The Phoenix of Socialism in Latin America

Remember the school bully? Pushing people around. Stealing their lunch money. Acting like he’d always be bigger and more powerful than the other kids.

More and more, Venezuela’s Hugo Chavez is acting like a bully whose dreams came true.

Ten years after he tried — and failed — to seize power through a coup, Chavez managed to get himself elected president in 1998. He’s been eliminating democratic institutions ever since.

On Jan. 31, Venezuela’s legislature granted Chavez the extraordinary ability to rule the country by decree. With these near-dictatorial powers, Chavez promises to push his socialist agenda. There’s just one problem for Venezuela: Socialism doesn’t work.

But that won’t stop Chavez. Last month he announced plans to nationalize much of his country’s telecommunications and power sectors. As a result, shareholder prices of the targeted main telephone company dropped 30 percent, and national bond yields soared. It’s already hard for Venezuelan companies and citizens to borrow money. This will make it worse.

Like the schoolyard bully, Chavez’s power is based on a physical trait — his country’s vast oil reserves — rather than on something he worked to develop. Venezuela is the Saudi Arabia of the Western hemisphere.

Oil is currently around $60 per barrel. Though down from $70 last summer, that’s still relatively high. The torrent of petrodollars has allowed Chavez to nationalize businesses. The cushion of cash also can help insulate most citizens from the state’s inefficiencies for the near term. But Chavez’s actions have made Venezuela a pariah state for investors, and Venezuelans will pay a huge price for that in the long term.

Many Venezuelans are wise to the dangers. The U.S. Embassy in Caracas reports that visa enquiries have doubled, with about 800 people per day attempting to get out. The British embassy is seeing a similar jump, and a spokesman reports that many applicants have a “tone of desperation.”

In time those Venezuelans unable to leave will see their country begin to lose its ability to compete in the international marketplace. And not just in those industries taken over by the state.

Relying on oil alone is a losing strategy. Lest we forget, the Soviet empire was also fueled by vast oil reserves, but its economic model still failed.

Both the U.S. and Britain once enjoyed huge petroleum reserves, but both developed dynamic economies based on producing other things (such as cars and textiles) and rewarding intellectual advancement (through higher education and financial industries).

Smart oil exporters seek to follow this successful model by trying to diversify their economies. The United Arab Emirates (particularly Dubai) is making a concerted and quite promising effort to transform itself into a regional financial hub, for example. Such countries recognize that oil is volatile, finite and not necessarily beneficial to their citizens.

Raw numbers tell the story. Despite its resources, Venezuela is ranked 144 out of 157 countries in the 2007 Index of Economic Freedom, published by The Heritage Foundation. We judge its economy to be 47.7 percent free (compared to the world average of 60.6), second to last in the Western Hemisphere. Given that, it’s no surprise that Venezuela’s per-capita income averages just $6,000 in comparable U.S. dollars.

There may be a silver lining in this cloud. Venezuela will likely continue to show (by its bad example) that economic freedom is critical if a country wants to increase its income. Chavez may inadvertently end up inspiring reformers nearby to choose the path of freedom, reviving the free-trade agenda currently bogged down in South America and elsewhere.

In the Far East, Hong Kong and Singapore provide a shining example of the benefits of free trade: less expensive goods, consistent productivity gains and growing prosperity. In Chile, Venezuelans feeling the pinch of socialism have another, much closer example of the benefits of economic freedom. As the contrast between the wealth of free-trading Chile (with per-capita GDP of $11,000) and the poverty of oil-soaked Venezuela increases, Venezuelans may well demand greater freedom.

In fact, even as Chavez drags his country toward a state-controlled economy, some neighboring states are taking the opposite tack. They’re growing their economies by freeing them from protectionism. Given the U.S.-Chile Free Trade Agreement and evolving bilateral deals between the U.S. and Colombia, Ecuador, and Peru, the stage is being set for a study in economic contrasts. If oil prices dip, an enormous gap will open between South America’s free economies and the “new” socialist states.

Bullies usually fail in the end. Venezuelans are already voting with their feet. The question isn’t whether Chavez’s policies will fail, but just how spectacular that failure will be.

Tim Kane, Ph.D., is director of The Heritage Foundation’s Center for International Trade and Economics (CITE). Andrew Peek is a CITE research assistant.

Tim Kane is the JP Conte Fellow in Immigration Studies at the Hoover Institution at Stanford University. He is a veteran Air Force intelligence officer. His most recent book is "Total Volunteer Force: Lessons from the US Military on Leadership Culture and Talent Management" (2017).

Andrew Peek was a strategic adviser to the top U.S. and NATO commander in Afghanistan. Follow him on Twitter at @AndrewLPeek.