Chavez & Radical Populism Chavez & Radical Populism in Venezuelain Venezuela

Final Presentation for ECN 7365: Final Presentation for ECN 7365:

Political Economy of Latin AmericaPolitical Economy of Latin America

Prof. Joe RiccardiProf. Joe Riccardi

Chinar Bansal, John Larkin, Thuy Le, Chinar Bansal, John Larkin, Thuy Le,

Mark Pasquine, Ari PatniMark Pasquine, Ari Patni

Agenda

• History

• Hugo Chavez

• Business Environment

• Managerial Implications

Agenda

• History• Hugo Chavez

• Business Environment

• Managerial Implications

• 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– Argentina: Juan Perón, 1945-55– Chile: Popular Front, 1938-41– Mexico: Lázaro Cárdenas, 1934-40– Brazil: Getulio Vargas, 1937-45 (Estado Novo period)

Populism

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

• History

• Hugo Chavez• Business Environment

• Managerial Implications

Hugo Rafael Chavez Frías

• 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

• 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

• History

• Hugo Chavez

• Business Environment• Managerial Implications

Economic Indicators

   1997  1998  1999  2000 

GDP per head (USD) 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

Budget balance (% of GDP) 2.2 -2.75 -3.75 -1.9

Consumer prices (% change pa; av) 50.03 35.7 23.55 16.2

Recorded unemployment (%) 11.35 11.15 14.9 12.21

Current-account balance/GDP 3.91 -3.39 3.57 10.9

Foreign-exchange reserves (m$) 14,378 11,920 12,277 13,089

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

• Weak non-oil sector

• Crashing in oil prices

• Capital flight

• Falling exchange rates

• Declining international reserves

Economic Forecasts

• 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

• 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)

• 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

• 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)

• 1958: Betancourt elected President– Agrarian reform/increased farm production, improvement of education & social

welfare, ISI & seek local control of the petroleum industry

• 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

• 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

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

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 1989-1990, he studied Political Science at Simon Bolivar University in Caracas.

Married to María Isabel Rodríguez and is the father of five children: 

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 Rates90-day Deposits

Exports

Geographic Trade Distribution (1999)

Current Account Balance and External Debt