Venezuela: Fracas in Caracas

Five months after last February's failed military coup, the previously unknown Lt. Col. Hugo Chávez is at the top of Venezuela's popularity polls. The coup leader is in a prison just outside Caracas, where he was moved to avoid constant manifestations of popular support in front of the army base in the city where he was held initially. He is awaiting a military trial that no one is in much of a hurry to start.

Chávez's amazing popular appeal is based on his promises to wipe out the special privileges and widespread corruption of the last four administrations, to remove the grotesque concentration of wealth in the hands of the local nomenklatura, and to reverse the precipitous drop in the standard of living for the lower and middle classes. He has also stirred up the people by accusing President Carlos Andrés Pérez of selling out to Colombia in negotiations over control of the oil-rich Gulf of Venezuela. Although Chávez probably would have turned out to be a leftist demagogue, he is seen as a patriotic champion of forgotten values.

After three decades of democratically elected governments, including four run by Pérez's Acción Democrática Party and two by the Copei Party's Christian Democrats, the people are fed up with politicians. They are tired of the government's inability or unwillingness to combat street crime, remedy mushrooming bureaucratic corruption, improve horrendous public services, or bring order to the courts.

The failure of Pérez—who, like Mikhail Gorbachev, is far more popular abroad than in his own country—has been depicted by both the domestic and international news media as the flop of a free-market program. But Venezuela's system under Pérez is really a mixture of mercantilism, corporatism, and IMFism. The test of a free market is whether tens of thousands of small entrepreneurs spring up to take advantage of new freedom and wider economic horizons. That certainly has not happened in Venezuela, and it won't without fundamental reforms to protect property rights and establish the rule of law.

Pérez, who nationalized Venezuela's vital oil industry during his first term as president in the mid-'70s, was supposed to be a new man when he came back to the presidency for another five-year stint in February 1989. In his earlier incarnation, he did much to derail a vibrant nation with emerging entrepreneurial talent, a strong currency, an inflation rate of around 2 percent, and one of highest foreign-investment rates in the developing world.

Pérez turned Venezuela into a socialist nightmare of price controls, import substitutions, and protectionism. He made the central bank a cash cow for the treasury, decreed nationwide salary increases, and enforced central planning. His policies created widespread corruption, since every private endeavor suddenly required multiple permits and licenses from a burgeoning bureaucratic state. The succeeding administrations of Christian Democrat Luis Herrera Campins and Social Democrat Jaime Lusinchi brought more economic regulation and worse corruption.

By 1989, Venezuela needed a Ludwig Erhard, a Margaret Thatcher, or a Václáv Klaus. Instead, we got a second edition of Pérez. He brought to his cabinet an odd minestrone of party comrades, Keynesian academics, and young technocrats with successful experience in the private sector. In spite of belligerent opposition from his own party and the unions (which make up the backbone of Acción Democrática), Pérez accomplished some impressive reforms during the first couple of years: the reduction of government subsidies, tariffs, and corporate taxes; membership in the General Agreement on Tariffs and Trade; less discrimination against foreign investment; the shrinking of red tape; decentralization of political power through direct election of mayors and state governors; and elimination of controls over currency exchanges, interest rates, and most prices of goods and services.

The government privatized some state-owned enterprises: the smaller state banks, the international airline, sugar mills, a few hotels. Most importantly, it sold off the telephone company and the ports, agencies that had managed to cancel out the country's geographical advantages by making communications with Venezuela as difficult and costly as if we were in the middle of Africa.

On September 16, 1991, a New York Times headline read: "Venezuela, Once Sick, Is Booming." The article described the fantastic growth of the Venezuelan economy under Pérez's free-market policies. Suddenly, Venezuela was supposed to be out in front of Latin American development, outperforming Chile, Mexico, and Argentina in economic growth, with a per capita gross domestic product increase of 5.1 percent in 1991.

But these numbers are misleading. The GDP figures include government expenditures that are often unrelated to the people's well-being: the shoddy output of money-losing state monopolies and the high cost of dreadful government services in health care and education. The common Venezuelan, with an average salary of $100 a month, can afford only one square meal a day; the minimum salary's purchasing power has dropped 56.5 percent since 1987. Despite the huge gain in GDP reported by the Central Bank for 1991 (10.4 percent), the real non-oil GDP per inhabitant remained 21.5 percent below its 1977 level.

Furthermore, the arrogant Pérez government made little effort to sell the benefits of a free market, perhaps because there was no real conviction behind its program. It privatized assets to obtain funds, get rid of money-losing enterprises, and please the International Monetary Fund so it could obtain further credits. The public perceived privatization as the sale of government assets to the same groups that had long benefited from close political connections, plus a few foreigners who saw the advantages of going into partnership with the government or buying into a protected monopoly such as the telephone company.

The key to the success of Margaret Thatcher's privatization program in Britain, and the main premise behind Václáv Klaus's "voucher" privatizations in the Czech Republic, was the idea of returning to the people what does not belong to the state. The sale of public housing in Britain and the weekly auctioning of small state enterprises by the Prague government created property owners overnight: small "capitalists" with a stake in their community, with something worth working for and passing on to their children. The success of privatization depends on maximizing the number of shareholders, rather than maximizing the income from the sale of government assets.

Venezuela chose the opposite path. The government's timid privatization program yielded a hefty $1.9 billion in 1991. It found that the way to get the best possible price for state enterprises is to include, along with the transfer of property, some of the monopoly privileges that every government agency enjoys. But the point of privatization is to open industries up to market forces, not simply to transfer monopolies.

If Pérez wanted to sell the public on privatization, he would have started with the dreadful government services that make a significant difference in the average citizen's life. Consider Venezuela's fraudulent public-pension system, which after 40 years of taxing workers has reserves of barely $300 million with which to pay retirement benefits. By contrast, Chile's privatized pension system, in a much smaller country and in just over a decade, has savings of more than $11 billion. Moreover, this money is in the individual accounts of workers and beyond the reach of unscrupulous politicians.

The government should also be looking at the huge tracts of arable land that belong to the Agrarian Reform Institute and other state agencies; the inefficient public hospitals, schools, and universities; a petrochemical industry that has kept fertilizers beyond the reach of farmers; and the monopolistic boards that purchase cotton, sugar, coffee, and cocoa at state-fixed prices. Instead, following the IMF's lead, Pérez has increased charges for government services, created new taxes, and raised gasoline prices. The higher fuel prices, although still low by world standards, have had a huge effect on the transportation costs of common workers.

In hindsight, the popular support enjoyed by last February's attempted coup should not have been such a surprise. Venezuela was regarded as one of Latin America's most stable democracies, but, as economist P. T. Bauer has pointed out, "people consider the freedom of the market—such as choice in employment, movement between places and jobs, and setting up businesses—of greater moment than the extent of suffrage and freedom of political speech. Second, historical experience suggests, though the evidence is not conclusive, that democracy is more likely to grow out of the market than the market out of democracy….What matters for a market system is not elected government but limited government."

In Venezuela, the property rights of citizens mean nothing in the face of political expediency. The judicial system has been the most corrupt branch of government since 1969, when the Social Democrats pushed a law through Congress changing the way judges are appointed. The law was designed to ensure that most judges would come from the party's ranks and that their interpretation of the law would be in tune with the party's policies. Every Venezuelan knows that he has no chance of successfully challenging in court someone with greater political influence. In cases where neither side has a political edge, the winner is often the one able to pay for a more expensive lawyer, who can then afford bigger bribes.

The Venezuelan Constitution gives the people every conceivable "social right"—housing, health care, free education, paid vacations—mandating a welfare state that $12 billion in annual oil exports can no longer pay for. Its passing mention of economic rights, Article 96, was "suspended" for 30 years, from the day the constitution was enacted in 1961 until last year, allowing the executive virtually to rule by decree on economic matters.

As philosopher Karl Popper has noted, "No state can have the duty to build up a working economic system. But every state has the duty to build up a rule of law….For without the rule of law, freedom is impossible; and without the rule of law, a free market is equally impossible."

Markets cannot be centrally planned or macroeconomically fine-tuned by local and international bureaucrats. They only evolve and thrive where the people are free to make and dispose of their personal wealth as they see fit—that is, where property rights are respected. If politicians keep insisting on putting the cart before the horse, Venezuela will remain, like Brazil, a country with a brilliant future.

Carlos Ball, a former editor-in-chief of a Caracas newspaper, is president of AIPE, an economic news-feature and syndication service for Latin American newspapers.