Deep Scars: Bolivia, Venezuela and the Effect of Crisis

After an embarrassingly long time, I finally finished reading Globalization and Austerity Politics in Latin America by Stephen B Kaplan, who was one of my favorite professors in grad school and also my boss for a year. This happened to (roughly) coincide with a fantastic blog post by Omar Zambrano comparing a similar “País X” with Venezuela. The two countries share a number of common characteristics. For instance, both depend heavily on natural resources for export earnings and government funding. Both countries also have heavy state involvement in the economy and both have benefitted enormously from the period of high commodity prices since 2002. However País X runs fiscal surpluses, has stable inflation, consistent high growth, no shortages and no capital controls. The big reveal is that País X is Bolivia, the ideological compatriot of Venezuela and one of the “bad children” of Latin America of the 21st Century.

I mention Zambrano’s post because he hypothesizes that a way to explain the divergence between Venezuela and Bolivia is that Bolivia experienced a severe economic crisis in the 1980s that resulted in hyperinflation and a massive economic dislocation. Essentially, he hypothesizes that Bolivia follows more conventional macro policies because even revolutionaries in Bolivia understand the consequences of bad macro policies. Venezuela, by contrast, has never had an economic crisis on the level of many Latin American countries, and therefore lacks the institutional checks that restrain even Evo Morales.

It turns out that Zambrano’s speculation happens to be the topic of Kaplan’s book and appears to be borne out by the statistical evidence. Kaplan argues that severe economic crises, particularly inflationary episodes (defined as 100% annual inflation) leave a lasting influence on how policy makers behave. Whereas traditional political economic theory postulates that politicians will attempt to use looser fiscal and monetary policy to encourage employment growth in the run up to an election, Kaplan hypothesizes politicians in countries that have experience inflation crises will actually behave in the opposite way; enacting policies designed to rein in inflation, even at the expense of jobs and growth. Furthermore, countries with high bond market exposure will behave even more conservatively, fearing that bondholders might become skittish at any sign of reckless fiscal behavior and begin selling off, triggering a sudden stop crisis.

Kaplan divides countries into four quadrants: those who have had inflationary episodes and those that haven’t and then those who have high exposure to bond markets and those who don’t. He hypothesizes that those who have both an inflation crisis and high bond exposure will behave most conservatively, while those without either will be the most spendthrift and those with an inflation crisis will be more conservative even without the pressure of bondholders. He runs a series of regressions that largely confirm the hypothesis, though with the slightly unexpected finding that left-leaning politicians in inflation-scarred countries are actually slightly more conservative in handling macroeconomic policy than right-leaning ones. He also includes several case studies to compare the empirical results with the specific motivations of the actors involved. His interviews with relevant policy makers essentially confirms that politicians are sensitive to the collective memory of inflation and perceive that voters prefer economic stability to rapid growth, as rapid growth is associated with eventual chaos and crisis.

This comes back to Zambrano’s post from before. When one looks back at Venezuela’s economic history there are plenty of missed opportunities and also some crises, but nothing of the magnitude of a country like Argentina or Brazil in the late 1980s or early 1990s, to say nothing of the catastrophe that struck Bolivia in the mid-1980s. If anything, Venezuela’s recent history of stagnant growth without any real shocks has made its citizenry willing to embrace an iconoclast willing to aggressively pursue growth the way that Hugo Chávez did. Bolivia experienced a similar period of economic stagnation that resulted in the election of a president who vociferously opposed neoliberal policy reforms. Bolivia, however, also experienced an inflationary episode in the mid-80s that ranks among the worst since the end of World War I. Consumer prices rose by 124% in 1982, 276% in 1983, 1,281% in 1984 and an incredible 11,750% in 1985. Since 1986, when inflation was *only* 276%, inflation has only topped 20% one time and has typically been below 10%, even in the years since Morales came to power and moved strongly away from the neoliberal camp.

Kaplan even quotes members of Morales’ economic team touting their sound macro management, something unimaginable in Venezuela, where inflation is treated (apparently seriously) as the result of speculation by greedy capitalists and not the natural byproduct of poor economic management that history and economic theory have shown it to be. Clearly, the episode in the 1980s was sufficient to temper even the most radical revolutionaries in Bolivia, much as similar—though smaller, if not necessarily less catastrophic—crises did in Chile, Brazil and Argentina.

Does this mean that Venezuelan politicians 20 years from now will be inflation hawks obsessed with sound fiscal and monetary management of their economies, perhaps even to the point of sacrificing safely obtainable economic growth? It’s obviously impossible to know, though there is plenty of reason to believe the current crisis will have a lasting effect on how Venezuelans perceive the political economy of their country. That said, inflation right now is *only* 50% (only half the rate Kaplan defines as an inflationary crisis), and while this clearly misstates the level of economic dislocation since it’s impossible to quantify the inflationary effect of scarcity, it’s also nowhere near the magnitude of the four crises I mentioned earlier. Nicolás Maduro could still implement some drastic measures to try to bring the economy out of its nosedive—or China and Japan could go to war over those stupid little islands the Senkakus and cause oil prices to spike—and forestall a truly horrific crisis that would have the kind of effect on the public and political class that Zambrano and Kaplan describe.

As of yet, there is little reason to believe, unfortunately, that things won’t get much worse in Venezuela before they begin to get better. Maduro truly seems to believe that sabotage, speculation and economic war against him, rather than the disastrous economic management of the past 14 years, are responsible for the current problems. However it plays out, I think the comparison between Bolivia and Venezuela and the factors affecting their behavior that Zambrano and Kaplan highlight are very important; crises have a prolonged effect on how politicians behave and what publics expect from them. I also think that Venezuela’s experience in the 1980s and 1990s is important to understanding the past 14 years as well. Perhaps if Venezuela’s decade and a half of economic malaise had been accompanied by a severe crisis chavismo would have governed with more restraint. However, the fact that Venezuela spent a decade and a half muddling through with declining real incomes and growing inequality is equally important because without that Hugo Chávez would never have been elected.

Decades of mediocre to bad economic management in Venezuela begot chavismo just as it did in Bolivia with Evo Morales. That even worse economic management before means that Morales governs better than the chavistas is an indictment of Latin American politicians in general, who have almost uniformly failed to deliver economic growth to their countries and have created openings for reckless—as opposed to just bad—governments to emerge.