Oil Wars: Heinz Dieterich and the path to oblivion

Oil Wars Blogspot writes: Heinz Dieterich, the German expat professor who resides in Mexico, has long been one of the key theoreticians who has advised president Chavez.

In the past few weeks he has penned two important theoretical articles describing what he views as the most important problems facing the Bolivarian Revolution and the way to fix them:

• "Hugo Chavez' survival strategy for 2008 and his problematic relationship with the Bolivarian right"
  
  
• "The self-defeating economic policy and rhetoric of the Venezuelan government"

These articles are at once very insightful and give an accurate assessment of many of the failings of the Chavez administration yet at the same time over dramatize some of its problems and propose "solutions" that will likely solve nothing.

To start I'll review what Dieterich gets right in his analysis.

He correctly notes that the Bolivarian movement lacks internal democracy. It is led, he states, by Chavez himself with assistance from the New Political Class (NPC) which Dieterich is calls the "Bolivarian right" and is personified by Miranda state governor Diosdado Cabello. Dieterich explains that Chavez had an opportunity to democratize and broaden the movement in the wake of the April 2002 coup and was even pressed by some cabinet members to do so but instead solidified his rule based only on himself with the support of the "Bolivarian right". Further, according to Dieterich, this "Bolivarian right" is more interested in its own survival and privileges than any transformation of Venezuelan society.

The "Bolivarian right" has tried to maintain its grip on power by disqualifying anyone who critiques it as we have seen clearly in what has happened with the attacks on Tascon referring to him as a "false" revolutionary and a CIA agent.

Chavez himself tries to maintain public support via "management by crisis" whereby the population is presented with some crisis, real or imagined, generally from the oligarchy or the United States which will cause them to rally around the government. As Dieterich correctly notes this strategy for managing public perceptions and maintaining public support generally loses effectiveness over time as the population tires of the constant agitation and the president loses credibility when many of the crisis never materialize.

Dieterich also correctly analyses at least some of Venezuela's current economic problems. He points out that whatever economic problems Venezuela faces are domestic in origin and not created by the United States.

The members of Chavez' cabinet, most all of whom are part of the "Bolivarian right", are incapable or unwilling to explain what is possible and what is not with the Venezuelan economy.

To counteract this Dieterich recommends that Chavez convene an international panel of leftist/progressive economic experts to advise him encompassing such people as Julio Boltvinik, Paul Cockshott, and the Nobel prize winner Joseph Stiglitz.

This is in my view a very worthy idea and one that should actually be implemented.In another part of his economic analysis Dieterich points out that the government has communicated to the population on economic issues very poorly and that rather than giving people accurate explanations that elevate their understanding and consciousness they are given false and distorted explanations or even just "mystification". For example he criticizes Chavez who responds to shortages by calling producers who fail to produce or send products to Colombia (where they can avoid price controls) as "traitors".

As Dieterich rightly points out in market economies economic activities are driven by profit rates not by values such as patriotism. So Chavez' appeals to patriotism will go nowhere. So we can see that Dieterich does grasp many of the important problems facing the Chavez government and how they are caused by very real failings of that very same government.

However, in other and even more important respects Dieterich has some very big flaws in his analysis which leads him to make recommendations which if followed will ultimately only make matters worse.

• This begins with what provoked his two essays in the first place -- the defeat of the constitutional reform referendum last December 2nd.

Dieterich views that as a major blow to the government akin to the April 2002 coup and shows that the governments support has dropped significantly.I believe Dieterich attributes far to much to that referendum. Many people who otherwise support the government viewed the proposed reforms as deeply flawed. Hence they voted against the reforms, but not necessarily against the government itself.

Further, Dieterich believes the government faces an important political crisis from which it must recover immediately. He quotes Chavez as saying that if the opposition wins many of the local elections this coming fall it will gravely damage the "revolution" and bring about a near "civil war" putting the country back to where it was in 2002. Dieterich clearly shares Chavez' beliefs on that.

I believe this is a huge misrepresentation of the political situation facing the government. In point of fact the local contests are minor as those offices have little power and even less ability to impact the national government. State and local governments are almost entirely dependent on the national government for their funding so the central government would still exercise tremendous power over them. Further, most of their functions, such as picking up garbage, maintaining streets, and dealing with other local quality of life issues are all rather pedestrian.

In fact, I would state that it has actually hurt Chavismo that it has won control over so many local governments. Many of these Chavista office holders have been notoriously inefficient in their jobs which has simply served to sully the image of the Chavez government as a whole.

Given the lack of internal democracy within the Chavez-led movement the party base has no way to try to select better local candidates so their is no obvious way for this to be remedied internally.

Yet if opposition candidates were to win a significant number of these offices then they get the privilege and responsibility for making sure the garbage is picked up and the roads are repaired. Either they do a good job, in which case Venezuelans have a better quality of life, or they also fail in which case they, not Chavez, face the political consequences of their failure.

Given that, the elections this year are not nearly as important as either Chavez or Dieterich make them out to be nor are they likely to be decisive to the future of this government. In fact, the next truly important elections are not scheduled until 2010 when the National Assembly would be up for re-election (a presidential recall vote could happen sooner but given Chavez' huge vote total in the last election this is probably not a major threat).

So rather than facing an emergency that needs to be fixed this year the government most likely has at least two or three years to more fully address problems.

Yet because Dieterich thinks the government has to fix the economic problems immediately he proposes very short term fixes to the most obvious problems which will likely only exacerbate the economic situation over the longer term.

The only economic problem that he addresses are high inflation and shortages of key foodstuffs. And he actually proposes that the government fix these problems BEFORE the end of the year so that he can win the local elections. His proposed fix is for the government to import large quantities of food and distribute to the population at fixed low prices -- sort of as is done through the Mercal food stores, only on a larger scale. So much food would be imported that the shortages would be eased.

Further, the government would tamp down inflation because the government would in effect assume the high costs of the food for itself. That is, the government would pay the international market price for the foodstuffs, import them, and then distribute them at a much lower cost to the population. These subsidized imports will cost the government billions of dollars but given the current sky high oil prices they will probably be able to afford it. The hope is this will reduce the food shortages, hold inflation in check by keeping the prices on these staples low and consequently boost Chavez' popularity enough to win the upcoming elections.

It is possible such a strategy will work.

In fact if implemented quickly and efficiently it probably will. And the government has already begun this with the new PDval food distribution centers of which there will soon be thousands giving out very inexpensive food.

However, this is a solution which only APPEARS to fix a problem while in reality not fixing it at all. In fact, it is only a temporary elixir meant as a response to an imaginary immediate political crisis which will only serve to increase economic problems over time and create a REAL economic crisis a few years down the road.

A big part of the problem is that Dieterich doesn't fully analyze the economic problems, he limits himself to only dealing with inflation, shortages, and to a certain extent price controls and his solutions are developed with only those issues in mind.

Yet looking at the Venezuelan economy more broadly there are many other problems: an overvalued exchange rate that favors imports over domestic production; siphoning off of many Venezuelan products to be sold in Colombia or on the black market; far to much of Venezuela's oil revenues being used to support a consumption binge and too little invested in building new industries; far too little productive economic growth outside the oil sector; the consequent dearth of new jobs in productive sectors of the economy; the low educational and skill levels of the Venezuelan work force.

Dieterich essay's never mention those problems and therefore propose nothing to address them. Rather, his quick fix scheme for food shortages would just cause the government to use even more of its limited resources to fund consumption further squeezing out investment in new industry. Worse still, all the same inefficiencies and distortions that currently exist in the food sector would still be there and would cause much of this new food to also wind up on the black market or outside of Venezuelan making this a very inefficient solution. Finally, it has the government try to fix through the brute force of its spending what could much more efficiently be resolved by Venezuelan industry if the perverse incentives its faces were simly eliminated.

And while this may work for 2008 it will surely fail longer term.

Without adequate growth in productive sectors the Venezuelan economy will never truly improve and will continue to be held hostage to the price of oil. Once the price of oil even stopped rising, not to even consider go down, the government would no longer be able to employ these methods. It is very clear that while this "solution" may boost the government's fortunes in 2008 it is sure to hit a brick wall in the near future which will lead to even more dire consequences for the Venezuelan government and the economy as a whole.

And of course, if the crisis then hits in 2009 or 2010, which it likely would, Dieterich's solution would blow up in Chavez' face with an impact much greater than anything he has faced to date.

In this sense, Heinz Dieterich's flawed analysis of the current problems faced by Venezuela paint an overly dire picture of the situation and lead to "immediatismo" -- that is proposing short term fixes that only serve to make problems worse in the longer term.

Here, in brief, is what I propose as a counter analysis of the current problems and how they should be solved:

The Chavez government does not face an immediate political crisis. The impact of the referendum defeat should not be overestimated nor should it all be attributed to a decline in support for the government. More importantly the government faces no important political contests for at least two years and more likely three years. This means that the government has a reasonable time frame in which to come up with and implement real solutions to problems -- it doesn't need to resort to immediate band aid fixes.

Here is what some of those fixes would be.

First, the immediate problem of food shortages could be largely fixed by eliminating price controls. With food able to be sold at full market rates domestic production will be stimulated over the next two to three years. This will lead to a spike in food prices but the government can insulate the popular classes at least partially from this via its sales of discount foodstuffs. To do that they don't need massive amounts of new food imports -- they simply need better control and accountability over what they currently sell through Mercal much of which is stolen.

Secondly, the Venezuelan currency needs to be devalued to market rates either in its entirety or at least for non-essential items (cars, electronics, consumer goods, etc.). This will make Venezuelan exports more competitive on international markets and even make local production more competitive with imports. If this devaluation is maintained (ie new devaluations are done as needed going forward) local production will increase and there will be new investment and new jobs over the course of the next few years. This will shift the benefits from the oil boom from imports to local industry and will make the economic growth more wide spread, balanced, and more sustainable.

Third, the government should then devote more of its booming revenues from the oil industry to investment in productive industries. This will likely not produce results within a three year time span but it is necessary if Venezuela is to progress in the longer term.

Fourth, the issue of crime needs to be effectively addressed. Although Dieterich for some reason never mentions it, all polling data I have seen shows this to be a greater concern to most Venezuelans than inflation or shortages. Getting it at least somewhat under control in the next two to three years is possible and would reap tremendous political dividends for the government.

Fifth, the panel of international economic experts that Dieterich proposes should be convened with their proposals very carefully examined and adopted whenever possible.

Finally, the government has to change its rhetoric. As Dieterich correctly notes, Chavez' continuous crisis mongering and gratuitous belligerence is accomplishing little. Worse, the government's patently false explanations of economic problems are steadily destroying its credibility.

To change that the government needs to shift to educating the population about the nature of the problems the country faces and what the solutions are. This is extremely important as some of the above solutions will create short term pain for the population which unless they understand why it is necessary will likely lead to an over reaction against the government.

In doing this the government, in particular Chavez himself, will have to admit to having made mistakes in policy. Only by coming clean about this and presenting coherent and accurate explanations about what those mistake were and how they are to be fixed will he be able to persuade his supporters, who are still the largest segment of the Venezuelan population, to go along. The bombast has to be out, to be replaced by enlightened explanations which elevate people's consciousness and understanding.

If this was all done without delay it is possible that enough positive results would be seen in the next two to three years to allow the government to regain enough popular support to win the really important elections. Of course, it is also possible that while the pain of these changes would be immediate and high the positive results would be too slow in coming to help the government in 2009 and 2010. But that is simply a risk the government can't avoid running as these problems can't be wished away nor fixed with band aids.

The reality is these measures should have been adopted immediately following the 2006 presidential win when the government had more time and Chavez had an immense store of political capital. Instead, the government has simply acted, as Dieterich notes, in ways that make the problems worse and Chavez himself has spent too much time tilting at windmills fighting imagined enemies.

• Still the government needs to not over react and fall into the "immediatismo" trap as Dieterich himself does. That will no more solve any of these problems over the intermediate term than the governments current policies will.

Finally, it needs to be kept in mind what the larger purpose of all this is, something which I think Professor Dieterich may have lost sight of. The point of all this is NOT just to have Chavistas win all the elections down to dog catcher in every little town. While this revolution is of course political it can't be about politics simply for the sake of winning political contests.

Rather it has to be about improving peoples lives -- improving them economically, culturally, environmentally, and in every other respect. If it doesn't do that then all the political victories in the world would serve no point.

For this reason when developing policies the first criteria always has to be will this policy over time improve the lives of Venezuelans.

How the policy will impact you at the next election is a consideration but it should always be a secondary consideration.

If you lose sight of that and devise your policies with only the goal of winning the next election in mind, as Chavez and Dieterich appear to be doing, then you've lost sight of what this revolution is supposed to be all about!

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