After spending much of 2012 shuttling back and forth between Venezuela and Cuba for surgery, Hugo Chávez is dead. Cuba’s Communist Party has shielded Fidel Castro from the public eye since his retirement, his shaky speech threatening to undermine the fiery legacy they seek to preserve. Fidel’s brother and successor Raúl, at 81, faces limited time to groom the Party’s future leadership. On the surface, the continuation of Latin American socialism is in jeopardy. Yet one need look no further than its history of oil-financed social programs, bloated bureaucracies, rising corruption, and skyrocketing inflation to realize that Latin American socialism is deeply ingrained and churning along like on its rickety path, flaws and all. Facing the realities of the global economy, the lip-service these leaders paid to Simon Bolívar and Jose Martí will give way to selective foreign investment and oil money that serves little social purpose aside from generating the funds needed to keep the current parties in power.
Though Chávez’s carefully cultivated propaganda machine energized Venezuela’s poor by playing into social divisions, his policies delivered few lasting social benefits; indeed, periodic food shortages are now a way of life for all Venezuelans. Over his 14-year presidency, the populist economic policies enacted as part of Chávez’s “Bolívaran Revolution” are marred by the state’s strict control of the banking sector. By appointing party loyalists to the board of directors of the Venezuelan Central Bank (BCV), Chávez diminished its constitutionally-mandated ability to conduct independent monetary policy. This crippled the BCV’s ability to combat inflation, resulting in multiple currency devaluations that effectively wiped out the savings of the poor. These economic shocks have outweighed the benefits of Venezuelan social programs, which are completely financed by oil exports. Chávez’s government-mandated price controls also increased unemployment and resulted in minimal industrial diversification outside of the oil and manufacturing sectors.
Depending on oil exports rather than developing other competitive industries is just one of Venezuela’s economic problems. It also is a key link between Venezuela and Cuba. Since 2000, Venezuela has provided oil shipments to Cuba well below market rates, amounting to $6-$8 billion in annual subsidies. This is a crucial lifeline to the hard currency-starved Cuban government, as Venezuela essentially took the place of the Soviet Union as Cuba’s primary benefactor. Until its collapse in 1991, the USSR provided $4 billion in annual oil subsidies to Cuba. The loss of these subsidies caused the GDP of Cuba to fall by nearly 50 percent between 1989 and 1993. Cheap Venezuelan oil–along with limited privatization and an opening of the island to tourism–allowed Cuba to stave off economic catastrophe.
In a curious twist of irony, the United States is Venezuela’s largest oil export market. In other words, the United States–by having Venezuela as its fourth largest oil supplier–has inadvertently financed Venezuela’s social programs, and in turn kept Cuba’s economy afloat. Given the vagaries of international oil markets, this is hardly a sustainable strategy. Nor did it square with Chávez's and the Castro brothers’ rhetoric of independence from foreign powers.
These policies–the very foundation of Latin American socialism–have wrought far more harm than good. In the Harvard Business Review, David Conklin pops a hole in every inflated eulogy to Chávez with a reminder that his political agenda was neither new nor original. Its nationalistic sentiment was deeply rooted in Latin America’s past, especially in the economic doctrine of Dependency Theory. This theory “supported autarky or economic independence, placing restrictions on imports and foreign ownership,” writes Conklin. Based on the notion that resources flow from a "periphery" of poor and underdeveloped states to a "core" of wealthy states, dependency theorists argued that without the intervention and solidarity of Latin American governments, economics as usual would only enrich the West at the expense of poor countries. This belief led to protectionist policies that made domestic monopolies increasingly uncompetitive.
Protectionism reduces the incentive to innovate, ultimately making states more dependent. Both Chávez and the Castro brothers subsidized food prices. Agriculture became less productive, and now both countries rely on food imports to feed their populations. This is particularly striking in Cuba. Though the island had a strong agricultural industry throughout the 19th and early 20th centuries, production has steadily declined since the Cuban Revolution. Even as its government attempts to inject new capital into this flailing industry through foreign investment and the legalization of private cooperatives, Cuba is still producing less food than it did in 2007 prior to reforms.
Market reforms initiated by Raúl Castro in 2010–including limited forms of self-employment, enhanced access to credit, and legalizing the sale of private property–are a step in the right direction, but the pace is haltingly slow and lack transparency. The Cuban government has a history of only opening those industries that are the least politically threatening–such as the enclave of luxury tourism. Tourism is tightly managed by the government; it hand-picks military officers and Party loyalists to run hotels. It also has a history of reversing reforms when its economy improves.
Venezuela’s reliance on oil exports results in a similar erosion of governance and transparency. Chávez’s antipoverty programs were notoriously corrupt. A recent poll suggested that more than two-thirds of Venezuelans do not believe they have benefited from the country’s oil income Chávez.
Distrust of foreign investors and reflexive nationalism coupled with populist policies run deep in Latin America’s past. Because of this, Latin American socialism–for all the damage it has wrought–will not be suddenly undone by the death of Chávez or transition of power from Raúl Castro to Miguel Diaz-Canel, the recently-named “second-in-command” of the Cuban hierarchy. Latin American socialism is more than the persuasive rhetoric of personalistic dictators. It is a deeply-ingrained set of laws, institutions, and incentives that keep parties in power, line the pockets of state-owned industries, and invest little in the social welfare of people that pose any threat to the status quo.
Rachel Fredman is a Presidential Management Fellow at the U.S. Department of State’s Bureau of Near Eastern Affairs, and previously consulted for the World Bank and Millennium Challenge Corporation. She is a 2012 graduate of the Fletcher School of Law and Diplomacy, where she was a Hitachi Fellow in Technology and International Affairs. She wrote her master’s thesis on the telecommunications market in Cuba, and conducted independent research on the island. The views in this piece are her own, and do not represent those of the State Department or the U.S. government.
This article was originally published in the Diplomatic Courier's May/June 2013 print edition.
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Latin American Socialism: Churning Along, Economic Failures Aside
May 30, 2013
After spending much of 2012 shuttling back and forth between Venezuela and Cuba for surgery, Hugo Chávez is dead. Cuba’s Communist Party has shielded Fidel Castro from the public eye since his retirement, his shaky speech threatening to undermine the fiery legacy they seek to preserve. Fidel’s brother and successor Raúl, at 81, faces limited time to groom the Party’s future leadership. On the surface, the continuation of Latin American socialism is in jeopardy. Yet one need look no further than its history of oil-financed social programs, bloated bureaucracies, rising corruption, and skyrocketing inflation to realize that Latin American socialism is deeply ingrained and churning along like on its rickety path, flaws and all. Facing the realities of the global economy, the lip-service these leaders paid to Simon Bolívar and Jose Martí will give way to selective foreign investment and oil money that serves little social purpose aside from generating the funds needed to keep the current parties in power.
Though Chávez’s carefully cultivated propaganda machine energized Venezuela’s poor by playing into social divisions, his policies delivered few lasting social benefits; indeed, periodic food shortages are now a way of life for all Venezuelans. Over his 14-year presidency, the populist economic policies enacted as part of Chávez’s “Bolívaran Revolution” are marred by the state’s strict control of the banking sector. By appointing party loyalists to the board of directors of the Venezuelan Central Bank (BCV), Chávez diminished its constitutionally-mandated ability to conduct independent monetary policy. This crippled the BCV’s ability to combat inflation, resulting in multiple currency devaluations that effectively wiped out the savings of the poor. These economic shocks have outweighed the benefits of Venezuelan social programs, which are completely financed by oil exports. Chávez’s government-mandated price controls also increased unemployment and resulted in minimal industrial diversification outside of the oil and manufacturing sectors.
Depending on oil exports rather than developing other competitive industries is just one of Venezuela’s economic problems. It also is a key link between Venezuela and Cuba. Since 2000, Venezuela has provided oil shipments to Cuba well below market rates, amounting to $6-$8 billion in annual subsidies. This is a crucial lifeline to the hard currency-starved Cuban government, as Venezuela essentially took the place of the Soviet Union as Cuba’s primary benefactor. Until its collapse in 1991, the USSR provided $4 billion in annual oil subsidies to Cuba. The loss of these subsidies caused the GDP of Cuba to fall by nearly 50 percent between 1989 and 1993. Cheap Venezuelan oil–along with limited privatization and an opening of the island to tourism–allowed Cuba to stave off economic catastrophe.
In a curious twist of irony, the United States is Venezuela’s largest oil export market. In other words, the United States–by having Venezuela as its fourth largest oil supplier–has inadvertently financed Venezuela’s social programs, and in turn kept Cuba’s economy afloat. Given the vagaries of international oil markets, this is hardly a sustainable strategy. Nor did it square with Chávez's and the Castro brothers’ rhetoric of independence from foreign powers.
These policies–the very foundation of Latin American socialism–have wrought far more harm than good. In the Harvard Business Review, David Conklin pops a hole in every inflated eulogy to Chávez with a reminder that his political agenda was neither new nor original. Its nationalistic sentiment was deeply rooted in Latin America’s past, especially in the economic doctrine of Dependency Theory. This theory “supported autarky or economic independence, placing restrictions on imports and foreign ownership,” writes Conklin. Based on the notion that resources flow from a "periphery" of poor and underdeveloped states to a "core" of wealthy states, dependency theorists argued that without the intervention and solidarity of Latin American governments, economics as usual would only enrich the West at the expense of poor countries. This belief led to protectionist policies that made domestic monopolies increasingly uncompetitive.
Protectionism reduces the incentive to innovate, ultimately making states more dependent. Both Chávez and the Castro brothers subsidized food prices. Agriculture became less productive, and now both countries rely on food imports to feed their populations. This is particularly striking in Cuba. Though the island had a strong agricultural industry throughout the 19th and early 20th centuries, production has steadily declined since the Cuban Revolution. Even as its government attempts to inject new capital into this flailing industry through foreign investment and the legalization of private cooperatives, Cuba is still producing less food than it did in 2007 prior to reforms.
Market reforms initiated by Raúl Castro in 2010–including limited forms of self-employment, enhanced access to credit, and legalizing the sale of private property–are a step in the right direction, but the pace is haltingly slow and lack transparency. The Cuban government has a history of only opening those industries that are the least politically threatening–such as the enclave of luxury tourism. Tourism is tightly managed by the government; it hand-picks military officers and Party loyalists to run hotels. It also has a history of reversing reforms when its economy improves.
Venezuela’s reliance on oil exports results in a similar erosion of governance and transparency. Chávez’s antipoverty programs were notoriously corrupt. A recent poll suggested that more than two-thirds of Venezuelans do not believe they have benefited from the country’s oil income Chávez.
Distrust of foreign investors and reflexive nationalism coupled with populist policies run deep in Latin America’s past. Because of this, Latin American socialism–for all the damage it has wrought–will not be suddenly undone by the death of Chávez or transition of power from Raúl Castro to Miguel Diaz-Canel, the recently-named “second-in-command” of the Cuban hierarchy. Latin American socialism is more than the persuasive rhetoric of personalistic dictators. It is a deeply-ingrained set of laws, institutions, and incentives that keep parties in power, line the pockets of state-owned industries, and invest little in the social welfare of people that pose any threat to the status quo.
Rachel Fredman is a Presidential Management Fellow at the U.S. Department of State’s Bureau of Near Eastern Affairs, and previously consulted for the World Bank and Millennium Challenge Corporation. She is a 2012 graduate of the Fletcher School of Law and Diplomacy, where she was a Hitachi Fellow in Technology and International Affairs. She wrote her master’s thesis on the telecommunications market in Cuba, and conducted independent research on the island. The views in this piece are her own, and do not represent those of the State Department or the U.S. government.
This article was originally published in the Diplomatic Courier's May/June 2013 print edition.
