FP – Petrostate Blues

Posted By Francisco Toro   Wednesday, June 20, 2012 – 5:07 PM

With 19,000 murders a year, constant power failures, periodic shortages of basic food staples, and rampant corruption throughout the state, you might think Venezuela would make an exceptionally tough place for an incumbent seeking re-election. Add the fact that the incumbent is visibly dying, and it seems like it should be a done deal, right?

No, not right. Not by a long shot. In fact, with most recent polls putting him somewhere between 5  and 16 points ahead, President Chávez is in a strong position to be voted back in for a third six year term — if he can stay ahead of those cancer cells, at any rate. His supporters attribute his remarkably resilient popularity to the advances of his self-styled “Bolivarian revolution” in health, housing, and social welfare. But the real secret to his success is simpler than that: He leads a country that sits on top of an enormous lake of petroleum at a time of booming oil prices.

Indeed, 2011 saw Venezuela take in $128 billion in oil revenues — a huge number for a country of just 29 million people. This being an election year, the oil windfall sent the government into a torrid spending binge. In the first quarter of 2012, public sector construction grew57% compared to the same period of the previous year, while public sector housing construction grew at a head-spinning 131% over its 2011 levels. Overall public spending grew a staggering 28% from its first quarter 2011 level, while imports rose 48.5% from a year earlier.

Indeed, Chávez’s popularity is no mystery at all. When money pours in at the frenetic rates the oil industry facilitates, it doesn’t take an economic genius to engineer a consumption boom in the months before an election.

People vote with their pocketbooks; incumbents everywhere are exposed when times are tough, and are strong when times are good. U.S. election watchers fixate on the monthly job-creation number: They know the president’s prospects in November hinge crucially on it. That the performance of the president has only the most tenuous of relations with that number on any given month is neither here nor there — U.S. presidents are expected to answer for them nonetheless.

You could argue that, in most Western democracies, pocketbook voting is a rough-and-ready heuristic, a short-cut to rational voting. Of course all kinds of factors add “noise” to the usefulness of your pocketbook as guide to your vote. (Americans voters, for instance, may very well punish Barack Obama for mistakes Greek finance ministers made years before he reached the White House.) But, in the long run, pocketbook voting arguably introduces an element of accountability, creating major incentives for politicians to make sensible economic policies.

In a petrostate, though, it’s much harder to make that argument, because the link between the government’s competence and your pocketbook is fundamentally screwed up. Venezuela’s latest consumption boom has happened as the country increasingly deindustrialized and lost competitiveness in every other tradable sector of the economy. These days, Venezuela even importsits coffee , a coal-to-Newcastle absurdity that speaks volumes about Dutch Disease gone out of control. The result has been to turn Venezuela increasingly into a parasite of the world oil market: A country happy to export oil, import everything else. As one economist sarcastically put it: “Why would we want to work? We have oil!”

Worse yet, petrostates have no trouble finding foreigners willing to lend them cash, so Venezuela has piled up debts throughout the fat years, further fueling the consumption spree. The unsustainability of the arrangement is underlined by the extraordinary spreads Venezuelan bonds command — and the country thinking nothing wrong with borrowing at Credit Card rates. Issuing bonds at 12% is common, with yields in the secondary market sporadically hitting 18%. In Europe, 7% is the threshold that triggers a freak-out followed by a bail-out, but then Ireland doesn’t sit on top of 300 billion barrels of crude oil, and Spain doesn’t make $350 million dollars a day out of thin air just by shipping black goop stateside.

In the 1960s, Venezuela’s energy minister famously dubbed oil “the devil’s excrement” — and we see why. The unpredictable gyrations of world oil markets, and the massive windfall it generates now and then, distort every aspect of Venezuelan public life. It distorts an economy where no other tradable product can be produced profitably, and it distorts the political system, where the fortunes of politicians are radically disengaged from their actual performance and placed in the hands of Olympus. But it also distorts the values of a society that can discern no clear link between investment and consumption, between effort and reward, between what you do, and what you get.

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