Hugo Chávez addresses oil workers in 2007, pushing for more national control of the country’s oil.

By Federico Fuentes

July 15, 2013 – Links International Journal of Socialist Renewal -- In the recent period, political discussion in Venezuela has centered on the government’s economic strategy. The reasons seem obvious. Inflation during the first half of the year climbed to 25%. First quarter growth was only 0.7%. And then there are the shortages affecting various basic goods. The questions many are asking is: has Chavismo’s economic model reached its limits?

A number of critics say yes. Underpinning the current crisis, they argue, are incorrect government policies that have contributed to the rise of a bureaucratic state residing over an excessively centralised economy that is increasingly dependent on oil revenue.

I would like to put forward an alternative argument, namely that focusing the blame primarily on the government’s policies ignores the historic realities and challenges intrinsic to the rentier and neo-colonial capitalist economy inherited by Chavismo; it also serves to conceal the existence of an ongoing economic war by Venezuela’s elites aimed at regaining control over the country’s prize possession: oil wealth.

To advance this argument I will begin by presenting a general outline of Chavismo’s economic strategy which at its core represents an attempt by Venezuela’s historically excluded popular classes to capture control of the state, stem the outward flow of oil wealth and utilise it as a means for achieving the goal set out in the Bolivarian constitution: “integral human development”. I will then evaluate how the government has gone about this in the social and economic sphere, showing how 21st century socialism differs from neo-developmentalism and how the main challenges faced by the process – bureaucratism, corruption and clientalism – pre-date the government of President Hugo Chavez. Finally, I will return to some of the current problems and potential ways forward.

On a side note, it must be said that the international aspect of Chavismo’s economic strategy is of fundamental importance. However, due to time I will only be focusing on domestic economic policy.

Chavismo’s economic model in theory

Chavez’s initial election platform was far from radical. However, two features, enshrined in the constitution, differentiated Chavismo from both its developmentalist and neoliberal predecessors.

The first was ensuring state control over oil in order to re-direct oil money towards meeting peoples’ needs, or as the constitution puts it, ensuring peoples’ “complete development, both individual and collective”. For Chavismo, this was only possible through people’s “participation in forming, carrying out and controlling the management of public affairs”.

The second feature was the proposal for an “economic regime” comprised of three sectors: state, private and social. Key to this was state control over industries deemed to be “in the public interest and of a strategic nature”. There was no talk of abolishing the private sector, but mention was made of a third sector, the social economy, comprised of collectively owned and run enterprises. Again, the overall aim of the economic regime, according to the constitution’s Article 299, was “ensuring integral human development”.

So, if 20th century socialism in the Soviet Union was meant to be soviet power plus electrification, Venezuela’s 21st century socialism could be summed up as oil rent plus peoples’ participation for human development. It is this second feature that also set it radically apart from neo-developmentalist regimes.

It should be no surprise that control over oil was central to Chavismo’s economic strategy. The rise of oil extraction in Venezuela led to a dramatic transformation in the economy. Agriculture slumped as foreign oil companies poured into the country to extract cheap oil and high profits. The preferred economic strategy of Venezuela’s elites was to privately appropriate as much of the oil wealth as they could and import rather than develop local industry. As such, Venezuela’s oil-based economy took on a neo-colonial character: while formally independent, Venezuela’s economy was dominated by and dependent upon the economies of imperialist countries, principally the US, which were the main destinations for its oil exports and the origins of its imported goods.

Oil dependency fostered the development of rentier capitalism, profoundly shaping the state and society in Venezuela. While oil transnationals extracted oil, the state ensured, via taxes, royalties and regulations, that a portion of Venezuela’s oil wealth stayed inside the country. Standing over and above Venezuelan society, the state came to act, in the words of Venezuelan anthropologist Fernando Coronil, as both a “mediator between the nation and foreign oil companies” and “manager of income derived from the nation’s major source of wealth”.

Local elites became increasingly reliant on their connections to the state to secure some of this wealth. This led to a fusion of power and wealth within the state and spawned a parasitic capitalist class for which capital accumulation was synonymous with rent appropriation rather than value production. The state also became a vehicle for the creation of a new middle class whose position was tied to the state bureaucracy.

Further down were the marginalised popular classes, driven from the countryside into the city in search of a livelihood and what they felt was their rightful share of oil wealth. Their struggles generally focused on pushing for greater state control over oil rent and/or its more equitable redistribution. All this underpinned the emergence of a pervasive culture of clientalism and corruption as an extensive array of legal and illegal channels were established for the purposes of appropriating and, to a limited extent, re-distributing the oil money that remained inside the country.

In practice, “developmentalist” policies (whether aimed at import substitution or export promotion) served to deepen the rentier and neo-colonial nature of Venezuela’s economy. Import substitution policies became vehicles to bolster the flow of oil rent to the local elites, whether through subsides to uncompetitive enterprises or by allowing access to dollars at the overvalued exchange rate and selling imports at inflated prices. Later attempts to promote production for exports reflected broader shifts towards globalised production chains. In exchange for removing national protection barriers and making available cheap natural resources, industries that were proving too expensive to run elsewhere shifted to Venezuela. But goods and profits continued to flow to the global North.

The presence of the state in the economy grew through large investments in heavy industries and with the oil nationalisation of 1974. The aim was to expand the state bureaucracy’s economic base. This led to tensions with private capital over spending priorities, generally framed as fights against corruption or state inefficiency.

High oil prices helped dampen these conflicts. However, when oil prices tumbled in the late 1970s and '80s, the state entered into severe crisis, becoming completely dependent on foreign loans to cover budget deficits. Capital used the state’s debt and deficit crisis to impose harsh austerity measures against the poor, while squeezing more and more wealth out of the country. This, along with a deepening crisis of the state, reflected in various military rebellions, and rising levels of protest and discontent among Venezuela’s fragmented popular classes, provided the backdrop to the rise of Chavismo.

Halting oil privatisation, recovering sovereignty over the state and re-directing oil wealth towards meeting the needs of the popular classes were all key priorities for the Chavez government, first elected in 1998. One of its first steps was to strengthen OPEC, thereby helping push oil prices up. Another was ramping up the royalties paid by oil transnationals. The new constitution also expressly forbade the privatisation of the state oil company PDVSA. However, it was the move to reign in PDVSA’s management that saw Venezuela’s elites step up their opposition.

This included an attempted military coup in April 2002 and a two-month bosses’ lock-out at PDVSA starting in December 2002. Each attempt was defeated by the combined mobilisation of the popular classes and the majority of the military. Both also ended with the popular classes capturing control over key parts of the state: the military, now purged of reactionary elements aligned with the old elites, and PDVSA, cleansed of its bureaucracy that walked out on strike and was never allowed to return. If, as Coronil contends, the Venezuelan state had once held “the monopoly not only of political violence but of the nation’s natural wealth”, out of these struggles Venezuela’s popular classes had now taken the reigns of the state and began wielding these weapons in their favour.

Chavismo’s economic model in practice

The Chavez government, now increasingly radicalised under the impact of intense class struggle, had an opportunity to begin implementing its economic program.

Social participation

In terms of re-directing oil wealth towards the popular classes, few doubt the tremendous advances made. Between 1999 and 2010, 62% of public sector income was directed towards social spending. Along with minimum and real-wage increases, price controls and other measures, the impact of this massive redistribution of oil wealth was remarkable. The poverty rate dropped from more than 60% in 2003 to 25.4% by 2012. In terms of wealth re-distribution, between 1998 and 2011, the income of the richest 20% as a portion of overall income, dropped from 53% to 44.8% and for the bottom 60% rose from 25.6% to 32.3%.

However, a key difference between Chavismo and “neo-developmentalist” models that have also prioritised social spending and rent transfer programs, was the policy of utilising social programs to expand popular participation. Rather than relying on the inherited bureaucratic state apparatus or clientalist networks, the government created a series of “social missions”, that is, community social programs aimed at meeting human needs such as health care, education and access to food. These missions relied upon existing community groups to get started and contributed to a dramatic expansion of citizen participation in administering public affairs.

Challenges encountered in funding and maintaining these missions led to more radical measures during Chavez’s second term, such as the promotion of communal councils, now with the expressed desire of dismantling the inherited state. These councils – elected from between 200 and 400 families in urban areas and 20 to 50 families in the countryside – sought to further build upon and link up activists from the various community organisations and social missions to collectively discuss and resolve problems facing their communities. Approximately 44,000 communal councils have been established throughout the country.

In 2009, the government took a further step by promoting the construction of communes, which encompass various communal councils within a self-defined community. These communes can develop medium and long-term projects of greater impact while decisions continue to be made in assemblies of the communal councils. As of 2013 there are more than 200 communes under construction. Together with the communal councils, these organisations are viewed as the building blocs of a new communal state.

Funding for communal councils and communes comes from the state, converting them into mechanisms for the democratic re-distribution of oil rent. This has created new challenges, with community activists complaining that state officials use control over funds to manipulate or divide communities. Some state bureaucrats, afraid of losing their power, have worked to strengthen the old capitalist state institutions rather than actively promote the new forms of the communal state. At the same time, rent-seeking behaviour has been apparent in some communities where they have organised themselves, not with the intention of collectively resolving local problems, but rather appropriating oil rent for individual enrichment.

However, despite these problems the communal councils advanced, actively involving more people than any previous form of community organisation and gradually taking on a greater role in managing public affairs.

Economic participation

Unlike neo-developmentalist regimes, a major focus for the Chavez government in the economic sphere was the social economy. Initiatives in this regard included the promotion of cooperatives and the nationalisation and reactivation of closed factories under workers’ cogestión (co-management).

The boom in cooperatives was fuelled by government programs and funding. By 2007, some 183,000 cooperatives were registered, although serious studies put the figure of active cooperatives at around 30,000, which, when compared to less than 1000 before Chavez came to power, is still impressive. By 2010, the number stood at more than 73,000. While the government and trade unions had an overly ambitious plan of taking over and reopening 800 abandoned factories under cogestion, by the end of 2006 there were around 40 recovered factories.

More generally, the popular classes benefited from increases in the minimum, real and social wage, as well as falling unemployment. Yet, advances in these areas did not lead to an overall change in Venezuela’s rapidly growing economy. The small scale of the social economy meant that the biggest beneficiary of the dramatic rise in consumption was the private sector, which took advantage of this situation by reactivating installed capacity (in a context where many companies had almost ground to halt in late 2002) or by importing goods. This meant that production capacity remained low and concentrated in a few hands, with 571 companies accounting for 80% of domestic production in 2007. Imports more than doubled between 2003 and 2006. Venezuela’s economy seemed to be becoming more capitalist, and more dependent on private capital (whose share of GDP increased relative to the public sector) and on oil sales to external markets.

With the global economic crisis in 2008, government revenue fell along with international oil prices. By the first quarter of 2009, the country’s economy had gone into recession, with GDP shrinking by 3.3%. Meanwhile, inflation began regularly exceeding 20% each year, and food shortages became a real problem.

To confront this complex situation of high inflation, low growth and shortages, the government unleashed two waves of nationalisations. While the first wave in 2007 targeted basic services such as electricity and telecommunications, a second wave in 2008-2009 sought to give the state greater control over strategic productive industries. In almost all cases, these moves were not a response to workers’ struggles within these industries, but rather the growing demands of the poor for basic services, housing and food.

By 2012, the government had nationalised 1168 companies. The state now had either majority control or was the biggest player across all strategic sectors of the economy, with the threat of expropriation looming for those that refused to cooperate.

Workers’ participation was encouraged in a number of these newly nationalised companies, notably in heavy industry and the electricity sector.

The government also built hundreds of “socialist factories” with the state providing necessary professionals and workers being selected by local communal councils. The aim is for the workers and communities to gradually assume complete management of these factories.

To overcome some of the deficiencies of cooperatives, which tended to reproduce the logic of capital, the government began promoting community-owned enterprises, in particular encouraging communal councils to create Enterprises of Social Community Property (EPSC). As they are collective property of the communities, it is the communities themselves that decide on the organisational structure of enterprises, who is employed in the enterprise and the eventual use of any profits. There are several thousand EPSC in existence.

In an initiative aimed at increasing collaboration between some of the newly nationalised and socialist factories, EPSCs and communal councils, Chavez launched the Grand Housing Mission in 2010 to try and tackle the housing problem. More than 350,000 houses were built over 2011 and 2012. Around 50% of the housing projects being built by the communal councils themselves.

As with the advances in participation in the social and political arena, the same challenges emerged in the economic sphere: corruption, bureacratism and clientalism. A number of nationalisations helped expose the existence of what is popularly referred to in Venezuela as the “Bolibourgeoisie”, or Bolivarian bourgeoisie, who amass immense fortunes in the name of the revolution. During the banking crisis of late 2009, a number of the bankers jailed had been closely aligned with the government.

Another target of popular discontent was la derecha endógen (the endogenous right wing). Encrusted in the state bureaucracy, these sectors sought to moderate the process in order to defend their economic interests. In Guayana, opposition to workers’ control in heavy industries took the public form of the local Chavista governor, state-appointed managers and bureaucratic trade union leaders, all of whom have an economic interest in halting the process of expanding workers’ participation.

At the same time, strong economist tendencies persist within the working class. And many of the experiments in cooperatives and EPSC have demonstrated a tendency to stimulate short-term rent circulation at the expense of production.

Current challenges and possible paths forward

So where does all this leave us in terms of current problems in Venezuela and ways forward. Well, this depends on your perspective.

For the private sector the problem is largely one of too much state intervention. A corrupted state bureaucracy has fuelled inflation by flooding the economy with oil money and distorted the market through arbitrary and inefficient decisions over who gets access to dollars. Rather than prop up failing enterprises in the social economy, the state should let them compete against the private sector in the market. The solution is to cut off oil funding to social programs and the social economy, and remove currency and price controls.

For statist sectors, the problem is the parasitic and corrupt rent-seeking behaviour of Venezuela’s economic elites, which also finds its reflection among Venezuela’s poor. Rentier capitalism has created not only a weak bourgeoisie, but also a weak working class. In its place, the state must take the lead, through a combination of state-orientated development projects and social spending. The main policy suggestion is the “deferral” of popular participation to a latter date, once state-led development has created the conditions for a strong working class (and national bourgeoisie).

There is a third vision, which takes as it starting point the reality that the current problems have less to do with government economic policy and more to do with the nature of Venezuela’s economy, an economy that continues to be oil-dependent and capitalistic, even if an important level of economic sovereignty has been reasserted and the seeds for a radical transformation have been planted. This vision is premised on the idea that overcoming the current problems requires deepening the Chavista model.

For example, figures show that inflation (which is well below that experienced in the 1980s and 1990s) was at its lowest in the 2005-2006 period, precisely when social spending was fuelling rising consumption and rapid economy growth. Moreover, shortages have always peaked around key political events, such as the recent presidential elections. This not only contradicts the idea that inflation in Venezuela is primarily driving by excess demand, or by the circulation of oil money in the economy, rather it is evidence that inflation is to a large extent a supply-side phenomenon. Focusing on the demand-side conceals the role played by Venezuela’s economic elites, who rather than produce to meet peoples’ needs prefer to rely on imports, actively hoard basic goods or trade on the black market to avoid price controls. This, together with speculation in black-market dollars, has pushed up the sale price for imported goods, leading to a shift of oil wealth out of the pockets of workers and into the bank accounts of the capitalists.

The state bureaucracy has often facilitated this. For example: the newly appointed head of the Central Bank of Venezuela revealed in May 2013 that of the dollars handed over by the state to the private sector, $15-20 billion ended up either in the black market or leaving the country.

I would therefore suggest that the problem is not “too much” control over oil rent. This seems obvious when we consider how much wealth seeps out through corruption and bureaucratism. Rather, corruption and bureaucratism are the problems; overcoming them requires deepening popular participation and control.

This means tightening control over the flow of oil wealth. This will require specific measures to beat back the current economic war being waged by the economic elites, as well as deepening the war on corruption within the state itself. But for these measures to be successful, they will need to be continuously guided by Chavismo’s radical vision of development, which, unlike neo-developmentalism, sees this not simply as a question of economic growth, public investment and social spending, but principally one of developing peoples’ capacities through greater participation in the political, economic and social sphere.

[The original sources of figures cited and quotes can be found in Latin America’s Turbulent Transitions: The Future of Twenty-First Century Socialism. Alternatively, you can contact Federico Fuentes at fred.fuentes[at]gmail.com. This paper was presented by Federico Fuentes, co-author of Latin America’s Turbulent Transitions: The Future of Twenty-First Century Socialism, at the Fourth Annual Conference in Political Economy, held at the Hague, Netherlands. The theme of the conference was “Political Economy, Activism and Alternative Economic Strategies”. The conference was held July 9-11, 2013, and was organised by the International Institute for Promoting Political Economy.]