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Venezuela’s tragedy fed by cronyism and the death of free markets

Fred McMahon is a Fraser Institute resident fellow and editor of a new study, "Changes in Economic Freedom in Venezuela, Ireland, and the United States."

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Imagine a city where menus don't print prices because inflation drives them higher daily; where streets are empty after dark and the murder rate is the world's highest; where people queue for hours for meagre supplies of medicines and food; where farmers don't take goods to market because roads are dangerous and police corrupt.

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Imagine a country whose richest woman, with billions stashed away, is the daughter of the former president, whose family owns 17 country estates in his birth state; where "socialist" elites live in mansions and have ready access to government-subsidized supplies that others must line up for from dawn to dusk.

Welcome to one of the world's most beautiful cities, Caracas, in resource-blessed Venezuela. Kidnapping is so routine one victim praised his kidnappers to me: Ransom negotiations were reasonable, and they only broke one finger. But murder is increasingly common even when ransom is paid.

This is the aftermath of the Bolivarian socialist revolution, led by the late Hugo Chavez, whose daughter is the billionaire. I saw the tragedy first-hand on a recent visit to Cedice Libertad, an impressive and courageous Venezuelan think-tank striving to build a better future.

This isn't just about Mr. Chavez and his successor, Nicolas Maduro: Venezuela has been failing for more than four decades.

In 1970, Venezuela had the strongest free-market policy in South America and was its richest country on a per-capita basis. Remarkably, Venezuela was poorer in 2014 than in 1970 (a period during which global per-capita GDP more than doubled). Some blame the price of oil for Venezuela's misfortunes; but in 1970, a barrel of oil was $20 (U.S.), and today oil prices, in real terms, are twice as high as in 1970.

So what happened? Venezuela, like much of Latin America, was afflicted by crony capitalists, who detest free markets as much as crony socialists, and degraded free markets long before Mr. Chavez.

Cronyism restricted markets, weakened the rule of law, undermined growth, adopted many leftist "populist" policies to maintain power and favoured their supporters at all income levels, excluding others and generating the frustration that led to Mr. Chavez.

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Can we gauge the decline? The best available measure of free markets is the Fraser Institute's economic freedom index. In 1970, Venezuela ranked 10th globally in economic freedom; by the time Mr. Chavez took over after 30 years of cronyism, it had fallen to 109th place; in the most recent data (2014), it's 159th out of 159 jurisdictions. Both Mr. Chavez and crony capitalists attacked free markets.

In the 1960s, under free-market policies, Venezuela experienced steady growth, despite declining real oil prices. After 1970, as free markets deteriorated and crony capitalism increased, Venezuela's economy staggered. Today's disaster has decades of history, but Mr. Chavez took bad policy to extremes.

Supporters of socialism and all-powerful governments try to explain away the failures of such regimes. But failure is systematic. The cavalcade of excuses borders on fantasy and reveals closed minds. Regimes such as the Castros' Cuba and Mr. Chavez's Venezuela concentrate absurd power in the ruling "socialist" clique. Institutions that protect people, particularly the legal system, are made subservient to government if not completely destroyed. The economy is nationalized and politicized. "Managers" are chosen for ideology. If enterprises squander resources, hardly produce anything, and make things of poor quality, then tough – the people can suffer.

Compared with crony socialism, crony capitalism tends to be less extreme and allows some competition, but is still destructive. True free markets produce prosperity and reduce poverty wherever they bloom, whether in Europe, North America or Asia.

Venezuelans are coming to understand the nature of the tragedy, but the opposition is divided with little policy. The current regime cannot endure in its present form – food is running out and the military may already be in control.

Venezuela will not jump to the level of economic freedom of Canada, Sweden or Denmark. Cronyism is baked into the system. But let us hope that as disaster looms, Venezuela can start down a road away from both crony capitalism and socialism.

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