had once risked his career to break their decades of dominance? Chavez's 1992 coup attempt may have been unsuccessful, but his 1998 election brought redemption for him and, it was hoped, for Venezuela.
But Chavez cannot maintain his popularity indefinitely by stirring up new "revolutions" (as the president modestly labeled his ascent to power). In 1999, Chavez's efforts to overhaul the political system met with surprisingly limited and ineffective resistance from AD and COPEI, both split by factions and under incompetent leadership. This weakness on the part of the old elite deprived the president of the foil he needed to bolster his support. And although Chavez's political revolution satisfied a widespread demand for revenge, it did not by itself generate economic prosperity, create new jobs, or increase social welfare.
Until recently, Venezuelans were prepared to wait patiently for the new leadership to bring about improvements in their daily lives. The prevailing assumption was that a political transformation was necessary before economic and social progress could be restored. Voters therefore approved of the priority that the Chavez government initially assigned to revamping Venezuela's political system. But many citizens are now growing restive. According to recent polls, Venezuelans feel that with the promulgation of the new constitution in December 1999 and the elections of new national, state, and municipal officials the following year, the government is well equipped to start on the real work of reform: concrete improvements in the well-being of the country and its citizens.
In contrast to Menem's Argentina (plagued by hyperinflation) and Fujimori's Peru (plagued by hyperinflation and a vicious insurgency), however, the problems of Chavez's Venezuela are not susceptible to dramatic remedies. The country suffers from long-standing economic decline and social deterioration, but these difficulties have never reached catastrophic levels. Ironically, therefore, Chavez faces a much less favorable context for political feats of the kind that Menem and Fujimori achieved. The grave crises that those two leaders confronted were exactly the kinds of dramatic showdowns that neopopulist leaders thrive on. The solutions that they produced benefited huge sectors of their populations.
In present-day Venezuela, most people's expectations focus on the kinds of economic and social problems that elude decisive remedies. Venezuelans expect Ch‡vez to lower unemployment, provide better social services such as education and health care, and attack common crime. And they expect these changes quickly: more than half of those surveyed this year give the president two years or less to produce tangible benefits on these priority issues.
FOOLING WITH GOLD
Unfortunately for Chavez, there is little indication that he will be able to meet these inflated expectations. The administration's initial economic and social policies were incoherent and inconsistent, often contradicting Chavez's stated political goals. For instance, during the 1998 presidential campaign he criticized the neoliberal policies of the incumbent president, Rafael Caldera, but once in office, Chavez reacted to low oil prices in early 1999 by enacting a surprisingly orthodox and austere economic policy. He even re-instituted a value-added tax, a favorite of neoliberal experts, which Caldera had abolished in 1994 in response to the widespread feeling that it was socially regressive. At the same time, however, Chavez's supporters sought to roll back some of the Caldera administration's important market-oriented reforms, such as the partial privatization of Venezuela's pension system.
Admittedly, uncertainty over the government's real economic stance has since diminished, as Chavez has steered policy toward the middle of the road. The oil price boom has allowed him to drop the austerity program and avoid the conversion to neoliberalism that Menem and Fujimori were forced to make to ensure economic stability and growth. Yet Chavez has not pushed for the "revolutionary" transformation of Venezuela's economy and society that he promised.
Furthermore, his economic mismanagement has kept economic growth down at a time when it should have been rising. Rather than investing in the country's future, the government is spending large parts of the windfall generated by high oil prices on short-term stimulus measures, while still racking up a substantial debt to compensate for ineffective tax collection and large-scale capital flight. Once oil prices fall, the economy will likely go down with them. Indeed, the Venezuelan economy has already suffered a net contraction under the Chavez government. The country's GDP declined 7.2 percent in 1999 and grew only 3.2 percent in 2000; it is expected to expand a mere 3.5 percent this year.
To make matters worse, business confidence has faltered due to both poor policy decisions and Chavez's populist language. Although the president promises to protect private capital, he often lambastes business and spouts radical rhetoric, as when he praised communist Cuba's progress "toward a sea of happiness." The lack of effective checks and balances on presidential discretion makes these outbursts seem like a direct threat to potential investors and entrepreneurs, both at home and abroad. As a result, private investment contracted by 18 percent in 1999 and barely rose in 2000, and the country's foreign currency reserves dropped by 20 percent in the first half of 2001, despite the continued boom in oil revenues. Compounding the damage caused by this shortfall in investment is the massive capital outflow, amounting to an estimated $8 billion from the time Chavez took office to mid-2000. Chavez's belligerent rhetoric has even induced many members of the educated middle class to emigrate, an exodus that will be difficult to reverse and will hamper Venezuela's development for years to come.
Anemic economic growth has also exacerbated such social problems as unemployment and poverty, making it harder for Chavez to satisfy the voters. The new administration's social policies have been, for the most part, neither promising nor even comprehensible. Official documents are strong on "revolutionary" rhetoric and declamations of noble principles but short on specific proposals. Where the government treads new institutional paths, it seems to be concerned more about centralizing power than about enhancing the population's well-being. For example, Chavez has transferred resources directly to civic community groups in order to bypass the state and local governments, some of which continue to be controlled by the opposition. On issues such as poverty reduction, the Chavez government has often followed old models that did not work before. Having first criticized the Caldera government's emergency aid programs for providing mere assistance, not the foundations for self-help, Chavez's administration then created an equally "assistentialist" scheme of its own. This "Plan Bolivar 2000" has sent tens of thousands of soldiers to provide basic services and distribute foodstuffs in poor neighborhoods. Although these activities alleviate people's suffering, they do not attack the root causes of poverty and inequality.
The few distinctive ideas the Chavez government has announced, meanwhile, are abstruse and probably unworkable. Such is the case with the proposed "Orinoco-Apure axis," a program to shift large numbers of people from overcrowded urban centers to the thinly populated hinterland of the Orinoco valley and the plains of Apure in the south and southwestern reaches of the country. How citizens would be persuaded to make such a move remains unclear, and the assumption that these underdeveloped regions could offer enough profitable jobs to sustain a large influx of people is equally dubious.
Another important limitation on the Chavez government's policy performance stems from the politically motivated revamping of the country's public administration. Like other personalistic leaders, Chavez has preferred loyalists over experienced, well-trained experts when making government appointments. He has filled many top posts with trusted confidants -- often military friends who have limited experience in public service. He has also promoted several subaltern officials to top positions in his administration, thus scattering among his old cronies new loyalists who owe their rapid ascent exclusively to presidential discretion. Even the management of the nation's economy has been politically determined: the finance minister from mid-1999 to the middle of this year, Jose Rojas, was a young, low-ranking bureaucrat until Chavez catapulted him into the minister's seat. One of the qualifications of Rojas' successor, Nelson Merentes, is that he is serving on the "National Tactical Command" of Chavez's political coalition, Movimiento V Repœblica (MVR).
By systematically placing loyalty ahead of competence and "revolutionary" fervor ahead of experience, the president has further weakened the state's limited technical expertise and bureaucratic organization. The few specialists he has retained from the preceding administration cannot prevent the already low quality of public administration from diminishing further. It is even difficult to ascertain whether certain programs and agencies still exist. The Venezuelan state has entered an advanced stage of decomposition.
Chavez's discretionary interventions in public agencies' decision-making have further undermined policy performance and created uncertainty and distrust. Last year the president, angered by private banks' alleged collaboration with capital flight, ordered the state oil company, PDVSA, to withdraw its substantial financial holdings from the banking system overnight. In addition to sending shock waves through the financial system and the investment community, this impetuous decision broke the operational autonomy of the PDVSA, which had always prided itself on its competent, technocratic management.
Poor policy results will eventually lead to popular dissatisfaction with the government, and ultimately even with its charismatic leader. A mere 32 percent of Venezuelans in a November 2000 survey expressed satisfaction with the administration's efforts to combat unemployment. As a result of such evaluations, Chavez's popularity has begun to decline. After reaching stellar levels of 75-80 percent during his first year in office, his approval ratings are currently hovering around 59-63 percent, and the trend points downward; one poll in January actually found a drastic drop to 42 percent. Ironically, Chavez's own success in concentrating political power in the presidency ensures that he will not avoid the blame for policy failures when the brewing discontent finally overflows.
Chavez could try to shore up his wavering popularity and distract attention from Venezuela's continuing economic and social difficulties by turning relatively minor problems into acute crises that require his charismatic leadership for resolution. Some exploitable issues certainly exist, such as ballooning domestic crime rates, a territorial dispute with neighboring Guyana that Chavez has rekindled, and the spillover from conflict in Colombia.
Concern about the tremendous upsurge in common crime runs high among voters; survey respondents designate crime as Venezuela's third most important problem after unemployment and the feeble economy. Combating crime effectively, however, will be difficult. Venezuela's police lack professionalism, and the different security forces operate without effective coordination. Furthermore, Venezuela suffers from common (not organized) crime, a heterogeneous collection of acts committed by numerous, independent perpetrators -- a scourge more difficult to suppress than an insurgent group such as Peru's Shining Path, whose capacity for violence drastically diminished after President Fujimori engineered the capture of its leaders in September 1992. In fact, Fujimori himself failed in 1998 to enhance his flagging popularity with an all-out attack on common crime, although he used the same forces that had earlier proven so successful in the struggle against the Shining Path.
Chavez has caused friction with the Colombian government, meanwhile, by voicing skepticism about the U.S.-sponsored Plan Colombia, in which Washington contributes funds and resources to help Bogota fight the country's drug producers and the rebel guerrilla movements while promoting economic development and human rights. Chavez even turns a blind eye to the Colombian guerrillas' use of Venezuelan territory. Although important sectors of the military and many Venezuelans living in border areas advocate a crackdown on the guerrillas' incursions, the president and his leftist advisers have instead made overtures to the insurgents. If the Colombian government retaliates by pursuing the rebels into Venezuela, Chavez could whip up nationalist outrage and win widespread backing for efforts to protect Venezuela's territorial integrity.
But the escalation of international tensions would carry considerable risks. Any threat of an armed conflict with Colombia or Guyana would expose Venezuela to strong pressure and perhaps economic sanctions from the United States, which is intent on guaranteeing stability in the region. External sanctions, in turn, would aggravate anxiety among investors, further depressing Venezuela's economy. The fate of Argentina's President Leopoldo Galtieri should be a warning: he sought to shore up his tottering military regime by invading the Falkland Islands in 1982, only to suffer an embarrassing defeat at the hands of Margaret Thatcher and lose office as a result.
Chavez will therefore have a hard time finding challenges that could justify his political predominance and allow him once again to capitalize on his charisma to bolster his support. Now that the meager results of the government's ill-designed and badly executed economic and social policies have begun to erode the president's popularity, his room for maneuver must become even more limited. Absent significant political victories, many of the president's supporters may abandon him, and he will have to fight for his political survival.
These defections will be all the more dire because Chavez is unlikely to build the type of formal political network of support that could forestall abandonment by loyalists during tough times. For one thing, his supporting coalition, the MVR, has become a victim of its own successful expansion. During the first two years after helping Chavez come to power, the MVR achieved a series of striking electoral victories too quickly and easily; it never devoted enough time or energy to integration of the massive influx of supporters who came on board or to institutional consolidation.
Moreover, the politically savvy Chavez knows that Venezuelans are averse to firmly organized parties, which they associate with the discredited AD and COPEI. In order to distinguish itself from the protagonists of the old order, therefore, the MVR has deliberately shunned the party format and preserved its character as a loose movement. Most important, the MVR is governed not by institutional rules, but by the personal predominance of a charismatic caudillo. Like other populists, Chavez disdains any party institutionalization that might constrain his personal autonomy. For all these reasons, Chavez's support base will remain volatile.
ENEMIES IN HIGH PLACES
Losing popular support, however, is not the same as losing power. For Chavez's troubles to jeopardize his presidency, his enemies would have to form an opposition strong enough to dislodge him, which might be difficult, but certainly not impossible.
Established constitutional procedures are not likely to be the tool they use. Congressional fiat has toppled neopopulists in several other Latin American states, but the MVR-led coalition's 60 percent share of the seats in Venezuela's National Assembly effectively protects the president from hostile action. The chances of an ouster by direct popular vote are equally slim. Although the 1999 constitution allows for the popular revocation of office holders, it mandates that the recall pass with an equal or larger number of votes than those garnered in the initial election. Even widespread disaffection with Chavez would probably not drive enough people to the polls to top the president's 59 percent popular vote last year.
Still, substantial drops in Chavez's popularity would encourage important sectors that feel besieged by the current regime to counterattack and perhaps try to bring Chavez down, either by force or with overpowering political pressure. Large parts of the business community have openly begun to oppose the president. The leading business association even advocated a "no" vote in the 1999 plebiscite on the new constitution. Such active and unusually bold opposition has thus far yielded little success, but entrepreneurs' defensive reactions (especially in the form of large-scale capital flight) have helped diminish economic growth and erode Chavez's support.
Chavez has also provoked increasing tension with the Catholic Church, especially by trying to reshape Venezuela's education system according to his own "Bolivarian" ideology, an odd mix of nationalist, militaristic, autocratic, plebiscitarian, and leftist ideas. These efforts are anathema to the church, which has always wanted to influence the formation of young souls itself. Such conflicts between church and state over education helped provoke military coups against several populist governments in the past, such as the 1948 overthrow of AD in Venezuela and the 1955 removal of Juan Peron in Argentina.
Important sectors of the military, finally, in addition to feeling general concern over Chavez's populist strategy and leftist leanings, have their own specific reasons to oppose the president. Chavez's background as the instigator of a bloody coup attempt against a democratically elected government and as a challenger to the military hierarchy makes him highly offensive to senior officers. These critics also see Chavez's use of the armed forces to provide social services, a crucial part of his Plan Bolivar 2000, as a violation of military dignity. These officers take pride in their exalted mission to defend national sovereignty, not in running soup kitchens for the needy. Most important, many of the top brass regard Chavez's unabashed political exploitation of military promotions as a profound threat, because the replacement of professionalism by cronyism discredits the armed forces and sets a dangerous precedent for future governments. Although the precise extent of military discontent with Chavez is difficult to gauge, its intensity is evidenced in the unprecedented challenges that officers are making to their commander-in-chief. In June 2000, an active-duty officer made a video asking for Chavez's resignation; a set of retired generals has even organized an open opposition called the "Institutional Military Front" and released the aforementioned video to the public.
These disaffected officers now face a dilemma. With every new round of military promotions, Chavez is forcing out presumed opponents and promoting loyalists. As the balance of power within the armed forces threatens to tip against Chavez's enemies, they may feel the need to act soon. But a premature coup attempt could encounter significant popular resistance, which -- given the military's reluctance to use heavy-handed repression against common citizens -- could foil the undertaking.
As Chavez's support declines, however, the president will be tempted to resort to ever more openly authoritarian means. For instance, in May he floated the idea of declaring a "state of exception," which would allow him to suspend democratic procedures and rule by decree. Such a daring move toward unmasked autocracy would pull the military even further into the center of politics and prompt even Chavez's initial supporters inside the armed forces to defect, as some of his leading allies -- including Francisco Arias Cardenas, the second leader of the 1992 coup attempt -- did in March 2000. In this case, democratically oriented officers may eventually help to force Chavez out in order to restore a truly competitive, liberal political regime. Such an attempt would find support among important sectors of Venezuela's civil society; for instance, Chavez's trial balloon about a "state of exception" triggered the publication of a manifesto by a new "National Emergency Coalition," which demanded the president's immediate resignation. And international efforts to maintain democracy in Latin America would provide encouragement for removing this radical populist, who could increasingly jeopardize Venezuelan democracy.
Having been in office for almost three years, which way will Hugo Chavez go? Will he follow Menem and Fujimori and consolidate his support over the coming years, or suffer the fate of Collor, Bucaram, and Perez? The answer depends on whether Chavez can maintain the loyalty of Venezuela's masses. If sufficient numbers begin to desert him, the powerful sectors that the president has antagonized could decide to counterattack, undermine his administration, and perhaps even oust him by force.
An anti-Chavez coalition of business and military interests is increasingly plausible. Further economic erosion and decline of popular support for the president could spark more defections within the armed forces. As has happened so many times in Latin America, military officers would join forces with business and the church, with tacit support from a disaffected middle class. Bold moves by the president could consolidate his rule, or they could lead to crisis and his ouster. Either way, the political clock in Venezuela is running out.