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A Nation Divided: Venezuela’s Uncertain Future

A year after the death of Hugo Chávez from cancer, Venezuela remains as polarized as at any time during the flamboyant strongman’s fourteen-year rule. As the dysfunctional economy he bequeathed to his successors continues to unravel—despite proven oil reserves rivaling those of Saudi Arabia—a determined political opposition continues its uphill fight against what Chávez designed as a permanent revolution.

President Nicolás Maduro, Chávez’s anointed successor, came to power in a special election last April that was much closer than expected, sending shock waves through the chavista ranks. There were enough doubts about the legitimacy of the vote that his opponent, Henrique Capriles, never conceded. Since then, Maduro has struggled to escape Chávez’s shadow and assert his authority over the faction-ridden chavista party, the PSUV, a hodgepodge of leftists of all stripes along with a faction of the military loyal to the late president. Maduro has been buffeted by one challenge after another: infrastructure breakdowns leading to electricity shortages, scarcity of basic consumer items, rampant inflation, declining production, an overvalued currency (the black-market rate for dollars is ten times higher than the official exchange), and rampant street crime.

Neither has Maduro helped himself with his propensity for verbal gaffes and other mishaps, such as falling off a bicycle before television cameras. By September 2013, his approval rating had fallen to forty-one percent, much lower than Chávez ever experienced, while seventy-three percent of Venezuelans said they were pessimistic about their country’s future—an increase of about twenty percent since April—and some sixty-seven percent saw the country’s political situation as unstable.

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Still, Maduro was able to obtain decree powers from the PSUV-controlled legislature and implement several drastic (if, over the long term, destructive) economic measures that helped him to survive the party’s first electoral challenge under his leadership in December. The opposition did better than expected, but his PSUV did well enough to forestall his political demise.

 

Mayoral and city and town council elections have a relatively minor impact on most countries’ national politics, but in hyper-politicized Venezuela, no electoral event is seen as unimportant. Voting patterns are studied to find hidden meanings about the country’s problematic future.

In the run-up to the December elections, the opposition sought to capitalize on citizen discontent and turn the vote into a plebiscite on the Maduro government. Maduro responded as if his presidency were at stake, which it basically was, flooding the airwaves with government giveaway projects and tightening the screws on opposition access to media. He even named December 8th, the day of the election, “Day of Loyalty to the Supreme Commander Hugo Chávez,” plastering the late leader’s image everywhere, to mobilize the large chavista base to get out and vote the “right” way.

Up for grabs in the election were some three hundred and forty mayorships and twenty-five hundred council spots. But the key question was who would win the aggregate popular vote. Despite retaining control of the country’s two biggest cities, Caracas and Maracaibo, and winning at least four state capitals currently controlled by the PSUV, the opposition fell just short of its goal, receiving forty-one percent of the vote to the PSUV’s forty-four percent.

Although it showed his weakness, Maduro took the three-percentage-point victory as a mandate to continue ever more drastic measures to consolidate his control. “The Bolivarian Revolution continues now with more strength,” he said. “We’ll be moving forward with force.” The leader of the opposition, former presidential candidate Henrique Capriles, came closer to the truth when he somberly observed, “We have a divided country.”

Maduro was able to turn around his precarious situation by what observers are now calling the “Plasma TV Effect.” In November, shortly before the vote, he ordered the country’s National Guard to invade electronics and appliance retail stores and force store owners to sell their products at steep discounts (up to seventy percent). It was manna from heaven for a country in which inflation had risen by fifty percent during the previous year. In some locations looting broke out, including by members of the National Guard. Scores of shop owners were arrested for “price gouging” and special courts were set up to summarily try them, while the crowds laughingly trucked away their goods.

From there, Maduro took aim at the automobile dealers and landlords, pledging to lower prices for cars and rents, while darkly warning business owners that he was “going all the way.” He also decreed that no company could fire an employee without government approval. Many Venezuelans believe he will target the food and pharmaceutical sectors next.

While the drastic measures may have rallied the chavista base just before the election, the bill is yet to come due. Clearly, Venezuelan consumers will pay dearly for the government’s war on the private sector. Among all his other accomplishments, Hugo Chávez was not able to repeal the laws of supply and demand. It will not be too long before shelves are empty, the black market is flourishing even more than it has been for the last year, domestic production and investment suffer a further decline, and more capital flees the country. As the Economist recently put it in a bit of dry British understatement, “As a solution to rampant inflation, banning price rises and jailing shopkeepers has limited potential.”

 

If the election gave Maduro a respite from internal pressures (he faced as much trouble within the chavista movement as from the opposition), it is unclear just how much room for maneuver he will have in 2014, which most sober analysts predict will be even more difficult for the average Venezuelan. The challenges are daunting: falling production of oil and declining revenues; substantial loss of international reserves; an inflation rate of fifty-four percent; an $85 billion debt (amounting to seventy percent of GDP); and a problematic currency exchange policy.

According to the Heritage Foundation’s Index of Economic Freedom, Venezuela ranks one hundred and seventy-fourth out of one hundred and seventy-seven countries, ahead of only Zimbabwe, Cuba, and North Korea. The authors of the study cite heavy government control and intervention that discourages entrepreneurship as one reason for this abysmal record, along with lack of transparency in decisionmaking, low respect for the sanctity of contracts, wanton expropriations, and a politicized judiciary.

Similarly, Venezuela ranks poorly in the World Bank’s Ease of Doing Business Report (one hundred and eighty-first out of one hundred and eighty-nine countries) and Transparency International’s Corruption Perceptions Index (one hundred and sixty-fifth out of one hundred and seventy-four). The Venezuelan central bank’s scarcity index, which measures the amount of goods out of stock at any given time, rose to 22.4 percent in the same month as consumers searched for milk, antibiotics, tires, and other basic goods.

The private sector has also been strangled by onerous currency restrictions. Given that the country produces only one-third of the goods it needs, importers’ access to dollars is crucial. But the difficulty of obtaining dollars from the government means many businesses have to depend on the black market, where the dollar trades at ten times the official rate.

Nor does foreign direct investment (FDI) offer much promise. The country’s political uncertainty, its high crime rates, lack of investor protections, and arbitrary decisionmaking make Venezuela one of the least attractive countries for investment in the world. Venezuela ranks one hundred and twenty-seventh out of one hundred and thirty-nine countries in amount of FDI, a status no doubt influenced by the fact that there are currently one hundred and seventy-six open cases against Venezuela in the International Center for Settlement of Investment Disputes, the World Bank body where foreign companies can appeal violations of contracts.

No wonder international investment banks have been bearish on Venezuelan bonds. Large banks like JPMorgan Chase and Barclays have warned investors of the risks of Venezuelan bonds due to distortions caused by currency and price controls. Following Maduro’s draconian moves in November, yields on Venezuela’s benchmark bonds due in 2027 hit a twenty-two-month high of 13.8 percent.

Now that the government is past December’s municipal elections, most economists see as inevitable another devaluation of the country’s currency, the bolívar, sometime in 2014. (The bolívar has been devalued five times in the last nine years, most recently in February 2013, when it lost thirty-two percent.) Barclays, for example, has said that it expects a devaluation of the official rate to 12.5 to the dollar from the current 6.3:1. While such a move may improve the government’s finances in the short term, it will only exacerbate inflation and further decrease the purchasing power of Venezuela’s already battered consumers.

Over the past decade, the biggest question surrounding the Venezuelan economy has been how long oil revenues can continue to paper over its fundamental distortions. Venezuela’s proven oil reserves are prodigious, but they can damage a country’s economic development if not used wisely. It is for that reason a famous Venezuelan once referred to oil as “the devil’s excrement.”

Today, Venezuelan oil revenues vary between $46 billion and $56 billion annually, but the figures will likely continue dropping as a result of declining production and lower international prices. The state oil company’s refineries are at about sixty percent of capacity because of a lack of reinvestment and maintenance in the oil sector and because of the dedication of revenues to hypertrophied social programs by which Chávez bought the goodwill of the people. But what was formerly a production rate of some 3.3 million barrels a day is now closer to 2.4 million, which amounts to about one-fifth of the Saudis’ output.

Because of its dependency on the undiversified oil monoculture, slumping international prices will hit Venezuela hard. Bloomberg News reported in December that “average prices of Venezuelan crude exports, responsible for ninety-five percent of the nation’s foreign currency earnings, fell to a sixteen-month low this month and ended last week at $93.98 a barrel. Each $1 dollar decline in a barrel of oil costs Venezuela about $700 million per year.” It also reported that the difference between oil prices 2013 and 2012 has so far reduced Venezuela’s earnings by $3 billion.

The fate of the long-stalled Keystone XL pipeline project between Canada and the United States could also impact Venezuela’s outlook. Since Canada and Venezuela both produce the same type of heavy oil, US refineries uniquely adapted to refine that crude could easily switch supplies from Venezuela to those from Canada without much difficulty, while Caracas would find itself in the difficult position of having to market its heavy crude to refineries ill equipped to deal with it.

 

Hugo Chávez’s genius was his ability to exploit the chasm between the Venezuelan haves and have-nots. Adroitly using the nation’s daunting poverty rate and the exclusion of so many citizens from political and economic life amidst seemingly incalculable oil riches, he had an uncanny ability to connect with the masses. While his antics were often madcap, they were part of the bread and circuses Chávez used to distract the people from their hardships, while portraying himself as the only thing saving them from further exploitation by the “parasitic bourgeoisie.”

Chávez’s knack for maintaining his own sense of balance by pitting Venezuelan against Venezuelan has left the country’s politics a wasteland. The opposition—anyone who signaled they are not on board with the chavista project—has been demonized in the harshest and most personal terms. No one is merely an opponent; they are the “enemy,” driven by base and opportunistic motives. The goal has been to keep the chavista base perpetually mobilized, with the government continually seeking and demanding constant reaffirmation of the people’s commitment to their political project.

Exercises in clumsiness rather than charisma, President Maduro’s attempts to emulate Chávez have been met with widespread derision. He announced the creation of a Vice Ministry of Supreme Social Happiness, whose job it is to improve people’s moods. Then he announced he was moving up Christmas two months for the “sake of happiness.” He has said that the late Chávez has come to speak to him as a little bird, and announced to great fanfare that a group of construction workers saw the face of Chávez on the wall of a subway tunnel. But all the while he makes himself more of a parody of Chávez than a political heir, Maduro has slavishly followed the example of his mentor by ordering even more state handouts, more government spending, and more strong-arm tactics against the private sector.

The problem comes when the money runs out, when oil revenues dip, when Venezuela’s creditors start demanding payment, when he has double-promised future oil sales in exchange for more high-interest loans, and when there are no more shopkeepers to bully into giving away their inventory for almost nothing.

That is when the politics of polarization that the government has practiced for so many years will become most dangerous. It is the kindling for the violence and social instability Chávez was able to subdue by force of will and a theatricality Maduro has shown himself incapable of asserting.

A challenge for Maduro in the months ahead is staying one step ahead of his intra-party rivals. Chavismo is a vipers’ nest of competing factions once kept in check only by the founder’s formidable persona. Today, Maduro’s ability to keep at bay other chavista aspirants to power, particularly as even harder times arrive, is the key question mark in Venezuela’s political life, not the relationship between the Maduro government and the opposition, as important as that is. There is discontent with Maduro in the ranks, a lack of faith that he has what it takes—the power, the skill, the vision—to make chavismo succeed. And that lack of standing undermines his ability to control those factions within the government, the military, and his own party.

 

The situation in Venezuela will remain turbulent and volatile for the foreseeable future. Unable to reestablish Chávez’s unique bond with his base, Maduro’s only option will be more authoritarianism and more heavy-handed tactics. By his own words, he intends to maintain his “offensive” amid deteriorating economic conditions.

With no electoral challenges until the fall of 2015, that can be interpreted as a willingness to impose ever more radical control rather than look toward orthodox economic remedies to deal with the country’s spiraling problems. The government may devalue the currency yet again, take on more debt, or else sell off more gold reserves. But none of these measures get to the underlying dysfunction: excessive spending on social programs, strangling the private sector, corruption, the lack of investment in infrastructure and oil production, and politically motivated assistance programs to Cuba and other allies.

As for the opposition, the recent municipal elections clearly demonstrated that they have more work to do in translating popular discontent over economic conditions into more support at the polls. A fourteen-year effort to systematically impose chavismo everywhere in Venezuelan national life—a tropical version of a cultural revolution—has made it difficult for the opposition to develop as a viable force, especially since it must overcome the legacy of Venezuela’s discredited two-party system, which Chávez was able to exploit. While it has made incremental gains, the opposition will require more time to force a truly pluralistic political environment—and time is running short.

Hugo Chávez passed from the scene before he faced the day of reckoning for the political movement he started; his successors are unlikely to be so lucky.

José R. Cárdenas has been working on inter-American relations in Washington for nearly three decades. During the George W. Bush administration, he served in senior positions at the State Department, the National Security Council, and the US Agency for International Development. He is also a former senior staff member for the Senate Foreign Relations Committee. This article was completed prior to the eruption of protests in late February.

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