Too poor to dissent, but not poor enough to revolt

A shocking, but not really all that shocking revelation yesterday from Venezuelan education minister Hector Rodríguez that chavismo does not want its supporters to become too wealthy because then they might turn into escuálidos—a common pejorative term used by chavistas to describe its middle- and upper-class opponents. Over at Caracas Chronicles Gustavo Hernández Acevedo has a good post exploring it from the perspective of the fundamental dissonance between preaching socialism while giving away free washing machines and how the movement now lacks the same charisma as Chávez to rhetorically paper over that problem. Hernández Acevedo is certainly correct but I think he gives chavismo too much credit for its actual devotion to socialism and misses how important the power dynamic Rodríguez is describing is, and the challenge that dynamic poses to chavismo going forward.

However devoted to the socialist cause Hugo Chávez may have been at some point in his life, he and his movement long abandoned any real pretense of building socialism in Venezuela in favor of more traditional Latin American-style corporatist populism. This populism is built on the premise of power and whatever rhetorical justifications it gives itself are little more than window dressings. Populism’s power is built and maintained through cooptation of certain groups—typically large but economically and politically marginalized groups—through policies designed essentially to buy that group’s loyalty. In Venezuela it started in a defensible fashion, with the early misiones at least ostensibly providing services that would improve the long-term productivity of the country, like improving healthcare access and eliminating illiteracy. Over time these morphed into crude giveaways like the washing machines Hernández Acevdo alludes to, but the basic principle behind them was always the same; buy loyalty through small, material improvements to people’s lives, all draped in the rhetoric of socialism.

What Rodríguez’s comments show, beyond a clear contempt for both free choice and the people his movement claims to be helping, is that chavismo is running up against the limit of its own sustainability. From a power perspective, Rodríguez is probably right. Corporatist structures tend to break down as societies become more middle class because middle class interests become more diverse and because middle class citizens tend to care more about transparency and accountability of government rather than just results in their own lives alone. At the same time, however, corporatist structures also tend to break down once the populist government loses its ability to continue improving the lives of its support base.

In Argentina, peronismo had the fortune of being removed from power before it fully ran up against that barrier in the 50s and then was out of power during both the hyperinflation crisis of the 80s and the meltdown of the early 2000s, allowing it to cast blame elsewhere. In Venezuela, however, chavismo remains in power and sits stuck between a metaphorical rock and hard place. It doesn’t want to improve people’s lives too much lest it lose their unwavering support as in Rodríguez’s formulation. But it also has to continue improving their lives on the margin to maintain their continued support a difficult. This balancing act has become all the more difficult now that the state is running out of money to shower on its base and the economy grinds to a halt.

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A hotel room too far?, ctd.

Yesterday, after I had already finished writing my last post about the corruption threats surrounding Cristina Fernández de Kirchner members of her cabinet, an op-ed column appeared La Nación by Carlos Pagni discussing the affect the Caso Báez is having on the Kirchner government’s policy stance. In effect, he argues that, whatever thoughts Kirchner may have had about finishing her term early, the threat to her son, in particular, in the investigation has necessitated that she redouble her efforts to remain in power.

His cause and effect are somewhat reversed from how I perceive the situation; that the threat from the case is a major driving factor in the embryonic economic reforms of the past several weeks. I would still argue that the overwhelming factor is the memory of de la Rúa and Alfonsín leaving office early that’s driving the reforms, but I do agree that the threat from the case certainly is upping the stakes for the Kirchners. That said, the threat cuts both ways. Not being in power anymore makes Kirchner and her family more vulnerable to the potential legal fallout from the case. But the economic reforms the government has begun to undertake—and especially the fiscal consolidation through below inflation adjustments in public salaries and phasing out subsidies that are still to come—will be highly unpopular and will make the illicit enrichment that the Kirchners stand accused of all the more salient, and the odds of destabilizing protests higher.

Cristina Kirchner may well be caught in a sort of catch-22 as the result of her poor economic management and apparent corruption. She has to try to mitigate the economic problems her policies created to avoid a crisis that could threaten her presidency and make her vulnerable to legal actions related to her alleged corruption, but the specter of her corruption could make difficult reforms intolerable to the Argentine public, threatening her presidency.

A hotel room too far?

Throughout the last decade, during the presidencies of the late Néstor Kirchner, and his wife and successor Cristina Fernández de Kirchner, accusations of corruption have abounded, but none have managed to stick, either as a political liability or as a legal threat. However, that has changed in recent months as two long-term corruption investigations continue to gain steam, threatening the president, the vice president and other high-ranking government officials. Corruption in Argentina is not a new phenomenon and neither scandal is as bad as the weapons trafficking scandal that engulfed multiple members of Carlos Menem’s cabinet in the 1990s. Nonetheless, it could prove more damaging simply because the Kirchner government is increasingly unpopular as the economy weakens and tolerance wanes for politicians with their hands in the cookie jar.

Both investigations deal with alleged improprieties by either the president or members of her cabinet in business dealings involving third parties and the government. The first, known locally as the Lázaro Báez case—named after the Kirchner’s business partner in Néstor’s home province of Santa Cruz—involves the president in what appears to be a money laundering scheme. Formal legal investigations and investigative reporting by La Nación—a Buenos Aires newspaper—have unearthed arrangements between companies owned by Báez and hotels belonging to the Kirchners whereby Báez’s companies paid more than 14.5 million pesos to reserve hundreds of rooms in those hotels, few of which were ever used. This ties circumstantially to the fact that Báez has already been formally accused of money laundering in a different investigation, and that his companies received more than 80 percent of the government contracts awarded in the past decade in Santa Cruz. Moreover, the amount paid to the hotels represents 20 percent of the Kirchner’s declared assets—which have increased tenfold in the past decade and have been the source of significant controversy.

The second investigation involves Vice President Amado Boudou and Ricardo Echegaray, the head of Argentina’s federal tax agency, the Administración Federal de Ingresos Publicos (AFIP), and their role in lifting Ciccone Calcográfica out of bankruptcy in 2010-11 before it eventually won a contract to print peso notes. The details of the case are complex, but Boudou—then the Minster of the Economy—and Echegaray are accused of using their office to maneuver new capital toward the company and manipulating the regulatory framework in favor of their desired outcome. According to a petition for an indagatoria—a formal inquiry by a presiding judge—filed on February 6, Echegaray allegedly acted directly through his role at the AFIP while Boudou was involved through Alejandro Vandenbroele, the head of The Old Fund, SA, the company that took control of Ciccone. Boudou has stridently denied ever having met Vandenbroele, even as evidence continues to accumulate about their relationship. Boudou and Echegaray are both accused of felonies in the indagatoria petition, but it remains to be seen what legal action will be taken against them. The case, however, will remain in the public consciousness as the investigations and trials continue.

The persistence of serious corruption allegations against the presidential couple and prominent cabinet members come at a delicate time for Cristina Kirchner. While the Kirchners were able to shrug off corruption allegations in the past, thanks in large part to torrid economic growth, the situation now is much different. Growth has slowed and inflation continues to grow, leaving Argentina susceptible to a period of stagflation during the last two years of her presidential term. During the fat years, many Argentines were willing to look the other way at high level corruption in way they will not during a period of falling real wages.

On February 13, the government unveiled a new, apparently credible method for calculating inflation after years of rigging its statistics. The announcement came just weeks after the peso was allowed to depreciate more than 20 percent in a few days after months of “micro-devaluations” of a few cents per day. To many, this indicates that the government is serious about correcting some of the imbalances that afflict the Argentine economy. Minister of the Economy Axel Kicillof and Cristina Kirchner have even hinted at a rollback in subsidies that are estimated to cost 4.9 percent of GDP. Undoubtedly, most of these measures are ones the government would have to take sooner or later. However, they are also politically difficult since they virtually guarantee an initial decline in lower- and middle-class living standards and may also cause a short-term burst of inflation above the current rate that is already is above 25 percent.

The fallout from these types of adjustments would challenge even the most popular governments, not least one whose popularity sits below 40 percent. Moreover, economic crises have forced two of Argentina’s past five elected presidents to relinquish office early, including Néstor Kirchner’s elected predecessor Fernando de la Rúa. Argentina is not yet on the brink of a crisis, but discontent with the economic situation is growing. As these cases proceed, the major players in the government will increasingly be perceived as having profited from an economic model that, in the end, hurts average Argentines. What is more, the government’s decision to attack the judiciary and media for investigating corruption will divert resources away from dealing with the economy while doing little to convince the public that the allegations lack credibility.

The real danger for Cristina Kirchner, therefore, is not that a corruption scandal brings down her government, but rather that, amid significant economic problems, her and her cabinet’s corruption becomes the proverbial “straw that breaks the camel’s back.”

Thoughts on chavismo, neoliberalism and Pinochet

One of the interesting points often made by chavista sympathizers concerns the legacy of Augusto Pinochet in Chile. Specifically, the argument first assumes that neoliberalism was an unequivocal failure in Latin America (which is highly debatable), and that, even apart from that, Pinochet implemented neoliberal reforms in Chile while he was also raging a brutal dirty war against “subversives” so neoliberalism is also evil because it was a Pinochet policy.

There are two things wrong with this framing. The most obvious is that policy ideas are good or bad regardless of who implements them. To give a sort of extreme example, a national system of high speed roadways is a good idea, even though it was Nazi Germany that built the first one. Similarly, Cuba’s national healthcare system is a national triumph; providing high-quality, cost effective healthcare to the entire population. That said, the United States, France and many other countries were able to build similarly effective road systems to the Autobahn without resorting to totalitarianism. Likewise, many democracies, and even some in poorer countries than Cuba (i.e. Costa Rica) have built national healthcare systems of similar or even better quality than Cuba’s, without banning free speech, opposition political parties or severely restricting their citizens from leaving the country for sixty years and counting.

The second problem is that it fails to address neoliberalism as a policy option and instead attacks it by association. Obviously, neoliberalism generates controversy for reasons apart from Pinochet but that is a separate issue. Free markets are good or bad on their own, and have won the day in many democracies around the world—and in many dictatorships. Few people making the Pinochet argument to discredit market-based policies while defending chavismo will actually take on the relative success of the actual policies in Chile, because it’s hard to argue that any other approach in Latin America has been more successful.

In 1980, despite fairly strong growth in the years since the Pinochet coup that removed Salvador Allende from power in 1973, Chile’s GDP per capita at purchasing power parity (PPP) was barely more than half of Argentina, Mexico or Venezuela’s and was 25 percent smaller than Brazil’s. By 2012, Chile’s GDP per capita at PPP had grown 280 percent and was 36 percent higher than Venezuela’s, 21 percent higher than Mexico’s and 54 percent higher than Brazil’s. This means that GDP per capita grew less than 1 percent in Venezuela during that time, 27 percent in Mexico and 36 percent in Brazil. Even looking more generously—comparing with Venezuela since the beginning of chavismo in 1998 and Brazil in 2002 when Lula took over and their neoliberal eras are supposed to have ended—the results are similar:

Since 1998 GDP per capita grew 46 percent in Chile compared to 14 percent in Venezuela

Since 2002 GDP per capita grew 40 percent in Chile compared to 28 percent in Brazil

Instead of confronting these realities, some critics demonize the whole concept by equating it with a brutal dictatorship that happened to also implement those reforms (a guilt by association few socialists seem willing to apply to their preferred policies and Stalin or Mao).

There is a lot to criticize about the reforms that were implemented in Latin America during the 1980s and 1990s—even though it’s difficult to find a country besides Chile that deeply implemented neoliberal reforms as conceived in the Washington Consensus. However, when defending the disaster that the Venezuelan economy has become, one cannot simply dismiss the success of the Chilean model because Pinochet was a monster (and make no doubt about it, he absolutely was).

Tales of a stagnant middle-income country and a growing poor country

Yesterday, the S&P downgraded the status of Puerto Rican debt to junk status. This further complicates the major fiscal problems the Puerto Rican government has been facing and could well lead to a death spiral resulting in a default. As it happens, I was in Puerto Rico just a few weeks ago, and while the looming debt problems were not obvious to a tourist, it was fairly easy to notice that the economy has been performing poorly in recent years.The signs that the economy was doing poorly, however, were not lots of people on the streets begging or other obvious signs of abject poverty. Instead, walking through popular tourist spots, there were lots of vacant storefronts and properties near the beach that were for sale and clearly had been for a while. I also cannot remember seeing a crane or other piece of equipment indicative of a major construction project. Compared with my visit to Bolivia in March, 2012, the contrast is rather striking. In Bolivia, everywhere one looked there was new construction, both in the posh neighborhoods in La Paz as well as in the much poorer El Alto suburb and the small Amazon city of Cobija in the Pando department.

El Alto: poor but growing.


 El Alto: poor but growing.

While those are obviously anecdotal observations, it is not coincidental that Bolivia’s economy grew by 5.2 percent that year and in 2013 achieved its fastest year of growth in decades at 6.5 percent while Puerto Rico has not had a year of GDP growth above 1 percent since 2004. Growing economies typically will see lots of new construction as growing aggregate demand requires increasing the supply of productive capacity, sometimes in a nice virtuous circle sort of way (and sometimes not, as in the case of Spain) while stagnant or shrinking economies have the opposite issue.

That said, life is still much better for the average Puerto Rican than the average Bolivian. According to the World Bank, Bolivian per capita GDP at purchasing power parity in 2012 was $4,880 while in Puerto Rico it was over $12,222. So while abject poverty was not obvious in Puerto Rico (though it no doubt exists), it was inescapable in Bolivia even despite its torrid economic growth. Life may be getting harder for Puerto Ricans, while it improves rapidly for many Bolivians, but Puerto Ricans are still materially much better off than Bolivians and will remain so for a while.