What Israel Can Learn From a Hungry Venezuela

The populist preoccupation with allocating resources to the poor and middle class without worrying where those resources are coming from inevitably ends badly for everyone.

David Rosenberg
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David Rosenberg

Venezuela these days looks like a Latin American version of Mad Max. Trucks delivering food to supermarkets have armed guards. That‘s no surprise since in a recent poll, the answer to the question when they last ate a meal was often not “today.” Hospitals are desperately short of antibiotics and intravenous fluids, so patients are needlessly dying. Power outages are routine, homes go without running water, children miss classes because teachers have to wait hours on line to buy necessities. Inflation is running into the triple digits and Venezuela may have the world’s highest homicide rate.

Venezuela is an oil exporter and the price of petroleum has fallen by more than half from its peak two years ago. Cheap oil has caused grief for other oil exporters like Russia and Nigeria and even the wealthy Gulf states, but their troubles pale compared to Venezuela’s, which The Economist awarded the dubious honor of the world’s worst performing economy.

Strictly speaking it isn’t, but the ones that are doing even worse are either at war or have fallen into complete anarchy, like Libya and Syria. Venezuela isn’t at war and the anarchy it suffers is of its own making – political unrest created by a dysfunctional economy, not the other way around.

Hugo Chavez, the country’s populist, long-serving president, died of cancer two years ago, before he could witness the havoc he wreaked. Whether he was an honest leader with a vision of lifting up the country’s poor, or a self-aggrandizing demagogue (or perhaps a bit of both), while he was alive his Bolivarian revolution looked good on paper. The poverty rate fell by nearly 20 percentage points, enrollment at universities tripled and real gross domestic product per capita grew by 24%.

But there was one reason, and only one reason, for that. Chavez presided over Venezuela at a time when oil prices jumped from $23 a barrel when he took office to more than $100 when he died in March 2013.

An ocean of oil

Oil is the life blood of Venezuela. It accounts for nearly all of its exports and two-thirds of the state budget. Oil allowed Chavez to pay for social programs, schools, healthcare and subsidized goods for the country’s poor. When oil revenues slumped, he borrowed overseas to keep the programs going, leaving Venezuela with a massive foreign debt it is struggling now to repay. The government’s decision to meet repayment deadlines at all costs, including importing food, is one reason why the country is experiencing such severe shortages.

No one can argue with the principle of helping the poor and equalizing opportunity. The question is how to do it. Chavez’s solution was to reallocate resources rather than investing in building Venezuela a productive economy that could generate well-paying jobs and create added value. Schooling was designed to disseminate propaganda, not to teach skills or critical thinking. Investment in machinery, equipment and factories as a percentage of the economy declined.

Given that Venezuela is floating on an ocean of oil, the temptation to spend on social programs must have been irresistible. But not only did Chavez fail to use the profits to make Venezuela a more diversified economy, he even failed to invest in his petroleum sugar daddy. Oil production actual fell under his rule. Large swaths of the private sector were nationalized and put into the hands of politically reliable but incompetent cadres. Price controls aimed at making goods affordable for the poor created shortages of domestically produced products by making them unprofitable to produce.

Under the circumstances, it’s no surprise economic growth for Venezuela was hardly impressive in the Chavez years, averaging about 3% annually.

Even the decline in poverty the government congratulated itself for was not atypical for a Latin American country in those years. When the price of oil began falling, Venezuela had no domestic economy to fall back on. It was a company town whose company went bust.

On the surface of things, there’s little Israel can learn from this. Our gas reserves aren’t anywhere near Venezuela’s, and no one would ever accuse the government of being generous to a fault to the poor.

Economics and justice

But there is an ideological lesson to be learned. Israeli Finance Minister Moshe Kahlon is no Hugo Chavez, but his worldview isn’t as safely distant from the late Venezuelan leader’s as it should be.

No declarations of class warfare or programs to create “21st century socialism” emanate from his Finance Ministry. But Kahlon has signaled time and again that he sees his goal as first and foremost making life better for the consumer, without much consideration for the impact on the economy.

Take his much vaunted reform of the cellular market. For consumers, it was a boon – monthly rates fell by tens of percent, bills were finally simple and easy to understand, and if you didn’t like one provider, all it took was a phone call to move to another.

The catch is that rates became so low that the cellphone companies saw their profits evaporate even after slashing expenses and firing employees.

Fine, you say, after years of ripping off the public, let them suffer. They deserve it.

They do, but no one ever said economics and justice are the same thing. Wafer-thin profits mean the cellular companies aren’t investing to maintain and upgrade their networks. Consumers will see the quality of service decline and new services, like 5G, will come to Israel.

Logically, if no one is making money providing cellular service, some of the payers should merge or shut down. But Kahlon, friend of the consumer that he is, is determined to prevent that. When Golan Telecom said it wanted to merge with Cellcom Israel, the answer was no. Never mind that having five cellular companies serving a small market isn’t economically viable: it’s good for consumers’ wallets.

Kahlon now seems to be playing this game with the banks, and it’s a much more dangerous one. In the interest of making loans and fees cheaper for households, he risks undermining the banking system, and if he does, the consequences will be far more serious than slow internet.

Israel, and Chavez’s unfortunate successor, Nicolas Maduro, would do the poor and middle class better by investing in infrastructure and schools, ensuring that business can prosper and creating globally competitive economies, rather than worrying so much about how to reallocate resources. There’s a place for the latter, too, but first you have to make sure the resources are there.

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