Lessons for SA in Venezuela and Latin America

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The death of Venezuelan president Hugo Chavez unleashed a tidal wave of economic and political commentary. To his supporters, Chavez performed an economic miracle and championed the cause of the developing world in global forums. To his detractors, he brought Venezuela to the brink of collapse.

Supporters and critics agree on one thing: poverty in Venezuela declined substantially. According to the United Nations Economic Commission for Latin America and the Caribbean, the percentage of Venezuelans living in poverty fell from 49.4% to 29.5% in the 14 years Chavez was in power. According to the World Bank, by 2010, Venezuela’s Human Opportunity index — a better measure of equality than income distribution — had risen to fifth-highest in Latin America. This is a significant achievement.

However, commentators disagree whether this is sustainable. Critics allege Chavez was just another in a long line of Latin American "populists" whose policies led to economic collapse. A study by economists Rudiger Dornbusch and Sebastian Edwards found that all populist regimes in Latin America before 1990 tried to reduce inequality by increasing government spending to unsustainable levels. Inflation soared and "at the end of every populist experiment, real wages are lower than they were at the beginning". It is "the most vulnerable and poor segments of society (who) are severely hurt".

Chavez’s critics note that from 1999 to last year, inflation of 22% a year was the highest in all of Latin America barring Haiti. Economic growth per capita was the lowest, even though Venezuela has the world’s largest oil reserves and global oil prices rose tenfold. Oil provides half of Venezuela’s state revenue. Chavez used the increase in revenues from higher oil prices to boost social spending. He also partially nationalised the oil industry. While greater state ownership initially drove further increases in state revenues, it later caused a 30% fall in oil production.

This experience of state-ownership mirrored that of nationalised oil and mining companies around the world. Experience shows that state ownership fails not just because nationalised companies are badly run, but because they are always starved of the capital they need to grow new production when oil wells run dry or mining deposits are depleted. This means production falls.

The government’s need to extract maximum revenue to fund social spending meant Venezuela’s oil companies were denied capital to sustain output — made worse by the firing of 20,000 skilled oil workers involved in a politically aligned strike. Lower production meant reduced revenue for the state, which then tried to squeeze out even greater proportions of remaining revenue for itself. This sparked a vicious cycle of falling production and falling state revenue. It has also seen a partial reversal of gains against poverty.

Commentators note that the fall in poverty under Chavez was not unique to Venezuela. It coincided with a fall in poverty for Latin America as a whole, from 44% in 2002 to 29% last year. Researcher Ivan Briscoe says: "Far from making an exceptional contribution to social welfare, (Chavez) appears to have formed part of a phenomenon in which he is condemned to share plaudits with the centre-left in Brazil or the right in Colombia and Panama."

Briscoe also notes that inequality in Venezuela was reduced not just because the incomes of the poor rose, but because of large-scale emigration of the skilled "upper and middle classes". Almost 250,000 Venezuelans now live in the US. The loss of skills contributed to falling production and growing shortages of many basic products. According to Chavez’s critics, the unsustainability of his policies will soon be painfully revealed. They warn that depreciation of an overvalued exchange rate will raise inflation still higher, further undermining the benefits of social spending for poverty reduction. As a result, some suggest the political opposition will do well to lose the upcoming elections, leaving Chavez’s chosen successors to face the disaster of his failed policies.

There are important lessons for South Africa from Venezuela’s experiences. The first is that the longer we fail to address the problems of poverty and inequality, the more attractive become policies that promise to solve these issues — even if the promise is illusory. Latin America is made up of countries which, like South African, have some of the most unequal societies in the world. So we need to ask why they made progress in reducing inequality and poverty over the past decade and we did not?

The National Development Plan has set laudable goals of eliminating poverty and reducing inequality by 2030. It proposes achieving this mainly through faster economic growth, development and improved government delivery. We would do well also to examine the varied experiences of Latin American countries and incorporate lessons from their successes into our future policies.

•Gavin Keeton is with the economics department at Rhodes University. This article was published on Business Day Live.