Hugo Chavez and Gringo Geopolitics

Who is Hugo Chavez? That’s a question that has just poked itself into a small corner of the national conversation, or at least into a small corner inhabited by those interested in South America. Having spent six of the 12 months in 2012 living in South America I find this interesting. Not just Chavez, mind, though he’s fascinating enough, but also by how little I knew about South America before I moved to Colombia. And as ignorant as I was, I probably knew more than a lot of Americans and Europeans did.

Because South America is a really fascinating place. It has close to 400 million people including the largest populations of Portuguese and Spanish speakers. It has all kinds of stuff that Americans really dig, like oil and natural gas, bananas, emeralds, starfruit, mangoes, and copper. Also perfect beaches, cheap beer and coffee, guys in funny hats, and likely more fascinating/terrifying undiscovered species than anywhere the world. It has purple mountain majesties and amber waves of grain. To say nothing of other stuff Americans seem to really, really like, including unimaginably gorgeous runner up beauty queens on uncommonly stupid reality TV shows and, of course, cocaine.

The United states dabbled unenthusiastically in South American politics in the good ol’ days of the cold war, with predictably catastrophic results for many, and predictably cushy outcomes for a very few. Even then, though, the biggest concern for the US was always Central America and keeping the Panama Canal open and humming. This was so important that in 1903 the US shamelessly hacked Panama off of Colombia, presumably because it was a lot easier to get to Panama City to fuck with Panamanians than to make the whole damn trek to Bogota to fuck with Colombians. Also, Colombians have an irritating tendency to shoot back when pissed off.

But back to Chavez. Because we know so little about South America (quick, get a map and find Bolivia and Uruguay without reading the names) we tend to see any news happening there through the eyes of our gringo geopolitics, whether neocon or neorevolutionary. It seems to me exactly that is happening now that Chavez has made his way into the news by nearly dying, right after getting himself re-elected.

One the one hand, you have Hugo Chavez, Piss-and-Vinegar-Eff-You-George-Bush-Bolivarian-Rebel. This is the Chavez that did his thing at the UN saying the podium still smelled like sulfur the day after Dubya spoke there. This also the Chavez who stands up to ‘big oil’ and even, according to Greg Palast, ‘big ketchup.’ The one who loves photo ops with Mahmoud Ahmadinijad, if only to piss off the yankees. The Chavez who works for the poor, giving essentially free oil to Cuba in exchange for doctors and nurses to bring basic health care to some of the poorest neighborhoods on earth. The one who takes the odd view that Venezuela’s oil wealth should improve the lives of Venezuelans.

On the other hand you have Hugo Chavez, Kleptocrat-Tinpot-Potentate-Ruining-His-Country. This is the Chavez, we are told (and not just by neocon gringo dingbats, but by plenty of Venezuelans themselves), who runs an excessively corrupt patronage machine that goes down to the neighborhood level, who squanders billions propping up post-Soviet Cuba, who bullies his opponents with an unfree press. The Chavez who has allowed Caracas to become the murder capitol of the world and whose price controls, supposedly to help the poor, are leading to shortages of core goods instead of making them cheaper. The same Chavez who steals whatever he wants and after all that is a showman, a carny barker tweaking the nose of Big Gringo instead of spending his time fixing what’s wrong with Venezuela.

So which one is he? The short answer, if you’re sick of reading, is ‘yes.’ He’s both. That may annoy anyone who wants to stick to their particular cookie-cutter geopolitical storyline, but it’s the truth. Love him or loathe him, Chavez has never been one for the cookie cutter.

But understanding Chavez, and Venezuela, is impossible without understanding a few important things about oil. First, Venezuela has a staggering amount of it. More proven reserves than Saudi Arabia and likely more to be discovered. (The Saudis are swimming in the stuff, but are unlikely to find much more. Venezuela definitely could.) However, not all oil is created equal. Part of what makes Saudi and Libyan oil so desirable is that it is relatively easy to get out of the ground and relatively easy to refine into the fuel or chemical products. Venezuelan oil (or at least the vast majority of it) is a comparative pain in the ass to get out of the ground and to refine. The technology to do so is not complex or new, as are most of the other unconventional techniques. Also, Venezuelan oil is not as expensive to exploit some of the newest deep sea offshore drilling. Nonetheless, as these things go their oil is on the expensive side.

All of which means the country lives or dies by oil prices. At some specific price Venezuelan oil gets too expensive for the bother. When oil is expensive, Venezuela is rich, when oil is cheap Venezuela is broke. Not only is 94% of the country’s export revenue from oil, for various reasons (about which more in a bit) it imports plenty of really important stuff like food, machinery, and technology. Absent those imports, paid for via oil revenue, the country would be in pretty bad shape. If you are old enough to remember what happened to Texas when oil prices crashed, it’s something like that, but with an even larger percentage of the economy centered on energy. Venezuela and Ecuador (another South American country reliant on energy exports for much of its economy) both suffered brutally over the past 30 years when oil has been cheap, while raking in chips when oil was dear.

When Chavez was elected the first time, in 1999, the core of his platform was that Venezuela’s oil wealth should benefit not just the wealthy and the Yankee imperialists, but everyday Venezuelans. His undeniable success in education along with improvements in health care are the most commonly cited stories by gringo chavistas. Looking at literacy, Venezuela ranks alongside Argentina for the highest literacy rate in South America, and has improved consistently since Chavez was elected. The 1999 Constitution, still the core document of the Chavez revolution, guarantees free access to higher education. As of 2011 public spending on education was over 5% of GDP, putting the country on par with comparatively civilized places like the United States and Malta.

Without question Chavez has also improved the economic lives of the poorest Venezuelans in his years as president. Poverty went from close to 50% in the late 90’s to well under 30% today. The numbers are even better for ‘extreme poverty,’ defined as of 2011 as people living on less than USD 1.50 per day. Venezuela has cut extreme poverty from 23.4% in 1999 to 8.5% in 2011. That single statistic shows how much Chavez has done to improve the lives of people genuinely fucked over by the world. One thing that shows up in nearly every interview of Chavez supporters is that until his election, no politician in Venezuela cared about the truly poor. South and Central America has some of the most dismal, depressing income distribution numbers in the world, and Chavez deserves every drop of credit he gets for even starting the poorest Venezuelans on the way to a better life.

Talking about the other side of Chavez’s Venezuela is tricky. Possibly agreeing with Donald Rumsfeld, Condi Rice, and the Weekly Standard is no small concern. However, in the interest of being ‘fair and balanced,’ a few things about the Chavez’s Venezuela that are not such great news.

First and most important, he has made a complete mess of what is left of the private economy. This has been (mis)managed using three tools: nationalizing businesses, price controls on basic goods, and a catastrophic currency policy.

Chavez starting ‘expropriating’ private businesses early, soon after he had been elected. Originally his targets were predominately international oil companies, along with a smattering of large landowners. These nationalizations were justified on the sensible grounds that a) the oil majors had negotiated deals with previous, corrupt governments that varied from punitive to comical, and b) huge tracts of land were held by absentee landlords with no intention of using them, while farmers nearby were penniless. In recent years, though, the expropriations have taken something of an absurdist bent. For example, in 2011 Conferry was nationalized. Conferry had a state-granted monopoly to run ferries from the mainland to swish resorts on islands in Venezuelan waters. It’s hard to see how five or six ferries used by rich people to go on vacation merit much government attention. Then again, we are told, and I’m not making this up, that their toilets were dirty. Here is a not in any way comprehensive list of expropriations that includes everything from soft drink bottlers to chemical companies to ExxonMobil, to parking lots, shopping malls, and a Wendy’s.

Even in the oil sector, nationalization has hardly been a universal success. Drilling a hole in the ground at the right spot is only the first step in oil production. Individual wells, bore holes, and transport infrastructure need constant attention to work properly. Beyond that, especially in unconventional production, entire oil fields need to be managed both for production and safety. International oil majors are hardly examples of exemplary corporate behavior, but they usually have the greatest expertise in the business, despite plenty of notable disasters. National oil companies, unsurprisingly, can become grossly corrupt vehicles for political patronage. Pemex in Mexico is famous for this. Statoil and Petrobras are famous for not allowing that sort of rot. (It is less than shocking that Norway, with a long history of socialism and state/business partnerships, has a well-regarded national oil company that has amassed a staggering amount of money for Norwegians. It is a little surprising Brazil has managed to do the same. Any developing nation looking to exploit energy resources could do a lot worse than Petrobras as a model)

PDVSA, the Venezuelan state oil company, was once thought of one of the best state oil companies, at least in terms of efficiency. Since Chavez was elected, though, it has a pretty dismal record when it comes to production. First, even the local press admits it invests a half to a third of what oil majors do in their projects. Second, the most often quoted number is that national production has declined by thirty percent since Chavez was elected, during a time when oil prices have been historically dear. In other words, as developing world demand (especially China and India) exploded, and the developed world was paying through the schnozz for oil, Venezuela has left ever more of it in the ground. All of those reserves notwithstanding.

Much of the blame is properly put at the feet of PDVSA. After the 2002 coup attempt and into 2003, PDVSA managers and employees staged a massive strike with the goal of either ousting Chavez or forcing new elections. Chavez held out, won, and then did a Ronnie Reagan and fired 40% of the work force, or as many strikers as he could. The replacements have been selected for ideological purity as much as qualifications in the oil business, and since then have put together an impressive collection of embarrassments and disasters. That article is from The Economist, surely no center for chavista sympathizers, but the stories all check out. No bid contracts, half a billion in missing pension funds, and suitcases full of cash, and that is only the start.

The last thing to note, though there is still much to discuss about the economy, is the confusing, sort of insane world of the exchange for Venezuelan currency, the Bolivar. The Chavez government has spent years trying enforce very strict rules for capital flows in and out of the country. The official rate for the Bolivar (aka the VEF), set by the government, is 4.3 Bolivars to the US dollar. Specially qualified businesses can use an even better exchange rate if they are deemed to be ‘essential’ imports. Individuals have to apply for the privilege of exchanging Bolivars for dollars, and are almost always limited to a few thousand dollars for travel and small purchases. Businesses have a better chance when applying for legal exchange, but by no means are guaranteed success.

4.3 Bolivars to the dollar, however, vastly overstates the value of the currency, at least as far as Venezuelan citizens are concerned. For the past two to three years a dollar on the black market fetched around 8.5 Bolivars. That means the closest thing to a free market thinks the Bolivar is worth half of the official rate, and a third of the preferred rate. Since the election, and Chavez being ill, confidence in the Bolivar has collapsed inside Venezuela. The unofficial rate has chopped the already depressed value of the Bolivar in half, with a dollar fetching between sixteen and seventeen Bolivars. The demand for dollars is also exacerbated by chronic, multi-year high inflation in Venezuela that makes any foreign hard currency (dollars, Euros, etc.) a comparatively safe store of value.

Let us say, then, that you own a business in Venezuela. You need something from the US (machinery, computers, soy sauce, detergent) that, for whatever reason, is not available on the shelves at your local Mart de Wal. One option is to simply drive to another country and try to buy it there. This actually happens a good deal, with Venezuelans driving to Colombia to buy imported supplies. The other option is to go to the black market to exchange Bolivars for dollars and use those dollars to buy things abroad. Either way, you are going to pay way more than 4.3 Bolivars/dollar for whatever you buy.

Let us say, on the other hand, that you have access to dollars. Maybe you are a licensed importer, maybe you have income or savings abroad that is Euro or dollar denominated. Maybe you are just willing to break the law and smuggle things into the country. In any of those scenarios you either have access to the official rate of 4.3 to the dollar or the currency arbitrage works in your favor. You can get something abroad at half (or a third, or a quarter, depending on the black market) what it costs an ‘average’ Venezuelan using Bolivars.

Needless to say, this is a massive disincentive to do or produce anything domestically if it can be imported instead. It has become cheaper to import beef from Brazil than to produce it domestically. According to the LA Times, Venezuela now imports sugar, rice, coffee, and beef, all staples in which the country was self-sufficient only a decade ago. Capital controls like the ones put in place by Chavez can work for awhile, but just as nature abhors a vacuum, the globalized economy abhors things priced at four Bolivars for some people in one place and sixteen Bolivars for someone else in another place. Of course, any decrease in oil prices only squeezes the economy more, leaving Venezuela even more dependent on high oil prices than most exporting nations.

As this piece is already overlong, one final note. It has to be assumed that Chavez is gravely ill, if he is even still alive. He was last seen heading to Cuba for surgery and other cancer treatment on December 10th. Not even a recorded speech or interview has surfaced since. I have to believe that if his minions could find a way to duct tape him to something and do a perp walk for the cameras they would have long ago. The last election is worthy of its own overlong article, but Chavez won handily, though by his smallest margin ever. It is not clear how much of his own popularity he can transfer to a successor. New elections might have to be called, or another prominent chavista might simply take over. Constitutional scholars and local politicians continue to squabble over this, even as state twists in the wind.

Whatever happens, Chavez deserves credit for his charisma, his unprecedented political longevity by South American standards, and the undeniable improvements he has made for so many Venezuelans long ignored by the government. Also, he has to get props for so enthusiastically fucking with George Bush. He also leaves the ingredients for a spectacular economic meltdown, and leaves the single industry that floats the entire economy in far worse shape than he found it. As mentioned before, Chavez has always refused to fit into anyone’s cookie cutter geopolitics. Maybe he deserves as much credit for that as for anything else.

Visit Us On TwitterCheck Our FeedVisit Us On Google PlusVisit Us On FacebookVisit Us On PinterestVisit Us On Youtube