Dramatic political changes are underway across South America. Earlier this week, Venezuelans handed the opposition control over their National Assembly – the first time in almost two decades that Hugo Chavez and his successors had lost a national election. It’s hardly a surprise when polls show that 89% of Venezuelans believe their country is faring badly or horribly. In November, Argentina also turned in a new direction, electing Mauricio Macri as its new President. His incoming finance minister boldly proclaimed that the “tyranny of authoritarian populism is over.”
These elections reflect the economic woes of Hugo Chavez’s 21st century socialism. “Chavismo,” as his movement was called, relied on high commodity prices to fund social spending. To put the extent of Venezuela’s public subsidy into perspective, gasoline prices were only a penny or two a gallon. It’s nice while it lasts, but resource spending is a house built on sand. When prices fall, economies usually end up worse off than their neighbors lacking commodities.
Such was the case in Venezuela. Oil accounted for more than 95% of Venezuela’s revenues, and as oil crashed, each $1 drop in price cost the nation $700 million of annual revenues. Venezuela also failed to reinvest in its oil fields, resulting in production declines. The practical result was that Chavismo’s social spending needed not only high prices but perpetually rising ones.
Now Venezuela’s day of reckoning has arrived. The Wall Street Journal summarized conditions in Venezuela as follows: “Inflation is the world’s worst at 200%, and expected to climb between 350% to 800% in 2016. There are rampant food shortages, a local currency that lost 81% of its value in 2015 on the black market, and the world’s second-highest murder rate.” Such were the fruits of Chavez’s “new” socialism.
The so-called “new” path of Chavismo was actually a familiar one. It even has a name: the oil curse. Venezuela was just another in a long line of nations squandering resource wealth on patronage and power. The only novelty was the extent to which Chavez exported the curse. Venezuela peddled its regional influence with handouts, including giving away 200,000 barrels of oil per day to its neighbors. It also persuaded other Latin American leaders to spend their own resource wealth on social programs.
Hugo Chavez once claimed that “[c]apitalism leads us straight to hell.” His oil-funded socialism looks to have reached the same destination, or at least its general vicinity. Yet the outcome of Venezuela’s spending spree was entirely predictable. Oil prices do not stay high forever. Why is it that nations keep making the same mistake? Winston Churchill once offered this answer: “It falls into that long, dismal catalogue of the fruitlessness of experience and the confirmed unteachability of mankind. Want of foresight, unwillingness to act when action would be simple and effective, lack of clear thinking, confusion of counsel until the emergency comes, until self-preservation strikes its jarring gong – these are the features which constitute the endless repetition of history.”
About the Gaille Energy Blog. The Gaille Energy Blog discusses innovative proposals in the field of energy law, with a new issue being posted each Friday at http://www.gaillelaw.com. Scott Gaille is a Lecturer in Law at the University of Chicago Law School, an Adjunct Professor in Management at Rice University’s Graduate School of Business, and the author of two books on energy law (Shale Energy Development and International Energy Development).