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Why Venezuela’s Social Programs are Failing

medvedchavez112808.jpgA good piece in the Financial Times points out that the gap between Venezuelan President Hugo Chavez’s rhetoric and achievements is becoming visibly wide, as his well intentioned social programs are failing despite their healthy budgets.  Lesson of the day:  not even 21st century socialism can work very well if the private sector is rendered ineffectual due to constant interventions by the state.  Somewhere in the Venezuelan experience, we can see a trend common to most authoritarian capitalist models, whereby the damage incurred on the independence of the judiciary in the consolidation of power causes corruption to soar and accountability to plummet, which obviously hampers the domestic programs of the administration.  Hopefully Russia, whose president Dmitry Medvedev just left Caracas for Havana this morning, is taking note.

Mr Chávez’s renowned “missions”, or social programmes, have been extremely popular among the poor but there are increasing signs that many are suffering from neglect, poor management, corruption and politicisation. Most disappointing have been attempts to encourage co-operatives, with little to show for over $1bn spent on grants.

Althoughsubsidised food programmes reach more than 40 per cent of thepopulation and cut budgets of poor families by 25-30 per cent, theyhave been hit by shortages caused by price controls. The flagshipBarrio Adentro programme providing free healthcare to the poor has runinto problems too: Jesús Torrealba, a social activist and governmentcritic, reckons that as many as seven of every 10 health centres inCaracas set up for the initial phase of the scheme are now eitherclosed or operate infrequently.

Educational programmes havereached hundreds of thousands but the quality of teaching isquestioned. Meanwhile, traditional hospitals and schools stagnate froma lack of investment. “It would be ridiculous to deny the achievementsof the missions, but their huge cost has yielded relatively modestresults,” says Mr Torrealba.

Mr Chávez frequently insists thathis revolution is just beginning.But the precipitous fall in oil pricesis likely to force the government into some tough decisions.

“It’snecessary to reduce costs, to end extravagance, finish with corruptionand unnecessary spending, and finish with [government] mega-salaries,”admitted Mr Chávez, who nevertheless insists that social spending willnot be affected. It is more likely that spending on less politicallysensitive investment projects will be cut. Already, the construction ofa $4bn refinery in Nicaragua has been postponed.

But regardlessof what happens to the price of oil, the economy is still in trouble,with inflation in 2008 expected to be about 30 per cent. This hascaused the currency, pegged at the same rate since 2005, to becomeovervalued by about 50 per cent.

The problems building up in theeconomy are a by-product of high state spending and a tangled web ofcontrols on prices, the exchange rate and interest rates. “This hasgenerated huge distortions that they are going to have a very hard timefixing,” says Patrick Esteruelas, an analyst at Eurasia Group.

Oneof the most serious problems is the strained relations between theprivate sector and the government. Nationalisations, expropriations,threats and general interference have caused private investment in somesectors to all but dry up. “We live in a permanent state of fear anduncertainty,” says José Antonio Tamayo, who runs a farm outside thewestern city of Barquisimeto.

With domestic private sectorproduction incapable of meeting the powerful consumer demand stimulatedby state handouts and subsidies, while also disadvantaged by theovervalued currency, imports have doubled since 2003. Economists fearthat sooner or later falling foreign currency receipts from oil exportswill fail to match what is needed to satisfy demand for imports,pushing Venezuela into a current account deficit that will eventuallybecome unsustainable. Even the most optimistic analysts admit that asustained period of oil prices below $50 a barrel will be problematic.

Photo: Venezuela’s President Hugo Chavez,right, and Russia’s President Dmitry Medvedev visit the AdmiralChabanenko, a Russian destroyer docked at La Guaira port, Venezuela,Thursday, Nov. 27, 2008. (AP Photo/ RIA Novosti, Dmitry Astakhov, Presidential Press Service)