On a frigid morning in January of 1999, I sat with more than 100 others in Ottawa and listened in fascination to president-elect Hugo Chavez as he warmed a stiff crowd with his own cocktail of business acumen, military bravado, Bolivarian quotes and a few lines of his own poetry.
He laid out his plans to open key sectors such as oil and gas, telecommunications and banking to Canadian investors. He promised to guard the rule of law, maintain a strong and independent judiciary, nurture a free press and defend investor rights. On that day, Brent crude sold for $13 a barrel, the lowest point in real terms since the 1960s.
Within months, oil prices began to climb and Mr. Chavez quickly realized he needed neither foreign capital nor foreign approval to run his country. As he began to articulate his Bolivarian vision, Venezuela’s already divided classes grew further apart.
The poor were enthralled by the mestizo strongman who began to deliver on many of the promises previous presidents had made as administrators of the world’s fourth-largest oil-reserve country. The wealthy grew worried and began to move their assets (and themselves) abroad. But oil revenue was climbing even faster than capital was fleeing and, for nearly a decade, until the global financial crisis hit, Mr. Chavez could make the case that his brand of 21st-century socialism was working.
Before strong resource prices began to lift Latin America in 2003, the region suffered a “lost half-decade” (1997-2002) and lurched to the left, inspired by the success of Mr. Chavez. Venezuela fostered his new friendships with cash, becoming the largest bilateral lender in Latin America. He single-handedly rescued Cuba’s economy and gave relief to the Dominican Republic, Jamaica and others through a beefed-up PetroCaribe program.
From 1999 to 2008, annual oil revenues captured by state-owned Petroleos de Venezuela (PDVSA) grew from $20-billion to $80-billion. Gradually, Mr. Chavez took full control of these moneys by dismantling the checks and balances of government and buying out or firing anyone who stood in his way.
To guarantee subsidized food pricing, he nationalized food companies. He took over private media enterprises that challenged his policies. He trumped up murder conspiracy charges against a dozen of the country’s leading bank owners to control capital flows. He fired PDVSA managers and engineers who stood up against his politicization of a once highly efficient energy giant. He created a militia of 125,000 who reported directly to him and helped to implement many of his social programs, thus bypassing democratically elected state and municipal leaders. He showered the military with money, contracts and power, then inserted Cuban spies to help prevent a coup.
While the money flowed, many of Mr. Chavez’s abuses of power were forgiven by the underclass, which relished the sight of struggling upper and middle classes. In return, they re-elected him three times.
Mr. Chavez’s Robin Hood policies delivered political success and facilitated a power grab unequalled in Latin America since the dictatorships of the 1970s and 1980s. More important, he squandered an economic gift of almost $700-billion in additional oil revenue that his 14 years in power received versus the preceding 14 years (1985-1999).
The divide between the poor and the rich has shrunk, but only because the rich and middle classes became poorer. The murder rate has doubled and, in Caracas, has quadrupled since 1999. When measured at the official rate of exchange, GDP per capita in dollars has doubled, but that’s a false reality. When measured by the grey market rate where most imports are purchased, GDP per capita is below where it stood in 1999.
Buoyed by comparatively less dramatic boosts to their economies, Brazil, Colombia, Peru and Chile have all surged ahead of Venezuela. Unlike Venezuela, the populist policies in those countries that helped lift millions out of poverty were accompanied by the rule of law, strong political opposition, respect for investor rights and a vigorous, independent press. May those countries and their lessons learned be a source of inspiration for Venezuela’s next chapter.
John Price is managing director of Americas Market Intelligence.