Chavez Re-Elected in Venezuela

Hugo Chavez won re-election yesterday as President of Venezuela. One could almost hear the crying coming from the Oval Office. Mr. Chavez declared that his triumph was “another defeat for the devil, who tries to dominate the world,” and since he already called President Bush “the devil” at the UN, no points for guessing whom he meant. The trouble, of course, lies in the long-term policy aims of Mr. Chavez. In trying to break the domination of the yanquis, he is squandering his nation’s resources.

Pure and simple, Mr. Chavez is riding a wave of oil. Petroleum accounts for about one-third of GDP, and 80% of export earnings. More than half of the government’s revenues come from oil royalties and other fees. The Arab world wasted more than a decade in the 1970s and 1980s frittering its irreplaceable wealth away. Venezuela is doing much the same.

That is not to say that Mr. Chavez has been bad for Venezuelans, particularly the poor. Medical care and schools are the kind of social spending that carry long-term benefits. A well-educated workforce is the foundation of future prosperity. However, much of the spending merely goes to consumption.

Inflation is often, though not always, the result of bad monetary policy. Inflation in Venezuela was running at 15.8% annualized in November and could hit 17.2% annualized in December. Too much money chasing too few goods, pure and simple. Planning Minister Jorge Giordani isn’t worried, though, “Rather than cut spending, we’re encouraged that capital investment is increasing, and that will boost the country's production.” However, there are limits to the amount of capital that an economy of 25 million people can absorb. And sadly, much of it is being spent on oil-related projects, like a pipeline to Brazil (which is focusing less on oil and more on bio-diesel).

Meanwhile, oil wealth should drive up the value of the local currency, but the bolivar is weak because of huge import bills. Imports rose 38% in the third quarter to $8.6 billion, and the currency has depreciated 25% since May. Venezuela still imports about half of its food, which adds to the bill.

The broad statistics look OK for now, and social spending for the poor has improved the lot of some Venezuelans. However, the currently hot economy is being fueled by a consumption binge. There’s a bust to follow this boom, and Mr. Chavez has done little to ensure that the economy diversifies enough to make it a small bust. Fortunately, the constitution requires him to step down in four more years. Unfortunately, he’s got the votes to change the constitution.

© Copyright 2006 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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