Q & A on Chavismo and its Challenges

David Smilde

[Yesterday I did an interview with a foreign journalist who sent me some questions beforehand. Below I elaborate the notes I wrote for our Skype conversation.]

I just read your piece “The End of Chavismo?” What are your latest thoughts?

As I said there it seems that Nicolas Maduro has found the one possible way to undermine Chavismo as a significant political-electoral movement: leave the model as is and drive it off a cliff. If he had altered the model and fallen into trouble, people would have simply blamed him and proposed going back to true Chavismo. But it is quite evident for everyone that what Maduro has done is simply take the model of state-led economic growth and an overvalued currency to its reductio ad absurdum. There are some on the far left who suggest that there is not a problem with the model, that it is really just a matter of corruption and execution. But I don’t think they are convincing many people.

Having said all this, Chavismo has always been not just about Chavismo but about an opposition that has been in-grown and out-of-touch. This opposition could indeed rescue Chavismo by misplaying their hand as they have so many times in the past.

Right now the opposition is discussing their strategy for trying to force Nicolás Maduro from office and can’t seem to come to an agreement. The 1999 Constitution has a mechanism explicitly created for this situation called a “recall referendum” which has high legitimacy with the population. But instead they are considering a constitutional amendment that would reduce Maduro’s term from six to four years and require new elections by the end of the year. Many in the opposition see this as the line of least resistance since it would not require a petition drive, nor a vote with the requirements of the recall referendum—in which you need to get more than 50% of the tally, and more votes than the president was elected with. And a constitutional amendment would lead to a full presidential term, rather than a completion of the existing term.

The background of this is that many in the opposition have always thought they were the majority, think that “Venezuela” supports them—i.e that there is a consensus in their favor–that Chavismo is illegitimate, and that therefore anything they do to try to obtain power will be seen as legitimate. But Chavismo still has support from about a third of the population—indeed in the legislative elections they got 42% of the vote despite horrendous economic conditions. And a good portion of the opposition’s support in the December election was light, coming from independent voters or disaffected Chavistas, and cannot simply be counted on come what may.

If the opposition pushes for a constitutional amendment instead of using the established mechanism of the recall referendum, the majority of Venezuelans who are not committed opposition supporters could well see it as a power play of dubious legitimacy, and withhold their support. Opposition leaders will likely say that the National Electoral Council is controlled by the government and biased against them. But three months after that same CNE presided over an election in which the opposition swept the legislative elections, it is not clear how convincing that argument will be. It could generate the image that they don’t want to play by the rules and are once again seeking a shortcut to power instead of mobilizing the population through footwork and communication.

Why is the currency considered overvalued and who wins and loses?

Already during the Chávez period, Venezuela’s national currency–the “Bolivar”–was overvalued. This reduced the prices of foreign imports and generated an economic bonanza. So one set of winners were average Venezuelans, especially the middle class, who were able to consume imported goods at reasonable prices. Along with them importers, transportation and distribution companies, construction firms and retail outlets all boomed.

However, letting your currency remain overvalued also creates “Dutch disease,” which refers to the process whereby a country with one very valuable export, ends up not being able to export anything else, and suffers a decline in national industry. Thus one big loser traditionally has been national industry, especially those manufacturers who aspired to export their goods. Exporting anything but oil became impossible because even efficiently produced goods would be too expensive in international markets because of the artificially high exchange rate. And competing with imported goods in national markets was also difficult.

What is the relationship between an overvalued currency and scarcities and what impact do these latter have?

The combination of an overvalued currency and price controls for basic goods created scarcities even when it had an expanding number of dollars coming in. These scarcities were extremely unpopular among the middle classes insofar as it meant they had to go shopping several times a week rather than, say, once every two weeks. But it was popular among the poor because it meant that they could actually obtain goods that in the past were difficult for them to purchase. Put differently, the middle class has more money than time, while the poor have more time than money. The system favored the latter over the former.

Indeed from 2008-2012 at the same time that Venezuela experienced a rate of scarcities of around 20% (meaning that in any given store one out of five basic goods was unattainable) it also saw soaring consumption in terms of calorie and protein intake.

But progressively over the past three years, and especially in the last year, the situation has become much worse and now affects the poor more than the middle classes. Scarcities have gotten so bad that it is next to impossible to obtain all the price-controlled goods you need even if you are willing to wait in line. This is because each person can only shop for basic goods on two days a week depending on their ID number. It can take 4 or 5 hours to wait in line at a store, so the maximum one person can do is visit 3 stores on their day. And there is no guarantee of what is going to be available. You might wait 4 hours in line and only get, say, rice and laundry soap. Another day you might get pasta, toilet paper and milk. Thus an average person can easily spend twenty hours a week waiting in lines. Whatever is available you buy even if you don’t need it because then you can use it to trade with with friends, family and neighbors—one kilo of pasta for one package of diapers, etc.

Or people sell whatever extra they are able to buy, to a middle man who then sells it to an informal street seller, who sells it to the public at double, five times or even thirty times its original price, depending on the product. As you might imagine, many people have dedicated themselves to this. They might have several ID cards, or have a circuit of stores where they know cashiers or pay them small kickbacks. They spend all of their time in lines, buying products, and then reselling them. In Venezuelan slang they are called bachaqueros, after leaf-cutting ants that carry enormous loads. This has created an enormous parallel distribution and retailing system which has actually functioned as an important economic escape valve because it has given economic opportunity to many unemployed or marginally employed people.

Thus in the current situation poor people are waiting in lines either because they don’t have the money to buy the goods in the informal market, or because they don’t have a better source of income than buying and reselling. The middle class can usually obtain goods at a fairly reasonable price on the informal market. However, who exactly is “middle class” these days is not clear. Professionals with a fixed income in local currency are hard pressed.

The situation with prescription medicines is really much worse. Many of them are simply unavailable. Drugs for chemotherapy, high blood pressure or other chronic conditions are difficult to obtain and these scarcities can have fatal consequences.

Any anecdotes of your own regarding scarcities in Venezuela?

Right now I have a car with some sort of problem in the drive train. It has taken three or four weeks just to find an auto repair shop that will accept it because they are all full of cars that are waiting for parts. Last year our car was in the shop 5 months after a fender bender that could have been fixed in two weeks in any other context. The year before that it was in the shop 4 months because of an air conditioner. In that case it only got fixed because I bought an air conditioner on Ebay and brought it with me in my suitcase from the US. In the parking lot of our apartment building in Caracas, about one third of the cars are not running because it is impossible or prohibitively expensive to get them fixed.

Beyond that we haven’t suffered scarcities like others because I travel abroad frequently. All of the dish soap, laundry soap, shampoo, cooking oil, milk, toilet paper, deodorant, shaving cream, razors, and pain relievers we consume I bring from abroad. I have even brought pasta, beans and rice in my suitcase. My luggage always, always gets searched by TSA agents when I travel and they are often bemused by the items they find.

Why is devaluation politically incorrect for Maduro?

Devaluing the currency can relieve pressure on Venezuela’s scarce dollars. But it essentially does so by reducing consumption through inflation, which is never popular. And to actually address the problem of scarcities would require raising or eliminating price controls which would be disruptive and unpopular in the short term.

First, any devaluation will have significant negative effects on Venezuela’s poor, which is the base of Chavismo. While floating the currency and lifting price controls would mean that the store shelves would quickly be filled. It would also mean that all of these people who depend on price controlled goods will be unable to afford them, and those who had bachaqueo as their primary economic activity will suddenly be unemployed. Of course devaluing can also reverse the aforementioned Dutch disease and restart national production. But that process takes months and years while deprivations are experienced in terms of days and weeks.

Second, any clear and substantial devaluation smells neoliberal and Chavismo was born as an anti-neoliberal movement, as a reaction to the neoliberal measures of the 1990s. Indeed, Chávez claimed that the decision to make a push for power among he and other military officers came as a reaction to the rioting, looting and massacres that occurred in February 1989 after the Carlos Andres Pérez government devalued the currency and raised gasoline prices.

Finally, in and around the government there are stakeholders that profit from these distortions, using them to export capital or contraband. It is likely that they are impeding significant change.

How significant was the gas price hike? The mild currency devaluation?

The measures taken in February helped the government’s bottom line somewhat but were really too little too late. For example, they had no impact in lowering the parallel rate for dollars which remained above 1000 per $1. The price of gasoline increased significantly, but with inflation in triple digits this year and the government continuing to print inorganic money, it will not matter for long. With the official exchange rate now at Bs. 10 per $1 the currency is still 100 times cheaper than on the parallel market, meaning there are huge incentives for siphoning off dollars for capital flight or for the parallel market, instead of using them to import goods.

It is important to realize that Venezuela is now in a very different context. All of these problems of scarcities and inflation existed in 2013 and 2014 with oil at $100 a barrel. At that time, getting ahold of the exchange rate distortions could have turned things around. But now, even if they did everything right, they would have a serious crunch because with oil below $30 a barrel they simply do not have enough dollars to both meet their foreign debt obligations and provide dollars to importers.

Economically, how horrific is the math as far as availability of dollars to buy imports?

This year Venezuela has approximately $14 billion in debt service to meet—which at current oil prices would leave approximately $10 billion to pay for imports. That would be approximately a third of what Venezuela imported in 2015, which was already a drop from the previous year and provided a context of severe scarcities and hardship. Venezuela has already met its first couple of payments this year. But it is not at all clear how the government can meet its obligations this fall even if it continues to burn its reserves, sell off assets, and restrict consumption. It could monetize more of the debt its Petrocaribe partners owe. It could also continue to try to get more loans from the Chinese. But even if it does everything in its power and intends to pay the debt, it is not clear that it can.

How can you explain Chavistas for a foreign audience? What was Chavez’s appeal for his supporters?

Chavez was a charismatic leader who put forward an inspiring nationalistic narrative that said that Venezuela could gain control of its resources and use them to improve the lives of its people. And he fulfilled his promises, at least during his presidency. He was able to reduce poverty and inequality and make people believe in Venezuela again, after the drab technocratic suffering of the 1990s. There was nothing messianic about his leadership and nothing irrational about those who supported him. He really did improve their lives. It was clear to many of us that his economic model was not sustainable long term. But the data are quite clear that many people’s lives improved during his presidency, and these people won’t forget that anytime soon. Indeed, given how terrible the current economic conditions are, it is amazing that Chavismo still has 20 to 30 percent support and this is why. Many still think that Chávez was the only politician who cared about average people.