Transcript Chavez, Fidel & Radical Populism in Venezuela

Chavez & Radical Populism
in Venezuela
Final Presentation for ECN 7365:
Political Economy of Latin America
Prof. Joe Riccardi
Chinar Bansal, John Larkin, Thuy Le,
Mark Pasquine, Ari Patni
Agenda
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History
Hugo Chavez
Business Environment
Managerial Implications
Agenda
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History
Hugo Chavez
Business Environment
Managerial Implications
Populism
• OED definition of Populist
– One who seeks to represent the views of the mass of
ordinary people
• OED definition of Populism
– The political doctrine or principle of the Populists
• Examples of Populist regimes in Latin America
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Argentina: Juan Perón, 1945-55
Chile: Popular Front, 1938-41
Mexico: Lázaro Cárdenas, 1934-40
Brazil: Getulio Vargas, 1937-45 (Estado Novo period)
Venezuela’s Past
• Early History (Pre-1820s)
– Venezuela declares independence from Spain in 1810
• Century of Caudillismo (1820s – 1935)
– Simon Bolivar & Gran Colombia Union
– Period of authoritarian dictatorships
– Emergence & development of oil industry
• Transition to Democracy (1935 – 1958)
– New constitution with popularly elected President
• Shifts between coups and Democracy
– Universal suffrage & political parties legalized
– Import Substitution Industrialization
Democracy (1958 - 1998)
• Democracy takes hold
• Venezuela opens itself to foreign markets
• Oil prices allow Venezuela to pursue populist policies
– High Government spending
– Price controls
– Nationalization of several industries
• Oil price shocks force better economic management
– Return to populist policies when prices rise again
• Banking crisis precipitates full economic crisis
• Failed coup attempts in 1992
• Hugo Chavez elected in 1998 to reorganize country
– Declining GDP, high inflation, poverty and rampant corruption
Agenda
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History
Hugo Chavez
Business Environment
Managerial Implications
Hugo Rafael Chavez Frías
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1975 – Attended Venezuela’s Military Academy
1982 –Bolivarian Revolutionary Movement
1989 to 1990 – Studied Political Science
1992 – Led unsuccessful military coup
– Two years in prison; later pardoned
• 1998 – Promising a peaceful social revolution,
Chávez elected president in a 1998 landslide
• 1999 – Chávez gets new Constitution passed
Chavez & The Economy
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New Constitution severely limits checks and balances
High government spending on populist policies
Maintained fixed exchange rate until recently
Expanded role of the military
Surrounded Presidency with old friends/acquaintances
– Corruption still exists
• Stronger OPEC relationships  oil prices
– Recently named political loyalists to top PDVSA posts
• Growing unrest with Chavez: poverty, crime & corruption
Chavez, Castro & Others
• Relationship with Castro
– Reopened trade with Cuba and sees Castro as friend/advisor
– Some similarities with Castro
• Attempts to enhance OPEC relationships
– Iraq, Libya & Iran
• Why might Chavez do this?
– Improve ability to control oil prices
– Stir up nationalism to redirect negative attention
– Belief in Latin American integration for international power
Agenda
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History
Hugo Chavez
Business Environment
Managerial Implications
Economic Indicators
1997
1998
1999
2000
3,893
4,089
4,357
4,980
GDP (% real change pa)
6.37
0.17
-6.09
3.21
Government consumption (% of GDP )
6.48
7.54
7.51
7.04
2.2
-2.75
-3.75
-1.9
50.03
35.7
23.55
16.2
11.35
11.15
14.9
12.21
3.91
-3.39
3.57
10.9
14,378
11,920
12,277
13,089
GDP per head (USD)
Budget balance (% of GDP )
Consumer prices (% change pa; av)
Recorded unemployment (%)
Current-account balance/ GDP
Foreign-exchange reserves (m$ )
Characteristics of
Venezuela’s Oil Economy
• Venezuela is charter member of OPEC Oil Cartel
• 4th largest petroleum exporter in world
• Oil Exports represents 30% of GDP and 80% of total
exports
• Venezuela possesses largest proven oil reserves outside the
middle east
• Oil riches give political regime the wherewithal to
consolidate power through military and social expenditure
– 40% budget increase in 2000
– 20% salary increase for public and private employees
US-Venezuela Petroleum
Interdependence
• US relies on imports for 52% of its Petroleum
supply.
• Venezuela sends 57% of its oil exports to the US.
• Venezuela represents of 14% of US oil imports,
third to Saudi Arabia & Canada.
• Given Venezuela’s history of cooperation with US
and its leadership in OPEC, the US-Venezuela
relationship represents a vital interest for the US.
Current Economic Conditions
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Weak non-oil sector
Crashing in oil prices
Capital flight
Falling exchange rates
Declining international reserves
Economic Forecasts
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Oil price decline is worrisome
US downturn affects export performance
Further declines in capital flows likely
Additional currency deterioration possible
Political/Commercial unrest against Chavez
Agenda
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History
Hugo Chavez
Business Environment
Managerial Implications
Managerial Implications
• Oil Economy Hedge
– Purchase a put on petroleum price futures as
hedge against oil price volatility.
• Joint Ventures
– Establish partnerships, including ownership
swaps, with key insiders to link in-country
managerial decisions with business interests.
Managerial Implications
• Scenario Planning
– Zig Zag Strategy
• Chavez Out – Underlying growth, traditions, resources exist.
Purchase hard assets now, while values are low and
competitors survey.
– Maximum Flexibility
• Chavez consolidates - Opt for variable over fixed cost
expenditures to protect against nationalization, property
redistribution, broad reform actions.
Managerial Implications
• Currency Strategy
– Fixed to float
• Hold dollars but wait and see.
• High cost of capital (30% interest rates)
– Finance through alternative means
• Finance projects externally
Back-Up Slides
Early History (Pre-1820s)
• 1498: Christopher Columbus lands on the
Peninsula de Paria
• 1521: First Spanish settlement (Nueva Cadiz)
• 1777: Provinces unified into Captaincy-General of
Venezuela
• 1810: Venezuela declares independence from
Spain
• 1811: Adoption of Constitution
Caudillismo (1820s – 1935)
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1820s to 1830s: Simon Bolivar – “War of Independence” & Gran Colombia
union forms
1830: Venezuela becomes an independent republic and elects Jose Antonio
Páez as President
1846: Páez selects General José Tadeo Monagas as successor, who acts as
dictator
1857: Monagas regime ousted, initiating 12 years of civil war
1864: New Constitution for United States of Venezuela
1870 – 1888: Peace and development under Antonio Guzmán Blanco
1888: Civil unrest marked by rioting by university students leads to overthrow
of Guzmán
1889: General Cipriano Castro takes over and provoke numerous international
military interventions
1908-1935: Under Vicente Gómez , the country is unified under a central
government and the economy was open to industrialization
1918 - 1920s: Emergence & development of oil industry
Transition (1935 – 1958)
• 1935: General Eleazar López Contreras assumes
Presidency & allows some political expression
– First mass political organizations in the nation's history form
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1936: Revised Constitution
1942: Ambitious economic plan hindered by WWII
1945: Military coup ousts dictator
1946: Universal suffrage & all political parties legalized
1947: Popularly elected president takes office & new
Constitution
• 1948: Democratic government overthrown & replaced with
repressive dictator
• 1958: Dictator overthrown & democracy restored
Democracy (1958 - Now)
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1958: Betancourt elected President
– Agrarian reform/increased farm production, improvement of education & social
welfare, ISI & seek local control of the petroleum industry
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1960: CVP (later becomes PDVSA) & OPEC formed
1963: First non-violent presidential succession since Gallegos
1968: After election, Venezuela opens itself to international markets
1973 – 1974: Arab-Israeli War led to oil price boom
– Populist price controls subsidized public consumption, but hurt poor
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1975: Nationalization of several industries
1979: New president reverses populist measures, but returns to them w/Oil
price increase  financial crisis follows
1989: Austerity measures & reliance on market forces
1992: Two coup attempts leads to freezing of reform & President resigns
1990s: Banking failures precipitate economic crisis
1998: Venezuelans turn to Chavez to reorganize government and the country
Hugo Rafael Chavez Frias
Born in Sabaneta,
Barinas State on July
28th, 1954
1975 - Venezuela’s
Military Academy,
where he graduated
with a degree in
Military Sciences and
Arts.
In 1982 he founded the
Bolivarian Revolutionary
Movement. During 19891990, he studied Political
Science at Simon Bolivar
University in Caracas.
Married to María Isabel
Rodríguez and is the
father of five children:
1992, Led an unsuccessful
military coup against President
Carlos Andres Perez, earned him
two short years in what he refers
to as the "prison of dignity, later
pardoned by President Caldera
A charismatic populist, he became the
leader of the leftist Patriotic Pole
alliance. Promising a peaceful social
revolution, Chávez was elected president
in a 1998 landslide.
Economic Data (2000)
GDP, Consumption and Investment
Annual variation in %
Consumer Prices
Annual variation in %
Monetary Aggregates
Annual variation in %
Exchange Rate
International Reserves
Interest Rates
90-day Deposits
Exports
Geographic Trade Distribution
(1999)
Current Account Balance and
External Debt