Venezuela in Chaos

Venezuela has enormous oil reserves, it has been selling oil for nearly a hundred years, and its people are impoverished. So what went wrong? Some say it is a fine example of the failings of socialism, but in fact it was plutocratic capitalism that set the rot in place.

Venezuela was possibly the richest country in South America before it struck oil. Because there was so much of it, foreign oil companies poured in, as did their money. This caused the local currency to increase wildly. The oil companies paid locals huge salaries or wages, and the growth was so pronounced that any reasonable contractor worked in the oil industry. That meant that people left agriculture and manufacturing by locals was squeezed for capital.

Worse, when the politicians become corrupt, which is easily done when law and order is weak and there is money flowing like water, the average person was overlooked and they slid into poverty. At first the plutocrats simply walked off with the profits but by 1950 the government reformed the industry and required half the profits to go to the state. This had the effect of making the government essentially totally dependent on oil money. For Venezuela the effect has been so dramatic that oil now accounts for about 98% of its exports, and up to 50% of its GDP. In the 1970s, the Venezuelan government received huge incomes, which led to rampant mismanagement and embezzlement. In the 1980s oil prices plummeted and Venezuela sustained rampant inflation and massive debts, in part due to government investments offshore that were not exactly wise. The IMF gave its usual recipe: austerity, and there were major riots. Austerity hurts the poor, while the rich remain unscathed, which may be why the bankers of the IMF favour it.

In 1998, Hugo Chavez was elected President on a socialist pledge, and while he did significantly improve the lot of the average Venezuelan, he also badly mismanaged the oil industry and the economy in general. Chavez also bailed out Cuba by supplying it with oil, and also managed to greatly increase national debt. His government was authoritarian, and when he was replaced by Maduro, the latter has probably become more authoritarian.

Maduro inherited a mess, and he was not gifted with luck. Between 2014 – 2016, oil prices slumped by a factor of three. The government gets out of its debt problems by inflating the currency, which may be running at a million per cent now. The effect of this is the impoverishment of the middle classes. The very rich get richer by picking up assets at a huge discount in forced sales. Currently, 90% live in poverty.

There are various opinions on what should have been done. The most obvious one is to have strong law and order and fiscal responsibility. The second is to ensure the wealth is controlled. A good example of this is Norway, where oil contributes 80% of its exports, but only 22% of its GDP, and huge reserves are being held for the future. Another good example where I have lived was Calgary. The state government poured money into health care, which was extremely cheap when I was there, and they had excellent roads and general infrastructure. My opinion is that such resource-rich economies must invest a large amount of the income in broadening the economy. In Venezuela’s case, there has been economic broadening, although agriculture contributes only 3% of GDP. It is largely a food importer, for no good reason. Nevertheless, while exports total $32 billion, imports only total $17.75 billion. The problem is with government finance. It has income of almost $93 billion, and expenses roughly twice that.

Maduro replaced Chávez in 2013 and narrowly won an election. There was a recent election that Maduro also won, but which the opposition boycotted. There are accusations that the elections would be rigged, and since then there are accusations that they were, but if there were no opposition candidates that seems somewhat moot. It is one thing to complain that elections were rigged; an entirely different matter to assert they were going to be rigged. Two weeks later, Juan Guaidó, leader of the legislature, declared himself acting President. The US government has declared support for Guaidó and refuses to recognize Maduro, and threatens that if he does not step down, they will make him. They declare the election was illegitimate, but do not cite any grounds. Exactly how Guaidó declaring himself President is more legal eludes me. If the opposition did not stand, it is hard to see how Maduro could not win, and if simply boycotting an election was sufficient to overturn an election, why Mr Trump could consider what would happen if Hillary had boycotted their election. The US claims the majority prefer Guaidó, but arguably the majority voted for Hillary, and I don’t see Trump stepping down. Nor should he, at least on that ground. The rules are the rules. Trump has even hinted at military intervention. Other countries have backed Guaidó. Macron has argued he should note the protests on the street. So should Macron. Hypocrisy runs strong when politicians have a deep problem and they can divert attention from their own failings.

The Venezuelan military is at this moment behind Maduro, and while that is the case, short of a massive US invasion, he is likely to stay there, and the Venezuelans are likely to stay poor. US sanctions are not helping, but US sanctions have been there for quite a long time and are not recent, although the recent freezing of oil money will hurt the poor even more. The history of US intervention is not good, the worst example being, in my opinion, the removal of Allende in Chile, which occurred because (a) he was a socialist, and (b) US corporations could control the copper. The fact that Pinochet murdered a large number of Allende supporters bothers not the US conscience. I heard one speech where it was stated that control of the oil industry would make things better for Venezuela and the US. So at least someone in Washington thinks US corporations should have the Venezuelan oil.

So how do they get out of this mess? Who knows? The economists say Venezuela must diversify its economy and do a number of other things, but the problem is with most of the population impoverished, they cannot start much. One thing I have learned while running my own business is that if you have no money, you are screwed. So what will happen, other than the poor becoming poorer? Who knows?

Exit Mugabe

I confess to having an interest in “important” people. What is it that makes them get to where they do? I have explored this in a number of my novels, and I have met and talked with a number of important people here, not that New Zealand is very important on the world stage, nevertheless I think I have seen enough to know that I don’t really know the answer. In Mugabe’s case, though, I think there were two major causes that brought him to the top. The first was self-belief and determination, and the second was stubbornness. Once he made up his mind on something, nothing would turn him away. And yet he has finally decided to quit.

He probably had little choice. The army did not want to have to shoot him, but eventually it must have occurred to him that the senior army officers could not back down and live. That is the sort of reality that someone like Mugabe would understand. The fact there were mass demonstrations may have finally got through to him, and now it must be galling that the crowds are cheering his departure. Still, he would know the usual exit for dictators is quite brutal, and there would be a time when the soft options would disappear.

Mugabe’s main positive claim to fame is that he led the Shona resistance to the white government the British colonial administration left as the government in Zimbabwe, or Southern Rhodesia as it was then called. For that he would get much gratitude from the Shona people, which would make him the obvious choice to become Prime Minister of the new government. It seems that at first he was reasonably enlightened, and expanded healthcare and education. Later, he would become President, but by then the signs were deteriorating.

This started when many of those of European descent fled, essentially for economic reasons. By itself, this was no great deal, however the skills they took with them was. It was the highly educated or those with money who could find a life most easily elsewhere. The economy started to contract, but Mugabe was not one to be put off his vision, and this is an unfortunate aspect with many dictators. They think their dream is the only one, and the reality of achieving anything is irrelevant. Means will be found, and they tend to shut their eyes at the consequences.

Worse was to come, because Mugabe now feared all those who had fought for revolution, and worse, there were scores to settle with the Ndebele. The Shona people hate the Ndebele for things that happened in the early 19th century, so then was the chance for revenge. To bolster his position, Mugabe ordered the training of the Fifth Brigade by North Korea, and set them loose on the Ndebele. Estimates are that there were 20,000 killed for no good reason.

Mugabe nominally was a Marxist, but he also realized that he should leave the economy working. Zimbabwe is naturally a rich country, and it was the breadbasket of Africa, and is also rich in minerals. The problem was, whites owned all the resources, so Mugabe set about confiscating them. The land seizures were declared illegal by the Zimbabwe courts, but Mugabe continued with them, declaring the courts irrelevant. Land was for Zimbabweans. It was all very well to put ill educated Shona as farm owners, but they did not know how to farm. Food became in short supply. Inflation soared to 7600%. Apparently, they even issued a banknote for 100 trillion dollars. But no matter how bad things got, Mugabe would not step down and let someone else try.

One of the bad aspects of revolution is that the people who carry out revolution are often not the best for what follows, and the history of revolutions is not a happy one. Not only that, but the leaders seldom if ever encouraged successors. South America was interesting because Jose de San Martin abandoned politics altogether after the successful liberation of the south, while Simon Bolivar did try to manage a major coalition of countries in South America and eventually gave up, leading to somewhat chaotic outcomes. The first Russian revolution was led by “nice” people who really had little idea what was required next, and we all know what Lenin and Stalin did to Russians.

One of the very few successful revolutions was carried out in America. What resulted after the British were ejected was a rather enlightened set of leaders who founded a truly great nation. And it is here that we see a great difference. This may sound awful, but in my opinion the best thing George Washington did as President was to step down after eight years. The reason I say it was the best is that while no doubt he did a number of other good things while President, they were relevant only at the time. His standing down and respecting the constitution, and I rather suspect he would have had the other option, has cemented that forever: no President would ever dare to suggest he was more important to the United States than George Washington, the man who effectively was responsible for it formation.

And here is Mugabe’s great failure: he could not put the country before his own personal wants. This was a tragedy. So what follows? Will Zimbabwe emerge into a bright new era? I am far from convinced prospects look good. The man replacing Mugabe is Emerson Mnangagwa, who was Mugabe’s “enforcer”, and was in charge of carrying out the killing of the 20,000 Ndebele. Not the most promising of starts. Worse, why the coup then? It appears that Mugabe fired Mnangagwa, and Mnangagwa had the generals behind him. You form your own conclusion.

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Governments want inflation

It is a bit like Alice in Wonderland: governments want some inflation; not too much but not too little. When there is inflation, debts shrink in real magnitude, and governments are notoriously deeply into debt. So, the more the better? Well, not quite. The classic example was Germany during the 1920s, where as soon as you got money, you spent it, or even better, converted it into something else that was not inflating. The German economy effectively collapsed, apart from isolated examples, such as the chemical industry. The reason they survived was because they exported much of their production to the US, and received their income in US dollars. They then paid their workers in something such as “aniline money”, which was convertible to US dollars, and their workers generally made purchases at company stores that sold in “aniline money”. So, in any economic problem, there are always some who survive, usually through being big enough.

There is the other side of the coin. While debtors see their debts inflate away, which in my opinion is essentially basic dishonesty, few want to lend, and if inflation gets high enough, nobody has anything liquid to lend. If you have money, it is converted into something else as quickly as possible. Workers don’t work very hard because the employer is not paying them. The instant they are paid, they are off to turn this paper into something else. So while governments want inflation to get their debts inflated away, and they will wave away the dishonesty aspect by arguing it is the people as a whole who benefit, they do not want it to be so big that people refuse to lend.

So why have inflation at all? One reason stated is that if there is next to zero inflation, the next downturn will lead to deflation, and during deflation people try not to spend, which exacerbates the problem. If people stop buying, there is no point in making the same amount of stuff. Companies either fire staff or go under, which leads to more unemployment and so many more people who cannot service their previous debt. This leads to a higher risk of bank failure. The risks of debt to equity ratios get worse, so more firms will go under, and that puts a lot more pressure on the banks. Another reason is that sustained low inflation means that there is little scope to cushion the next downturn, i.e. the banks have no tools left. As turnover drops, tax returns decrease in value but debt levels stay high, and accordingly the governments have less room to move. As you may notice in these situations, the whole reasoning for whatever is being decided is to make life easier for the banks, or for the government. The whole financial management system is designed to require the least effort from financial managers!

There is a problem here that can be left for a later post, but basically it lies in the possibility that the economies of the world are changing, the rules are changing, and we cannot use the past to predict what is likely to happen in the near future.

Which leaves the question, is zero inflation a disaster? In this context, after Isaac Newton left the British Mint, the value of the pound remained constant more or less until the first world war. During that time, Britain became an economic superpower. Since then, the value of the pound has tanked, and Britain is not. True, there is more involved in Britain’s decline, but the prolonged time during which there was effectively zero inflation did not do Britain any harm. (Note that some prices would, of course, rise. Property prices in certain parts of London rose because there was a shortage of land, but that does not count in the inflation concept.) Further, during that period there was significant investment that powered the Industrial Revolution. Of course it also contained horrible wealth inequality, but that was endemic, and was essentially a consequence of feudalism. There were also serious downturns, but there is no evidence whatsoever that that had anything to do with the value of money, and as yet I do not believe we have an answer to the question of economic cycles and their downturns. So my conclusion is, there is no reason whatsoever to argue that we need inflation, other than to make life for governments and bankers easier. That, in my view, is not an acceptable reason as it has little or no public value.

All of which leaves a problem for writers such as me who write futuristic novels. It seems to me that the world economic situation is changing, but it is far from clear what to? That it is changing is something I shall write about in a future post, but right now, if anyone has any comments along the “what to?” lines, I would love to hear them. In my ‘Bot War novel, the change is forced on the government because economic growth has become negative, and debt servicing takes up too much of the income. Accordingly, the government is forced to reduce current services, and this is not what is required when a crisis appears. But there have to be other possibilities. Your opinion?