[Introduction ] W hat this book is about

This book spotlights one of the most sweeping and unexpected political
transformations in contemporary Latin American politics. Venezuelan
President Hugo Chávez Frías (1999-2000, 2000-06, 2006-present) has
reshaped a frail but nonetheless pluralistic democracy into a semi-
authoritarian regime; an outcome achieved in the context of spectacularly
high oil income and widespread electoral support from the population. By
semi-authoritarian we mean a regime in which freedoms and elections
exist, but where the system of checks and balances has become inoperative,
government negotiations with opposition forces are rare, the state actively
seeks to undermine the autonomy of civic institutions, the law is invoked
mostly to penalize opponents but seldom if ever to sanction the
government, and the electoral field is uneven, with the ruling party making
use of sinecures that are systematically denied to the opposition.

7KHVH DUH DOO W\SLFDO IHDWXUHV RI DQ ³HOHFWRUDO DXWRFUDF\´ D WHUP WKDW
became popular early in the new century to describe hybrid regimes where
one dominant party or ruling coalition overwhelms the rest1. But
9HQH]XHOD¶VSROLWLFDOUHJLPHH[KLELWVWKUHHDGGLWLRQDOIHDWXUHVWKDWDUHOHVV
typical of other contemporary electoral autocracies. First, there is a heavy
and unconcealed militaristic bent, offering ranking members of the armed
forces privileged access to decision making. Second, in terms of economic
1
6HH &DURWKHUV 7  ³7KH (QG RI WKH 7UDQVLWLRQ 3DUDGLJP´ -RXUQDO RI
Democracy 13:1; Ottaway, M. (2003), Democracy Challenged. The Rise of Semi-
Authoritarianism: Washington, D.C, Carnegie Endowment for International Peace;
Schedler, A. (ed., 2006) Electoral Authoritarianism. The Dynamics of Unfree
Competition%RXOGHU /\QQH5LHQQHU /HYLWVN\ 6DQG:D\ / ³7Ke Rise of
&RPSHWLWLYH$XWKRULWDULDQLVP´ Journal of Democracy 13:2; and Magaloni, B (2006),
Voting for Autocracy: Hegemonic Party Survival and Its Demise in México, Cambridge:
Cambridge University Press.

2
policy, the regime is heavily statist. Other than offering a major fiscal
stimulus and cheap imports, the state does little to promote private
investments; in place are some of the most severe regulatory restrictions to
be found in the region. State control has expanded in basic industries
ranging from power & light to telecommunications, and ordinary sectors
such as cement and hotels. And third, the regime has adopted a distinctive
foreign policy: an active commitment to balancing the United States and
promote illiberal groups across the region.

Few Latin American countries since the 1980s have gone this far in
transforming politics. To be sure, over the past decade many of the
UHJLRQ¶V FRXQWULHV KDYH GHSOR\HG LOOLEHUDO SUDFWLFHV EXW QRQH KDV
undermined checks and balances and brought in the military to the extent
that Chávez has in Venezuela. A number of countries have veered to the
left in economic policy, especially when compared to the 1990s; but only a
scant few have sought the same degree of state control. And while some
countries have abandoned the policy of close rapprochement toward the
United States that prevailed at the close of the twentieth century, none since
Cuba during the Cold War has embarked on such a world campaign to
counter American influence in the Hemisphere and elsewhere.

The chapters that follow provide an in-depth review of how this major
political transformation took place in Venezuela. We chiefly draw on
studies produced by both authors over the past 15 years. As academics,
both of us have focused much of our career on the study of Venezuela. We
both wrote doctoral dissertations on Venezuelan politics prior to Chávez
from a comparative perspective (Corrales compared Venezuela to
Argentina, Penfold to Colombia). Since Chávez came to office, we have
published²both separately and jointly²academic journal articles, book

3
chapters, commissioned reports, and newspaper Op-Eds. With this book we
seek to bring together a number of key thoughts generated in our research
and policy experience, render them accessible to a less specialized
audience, and update them to take into consideration new developments
since they were first published.

We have several goals in mind. A major objective is to provide an overall

H[SODQDWLRQ IRU 9HQH]XHOD¶V SROLWLFDO WUDQVIRUPDWLRQ &RQYHQWLRQDO
explanations for the Chávez regime generally address three factors: the
role of (decaying) liberal democracy since the 1970s, (failed) neoliberalism
LQ WKH V DQG RYHUSULFHG RLO LQ WKH V  9HQH]XHOD¶V OHJHQGDU\
democracy, some scholars have argued, turned into a ULJLG³SDUW\DUFK\´LQ
the 1980s that led to the exclusion of far too many actors across all income
categories, together with demands for new political institutions that were
more participatory and less accommodating for traditional actors. In
parallel, VHQH]XHOD¶V H[SHULPHQW ZLWK QHROLEHUDOLVP LQ WKH V OHG WR
harsh austerity policies that expanded poverty without restoring growth,
leading to a demand for a more leftist-populist-nationalist type of economic
development. Oil supplied the means for the Chávez regime to deliver on
these society-demanded changes. In a nutshell, for many scholars, the
failure of liberal democracy and economics explains the demand side of the
regime, and oil, forgive the pun, provided the fuel.

We address conventional explanations of political change in Venezuela and

offer a different version of events. First, on the role played by political
LQVWLWXWLRQVZHGRQ¶WGLVSXWHWKHGHJUHHRIH[FOXVLRQWKDWFDPHWRSUHYDLO
arguing instead that it was a dramatic institutional opening in the 1990s,
rather than continued institutional closure, that created opportunity for
regime change. In 1989, political decentralization reform triggered two

4
profound effects. First, it allowed new political forces to emerge (e.g.,
Causa-R at thHRXWVHWRIWKHVDQG&KiYH]¶VRZQ095LQODWHU\HDUV
HIIHFWLYHO\HQGLQJWKHFRXQWU\¶VVWDOHSDUW\DUFK\6HFRQGGHFHQWUDOL]DWLRQ
eased the stranglehold of the leading traditional parties, ushering party
fragmentation. For us, the opening provided by governmental
decentralization together with party fragmentation are the key institutional
explanations for the rise of chavismo. The institutional opening made
possible the entry of new political actors, which together with party
fragmentation created the space for a new political force to overwhelm the
opposition in a short period of time.

With respect to neoliberalism, we agree that poverty and slow economic

growth in the 1980s remained a major challenge in Venezuela, but we
disagree that neoliberalism was the key culprit. Neoliberalism never really
took hold in Venezuela; attempts to implement market-friendly reforms by
Carlos Andres Peréz in 1989 and, after some delay, by Rafael Caldera in
1996, faced numerous political roadblocks that prevented deep
implementation, as indeed occurred in most of the region. Other than trade
liberalization and a few privatizations, the bulk of economic activities,
especially on the export side, remained largely statist. Moreover, there is
no evidence that the majority of the population repudiated neoliberalism as
YHKHPHQWO\DV&KiYH]GLGLQ9HQH]XHOD¶VHFRQRPLFDLOPHQWV owed
to factors other than neoliberalism: the persistence of dependence on oil,
which caused macroeconomic volatility; political party fragmentation,
which triggered policy incoherence and infighting; government
mismanagement of the banking crisis, which led to more centralization of
power and a greater contraction of the private sector in the 1990s; and the
Asian crisis of 1997, which devastaWHG 9HQH]XHOD¶V HFRQRP\ MXVW DURXQG
the time that Chávez ran for president. To blame neoliberalism for

5
9HQH]XHOD¶V HFRQRPLF LOOV XS WR  LV DQ H[DJJHUDWLRQ RWKHU PRUH
serious issues should not be overlooked.

And with regards to oil, our position is a bit more complicated, and thus,
we devote an entire chapter of the book (chapter 3) to this topic. We do not
dispute the growing consensus in development studies that high
dependence on mineral or land-based natural resource generates multiple
forms of political and economic distortions, the so-called resource curse or
³SDUDGR[RISOHQW\´DUJXPHQWV+RZHYHUZHFRQVLGHUWKDWRLODORQHIDLOV
to explain the course of Venezuelan politics ± and even less, the direction
taken in regime change. Oil has been the key economic factor in
Venezuela since the 1920s; yet in the decades that followed Venezuela
experienced all forms of political regimes (dictatorships, democracies, and
semi-democracies), institutional arrangements (uni-partisan, bi-partisan,
multi-partisan, anti-partisan), and economic policies (import-substitution
industrialization in the 50s and 60s, heavy investment in large utilities in
the 70s, unorthodox economic adjustment in the 80s, aggressive market
reforms in the early 90s, timid reforms until 2003, and aggressive fiscal
spending since 2003). Oil has been invoked over and over again to explain
the status quo, even though the political status quo has changed repeatedly
during the last 100 years.

We propose instead that the explanation lies in what could be called an

³LQVWLWXWLRQDO UHVRXUFH FXUVH´ RLO FHUWDLQO\ EXW LQ FRPELQDWLRQ ZLWK D
number of institutional arrangements that explain key regime features. In
particular, direct political control of the Chávez presidency over PDVSA ±
which reflects a weak framework of checks and balances± is what allowed
the Executive branch to extract oil rents and distribute them to the
population without any intermediation from other political factors. This

6
asymmetry of power is the culprit of the Chavez regime and exacerbates
many of the problems caused by oil: political conflict, weak accountability
and rampant political clientelism. Our focus is therefore on identifying the
type of institutions that, in combination with oil dependence, lead to
changes in regime type and policies.

Focusing on oil-cum-institutions, rather than oil alone, departs from

common practice in current, generally quantitative studies, but is a
venerable tradition in research on Venezuela and in qualitative studies of
development in general. For instance, some of the best work on whether
countries succumb or escape the resource curse²however the curse is
defined²tend to stress variations in institutional features among petro-
states2. Likewise, some of the best studies of Venezuelan politics over the
years all emphasize the role of institutions, not just oil, on the origins of
democracy in the 1960s, on policy incoherence in the 1980s and on regime
change in the early 2000s3. All these studies consider variations in state-
based variables, with some addressing party-based pacts, party collusion
and party fragmentation and de-institutionalization. This book builds on
the aforementioned approach of examining oil and institutions
interactively rather than separately.

2
+XPSKUH\V 0 DQG 6DQEX 0  ³7KH 3ROLWLFDO Economy of Natural Resource
)XQGV´LQ+XPSKUH\V06DFKV-DQG6WLJOLW]- Escaping the Resource Curse, New
York: Columbia University Press; and Robinson J, Torvik R, and Verdier, T (2006):
³3ROLWLFDO)RXQGDWLRQVRIWKH5HVRXUFH&XUVH´Journal of Development 79:2.
3
See for example Levine D (1973) Conflict and Political Change in Venezuela ,
Princeton: Princeton University Press; Karl, T (1997) The Paradox of Plenty: Oil
Booms and Petro States, Berkeley: University of California Press; Naím, M (1993)
Paper, Tigers and Minotaurs: The Politics of Venezuela´s Economic Reforms,
Washington DC: Carnegie Endowment for International Peace; McCoy, J. and Myers D
(2004) The Unraveling of Representative Democracy in Venezuela , Baltimore: Johns
Hopkins University Press.

7
We do recognize, however, that regardless of institutions, oil dependence
JHQHUDWHV D GHPDQG IRU µUHQWLVP¶ RQ WKH SDUW RI HFRQRPLF DJHQWV WKDW LV
perhaps more pronounced than in other societies4. Moreover, oil is no
doubt the fuel that has powered the Chávez regime, as it does with any
incumbent in petro-states enjoying an oil boom. But again, why the regime
has taken on its current shape, and more importantly, why it has moved in a
particular direction, requires us to know more than just the fact that fuel has
been plentiful.

Additionally, focusing exclusively on oil, as the resource curse literature

RIWHQGRHVIDLOVWRH[SODLQRQHRIWKHPRVWQRWHZRUWK\IHDWXUHVRI&KiYH]¶V
SROLFLHV  WKH GHFOLQH LQ WKH FRXQWU\¶V RLO VHFWRU XQGHU KLV ZDWFK
Considering that both in rhetoric and in practice the Chávez regime places
RLODWWKHKHDUWRIWKHFRXQWU\¶VGHYHORSPHQWVWUDWHJ\DOORZLQJWKLVVHFWRU
to decline as much as it has becomes something of a mystery. If anything,
one should think that Chávez cherishes the oil sector as the most important
national treasure to support and expand²and considering his concentration
of power, that he would have no trouble protecting this sector from
predatory actors. Yet most indicators reveal a serious weakening in
9HQH]XHOD¶VRLOeconomy. Chávez is not the first president in Venezuelan
history to be mesmerized by the promise of oil, but he became the one who
allowed the sector to decline the most. The mystery of the Chávez regime
is not that it has relied on oil as much as it has, but that despite this explicit
reliance on oil, he has allowed the sector to decay. Our chapter on oil tries
to offer an explanation for this decline. Again, to explain this trend in the

4
5RVV 0  ³+RZ 0LQHUDO-5LFK 6WDWHV &DQ 5HGXFH ,QHTXDOLW\´ +XPSKUH\V 0
Sachs, J. and Stiglitz, J: Escaping the Resource Curse, New York: Columbia University
Press; and Weyland K (2007), "Politics and Policies of Latin America's Two Lefts: The
Role of Party Systems vs. Resource Bonanzas" Paper presented at the annual meeting
of the American Political Science Association, Hyatt Regency Chicago and the Sheraton
Chicago Hotel and Towers, Chicago, IL , Aug 30.

8
RLOVHFWRUQRWMXVWLQUHJLPHFKDQJHZHSURSRVHDQ³LQVWLWXWLRQal resource
FXUVH´WKHVLVZKHUHE\LQVWLWXWLRQVSURYLGHPRVWRIWKHH[SODQDWLRQV

More fundamentally, we feel that to understand chavismo it is necessary

not just to look at the demand side, but also the supply side: ways whereby
strategic actors linked with the state managed to manipulate policies and
institutions in order to prevail politically. Chavismo represents one of the
EHVW H[DPSOHV RI D UHJLPH¶V ³DGDSWDWLRQ´ WR FRQFHQWUDWH SRZHU LQ WKH
Executive branch. At its core, chavismo is an ideology that seeks to
undermine traditional checks and balances by building an electoral majority
based on a radical social discourse of inclusion, glued together by property
redistribution plus vast social handouts extracted from the oil industry.
Essentially, it is a political project aimed at the concentration of power,
although it does so by distributing oil rents to the very poor. As with
previous populist efforts, chavismo is a politically illiberal project.

-XGJHGLQWHUPVRI5REHUW'DKO¶VFODVVLFLGHDRIOLEeral democracy²high
contestation and high inclusion²chavismo may be deemed deficient. At
the level of contestation, chavismo has increasingly undermined political
competition for office by placing state resources and security services at the
disposal of the ruling party while denying them to its rivals. Whereas at the
level of inclusion, chavismo has mobilized new and non-traditional actors
(which clearly strengthens democracy, as commonly occurs with populist
projects); but on the other hand has deliberately (and undemocratically)
excluded comparatively large segments of society who make up the
RSSRVLWLRQ E\ ODEHOLQJ WKHP DV ³ROLJDUFKV´ ³FRQWHPSWLEOH´ DQG ³HQHPLHV
RIWKHFRPPRQSHRSOH´

9
The end result of these changes in contestation and inclusion is the
complete erosion of checks and balances²which in our view, comes very
close to marking the end of democracy. Consider one example of this
erosion: very few court cases are known of societal actors suing the state,
let alone winning a case against the state. Under chavismo, the concept of
limits on the power of the majority²which all scholars who study the
quality of democracy posit as being a minimal condition that regimes must
meet to qualify as a democracy²has collapsed in Venezuela.

Authoritarian leaps have always been commonplace in Latin American

politics, as elsewhere in the developing world. In the 1980s, new checks
emerged on these tendencies in Latin America and, for a while, they
actually worked. The radical left lost steam with the collapse of European
communism, the military retreated from politics and experienced budget
cuts, civil society became stronger and drew on international support, the
UHJLRQ¶V SUHVV JDLQHG VWUHQJWK DQG DXWRQRP\ WKDQNV WR QHZ PHGLD
technology and new markets, and a general climate against mistreating the
opposition prevailed worldwide. Moreover, radical right wing movements
that had either sponsored paramilitary groups or military governments have
been under increasing scrutiny from human rights organizations.
Accordingly, traditional means by which concentration of power imposed
itself in the region²coups, insurgency, repression, terror, outright bans on
political liberties²were barred by these international and domestic
barriers. But evidence from Venezuela shows that, rather than being laid to
rest, autocratic impulses can simply adapt to new circumstances. Rather
than retreat, political movements aimed at concentrating power can
discover and conceive new ways of surviving and taking hold.

10
Chavismo adapted to this situation, as shown in Chapter 1, by selectively
discontinuing certain institutions, co-opting others, and creating new ones.
Hence significant attention is focused on the supply-side of the regime²its
clever manipulation of state institutions² to show how a project that is
UHPLQLVFHQWRI/DWLQ$PHULFD¶VSDVWFDQRYHUFRPHDGYHUVHFLUFXPVWDQFHV

+RZHYHU RXU JRDO H[WHQGV EH\RQG H[SODLQLQJ 9HQH]XHOD¶V SROLWLFDO

change. We also want to explore how different aspects of this new regime
require us to rethink not just questions about illiberal politics, but also,
development from a broader standpoint. Chapter 2 thus focuses on
economic development issues and what we call chavenomics²or heavy
use of statist policies. We argue that while Chávez brought forth a new
IRUPRISROLWLFVKHQRQHWKHOHVVUHF\FOHGROGHFRQRPLFV&KiYH]¶VSROLWLFDO
economy could be labeled as a modified return to import-substitution
industrialization (ISI). State intervention has been maximized, leading to
extraordinary inefficiencies, not unlike those generated by previous ISI
episodes. However, Chávez has also encouraged imports, departing from
the anti-import bias of classic ISI; also, in an attempt to socialize
production, oil rents are being used to expand the role of the state through
nationalization in areas that move well beyond the traditional ISI model.
This modified ISI model has allowed Chávez to attract voters and build
adherence from unexpected sectors and special interest groups, which helps
explain his electoral successes following 2003.

Chapter 3 discusses oil policy in tandem with social expenditure, an

ancillary of chaveconomics. Without a doubt, social policy is the most
widely discussed feature of the regime, yet paradoxically the least
understood. For PDQ\ &KiYH]¶V VRFLDO SROLF\ LOOXVWUDWHV D GHPRFUDWLF
commitment rare in Latin America. We disagree. Our message is that

11
under certain circumstances, disbursing aid to some of the poor by
deploying direct control over PDVSA with no semblance of check or
balance, as Chávez has done, ends up helping the president the most; this
practice is not necessarily felicitous for democracy, although, from a social
persSHFWLYH LW PLJKW TXDOLI\ DV ³SURJUHVVLYHO\ GLVWULEXWLYH´ 7KHUH LV QR
question that the Chávez regime has channeled unprecedented funding
towards social policy, exceeding by far what is generally expected from
liberal democracies in developing countries and paternalistic autocracies.
$FFRUGLQJO\ ZH H[SODLQ ZK\ D UHJLPH VXFK DV &KiYH]¶V²neither fully
democratic nor fully authoritarian²tends to generate a higher-than-
expected level of spending than democracies and dictatorships. To begin
with, the type of political competition that is allowed to exist in a hybrid
regime triggers an incentive for the government to spend; moreover, the
erosion of checks and balances that is typical of these regimes permits the
state to overspend. The combined outcome is a level of state spending that
is both high and inefficient.

Chapter 4 turns attention to foreign policy. In the 1990s, interest in foreign

policy by Latin Americanists waned; but with Chávez, interest has been
rekindled, in part because he has adopted one of the most active foreign
policies in decades. Not much has been written about the implications of
&KiYH]¶VIRUHLJQSROLF\:HDUJXHWKDWWKHGHILQLQJIHDWXUHRI9HQH]XHOD¶V
foreign policy is soft-balancing the United States, and one of its primary
tools is what we have labeled social power diplomacy. Soft-balancing
refers to efforts by nations, short of military action, to frustrate the foreign
policy objective of other, presumably more powerful nations; a variation of
traditional balancing behavior, the concept is a core tenant of realism.
Whereas hard balancing involves efforts, typically military in nature, to
reconfigure the international system (e.g., ending the predominance of a

12
great power), soft-balancing seeks less ambitious goals, centered chiefly on
raising the costs of action for the more powerful state. Beginning with
2004, Venezuela has displayed all the usual signs of soft-balancing. A key
tool deployed by Venezuela is social power diplomacy²the disbursement
of funds to smaller nations, presumably to carry out development goals, but
more precisely, to be used by recipients without the acceptance of major
conditions. We consider that social power diplomacy is one of the
UHJLPH¶V PRVW LPSRUWDQW WRROV LQ LWV FRQWHVW ZLWK WKH 8QLWHG 6WDWHV  :H
discuss how this policy works, and why its emergence is directly related to
the change in regime type. A real electoral democracy would never be able
to develop this type of social power diplomacy given the large domestic
costs of deploying such a strategy.

The authors hope the content of this book offers something of value to
scholars interested in Venezuela, Latin America, and development in
general. For Venezuelanists, we offer arguments that dispute some of the
most widely held theories concerned with the rise of chavismo. For Latin
Americanists, we offer enough material to provoke the question of whether
chavismo represents an anticipation of the future of politics in Latin
America, or simply, a phenomenon of the kind that is hard to replicate
where oil is less salient. And for those interested in development more
generally, we hope to offer some criteria to help assess whether countries
enjoying formidable economic fortune are doing all that is necessary to
manage such blessings for the good of society, not just of the president in
charge.

13
 C hapter 1
Power G rabbing in Democracy

Spanning more than a decade, the popularly elected administration of Hugo

Chávez Frías in Venezuela has enjoyed a fairly favorable political turf at
home: unprecedented oil income as of 2003, five decisive electoral
victories from 2004, increasingly tamed opposition forces following 2005,
and declining, seldom violent street turmoil. Additionally, Chávez has
achieved complete control of all check-and-balance institutions, including a
legislature with almost no representation from the opposition since 2006.
Such political blessings would be the envy of any world leader. Yet Chávez
has governed as if Venezuela were facing some kind of emergency. He has
utilized this relative calm to concentrate more power on the Executive
branch, and ushered startling changes in relations between the state and
society ±even at the expense of political disenfranchisement for certain
sectors of the population.

How did a grass-roots movement that began in 1998 as an effort to bring

democracy back to the electorate at large transform itself into a movement
intent on empowering the Executive branch above any other actor? The
emergence of this trend in Venezuela, which became extended to other
countries in Latin America, cannot be explained easily with functional
theories. Such arguments5 posit the breakdown of democratic institutions
is an outgrowth of chronic crises in governability, which prompt political
actors²whether in office or the opposition²to seize and centralize power
in order to cope with the issues at hand. Prior to 2004, one could argue that
Venezuela was suffering from a governability crisis: political groups were
5
Guillermo O'Donnell, Modernization and Bureaucratic-Authoritarianism : Studies in
South American Politics. (Berkeley CA: Institute of International Studies, University of
California, 1973).

14
sharply polarized along ideological lines, and declining oil revenues
precluded the opportunity for implementing income redistribution
strategies. One could debate whether this crisis was structural or fabricated
(we argue below that there was substantial fabrication), and this, to some
H[WHQWMXVWLILHGVRPHRI&KiYH]¶VJURZLQJEXLOGXSRISRZHUV+Rwever,
following 2004, Chávez had almost no reason to feel politically threatened
or encumbered. Yet he speeded the pace at which power was accumulated.

9HQH]XHOD¶V ODWHVW DQG PRUH VLJQLILFDQW DXWKRULWDULDQ OHDSV SDUWLFXODUO\

&KiYH]¶VVXFFHVVIXOFRQVWLWXtional amendment in 2009 to ban presidential
term limits, undertaken by means of a referendum, draws on elite intentions
±by which we mean the elecWHGSROLWLFLDQV¶RZQLGHRORJLHVDQG misreading
the preferences of larger constituencies.6 But we go further, showing how
this leap was also an outcome of available political opportunities, chiefly
the presence of economic resources at the disposal of the state, together
with weakened institutions of representation. Economic resources alone
would not have sufficed. Under stronger political parties and institutions
subject to accountability, the impact to be expected from an economic
windfall would have differed. Additionally, these authoritarian leaps are
also an outcome of deploying political strategies, by which we mean the
LQFXPEHQW¶V GHOLEHUDWHXVHRISRODUL]DWLRQSROLWLFDOµFOLHQWHOLVP¶LPSXQLW\
from corruption, and job discrimination. Chávez has never tired of
proclaiming a commitment to participatory, as opposed to liberal
democracy. He is certainly right that Venezuela is moving away from
liberal democracy; but hardly has he replaced it with greater participation.
The Chávez regime has emerged as an example of how a democratically
HOHFWHG OHDGHU FDQ H[SORLW WKH SXEOLF¶V ZLGHVSUHDG GHVLUH IRU FKDQJH LQ

6
Nancy Bermeo, Ordinary People in Extraordinary Times: The Citizenry and the
Breakdown of Democracy (Princeton, NJ: Princeton University Press, 2003).

15
order to crowd out social and political groups that oppose the revolutionary
process, and by extension, democracy.

This chapter provides an alternative explanation for the rise of this

concentration of power in the Executive branch ±in the midst of a
spectacular oil boom± and weaves together what are viewed as relevant
SROLWLFDO HYHQWV VXUURXQGLQJ WKH SRODUL]DWLRQ RI 9HQH]XHOD¶V SROLWLFV DQG
society during the chavista years.

I. Act I: Hyper-presidential Constitution.

From 1999 to 2003, the rise of an empowered presidency in Venezuela

followed a consistent pattern: the government would carry out a power
grab²selectively choosing a few (rather than all) institutions and
attempting to strip them of autonomy, almost one at a time. The opposition
would respond by protesting, and the government, in turn, by becoming
more hard-line and exclusionary.7 Beginning with late 2003, this strategy
took a different twist: the government deployed a new weapon²heavy
state spending aimed at rewarding loyalists and punishing dissidents. This
new artillery, as we will show, disarmed the opposition.

5HJLPH FKDQJH EHJDQ ZLWK WKH UHZULWLQJ RI 9HQH]XHOD¶V FRQVWLWXWLRQ

shortly after Chávez took office in early 1999. In 1998, Chávez won the
SUHVLGHQF\ DW D WLPH ZKHQ FOHDYDJHV VXUIDFHG LQ WKH FRXQWU\¶V
comparatively mature party system, thus showing the decline of the
puntofijista era8. Chávez had promised to radically dismantle what was

7
Javier Corrales, "In Search of a Theory of Polarization," European Review of Latin
American and Caribbean Studies, no. 79 (2005).
8
)UDQFLVFR 0RQDOGL DQG 0LFKDHO 3HQIROG´ ,QVWLWXWLRQDO &ROODSVH 7KH 5ROH RI
Governance in Explaining Venezuela´s Economic Decline 1975-´ LQ Venezuela:

16
perceived by the public to be a corrupt and centralized party system.
Venezuela during the 1990s had been struggling to introduce market
friendly reforms after several social and political backlashes, including
&KiYH]¶VIDLOHGFRXSDJDLQVW&DUORV$QGUpV3pUH] During the 1990s
the two party system that had characterized the puntofijsmo had collapsed
due to the opening created by the decentralization process by which
governors and mayors were directly elected rather than appointed by the
president. This change created an important opening for new leaders and
political movements to emerge shaking the power structure of traditional
party barons.

,Q UHWURVSHFW 9HQH]XHOD¶V SRRU HFRQRPLF DQG VRFLDO SHUIRUPDQFH GXULQJ

and following the 1980s was another underlying cause for the dismissal of
crony-plagued political parties such as AD and COPEI. In 1998, GDP per
capita had already reverted to the level of the early 1950s. Moderate and
extreme poverty spread from 44.4 percent of households in 1989, to 57.6
percent in 1998, whereas extreme poverty grew from 20.1 to 28.8 per cent
during the same period. This steep fall in economic and social indicators
can partially explain why voters were willing to support Lieutenant Colonel
Hugo Chávez in 1998. Nonetheless, oil prices in that very year provided
WKHILQDOEORZDJDLQVWWKHVKDWWHUHGWUDGLWLRQDOSDUWLHVZKHQ9HQH]XHOD¶VRLO
basket reached almost 8 dollars per barrel ± its lowest point in decades.

Chávez could have started off by focusing on the economy, which

everyone knew was in shambles. Instead, he focused on rewriting rules
governing relations among the branches of government, with an eye toward
expanding presidential powers. In what is now becoming a trend in the

Anatomy of a Collapse, ed. Ricardo Haussman and Francisco Rodríguez, (Pennsylavia:

Penn State University Press, 2010)

17
region, Chávez took advantage of the widespread anti-party sentiment
across the electorate to call a National Constituent Assembly expressly
aimed at putting an end to partidocracia , the local term for the stranglehold
of traditional political parties in Venezuela. Because these parties held
some power in other branches of government, it was easy for Chávez in
1999 to justify weakening those branches ± if for no other reason than, as
KHSXWLWWR³VWDEWRGHDWKWKHPRULEXQGSDUWLHV´

&KiYH]¶V ILUVW DGPLQLVWUDWLYH DFW ZDV WR VLJQ D SUHVLGHQWLDO GHFUHH FDOOLQJ
for a consultative referendum under which a Constituent Assembly could
be elected. Terms for the referendum were drafted by a special commission
appointed by the president and led by Ricardo Combellas, Ernesto Mayz
Vallenilla and Oswaldo Álvarez Paz, reputed intellectuals or politicians
who had long favored the idea of redrafting the 1961 Constitution. At the
time, a two-thirds vote was required for Congress to change or reform a
FRQVWLWXWLRQDO DUWLFOH RU WR FDOO D &RQVWLWXHQW $VVHPEO\ EXW &KDYH]¶V
supporters had obtained little more than 23 per cent of seats in the Chamber
of Deputies and 15 per cent in the Senate.

As a means to bypass Congress, the special commission recommended the

use of a consultative referendum, a novel instrument first employed in 1997
to reform the electoral law. This political strategy triggered a conflict
among the branches of powers. In March 1999, a Supreme Court ruling
approved the administrative act to organize a consultative referendum, and
accepted as binding the mandate to organize an election for a National
Constituent Assembly in the event a majority of citizens so voted. On April
25th 1999, as many as 87 per cent of the voters approved the idea and terms
set up by the presidency to elect a National Constituent Assembly; and

18
some months later, the Supreme Court also agreed to suspend Congress
while the Constituent Assembly was under way.

&KiYH]¶VILUVWSROLWLFDOIHDWZDVWRJDLQRYHUZKHOPLQJFRQWURORIWKH
Constituent Assembly. He achieved this by designing a self-serving
electoral rule for selecting delegates (a plurality system with different
district sizes at the state level) together with a well thought out nomination
strategy (ensuring that no more candidates from his coalition would be
nominated per district than there were seats under competition, a means for
avoiding wasted votes). These formal and informal rules enabled the
government, with only 53 percent of the votes, to obtain 93 percent control
of seats.

Not surprisingly, the constitution was drafted with negligible input from the
opposition in less than three months ± at the time the most presidential
constitution in Latin America.9 The presidential term was expanded from
five to six years, permitting reelection. The president obtained complete
discretion over promotions within the Armed Forces without need for
legislative approval. The Senate was eliminated, thus lessening the
balancing of states in the legislature and checks on the president. The
president gained the power to activate any kind of referendum without
support from the legislature. Public financing for political parties was
banned. Also, the new constitution introduced the possibility of recalling
mayors, governors or the president, but contingent upon very stringent
conditions.

9
Michael Coppedge, "Venezuela: Popular Sovereignty Versus Liberal Democracy," in
Constructing Democratic Governance in Latin America , ed. Jorge Domínguez and
Michael Shifter (Baltimore, MD: Johns Hopkins University Press, 2003), Javier
Corrales, "Power Asymmetries and the Rise of Presidential Constitutions," in APSA
(Philadelphia, PA: 2006).

19
9HQH]XHOD¶V  &RQVWLWXWLRQ SURGXFHG ZKDW VFKRODUV GHQRWH D ³KLJK-
VWDNHSRZHU´SROLWLFDOV\VWHP:10 both the advantages of holding office and
the costs of remaining in the opposition were significantly expanded. When
power stakes are high, the incentives for incumbents to share power with
the opposition decline, and the acceptability of the status quo for the
RSSRVLWLRQ VKULQNV ,Q &KDYH]¶V 9HQH]XHOD D GHPRUDOL]HG RSSRVLWLRQ IHOW
excluded and deprived of any means of influencing policy, and soon turned
to organizing street protests to protect the few strongholds of autonomy it
could still hold.

The political regime that emerged in Venezuela at the turn of the century
differed sharply from the preceding system, the so-called Punto Fijo
regime (1958-1998). The focal starting point of the Punto Fijo system had
been the newly legalized political parties; and by the 1970s, the regime
became known worldwide as a paradigmatic case of how political pacts can
lead to democracy even in unlikely places. But in the 1990s, the Punto F ijo
regime also gained fame as a case study of how a pact among political
parties can ossify and become repudiated by voters. The chavista era
replaced this focus on parties with a focus on the presidency. Once
legislative prerogatives were weakened, it became easier for the president
to pack the court and tighten control of the attorney general, comptroller
general, and of course, the military.
10
Douglas C. North, William Summerhill, and Barry R. Weingast, "Order, Dirsorder,
and Economic Change: Latin America Versus North America," in Governing for
Prosperity, ed. Bruce Bueno de Mesquita and Hilton L. Root (New Haven, CT: Yale
University Press, 2000), Adam Przeworski, Democracy and the Market: Political and
Economic Reforms in Eastern Europe and Latin America (New York, NY: Cambridge
University Press, 1991). For an applied version of this argument to the Venezuelan case
VHH )UDQFLVFR 0RQDOGL DQG  0LFKDHO 3HQIROG ³,QVWLWXWLRQDO &ROODSVH 7KH 5ROH RI
Governance in Explaining Venezuela´s Economic Decline 1975-´ LQ Venezuela:
Anatomy of a Collapse, ed. Ricardo Haussman and Francisco Rodríguez. (State Park
PA: Pennsylvania State University Press, 2010).

20
In the meanwhile, the Executive branch also acquired control over the body
that governs electoral affairs ± a move that prompted, for the first time in
9HQH]XHOD¶V GHPRFUDWLF KLVWRU\ GRXEWV DERXW WKH IDLUQHVV RI HOHFWRUDO
rule.11 Electoral control was achieved by creating a transitory council that
governed legislative affairs between the approval of the new constitution in
December 1999 and the election of the new congress in August 2000. This
transitory council, labeled little congress ( congresillo), was comprised of
members of the Constituent Assembly and non-elected representatives.
Based on a set of transitory prerogatives provided by the National
Constituent Assembly, the congresillo appointed the National Electoral
Council and enacted a body of key legislation.

The 1999 Constitution thus empowered the Executive branch far more than
any other political actor. The next step was to rearrange state-society
relations.

II. Act II: Polarize and Punish

Taking advantage of his new constitutional prerogatives, Chávez in 2001

oEWDLQHG IURP WKH OHJLVODWXUH ³HQDEOLQJ SRZHUV´ WR UXOH E\ GHFUHH RQ D
series of policy areas, mostly property rights in the hydrocarbon and
agricultural sectors. Prior to this, in August 2000, he had obtained control
of the Assembly, when all existing powers, including the president, were
subject to new elections under the 1999 Constitution. The Polo Patriótico ±
&KiYH]¶VORRVHSROLWLFDOFRDOLWLRQ± obtained over 59 per cent of the vote for
the presidency and controlled 60 per cent of seats in the new unicameral
Assembly. Using his grip on the legislative branch, Chávez also threatened
11
Miriam Kornblith, "Elections vs. Democracy," Journal of Democracy (2005).

21
to use his power to change the Law of Education. This provoked an
immediate allergic reaction from broad sectors of society, shocked at what
was perceived as a gratuitous power grab. Now comprised of business
groups, labor unions, civic organizations, and new and old political parties,
the opposition began to promote national protests, including a two-day
civic stoppage in December 2001. By 2002, the country was immersed in
the worst polarization in Latin America since the 1980s Sandinista regime
in Nicaragua.

For two years, from 2001 to 2003, the opposition seemed to gain the upper
hand. The ruling coalition suffered defections in record numbers ±from the
cabinet, the legislature, the voting ranks, and even the military. Interior
Minister Luis Miquilena, a skillful political operator who had maneuvered
&KiYH]¶VULVHWRSRZHUOHGDODUJHGLVDIIHFWHGIDFWLRQZLWKLQ chavismo that
became more vocal about the lack of consultation over key legislative
changes. On November 13th 2001, in a cabinet meeting that lasted almost
14 hours, the Executive branch approved 49 laws, some of which had not
been discussed with any social, business or labor organization. The abrupt
nature of this decision created a political schism; a group within the
Assembly, headed by Alejandro Armas and Ernesto Alvarenga, organized a
special commission to review the content of the new legislation.
Nonetheless, the damage had been done. Civic organizations, political
parties, business groups and the media reacted by stirring discontent against
the president. Luis Miquilena quietly left the government. Across the
country, opposition marches and civic stoppages became commonplace.

On April 11th, 2002, nearly a million people marched on the presidential

SDODFH LQ RQH RI WKH ODUJHVW FLYLF GHPRQVWUDWLRQV LQ /DWLQ $PHULFD¶V
history, to demand the ousting of Hugo Chávez. As they neared the palace,

22
surrounded by loyal supporters, violence broke out, 19 people were killed
anGRYHUZRXQGHG0LOLWDU\OHDGHUVUHIXVHGWRKHHGWKHSUHVLGHQW¶VFDOO
to repress protesters, and Chávez reportedly resigned as president. The next
day Pedro Carmona, head of the Federation of Business Chambers
(FEDECAMARAS) leaded a coup, with support from a small military
IDFWLRQ VZRUH KLPVHOI LQ DV D ³WUDQVLWLRQDO´ SUHVLGHQW DW WKH KHDG RI DQ
ultra-conservative government, and announced the scrapping of the
constitution and dissolution of the National Assembly and governorships.
But initial supporters soon abandoned Carmona, the military retracted,
chavista supporters took to the streets, and Chávez was restored to power
by loyal army units in less than 72 hours. This event condemned the
opposition for having organized a failed coup, labeling it golpista .12

To no avail, the 2002 crisis prompted the mediation of the international

community. César Gaviria, Secretary General of the Organization of
American States (OAS), moved to Caracas for almost six months in order
to promote negotiations between chavista and opposition factors, with the
Carter Center as observer. Negotiations soon became stalemated. Chávez
remained unwilling to concede his resignation, and Venezuelan society
continued polarized. Under the Coordinadora Democrática , an umbrella
organization comprised of political parties and civic movements, the
opposition was also unwilling to accept constitutional rules, particularly to
ZDLWRUDFWLYDWHHOHFWRUDORSWLRQVLQRUGHUWRFRQWHVW&KiYH]¶VLGHRORJLFDO
project. As the chance of reaching some accommodation disappeared from
sight, the opposition chose a second line of attack²a two-month strike
supported by workers and managers of the state-owned oil company,
PDVSA.
12
For a detailed account of the short-lived coup against Chávez, see Brian Nelson
(2009), The Silence and the Scorpion: The Coup Against Chávez and the Making of
Modern Venezuela , Nation Books.

23
Following the April 2002 failed coup, PDVSA leadership feared the
privileged and autonomous position enjoyed by the company would soon
be challenged. The government blamed top management for abetting and
participating in the political uprising, and conflict ensued. From the time
the oil industry was nationalized in 1974, PDVSA had been managed as an
HQFODYH RIWHQ UHIHUUHG WR DV D ³VWDWH´ ZLWKLQ WKH VWDWH 7KH FRPSDQ\¶V
technocratic style, inherited from former multinational companies such as
Exxon and Shell, was an outgrowth of the Carlos Andrés Pérez
administration, which had sought to keep politics out of operations by
allowing politicians to haggle over the distribution of oil revenue at the
time of preparing the national budget.

The autonomous strategy prescribed for PDVSA enabled the company to

become known as one of the best-managed state-owned oil companies in
the world and certainly in Latin America, but kindled growing resentment
even within the local business community. Added to this came Rafael
&DOGHUD¶V PRYH WR RSHQ WKH RLO LQGXVWU\ WR IRUHLJQ LQYHVWPHQW GXULQJ KLV
second administration in the late 1990s, which left the industry vulnerable
to attack by nationalist and left-wing groups. Chávez, enraged and restored
to power, was quick to take advantage of these cracks.

Before Chávez became president in 1998, Congress had agreed to support

&DOGHUD¶V LQLWLDWLYH WR DOORZ IRUHLJQ FRPSDQLHV LQ DVVRFLDWLRQ ZLWK
PDVSA, to undertake investments required to rapidly expand oil output.
But implementation of the oil opening required a Supreme Court ruling to
interpret the 1943 Hydrocarbons Law, which according to nationalist
groups limited private investments exclusively to joint ventures directly
controlled by the state ± a view challenged by PDVSA. As it turned out, the

24
&RXUW EDFNHG 3'96$ SUHVLGHQW /XLV *LXVWL¶V LQWHUSUHWDWLRQ DOORZLng
operations and strategic associations with foreign companies to be set up as
joint ventures not directly controlled by PDVSA.

3'96$¶VRLORSHQLQJSURYHGWREHDKXJHVXFFHVV,QOHVVWKDQWKUHH\HDUV
Venezuela brought in more than 20 international oil companies and
guaranteed investments for more than 22 billion dollars for the next ten
years. However, the process was widely criticized by nationalist and left
wing movements such as Patria Para Todos (PPT) and the Partido
Comunista de Venezuela (PCV), bRWK RI ZKLFK VXSSRUWHG &KDYH]¶V
coalition. Among the prominent politicians that opposed the oil opening
were deputies Alí Rodríguez Araque and Bernardo Álvarez, as well as
senator Álvaro Silva Calderón. These politicians claimed the oil opening
was unconstitutional and clearly violated the 1943 Hydrocarbon Law. In
their view, the fiscal regime established by the Hydrocarbons Law was
transparent and rigid, and could not be changed by PDVSA by means of a
flexible interpretation.

Moreover, according to the aforementioned politicians the Hydrocarbons

Law strictly limited private control over oil investments, and did not allow
for international arbitration. During the 1998 presidential campaign, Hugo
Chávez echoed criticism against the oil opening on the grounds the process
had abdicated sovereign rights; and once president, he appointed Alí
Rodríguez Araque as Minister of Energy and Mines, as well as Bernardo
Álvarez and Álvaro Silva Calderón to key positions within this same
ministry, charging them with revamping oil legislation in Venezuela.

Following these political moves, the relationship between PDVSA

management, the multinational oil firms and the government deteriorated

25
rapidly. Chávez had made it clear he wanted to have both political and
operational control over the oil industry. Top management at PDVSA, after
Carmona´s failed coup, organized a quasi-union, named Gente del Petroleo
(The Oil People) that enlisted a sizable group of members from middle-
and top-management positions. This group soon decided to strengthen its
relationship with the Coordinadora Democrática by pressuring opposition
politicians to abandon negotiations and begin a national strike.

By late November 2002 politicians were unable to stop pressures either

from Gente del Petróleo or the National Labor Confederation (CTV),
failing to convince them that the best option was an electoral solution.
Instead, Coordinadora Democrática called for a national strike on
December 2nd DQGLQIHZGD\V¶WLPH Gente del Petróleo joined the
strike. Although public services, the media, banks, leading food producers
and supermarkets continued operating, large numbers of firms, together
with almost the entire oil industry, closed for the better part of three
months.

9HQH]XHOD¶V RLO SURGXFWLRQ FDPH to a halt. Again, rather than negotiate,

Chávez arbitrarily fired nearly 60 percent of PDVSA staff, including most
managers, and assigned control of the oil industry to the military. Gasoline
distribution collapsed. In large urban centers, certain foodstuffs and other
convenience goods were in short supply or simply unavailable. Moreover,
the country was mired in political uncertainty.

Chávez deployed remarkable political skills and soon persuaded the

military and the international community that PDVSA was being used for
subversive purposes, and the national interest required direct state control
of the industry. The military accepted and, with the support of chavista

26
militants and low-ranking PDVSA managers, production was slowly
restored at high cost. In game parlance, tKHVWULNHEHFDPHD³FKLFNHQJDPH´
between the government and the opposition. But because the economic
recession that ensued (a 17.6 percent contraction of Gross Domestic
Product in the first quarter of 2003) hurt strikers far more than it did the
government, the strikers became the first to defect. By early March, the oil
strike, which chavistas KDG ODEHOHG DQ ³RLO FRXS´ KDG EHHQ SROLWLFDOO\
defeated.

Following the failed strike, the opposition chose yet another angle of
attack: activate a recall referendum. For the first time, the opposition posed
a truly electoral challenge to Chávez, in part because previously no such
challenges were constitutionally available. The problem was that the
Constitution set high thresholds for this kind of challenge. To activate the
referendum, proponents were required to collect valid signatures from 20
per cent of registered voters; and to execute removal from office, the
opposition needed to obtain more votes than the number obtained by the
president in the previous election ±that of August 2000, when he was first
elected by a landslide under the 1999 Constitution. As might have been
expected, the regime came up with several legal and administrative barriers
to discourage signature collection.

First, the National Electoral Council (CNE) declared null and void the
process under which the opposition had gathered the required signatures
with support from local specialized civic associations in electoral affairs,
such as Súmate. Instead, CNE crafted strict rules for signature gathering
and ruled that it would directly supervise the process. Despite this ruling,
the opposition managed to again collect the required number of signatures
under these strict procedures. Second, CNE declared void a large number

27
of signatures that were collected following the procedures set up by the
electoral authority, and forced the opposition to validate these signatures
one more time. By March 2004, CNE agreed the opposition had indeed
collected more than enough signatures for holding a referendum, and
preparations began to schedule it in the following month of August. This
was the weakest moment for the administration, the closest it came to
succumbing. Polls showed the opposition was far ahead.

Nonetheless, the government, yet again, did not respond by softening

exclusionary policies. Instead, to deal with this new threat from below, the
state introduced an old tool in Latin American politics²vintage populism.

III. Act III: Spend and Deflate

Faced with mounting challenge to his regime, Chávez deployed his now
famous misiones programs. Prior to the April 2002 coup, Chávez was
relatively inattentive to social spending. He had dismantled most social
programs inherited from the previous administrations ±even dropping aid,
e.g., for widely used urban day-care centers. In effect, social policies were
minimal, delegated mostly to the military under the Plan Bolivar 2000 .

This changed in late 2003. Taking advantage of rising oil revenue and
perhaps concerned over public demand for a recall referendum, Chávez
ODXQFKHGDVHWRIVRFLDOSURJUDPVODEHOHGDVKHGHVFULEHGWKHP³PLVVLRQV
WRVDYHWKHSHRSOH´2QFHWKHUHIHUHQGXPZDVVFKHGXOHGIRU$XJXVW
an astounding amount in public spending, almost 4 percent of GDP, was

28
emplR\HG WR GHIHDW WKH RSSRVLWLRQ WKURXJK WKH ³PLVLRQHV´13 As a result,
Chávez succeeded in overturning his low 2003 approval ratings, hovering
at 45 per cent, into a 59 percent victory.

Dismayed, the opposition claimed fraud, but international observers

(chiefly OAS, the Carter Center, and United Nations Development
Program) dismissed the charges. The expansion in public and social
H[SHQGLWXUHDVREVHUYHGLQ)LJXUHERRVWHG&KiYH]¶VSRSXODULW\PDNLQJ
his personal acceptance closely correlated to real spending growth.

)LJXUH*URZWKRI5HDO3XEOLF6SHQGLQJYV&KiYH]¶V3RSXODULW\5DWLQJV
(August 2001 to July 2009)

Real Spending Growth vs. Popularity

Popularity Spending Growth
100 60
50
90
Real Spending Growth (%)
Degree of Popularity (%)

40
80
30
70 20

60 10
0
50
-10
40
-20
30 -30
May-05

Mar-06
Nov-02

Nov-07
Jan-02
Jun-02

Apr-03
Sep-03

Jul-04

Jan-07
Jun-07

Apr-08
Sep-08

Jul-09
Feb-04

Dec-04

Oct-05

Feb-09
Aug-01

Aug-06

!"#$%&'()*+,%,-.)/.%,"-.0)1&0)2&'"$")34567)89:7);.<.-=0,',').-1)>%".-.0?<,%.

13
Social spending for political purposes in 2004 reflects both the amounts deployed to
defend the regime on the occasion of the August referendum, as well as the upcoming
gubernatorial and mayoralty elections held in October.

29
Stunned by the outcome of the referendum, the opposition plunged into a
prolonged coma; so great was the reversal of fortune from a mere four
months earlier, its energy fizzled. Significantly, resources were barely
mustered to prepare for the upcoming gubernatorial and mayoralty
elections, to be held only two months later, in October 2004.

Chávez, buoyed and elated by victory in the referendum, maintained

unprecedented levels of public spending to promote chavista candidates for
governors and mayors. As a result, he succeeded in taking control of 21 out
of 23 state governorships, and more than 90 percent of municipalities. In
addition, the government proceeded to pack the Supreme Court with 12
DGGLWLRQDOMXVWLFHVDOOGHHPHGDYRZHG³UHYROXWLRQDULHV´

Events taking place in a span of only three months turned Venezuela from a
situation of heightened power competition in 2003 to power asymmetry in
2005: the government began to feel more emboldened, and the opposition,
more futile. Exhausted and discouraged, the opposition failed to prepare
adequately for still another upcoming election ±the National Assembly,
scheduled for December 2005. Claiming the government could use the
automated voting system to trace voter identity, the opposition opted to
boycott the elections. This proved to be a foolhardy choice. Chávez ended
up with total control over the legislature, with almost no dissident voice.

By early 2006, the opposition had virtually surrendered. Every effort to

design a strategy to counter the Chávez regime had failed ±from mobilizing
vast public demonstrations to promoting the failed coup, shutting down the
oil industry by means of a national strike, holding a recall referendum,
boycotting one election and standing for others, all this time pleading to no
avail for support from the international community. Each successive

30
election cut short the oppositioQ¶VSRZHUDQGEURXJKWIHZHUFRQFHVVLRQVE\
the government. The opposition, as it were, ran out of oxygen; for in
Venezuela, as is true of any oil producing country where the state runs the
industry, the government controls the oxygen tank, and most of that oxygen
went to supporters.

IV. The December 2006 Presidential Elections

9HQH]XHOD¶V 'HFHPEHU 06 presidential election result reflected the

LQFXPEHQW¶VJURZLQJHOHFWRUDOVWUHQJWKVLQFH3UHVLGHQW&KiYH]ZRQ
reelection for a six-year term with 62.9 percent of the vote, compared to the
oppositioQ¶VSHUFHQW8QOLNHWKHRutcome from the recall referendum,
the opposition did not claim fraud. The CNE approved a manual audit of
votes that confirmed the official tally, according to international observers
such as the European Union and a local NGO, Ojo Electoral .

Chávez won at least 50 percent of the vote in all Venezuelan states,

LQFOXGLQJ WKH RSSRVLWLRQ FDQGLGDWH¶V KRPH VWDWH RI =XOLD 2YHUDOO UHVXOWV
showed he won with the widest margin and highest voter turnout in
Venezuelan history ± although voter abstention reached at least 25 percent.
Chávez widened his margin with every major election since 1998 but this
time Chávez garnered a larger share of votes in rural states, such as
Amazonas, Apure, Cojedes, Delta Amacuro, Guárico and Sucre. Only in
urban centers did the opposition candidate, Manuel Rosales, fare better
WKDQ&KiYH]LQ3HWDUHKRPHWRWKHFDSLWDOFLW\¶VODUJHVWFRQFHQWUDWLRQRI
poor voters, Rosales trailed by only 19,000 votes. Other more contested
results took place in several western states, such as Táchira and Mérida.
However, voter support for Chávez was large in several oil producing
states, such as Anzoátegui, Falcón, Monagas and Zulia.

31
&KiYH]¶VSROLWLFDOSDUW\ Movi miento Quinta República (MVR), carried an
overwhelming share of votes in the presidential election. Other parties
supporting Chávez ( Podemos, Patria Para Todos and PCV) contributed
only 14.6 percent of the vote. The one glimmer of hope for the opposition
may have been that the tendency since 1992 for opposition voters to turn
DZD\ IURP SROLWLFDO SDUWLHV ZKLFK ZHDNHQHG VRFLHW\¶V FDSDFLW\ WR KROG
authoritarianism in check,14 may have started to revert: most of the
opposition votes were concentrated in two non-traditional parties, Un
Nuevo Tiempo and Primero Justicia .

7KLV GHFLVLYH UHHOHFWLRQ YLFWRU\ JUDQWHG &KiYH]¶V OHDGHUVKLS D GHJUHH RI

institutional power unprecedented in the history of democracy in Latin
America. And yet, Chávez misread the meaning of the 2006 electoral
results. Except for the most radical supporters,15 the vast majority of
Venezuelans who voted for Chávez in 2006 viewed his reelection as an
expression of approval of the status quo: the incumbent was being
rewarded for delivering a formidable spending boom after almost 25 years
of economic contraction, and for restoring political peace following three
years of intense instability. But Chávez saw his reelection instead as a
mandate for further radicalization.

14
Javier Corrales, "Strong Societies, Weak Parties: Regime Change in Cuba and
Venezuela in the 1950s and Today," Latin American Politics and Society 43, no. 2
(2001).
15
For a discussion of the division within chavismo between radicals and moderates, see
Steve Ellner, Rethinking Venezuelan Politics (Boulder, CO: Lynne Rienners, 2008).

32
V. How Electoral Support and Rising Authoritarianism Reinforced Each
Other

In the years spanning 1989, when decentralization reform was introduced

by allowing state governors and municipal mayors to be elected by popular
vote, and 1998, when Chávez was first elected, Venezuelan voters
repeatedly turned against efforts by presidents to concentrate power.16
How did Chávez manage to prevent this electoral sentiment, so strong in
the 1990s, to unseat him in the years that followed?

7RXQGHUVWDQG&KiYH]¶VHOHFWRUDOIRUWXQHVVLQFHLWKHOSVWRFODULI\WKH
symbiotic relationship between political clientelist spending and declining
checks and balance institutions. As the effectiveness of these institutions
declines in an improving economy, the incumbent enters the enviable
position of being able to increase spending while making it more
discretionary. This expands opportunities for clientelism, and thus gain
more votes, while simultaneously eroding institutions of accountability.17

For the sake of discussion, we propose there are four kinds of social
spending: 1) underfunding; 2) cronyism; 3) clientelism; and 4) pro-poor.
Underfunding refers to situations where governments fail to provide
sufficient funds for social programs. Cronyism consists of social outlays
WKDW DUH LQ IDFW FRQFHDOHG GLUHFW VXEVLGLHV WR HOLWHV PRVWO\ ³IULHQGV´ DQG
favorites of incumbents. Clientelism refers to spending that, unlike
cronyism, is directed toward non-elites, but is nonetheless offered

16
Jennifer L. McCoy, "From Representative to Participatory Democracy? Regime
Transformation in Venezuela," in The Unraveling of Representative Democracy in
Venezuela, ed. Jennifer L. McCoy and David J. Myers (Baltimore: The Johns Hopkins
University Press, 2004).
17
This section draws from Javier Corrales and Michael Penfold, "Social Spending and
Democracy: The Case of Hugo Chávez," LASA Forum (2007).

33
conditionally: the state expects some kind of political favor back from the
grantee. Lastly, pro-poor spending occurs when aid is offered
unconditionally, based on true need.18

All democracies engage in all four types of spending, although proportions

vary. The key question is whether a newly elected administration manages
to change the inherited proportions. We suggest the answer depends on
whether two democratic conditions exist: 1) extent of political competition,
and 2) strength of check and balance institutions.

Political competition refers to the distance between the incumbent and the
opposition in terms of political force . If the opposition is small in terms of
votes, has reduced access to state office, or has no immediate opportunity
to challenge the government electorally, then we can say that the
opposition is weak relative to incumbents. The other democratic variable is
institutional accountability. When presidents face constraints from the
legislative branch, i.e. divided government or high legislative prerogatives
over budgets, the opposition is better able to oversee the administration,
WDUJHW VRFLDO IXQGV DQG FRQWDLQ WKH LQFXPEHQW¶V WHPSWDWLRQ WR XVH VRFLDO
policy self-VHUYLQJO\  $OO WKLV IDYRUV ³SUR-SRRU´ VSHQGLQJ RYHU ³YRWH-
EX\LQJ´VRFLDOVSHQGLQJ

Different values for these two democratic conditions can yield different
results in terms of social spending tendencies (see Table 1). The worst
situation, for the poor at least, is low political competition. If there is little
political pressure because the opposition is weak, incumbents have little or
no incentive to cultivate votes and thus expand spending. Social spending

18
See World Bank, Making Services Work for Poor People (Washington, DC: The
World Bank, 2004).

34
will remain sparse or easily diverted toward cronyism if institutions of
accountability are also weak. If there is heightened competition, on the
other hand, the incumbent begins to have an incentive to cultivate the vote
and thus spend among a larger group of potential voters. This is still no
guarantee that spending will be pro-poor rather than clientelist. The best
safeguard against clientelism comes from the other key variable: checks on
the arbitrariness of state officials.

Table 1. How political competition and institutional accountability

influences social spending

Constrained by Not Constrained By

Institutions Institutions
Low Underfunding Cronyism (friends and
Competition family)
H igh Pro-poor spending Clientelism
Competition

In short, pro-poor spending occurs when two conditions are met: high
political competition and institutional constraints. This proposition helps to
H[SODLQ 9HQH]XHOD¶V VRFLDO SROLF\ XQGHU +XJR &KiYH] The first stage
represented the political shift from high accountability in 1998-99 to low
accountability, following the approval of the new constitution in December
1999²when underfunding and some cronyism prevailed. The second
stage, 2000-2003, corresponds to a move from a situation of low political
competition to heightened political competition. Once the opposition began
to focus on the 2004 recall referendum and subsequent elections, political
competition heightened further. Fierce political competition prompted the

35
Executive branch to spend, and declining accountability allowed it to spend
opportunistically.

No estimates of the magnitude of social spending under Chávez are

available. Perhaps the best indicator that can be used is the accumulated
fiscal deficit for 2006, which reached 2.3 percent of GDP despite a five-
fold expansion in oil prices during the previous three years.19 As discussed
in the following chapter, the government established a special non-
transparent fund believed to hold more than US $15 billion from the oil
windfall, with no legislative oversight. This fund was placed under the
control of the Executive branch through the Ministry of Finance, rather
than the Central Bank.

Returning to the four classes of social spending described earlier, Chávez

appears to have distributed resources following different political criteria
for different programs; but clientelism primes heavily in most of them.20
While some programs were influenced by poverty considerations ( Misión
RibasPRVWSURJUDPVZHUHXVHGWR³EX\YRWHV´DWWKHPXQLFLSDOOHYHO$V
a consequence, clientelism and poverty interacted closely. In fact, when
distributing cash transfers, the Chávez regime was able to simultaneously
³EX\ YRWHV´ ZKLOH GLVWULEXWLQJ RLO LQFRPH WR WKH YHU\ SRRU  ,Q RWKHU
programs ( Barrio Adentro and Mercal ), spending followed demographic
considerations and political criteria, namely, whether the governor or
mayor was pro-regime. In these particular missions, poverty variables had
no influence in explaining the distribution of resources at the state and
municipal levels.

19
Francisco Rodríguez, "Why Chávez Wins?," Foreign Policy (2007).
20
Michael Penfold, "Clientelism and Social Funds: Empirical Evidence from Chávez´s
Misiones Programs," Latin American Politics and Society, Vol. 49, No. 4 (2007).

36
The key point is that the combination of opportunistic social spending and
declining accountability has decisive political effects: on the one hand, it
leads to favoritism and thus polarization;21 and on the other, it leads to a
regime that is virtually impossible to defeat electorally. The opposition can
never match the level of resources deployed by the state.

In short, state spending is a product of democratic pressures (heightened

political competition), but after a certain threshold of irregularity, it begins
to undermine democratic institutions, by creating an uneven playing field
between the incumbent and opponents. Spending has given the Chávez
regime an advantage in competing for votes: the state competes with words
and money; but the opposition, with words only.

9, $FW ,9 'HDOLQJ ZLWK $PELYDOHQW *URXSV  ,W¶V PRUH WKDQ MXVW RLO
money

Clientelist spending has been crucial for Chávez to win elections and tame
the opposition since 2004, but not the only tool at his disposal. The
chavista regime also relied on two less tangible but equally powerful
strategies to sustain its electoral coalition: offering supporters impunity to
engage in corruption and job discrimination. These two levers are not that
different IURP WKH IDPRXV ³LQGXFHPHQWV DQG FRQVWUDLQWV´ W\SLFDO RI
traditional Latin American corporatism.22 The difference is that in classic
corporatism, inducements and constraints were applied largely to organized

21
See Youssef Cohen, Radicals, Reformers, and Reactionaries: The Prisoner's
Dilemma and the Collapse of Democracy in Latin America (Chicago: Chicago
University Press, 1994).
22
Ruth Berins Collier and David Collier, "Inducements Versus Constraints:
Disaggregating "Corporatism"," American Political Science Review 73 (1979).

37
labor; under Chávez and other neo-populists,23 these tools became applied
to amorphous groups that are not necessarily organized. In Venezuela,
these groups are largely comprised of non-ideologized, voters, i.e., those
who have not sided with either Chávez or the opposition, and conceivably
could go either way. Locally, they are termed ni-nis (neither/nor).

Polls have for some time identified significant presence of ambivalent

voters. By July 2001, for instance, one reputable pollster began to classify
VRPH YRWHUV DV ³UHSHQWHG chavistas´ the number of which reportedly
swelled to 32.8 percent of voters by December 2001.24 Some of these
chavistas EHFDPH ³OLJKW´ RSSRQHQWV RI WKH UHJLPH DQG RWKHUV ³OLJKW´
supporters. Even by 2006, as many as 30 percent of voters were either in
³VOLJKW´ DJUHHPHQW RU ³VOLJKW´ GLVDJUHHPHQW ZLWK UHJLPH SROLFLHV 25 This
suggests radical leftist governments in a polarized electorate need to
GHYHORS VWUDWHJLHV WR GHDO ZLWK DPELYDOHQW JURXSV &KiYH]¶V UHVSRQVH WR
this challenge was two-fold: impunity from prosecution and job
discrimination.

Impunity from prosecution differs from clientelism in that benefits

distributed pass from strong actors (in this case the state) to locally
powerful actors (e.g., the military, business groups). Like clientelism,
opportunity for corrupt practices may serve as a strategy designed for non-
ideologized groups. To the extent powerful actors can act as major veto
groups vis-à-YLV SROLF\ LVVXHV RU HYHQ WKH UHJLPH¶V RZQ VXUYLYDO LW LV

23
Kurt Weyland, "Neopopulism and Neoliberalism in Latin America: How Much
Affinity?," Third World Quarterly 24, no. 6 (2003).
24
José Antonio Gil Yepes, "Public Opinion, Political Socialization, and Regime
Stabilization," in The Unraveling of Representative Democracy in Venezuela , ed.
Jennifer L. McCoy and David J. Myers (Baltimore, MD: Johns Hopkins University
Press, 2004).
25
Consultores 21, (2006).

38
important for governments in polarized political settings to deploy
significant resources to deal with these actors.26 Moreover, in radicalized
settings, the opposition becomes so galvanized that it may be vital to have
at hand a mechanism for co-opting elites (e.g., military and business
groups), if anything, as a potential shield against possible coups. In
Venezuela, this might explain why competitive bidding was not an option
for most government contracts and why few individuals close to the
government were prosecuted for corrupt practices.

The second strategy deployed by the Chávez regime to deal with

ambivalent groups was job discrimination. Chávez himself repeatedly
boasted that the largest benefits of his administration (e.g., government
jobs, state contracts, subsidies) were earmarked exclusively for his
supporters. Additionally, the regime did little to discourage the notion that
LWKDGDYDLODEOHNQRZOHGJHRISHRSOH¶V voting behavior.

Two of the best-known examples of government access to voting behavior

were Súmate and the Lista Tascón. Súmate was a not-for-profit
organization accused by Chávez of breaking the law for obtaining US
$53,000 in support from the National Endowment for Democracy,27 an
agency funded by the U.S. Congress. The funds in question²hardly a
significant sum² was less at issue than the fact that Súmate was deeply
involved in collecting signatures for the 2004 recall referendum.

Lista Tascón was a document publicized by chavista Assembly member

Luis Tascón that showed voting data for citizens who signed the recall

26
See Bruce Bueno de Mesquita et al., The Logic of Political Survival (Cambridge,
MA: The MIT Press, 2003).
27
On similar trends elsewhere, see Thomas Carothers, "The Backlash against
Democracy Promotion," Foreign Affairs (2006).

39
petition. The document in question represented a digital database of
signatures CNE released to Tascón for transmission to the National
Assembly. Deplorably, this information appeared on the Internet and was
deliberately employed to induce citizens to withdraw their signatures or
else face job termination and denied access to public contracts and social
benefits.

Public dissemination of voter data was bad enough. Some months later, in
order to enhance the common belief that the government had ready access
to voter behavior, the regime also published the use of special software,
called Maisanta , where Lista Tascón data were correlated with the voter
registration and identity card numbers of citizens participating in misiones.
Hence Maisanta SURYLGHG YRWHUV D SV\FKRORJLFDO LPSUHVVLRQ WKDW ³ELJ
EURWKHU´ ZDV LQGHHG ZDWFKLQJ DQG KDQGHG WKH UHJLPH D GLVWLQFWO\
sophisticated tool for job discrimination in the public sector, and in turn,
vote buying.

The foregoing shows the Chávez regime actually publicized, rather than
disguised, the image of being a powerful government. Conveying this
image to the electorate was necessary to suggest that there were significant
gains to be had from remaining loyal to the regime, and large losses from
dissenting ± a strategy that clearly worked among non-ideologized and
non-polarized groups.

In retrospect, it may be noted the chavista coalition changed enormously

since its inception. Back in 1998, the movement offered a progressive
ideology that promised to free Venezuela from the stranglehold of
stagnated political parties and repeated economic breakdowns. This agenda
was pro-change but not radical, and served to attract a vast majority of

40
voters. Soon, however, the agenda turned radical. This move played up to
the extreme left, but at the expense of polarization ± and with it a large
segment of ambivalent voters who were turned off by either extreme.
Lavish use of strategies allowing for corruption, impunity, and job
discrimination kept ambivalent groups from defecting and enabled the
regime to increase voter support beyond that which radical groups on the
left provided on their own.

9,,7KH2SSRVLWLRQ¶V'LOHPPD

Dealing with an uneven playing field, however daunting, was not the
greatest challenge faced by the opposition in an electoral context offering
flimsy guarantees of fairness. To become a credible option, the opposition
certainly had to overcome internal rifts ± but more significantly,
predisposition among many of its ranks to abstain from voting. The
opposition had been divided between two camps: one that felt electoral
conditions barred voters from participating, and another claiming the only
option at hand was to vote despite lack of fairness. The former camp
DUJXHG WKDW WKH RSWLPDO FKRLFH ZDV WR ³GHOHJLWLPL]H´ WKH UHJLPH E\
abstaining, whereas the latter group argued that promoting abstention or
non-FRQVWLWXWLRQDO H[LWV RQO\ IDYRUHG &KiYH]¶V SROLWLFDO DQG HOHFWRUDO
strategy. In the 2006 presidential elections the opposition tried to deal with
some of these challenges for the first time, but clearly not well enough.

Overcoming internal divisions was (temporarily) solved less than five

months before the 2006 presidential election. The race started with three
reputable candidates, each from different ideological backgrounds:
Teodoro Petkoff (a former guerilla leader in the 1960s, planning minister
under Caldera, and editor of the respected daily Tal Cual ), Julio Borges

41
(leader of Pri mero Justicia , a new party with well-regarded mayors in a
few municipalities), and Manuel Rosales (who was then the governor of the
western oil-producing state, Zulia). For a time, it seemed an accord would
prove impossible; by mid-2006, there was no agreement even on how to
VHOHFWDFDQGLGDWH7RHYHU\RQH¶VVXUSULVHWKHWKUHHFRQWHQGHUVUHDFKHGDQ
amicable pact to select a candidate trough an opinion poll, which by early
AXJXVW SRLQWHG WR 0DQXHO 5RVDOHV DV WKH YRWHUV¶ IDYRULWH 7KH UHPDLQLQJ
candidates opted to endorse his campaign²a show of unity that few
observers anticipated and clearly boosted the electoral strength of the
opposition.

More difficult to overcome was the strong pro-abstention sentiment

mentioned earlier. Acutely aware of its lack of political strength vis-à-vis
the regime, as late as mid-2006 many in the opposition were still undecided
about whether to even vote. Conditions for fair and transparent elections
remained very much in doubt. Specifically, the opposition claimed that 1)
the National Electoral Council (CNE) was not independent of the regime;
2) the electronic voting system was susceptible to manipulation; 3) the
electoral registration system had been artificially inflated by indiscriminate
issuance of a record number of voter registrations;28 4) the media was
unevenly used by the incumbent;29 and, as had occurred in the past, 5) the
state was greatly exceeding spending limits on political campaigning.

28
The opposition wondered about the spectacular, hard-to-explain surge of 11.7 percent
of registered voters in a brief, 6-month period between April and October 2004.
Moreover, newspapers reported a greater number of registered voters at the same
address than were likely to reside at that location.
29
By September 2006, the incumbent was using three times more airtime minutes in ad
campaigns than allowed by the law, and this did not include the famous Aló Presidente
Sunday TV program, in which president addresses the nations for several hours. See
Ciudadanía Activa, "Abuso Presidencial En Los Medios De Comunicación Del Estado,"
(Caracas: 2006).

42
Over the months in 2006, the government addressed some of these claims.
As respects voter rolls, CNE allowed an electoral organization affiliated to
the Inter-American System of Human Rights, CAPEL, to audit the electoral
registration system. Moreover, CNE authorized a group of national
XQLYHUVLWLHV WR DXGLW YRWHU UHJLVWUDWLRQ KRZHYHU WKH FRXQWU\¶V WKUHH PRVW
prestigious institutions ± Simón Bolívar University, Central University of
Venezuela, and Catholic University Andrés Bello ± declined, as they
considered the statistical methodology proposed by CNE to be invalid.
Neither CAPEL nor the university study undertaken by other institutions
found evidence of rigged voter registration, although confirming that the
system did not fully protect voting against unregistered voters.

Reforms were also partial on issues raised by the electronic fingerprint

machines installed at polling stations. In the 2005 election for delegates to
the National Assembly, analysts discovered that, under certain conditions,
these fingerprint machines could be sequenced with touch-screen voting
machines in a way that allowed government officials to identify who voted
KRZ &1( GLVPLVVHG WKH RSSRVLWLRQ¶V UHTXHVW for a manual vote, arguing
that the Electoral Law required automated voting. After much hesitation,
opposition parties withdrew from the election at the last minute, and ended
up paying a high cost: the national legislature was fully captured by pro-
incumbent forces.

For the 2006 presidential elections, the OAS provided CNE with technical
assistance to reduce the possibility of tracing voting records through
fingerprints, but the opposition pressed for more changes. The government
then agreed to remove fingerprint machines from certain polling stations,
but not in densely populated, poorer communities. The opposition claimed
that by keeping fingerprint machines in these key polls, the government

43
ZDV GHYLRXVO\ SOD\LQJ D ³SV\FKRORJLFDO´ FDUG²encouraging people to
question the secrecy of the vote, which, in turn, would propel abstention
rates among opposition voters.

CNE did address campaign finance, but by focusing only on regulation, not
enforcement. Because these were the first elections under the 1999
Constitution allowing the incumbent to run (and one more election in
which the opposition was not allowed to receive state funding), the issue of
XQHYHQ VWDWH VSHQGLQJ ZDV XSSHUPRVW LQ WKH RSSRVLWLRQ¶V PLQG ,Q
response, CNE agreed to ban public officials from using official acts for
HOHFWRUDO SXUSRVHV DQG OLPLW HDFK FDQGLGDWH¶V GDLO\ WHOHYLVLRQ DGYHUWLVLQJ
time.

CNE eschewed enforcement. The best example was a scandal that took
place a month before the election, in November 2006, filmed and
distributed on the internet, where PDVSA president Rafael Ramírez called
on employees convened in assembly to vote for Chávez because the state-
RZQHGFRPSDQ\ZDV³UHGYHU\UHG´ roja, rojita ), a reference to the colors
of the ruling party. Rather than fire the minister for breaking the law,
Chávez congratulated him and urged other ministers and public officials to
repeat the message. This uneven, excessive, pro-incumbent state spending
was widely criticized by international observers in 2006, as they had a year
earlier at the December 2005 legislative elections.

All told, voting conditions improved for the December 2006 presidential
elections when compared to the December 2005 legislative elections and
the August 2004 recall referendum. But campaign finance conditions
actually deteriorated, because nothing was done to restrain the
unaccountable, political spending machine set up by Chávez in 2003 and

44
2004. CNE focused mainly on technical and legal reforms, ignoring
enforcement. Even in terms of access to the media, the opposition stood at
a disadvantage: the regime invested more than US $40 million in upgrading
the state-owned TV channel and the state news agency, established three
other TV stations, acquired as many as 145 local radio stations and 75
community newspapers, and launched between 24 and 66 pro-government
websites.

Prospects for a partial (rather than full) reform of the electoral system also
placed the opposition in a dilemma. Had the opposition agreed to one
change or another, a good many opposition voters would still have
remained dissatisfied, fearful, and inclined to abstain from voting, which
would have depressed the anti-Chávez vote; and had the opposition
rejected the reforms on the grounds of inadequacy, it would have
strengthened its reputation of being recalcitrant and disloyal, at a major
cost to its already weak international reputation. As it happened, the
RSSRVLWLRQ¶VOHDGHUVKLSWRRNDJDPEOHLQIDYRURIWKHIRUPHURSWLRQ%XW
accepting a partial reform came with a cost. The opposition had to lure not
one, but two large electoral blocs: the ambivalent ni-ni groups, and the pro-
abstention anti-chavistas.

At the end, Rosales proved to run a successful campaign despite losing the
election. Proclaimed unity among the different candidates opened the way
for the opposition to return to the electoral arena; a shift that in 2007 and
2008 would pay off when opposition movements won key mayoralties and
JRYHUQRUVKLSVDQGVXFFHHGHGLQEHDWLQJ&KiYH]¶VLQLWLDOHIIRUWWRRYHUKDXO
the constitution. In fact, in the 2008 regional and local elections, the
opposition carried the most urban and populous states in the country,
including Carabobo, Miranda, Nueva Esparta, Táchira, Zulia, and the

45
Capital District. However, the opposition lost in more rural and poorer
states. A noteworthy exception was the triumph by Pri mero Justicia in
SucreRQHRI*UHDWHU&DUDFDV¶SRRUHVWPXQLFLSDOLWLHV

'HVSLWHWKHRSSRVLWLRQ¶VSDUWLDOJDLQVWKHUHJLRQDODQGORFDOHOHFWLRQV
showed that chavismo still remained a potent force. PS89&KiYH]¶VQHZ
unified socialist party) won in 17 states, defeating all chavista dissidents
and even winning in states the opposition originally expected to carry
(Falcón, Anzoátegui, and Mérida). Nonetheless, the elections showed a
major shift in chavismo demographics. Before the 2008 elections, the
government could claim that its core constituency consisted of the entire
³KDYH-OHVV´ SRSXODWLRQ LQ 9HQH]XHOD 1RZ WKH YHU\ SRRU LQ XUEDQ DQG
industrial areas sided with the opposition in greater numbers. CKiYH]¶V
core constituency became confined to voters in rural/non-industrial regions.

But the chavista regime soon came up with another means for humiliating
the opposition and undermining its leadership: the Comptroller General
began restricting political rights by banning potential candidates to run for
office. During the 2008 electoral contest for governors and mayors, more
than 400 politicians (subsequently reduced to 270) were banned, of which
more than 200 were opposition candidates. Invariably, such bans were
grounded on corruption charges that had not been validated by the courts.
In 2009, political persecution was extended to elected officials, including
former presidential candidate and governor Manuel Rosales, who had to
abandon office and seek exile in Peru. Chávez publicly threatened other
governors with similar charges. Moreover, the National Assembly, also in
2009, stripped the administrative responsibilities of recently elected Mayor
of Greater Caracas, Antonio Ledezma, leaving him with meaningless
prerogatives. Certainly the opposition had taken an important step by

46
returning to the electoral arena, and claimed victory in some significant
posts; but it still had to overcome the limitations of working alongside
biased institutions.

9,,,³1RWKLQJ&DQ6WRSWKH5HYROXWLRQ´The End of Term Limits

&KiYH] FHOHEUDWHG KLV  SUHVLGHQWLDO YLFWRU\ E\ SURFODLPLQJ ³QRWKLQJ

FDQVWRSWKHUHYROXWLRQ´+HVHHPHGWREHULJKW$OOWKHRSSRVLWLRQFRXOG
do was watch the president shape the much-WRXWHG³6RFLalism of the 21st
&HQWXU\´ DQG DWWHPSW WR FRQVWUDLQ KLV HOHFWRUDO VXSSRUW ,Q D IDPRXV
Christmas speech following the election, Chávez announced plans to hold a
constitutional referendum expressly aimed at advancing a socialist agenda
and eliminating term limits for the presidency, to be scheduled for March
2008.

This new phase of the revolution involved five goals. Chávez termed them
axles; the first axle was aimed at using a new enabling law to change more
than 60 pieces of legislation; the second axle was aimed at changing the
constitution by means of an opposition-free presidential committee that
would offer proposals to be voted in a referendum ± including unlimited
reelection for the president ± and set more stringent conditions for recall
referenda; the third axle would redraw the administrative political map at
the regional and local levels to curtail the influence of governors and
mayors; and the fourth axle was to expand ideological hiring and training
of public school teachers. Under a fifth axle, Chávez sought to create still-
unspecified centers of power at the sub-municipal level, the so-called
communal assemblies, to challenge the authority of mayors and other local
RIILFLDOV&KiYH]¶VQHZYLFHSUHVLGHQW-RUJH5RGUtJXH]ZKRKDGVHUYHGDV

47
CNE president when the recall referendum was activated, labeled this new
phase of the revolution as a ³GLFWDWRUVKLSRIWUXHGHPRFUDF\´

Other, more transcendent measures were announced in the same Chávez

speech. First, the decision not to renew the license of the oldest and most
popular television channel in Venezuela, privately owned RCTV. By doing
so, Chávez had become the first popularly elected government in Latin
America since the 1980s to blatantly curtail freedom of the press. The only
reason given to revoke the RCTV license was serving as golpista, a coup
promoter ± a clear admission by the regime of political bias in managing
economic affairs and basic liberties. Chávez also announced nationalization
of the telecommunications and electricity sectors, as well as increased state
involvement in other areas of the economy, such as agribusiness and
banking. In a single speech, Chávez had signaled his decision to deepen the
UHYROXWLRQDQGFRQWLQXHSRODUL]LQJ9HQH]XHOD¶VVRFLHW\

This time response opposing these authoritarian leaps announced by

Chávez came from a fresher corner: students drawn from public and private
XQLYHUVLWLHVRUJDQL]HGSURWHVWVDJDLQVWFORVLQJ 5&79 DV ZHOO DV &KDYH]¶V
plans to advance a constitutional reform that many legal experts claimed
would have required calling for a new Constituent Assembly.

7KH VWXGHQW PRYHPHQW ZDV TXLFNO\ GLVPLVVHG E\ WKH UHJLPH DV ³HOLWLVW´
but its importance should not be underestimated. For the first time in years,
students in Venezuela managed to articulate a national movement, with
contrasting views, but united by their vision of the need to constrain the
revolution. An impressive campaign was launched against the announced
constitutional reform, especially banning term limits for the presidency and

48
diluting the concept of private property by introducing concepts such as
social and communal property in the constitutional text.

Two months prior to the March 2008 constitutional referendum, General

Raúl Iasías Baduel, a former minister of defense noted for having helped
Chávez return to power following the April 2002 coup, publicly read a
statement against constitutional reform. In this statement, Baduel informed
the public of rising discontent among Armed Forces officers towards the
idea of reforming the constitution, and recommended to the public to vote
³1R´ Chavista governors and mayors also felt uncomfortable with the
reform. They disliked the fact that banning term limits was a presidential
prerogative, not extended to regional and local authorities. This time, state
and municipal chavista politicians were unwilling to mobilize voters.

In his first electoral defeat, Chávez lost the constitutional reform by a slim
margin. According to unofficial results shown on the CNE website in the
early dawn following the referendum, the margin between the No and Yes
vote was a slim 1.4 per cent, but official results were never published.
Baduel was later sent to jail, and students were selectively intimidated.

Despite this electoral defeat, Chávez continued to insist on eliminating term

limits. In December 2008, he announced still another referendum, to be
KHOGWKHIROORZLQJ0DUFKWRDOORZ³LQGHILQLWHUHHOHFWLRQ´IRUDOOSRVWV7KH
decision to seek a constitutional amendment to allow this change obeyed to
political logic. The 2007 defeat of constitutional reform, albeit by a narrow
margin, implied the first major setback for a political project aimed at
FXUELQJ SULYDWH SURSHUW\ WUDQVIRUPLQJ WKH FRXQWU\¶V DGPLQLVWUDWLYH DQG
territorial structure, and further strengthening presidential powers. This
defeat showed the limits of what Venezuelan voters were willing to accept

49
ideologically, and made evident the lack of regional and local chavista
leadership to mobilize grassroots support for these proposals. Elections for
governors and mayors held in December 2008 also showed important
cracks within chavismo, and substantive gains for the opposition.

,QWHUQDOGLYLVLRQVZLWKLQ&KDYH]¶VSROLWLFDOSDUW\ Partido Socialista Unido

de Venezuela (PSUV), became evident in primary contests to select
candidates for mayors and governors, and obliged the president to intervene
in certain instances to impose loyal politicians. Concern over party rifts
became even deeper following the December 2008 elections, when two of
&KDYH]¶V SRtential successors were defeated: Diosdado Cabello for the
governorship of the largely urban state of Miranda, and Aristóbulo Isturiz
as mayor of the Greater Caracas Metropolitan District.

Well before the primaries, it had become evident that Chávez needed to
bolster his leadership position, for otherwise internal factions within PSUV
and his closest collaborators would have threatened the viability of the
revolution. The only option was to push again for a referendum banning
term limits ± although this time, all popularly elected offices were included.
This small but significant trick realigned the chavista base with the
leadership to move forward with a campaign that, once more, enjoyed
practically unlimited access to public funds.

The global financiaOFULVLVLQWKHIDOORIDOVRKHOSHGVSHHGWKHUHJLPH¶V

decision-making. CNE contributed politically to convening the new
referendum: its president, Tibisay Lucena, acceded at the outset to
organizing the process even before a referendum was formally approved by
the legislature. The goal was to shorten the time required to prepare the
plebiscite and overcome potentially adverse consequences for the

50
popularity of President Chávez stemming from the fall in oil prices and the
global financial crisis. Happily for the regime, 55 percent of the electorate
favored the proposal.

By winning the constitutional amendment to eliminate term limits to all

elective offices, Chávez had succeeded in shaping the most hyper-
presidential political system in the region. The 1999 Constitution already
guaranteed the longest term of any Latin American president (12 years in
the event of re-election), and the constitutional amendment made the
presidential term indefinite (a feature not found in any presidentialist
constitution worldwide).

IX. Reflections

&KiYH]¶V VRFLDOLVP RI WKH st FHQWXU\ ORRNV PRUH OLNH /DWLQ $PHULFD¶V
³KDUG FRUSRUDWLVP´ RI WKH PLG th century,30 sans repression. In this
context, the opposition has fewer and fewer mechanisms, or even
incentives, to undertake the cost of halting authoritarian leaps. The problem
goes beyond mere internal divisions within the opposition, crippling as they
might be. At the core, the opposition faces a fundamental inequality in the
distribution of political resources vis-à-vis the state. Its only alternative
source of financing is private contributions, but even this source is
MHRSDUGL]HG E\ WKH VWDWH¶V RIIHU RI LPSXQLW\ DQG MRE GLVFULPLQDWLRQ WR
cooperating business elites.

A familiar notion in politics is that unli mited campaign finance hurts

democracy. Our take on this argument is that uneven campaign finance is a
30
Alfred Stepan, "State Power in the Southern Cone of Latin America," in Bringing the
State Back In, ed. Peter Evans, Dietrich Rueschemeyer, and Theda Skocpol (New York:
Cambridge University Press, 1985).

51
worse curse. In Venezuela, this unevenness was not simply the result of
more abundant resources enjoyed by the state, but rather the outcome of
injecting more resources in the context of eroding institutional constraints
which have even come to include political persecution of elected office-
holders and banning potentially successful candidates from running for
office. This erosion of institutional constraints, in our view, is what
generated the governability crisis experienced in 2002-04, rather than the
other way around. The Chávez regime was able to overcome this crisis by
deploying such policies as polarization, selective impunity, and job
discrimination.

To put it bluntly, Chávez put together a winning coalition of radicalized

ideologues and plentiful economic winners. Some of these winners were
clearly low-income groups. But others, paradoxically, were old-time elites
who did not look all that different from winners of the Punto F ijo era (e.g.,
military officials, government and state enterprise employees, and state
contractors). There is no doubt that this was a majority coalition, but it was
not mobilized for democratic gains. In other words, social spending
launched in the context of deficient democratic institutions can end up
entrenching, as opposed to improving these institutions.

52
 C hapter 2
E conomic Policy and the O il Honey Pot

The political regime that has emerged in Venezuela has distinctive features
of its own; some have even been exported to certain countries in Latin
America unGHU WKH JXLVH RI SURPRWLQJ ³SDUWLFLSDWRU\ GHPRFUDF\´ %XW
9HQH]XHOD¶V SROLWLFDO FKDQJH WRRN SODFH LQ WKH FRQWH[W RI D GLVWLQFW
economic background, driven by the most spectacular oil boom in the
FRXQWU\¶VKLVWRU\(FRQRPLFSROLF\XQGHU&KiYH]UHVSRQGHGVZLftly to the
surge in oil revenue. At the time he took office in 1999, his administration
was fiscally conservative and his policy toward foreign investment
friendly; economic hardship led to cuts in social outlays despite political
tensions stirred by two decades of economic decline. But once oil prices
reached unprecedented levels in 2003-04, the regime deployed
expansionary fiscal and monetary policies, coupled with measures that
rebuffed private investment.

$FFRXQWVRI9HQH]XHOD¶VHFRQRPLFSROLF\RIWHQ fail to report these changes

in economic policy, attempting to either label Chávez as a radical anti-
market reformer from the beginning of his tenure, or offer a friendly view
of his state-oriented policies by drawing almost exclusively on social
indicators distorted by an overvalued currency.31

31
³3HUVSHFWLYDV(FRnómicas, Políticas y Sociales 1998-´Caracas: Veneconomía ,
 DQG 0DUN :HLVEURW 5HEHFFD 5D\ DQG /XLV 6DQGRYDO ³7KH &KiYH]
$GPLQLVWUDWLRQ DW  <HDUV 7KH (FRQRP\ DQG 6RFLDO ,QGLFDWRUV´ Washington DC:
Center for Economic and Policy Research, February 2009. For a similar point see Vera,
/HRQDUGR  ³3ROtWLFDV 6RFLDOHV \ 3URGXFWLYDV HQ XQ (VWDGR 3DWULPRQLDOLVWD
Petrolero 1999-´1XHYD6RFLHGDG1R0D\R-Junio.

53
2XUDFFRXQWZLOOWDNHDGLIIHUHQWSDWK&KiYH]¶VHFRQRPLFSROLF\EHFDPH
radical only when oil revenue allowed him to seize the opportunity, with a
view to reduce political tensions. Beyond an expansionary fiscal and
monetary policy, Chávez employed distributive strategies implemented
through nationalizations, exchange and price controls, lavish state
contracts, and massive social handouts earmarked in order to sustain his
political and electoral strategy. Yet in lLJKW RI WKH FRXQWU\¶V WUDGLWLRQDO
HFRQRPLF PLVPDQDJHPHQW &KiYH]¶V HFRQRPLF SROLF\ GLG QRW GHSDUW DV
much from past practice as did his politics, thus fitting nicely into what has
traditionally been called the macroeconomics of populism in Latin
America.32

From this perspective, populism in the economic realm is seen as an

approach that focuses on growth and income redistribution,
underestimating inflationary risks, external shocks, and negative reactions
from the investment community vis-à-vis aggressive interventionist
policies.33 Such a mix of policies tends to be anchored around artificially
fixed exchange rates that generate price distortions, foster capital flight and
augment economic pressure on the balance of payments. As pressure
mounts, governments fearful of political backlash spurn currency
devaluation, send the economy into disarray, and introduce further controls,
creating even deeper economic distortions. Venezuela mirrors this
experience remarkably, adding a simple caveat: oil can allow sustaining
these policies for a longer period of time.

One obvious reason why the mix of populist policies can be sustained for a
longer period of time in oil-based economies is that oil revenue allows
32
Sebastian Edwards and Rudiger Dornbusch, The Marcroeconomics of Populism in
Latin America (Chicago: Chicago University Press 1991).
33
Ibidem., p. 9

54
using imports to soften inflationary pressures. Also, access to capital
IDFLOLWDWHGE\ULVLQJRLOUHYHQXHHQDEOHVWKHJRYHUQPHQWWRHPSOR\³PDUNHW
PHFKDQLVPV´ WR EX\ RXW SLHFHV RI WKH SULYDWH VHFWRU UDWKHU WKDQ LQFXU LQ
expropriation without fair compensation. Under a populist regime in an oil
economy, as the investment climate deteriorates, the private sector courts
the state, which has accumulated hard currency in sovereign funds, and is
ZLOOLQJWRRYHUSD\DVVHWVLQH[FKDQJHIRUD³VLOHQW´H[LW%XWLQ9HQH]XHOD
as one company after another was nationalized, firms became more fearful
RI&KDYH]¶VSROLWLFVWKDQKLVHFRQRPLFSROLFLHV

Companies that remained operating in Venezuela were expected to keep a

low political profile, even as many engaged in rent extractions by
manipulating administrative procedures, bribed officials to obtain foreign
exchange, or undertook currency arbitrage in the unofficial exchange
market. Financial intermediation, thanks to a fixed and controlled exchange
rate, became as it were the only game in town; as a result, a growing
coalition of private agents colluded with public officials, which in turn
increased the stakes of prolonging these controls.

Living with this arrangement was easy enough for the public at large. Oil
revenue provided subsidies for any number of consumer goods and services
± from cheap fuel to foodstuffs, electricity and telecoms, plus a wide
variety of underpriced imports. To be sure, economic doomsayers predicted
this vicious circle could not last. A downturn in world oil prices, they
warned, would trigger a need to devalue the currency LQRUGHUWR³IL[´WKH
balance of payments and, equally as important from a political standpoint,
quickly expand fiscal revenue to sustain populist spending by generating
more bolivars for each dollar of oil exported. Only then does it become

55
OLNHO\WKDWKLJKHULQIODWLRQUDWHVZLOONLFNLQWRWKHHFRQRP\DQGWKH³SDVV
WKURXJKHIIHFW´EHJLQWRXQGHUPLQHYRWHUFRQILGHQFH

&KiYH]¶V HFRQRPLF PRGHO IROORZLQJ  DV DOUHDG\ QRWHG UHSUHVHQWHG

more continuity than originality for Venezuela. Privileging state control
over the economy and relying on oil, the model mirrored policies pursued
in the past. In some ways these economic policies resembled the high point
of import-substitution industrialization (ISI) of the 1970s, also a time when
Venezuela experienced a spectacular oil boom. What has changed this time
around is the magnitude of the windfall ± the latest being by far the
grandest. This combination of new politics (concentration of power in the
executive branch and constraints on the opposition) with old economics
(statist controls and oil dependence) has aggravated, rather than a
FRUUHFWHGVRPHRI9HQH]XHOD¶VZRUVWKLVWRULFDOHFRQRPLFPDODGLHV

On the issue of sustainability, some consider that because the Chávez

regime is repeating economic mistakes similar to those of the past, the
system is likely to crumble rapidly ± much as did the political regime that
unraveled in the 1990s, a victim of economic mismanagement. This time,
however, the regime may prove more resilient. Given its concentration of
powers, the regime controls key institutions that will side with the
incumbent, not the opposition (National Assembly, the courts, regulatory
agencies, state-owned enterprises, and expanding state-controlled media).
More important, as noted in Chapter 1, support for the regime does not rest
entirely on clientelism. Chávez also relies on cronies, who receive tangible
benefits, and on other supporters, who receive intangible rewards
(impunity, radical ideology). Hence it is not clear that an oil bust will
MHRSDUGL]H LPPHGLDWHO\ WKH UHJLPH¶V FDSDFLW\ WR SURYLGH WKHVH WZR RWKHU
forms of rewards. Populist spending might need to be curtailed, but waste

56
spending (to maintain the cronies) can remain affordable, and intangible
resources such as impunity from corruption and radical ideologies to
seduce activists can endure even during periods of austerity. Economic
conditions even if they deteriorate will promote a more gradual and
conflictive transition rather than a sudden collapse of the system.

I. Political Polarization and Moderate Economic Policies

&KiYH]¶V ULVH WR WKH SUHVLGHQF\ ZDV SRVVLEOH WKDQNV WR KLV SROLWLFDO
campaign against the puntofijista regime, instead of his critique of the
economy. The initial team that drafted his economic program during the
1998 electoral campaign was comprised of left wing economists, all faculty
members at the Central University of Venezuela, among them Adina
Bastidas, Jorge Giordani, Francisco Mieres, J.J. Montilla and Jorge Pérez.
,Q &KiYH]¶V ILUVW JRYHUQment platform, the economic program was vague
and plans were seen as contingent on the outcome of a National Constituent
Assembly.34 +RZHYHU &KiYH]¶V HFRQRPLF SURMHFW DW WKH WLPH DV KH
described it, was to reinforce state intervention and promote redistributive
measures without dismantling market economic reforms; he even compared
WKHVHLGHDVZLWK7RQ\%ODLU¶V7KLUG:D\,Q&KiYH]¶VZRUGV

This vision entails three basic factors: first, the state, the
need of an effective state that regulates, promotes,
pushes, etc. economic development; second, the need of
the market, a fair market, were the laws of supply and
demand are able to exist; not a monopolized or an
oligopolistic market; and finally, the individual, the
34
)UDQFLVFR 5RGUtJXH] &DEDOOHUR ³/DV &RQVHFXHQFLDV (FRQyPLFDV GH OD 5HYROXFLyQ
%ROLYDULDQD´ Revista Nueva Economía , Academia de Ciencias Económicas, nº 19, April
2003, Caracas.

57
 human being. That is why we have talked about a
³KXPDQLVWLF´SURMHFW´35

,QSULRUWR&KiYH]¶VHOHFWRUDOYLFWRU\5DIDHO&DOGHUD¶VJRYHUQPHQW
was struggling to sustain market economic reforms. Oil prices were at their
lowest point in years, close to eight dollars per barrel, generating fiscal
strain and capital flight. Teodoro Petkoff, then Minister of Planning,
attempted to appease markets, already affected by the Russian crisis, by
obtaining support from multilateral organizations, including the
International Monetary Fund (IMF). The administration made an effort to
behave responsibly by curbing public expenditure, anchoring the exchange
rate and protecting social outlays. With support from the Inter-American
Development Bank (IADB) and the World Bank, the Caldera government
had put in place focalized social policies, including cash transfers to poor
families with children to increase school attendance. Caldera did not want
to sacrifice these social gains despite fiscal strain: a general election was at
hand and Chávez could accuse him of beinJD³QHROLEHUDOVDYDJH´

Economic woes notwithstanding, the investment community held a positive

medium-term outlook for Venezuela given PDVSA success in attracting
foreign investment for oil exploration and development. But in the short
term financial markets feared a possible default on foreign debt, following
a campaign statement by Chávez claiming Venezuela had abdicated
sovereign rights when it signed oil contracts with foreign companies. Yet
Chávez also publicly remarked that he was committed to maintain the
³VKDGRZDJUHHPHQW´ZLWK,0)

35
Translated from Rodriguez Caballero, op. cit. p. 5.

58
7RIXUWKHUDSSHDVHPDUNHWV&KiYH]QRZSUHVLGHQWUHDSSRLQWHG&DOGHUD¶V
Finance Minister Maritza Izaguirre.36 Of the original campaign team of left
wing economists, only Jorge Giordani was included in the cabinet as
Minister of Planning. Early effort focused mainly on the fiscal adjustment
process, and the government even dismantled existing social policies;37
funding was instead allocated to more ample safety networks such as the
Social Security system and a new Social Fund, called Proyecto Bolívar
2000, to be managed directly by the Armed Forces.

Oil contracts with foreign companies were respected, and PDVSA

continued to honor investment requirements for new projects undertaken
with foreign partners in the Orinoco Tar Belt. Chávez went as far as to
approve a decree on investment protection and promotion that guaranteed
stability of contracts and access to international arbitration. 38 These and
other measures suggest that, during his first year in government, Chávez
sought to ensure a smooth economic transition. Nonetheless, his focus of
concern was political: activating a Constitutional Assembly. One of the few
exceptions to this rule was opening telecommunications to foreign
investment in 2000, a process undertaken within a market-friendly
regulatory framework. Led by Diosdado Cabello, who has to this day
UHPDLQHG RQH RI &KiYH]¶V FORVHVW FROODERUDWRUV WKLV PRYH ZDV ZLGHO\
celebrated both by the private sector and multilateral organizations. 39

36
-DQHW.HOO\DQG3HGUR3DOPD³7KH6\QGURPHRI(FRQRPLF'HFOLQHDQGWKH4XHVWIRU
&KDQJH´ LQ -HQQLIHU 0F&R\ DQG 'DYLG 0\HUV HGLWRUV The Unraveling of
Representative Democracy in Venezuela (Baltimore: The Johns Hopkins University
Press 2004).
37
Michael Penfold, "Clientelism and Social Funds: Empirical Evidence from Chávez´s
Misiones Programs," Latin American Politics and Society, Latin American Politics and
Society 49, No. 4(2007).
38
Ley de Protección y Promoción de Inversiones, Decreto 356, Gaceta Oficial
Extraordinaria No. 5390, 1999.
39
Following liberalization, in 2000-02, the telecommunications sector attracted over 2
billion dollars in foreign direct investment.

59
How did the economy fare at this early point of the Chavez administration?
On the whole, the numbers were not encouraging. The drop in oil prices
devastated the economy: GDP declined by 6 percent in 1999, with public
expenditure falling from 21.4 percent of GDP in 1998 to 19.8 percent in
1999; yet despite this adjustment the central government experienced a
fiscal deficit of 1.7 percent of GDP.

Figure 2.1 Economic Growth (as % of GDP) and Inflation 1998-2008

Growth of GDP, Inflation and Aggregate Demand

40
GDP Aggregate Demand Inflation (average)

30

20
(%)

10

-10

-20
1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Source: BCV and Own Calculations

In a desperate move, the administration, under the leadership of Energy and

0LQHV 0LQLVWHU $Ot 5RGUtJXH] $UDTXH VRXJKW WR UHDOLJQ 9HQH]XHOD¶V RLO
quotas with those of the Organization of Oil Exporting Countries (OPEC).
This meant PDVSA would have to bite the bullet on two counts: not only
abandon its policy of increasing output but also cut its own production, for
output levels by foreign companies operating in the Orinoco Tar Belt under
joint investment projects with PDVSA were shielded by contract

60
limitations. Worse yet, public revenue was further cut because PDVSA
output royalties were higher than those for pumping heavy oil from the Tar
%HOW&KiYH]DOVRVXSSRUWHG5RGUtJXH]$UDTXH¶VHIIRUWWRUHVFXH23(&DV
a key actor to protect oil prices. A few months prior to the U.S. invasion of
Iraq, Chávez traveled extensively in the Middle East ± challenging U.N.
sanctions by including a widely publicized visit to Saddam Hussein.

By late 2000, unprecedented economic growth in China and India, together

with the war on global terrorism launched by the U.S. following 9/11, led
to an almost three-fold rise in oil prices. Venezuela expanded public
expenditures to 25.1 percent of GDP while deciding, unwisely, to anchor
its nominal exchange rate to reduce inflationary pressures.40

In parallel with bolder public spending, the government moved ahead with
its hitherto dormant political agenda. By means of an enabling law,
legislation was passed that, as described in the previous chapter, triggered
institutional uncertainty and activated political polarization. Two general
strikes, along with an appreciated currency, created strong incentives for
both capital flight and speculative attacks on the bolívar , eventually leading
to the April 2002 failed coup.

By February 2002 international reserves had declined from 21 billion

dollars to little more than 16 billion dollars, and the government had no
choice but to devalue. A further push for devaluation was experienced after
&KiYH]¶VVKRUWUHPRYDOIURPRIILFHLQ$SULO7KHILQDOEORZFDPHZLWKWKH
oil strike in December 2002, which halted oil output for over two months
and slowed the economy to a crawl. The social and political confrontation

40
Rodríguez Caballero, op.cit.

61
that ensued shattered the economy.41 Economic adjustments, together with
political developments, had taken a heavy toll: 2002 ended with an
economic contraction of 8.9 percent of GDP; and by end 2003, the
economy shrunk by another 7.8 percent.

Chávez by this time had lost trust in the possibility of a smooth political
transition. With the economic and political damage done, he decided to
curtail the power of PDVSA and tighten control of the market economy.
Understandably, the administration had no other option but to introduce
exchange control to confront the collapse in exports and protect foreign
reserves. But Chávez also used price controls to closely monitor private
firms. He outspokenly threatened to nationalize firms that engaged in what
ZHUHGHHPHG³FRQVSLUDF\´DFWLYLWLHVHVSHFLDOO\E\IRRGSURFHVVRUVGXULQJ
the oil strike, a number of food and beverage companies had shut down
operations.

The oil strLNHEHFDPH&KiYH]¶VEOHVVLQJLQGLVJXLVHKHFRXOGQRZEODPH

the opposition and PDVSA technocratic elites for what in fact was gross
PLVPDQDJHPHQW RI 9HQH]XHOD¶V HFRQRP\ IURP WKH WLPH KH WRRN RIILFH
From 1998 to 2003, economic growth was ±5.6% of GDP. Inflation soared
to an average of 24.3 percent, albeit lower than during the second
administrations of Carlos Andres Pérez (1988-92) and Rafael Caldera
(1993-98). Poverty reduction had improved by over 10 points, partially a
result of real currency appreciation, which curbed the cost of tradable
goods consumed by the poor. Charging the oil industry and leading
business firms with sabotaging the revolution enabled the regime to
promote further political polarization and control over the economy.
41
According to estimates prepared by the National Budget Office of the National
Assembly, the economic impact of the April 2002 failed coup was 1.36 percent of GDP;
and negative growth caused by the 2002-03 oil strike, 7.59 percent of GDP.

62
Meanwhile, oil prices skyrocketed, allowing the regime to launch a radical
populist phase.

II. The Scale of the Oil Boom and Populist Expansion

)LJXUHVKRZV9HQH]XHOD¶VRLORXWSXWIURPWRWRJHWKHUZLWK
SULFHVIRUWKHFRXQWU\¶VRLOEDVNHWLQFRQVWDQWGROlars. Oil production fell by
50 percent from 1968 to 1985 ± from 3.6 to 1.8 million barrels per day
(mbd) ± UHERXQGLQJWRPEGE\3ULFHVIRU9HQH]XHOD¶VRLOEDVNHW
rose sharply following the OPEC oil embargo in 1973,42 averaging close to
29 dollars a barrel from 1978 to 1982. From 1985 onwards oil output
expanded but prices dropped, bottoming out the year Chávez was elected in
1998.

)URP  WR  WKH DYHUDJH SULFH IRU 9HQH]XHOD¶V RLO EDVNHW UHDFKHG
close to 25 dollars per barrel, more than double the 11 dollar average
GXULQJWKHILUVWILYH\HDUVRI&KDYH]¶VSUHVLGHQF\%XWWKHVFDOHRIWKHRLO
boom exceeded that enjoyed by Venezuela in the late seventies, for output
was significantly higher. In fact, Venezuela in 2008 produced 1 million
barrels per day more than average oil output during 1974-1982, even
accounting for a PDVSA output decline of almost 700,000 mbd during
&KiYH]¶V ILUVW GHFDGH LQ SRZHU ,Q  RLO UHYHQXH ZDV  SHU FHQW
higher than at the previous peak in 1981.

42
Venezuela did not join the OPEC-led oil embargo, and remained a U.S. supplier.

63
Figure 2 9HQH]XHOD¶V RLO RXWSXW DQG EDVNHW SULFHV LQ FRQVWDQW GROODUV
1968 ± 2008 (1982-84 = 100)

Average Oil Production and Oil Prices

4,0 45,0
Oil Production Oil Price (US$ 1982-1984)
3,5 40,0

Constant US$ / barrel

35,0
MM Daily Barrels

3,0
30,0
2,5 25,0
2,0 20,0
15,0
1,5
10,0
1,0 5,0
0,5 -
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
Sources: MENPET and Own Calculations

64
)LJXUH  9HQH]XHOD¶V RLO UHYHQXH DQG SHU FDSLWD RLO ILVFDO UHYHQXH LQ
constant dollars, 1968 - 2008
(1982-84 = 100)

Oil Income and Oil Fiscal Revenues in Per-Capita Terms

(Constant US$ 1982-1984)
3.500
Oil Income Oil Fiscal Revenues
Constant US$ per capita

3.000

2.500

2.000

1.500

1.000

500

0
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
Sources: BCV, MENPET, MF, INE and Own Calculations

Per capita oil revenue in Venezuela remained impressive despite significant

population growth. At the height of the 1974 OPEC oil embargo the
FRXQWU\¶VSHUFDSLWDRLOUHYHQXHZDVZKHUHDVE\LWKDGVXUJHG
to $3,123 in constant terms. In the latter year, Venezuelan families received
$43 per day from oil income alone, the equivalent of 1,283 dollars per
month.

Growth in oil revenue had immediate and powerful impact on public

finances. Thanks to the price windfall, the regime deployed anti-cyclical
spending to counteract economic contraction experienced in 2002-03,
raising public expenditures to expand aggregate demand. In 2004 public
expenditures reached a robust 26 percent of GDP, a momentum that
continued vigorously for the next four years. By 2006 central government
expenditures surpassed 29 percent of GDP ± not including extra-budgetary

65
expenditures financed through the National Development Fund (FONDEN)
and PDVSA. Were outlays from these non-audited funding channels
available, estimated public expenditure in 2006 would have topped 35
percent of GDP.

Figure 2.4. Central Government Expenditure as a percent of GDP, 1998-

2008.

Central Government Expenditures as % of GDP

40,0
Central Government Expenditures Central Government Expenditures +Extra Budget Expenditures

35,0

30,0
(%)

25,0

20,0

15,0
1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Sources: MF and Own Calculations

The composition of public expenditures by the Chávez regime is a matter

of considerable dispute.43 Some specialists claim central government social
spending increased under the regime while others argue that, in relative
terms, social outlays remained about the same ± except for expanded
transfers to the Social Security system. According to the latter group,
budget allocations for housing, health, education, and special social

43
6HH )UDQFLVFR 5RGUtJXH] &DEDOOHUR ³$Q (PSW\ 5HYROXWLRQ 7KH 8QIXOILOOHG
3URPLVHV RI +XJR &KiYH]´ Foreign Affairs, March/April 2008; and Mark Weisbrot,
³$Q(PSW\5HVHDUFK$JHQGD7KH&UHDWLRQRI0\WKVDERXW&RQWHPSRUDU\9HQH]XHOD´
Center for Economic and Policy Research, Washington DC, 2008.

66
programs remained at the same level, while other sectors such as
infrastructure and the military gained importance. Clarifying the issue is
VLJQLILFDQW LI WKH UHJLPH¶V UHDO HIIRUW WR UHGLVWULEXWH LQFRPH LV WR EH
measured. But doing so would require taking into account huge outlays not
included in budget data, beginning with the support PDVSA and other
sovereign funds funneled to the misiones programs, plus unaccounted
direct transfers to community councils ( consejos comunales), social
production firms (empresas de producción social ) and co-operatives.44

6RYHUHLJQIXQGVHPSOR\HGWRFKDQQHOWKHUHJLPH¶VH[WUD-budgetary outlays
included the aforementioned FONDEN, which drew on hard currency
transfers both from international reserves and PDVSA. FONDEN was
managed directly by the presidency through the National Development
Bank (BANDES) with no oversight from the National Assembly. A simple
scheme was devised to maximize FONDEN income: the Ministry of
Finance would systematically underestimate the price of oil used to prepare
the national budget in order to reduce the size of transfers that, under the
Constitution, were annually allocated to states and municipalities; in turn,
underestimated oil revenue accruing to either PDVSA or the Central Bank
was transferred to FONDEN.

The scheme employed for channeling funds to FONDEN drew on political

support from the National Assembly: in 2005, for example, the National
44
According to data provided by the Central Bank of Venezuela, the non-for-profit
sector under which these beneficiaries would be included grew more than 16.5 percent
in 2006, 10.9 percent in 2007 and 9.2 percent in 2008. Co-operatives were vigorously
SURPRWHG WR EXLOG D ³VRFLDOLVW PDUNHW´ PRGHO DQG JHQHURXVO\ VXSSorted by means of
seed capital, equipment, and state contracts; their number increased from 1,336 in 2001
to 102,568 in 2005. However, an in-depth study of a small number of co-ops showed
that most were unable to replace initial capital. See Josefina Bruni-&HOOL ³9LDELOLGDG
HFRQyPLFD\GHVHPSHxRFRRSHUDWLYR´LQ0LFKDHO3HQIROGDQG5REHUWR9DLQUXE(GV
Estrategias en Tiempos de Turbulencia: Las E mpresas Venezolanas. Caracas: Ediciones
IESA, 2009.

67
Assembly approved a change in the Central Bank Law that allowed
WUDQVIHUULQJ  ELOOLRQ GROODUV IURP WKH QDWLRQ¶V LQWHUQDWLRQDO UHVHUYHV WR
FONDEN; and in February 2006, the National Assembly approved another
transfer for 4 billion dollars. That same year, the president announced that
PDVSA would transfer directly to FONDEN over 6.8 billion dollars. Given
the level of support required by the misiones and other social causes, it is
not surprising that funding by PDVSA channeled directly to FONDEN and
dedicated to social investments became massive, as shown in Figure 2.5.

Figure 2.5. PDVSA contributions to FONDEN and Social Investment

2003-2008 (billions of dollars)

PDVSA contributions to Social Development and Fonden

12.000
Social Investment PDVSA contributions to FONDEN
10.000

8.000
(US$ MM)

6.000

4.000

2.000

0
2003

2004

2005

2006

2007

2008

Source: Own Calculations

How large was the scale of unaccountable transfers made to sovereign

IXQGV IRU GHSOR\PHQW DW &KiYH]¶V GLVFUHWLRQ" &RQVLGHU WKH IROORZLQJ
example: the 2008 budget projected revenue based on $35 per barrel of oil;
for three weeks in 2008, the Venezuelan oil basket sold for at least $116
per barrel, which was 233 percent higher than the budgeted amount.
Finance minister Rodrigo Cabezas reportedly justified this underestimate

68
E\ VWDWLQJ LW ZDV D ZD\ WR ³PLQLPL]H WKH ULVN´ RI DQ H[WHUQDO VKRFN DQG
SURPLVLQJWRFKDQQHODQ\VXUSOXVHVIRUWKHEHQHILW³RIWKHSHRSOHDQGRQO\
IRU WKH SHRSOH´  El Economista 2007). Such systematic underestimation
generated, on the average, a revenue surplus of 20 percent surplus each
year ± essentially the amount Chávez was free to use unaccountably.

This lack of transparency, at a time oil prices were soaring, did not come
without a price. Public waste and graft had expanded to unforeseen levels;
corruption is difficult to measure, but the media often documented
examples. For instance: the Ministry of Finance systematically failed to
comply with competitive bids for pricing and underwriting public bonds.
International banks and local financial institutions often colluded with the
regime to place foreign debt in the local market, pricing it below market
levels, for resale above placement price on Wall Street.45 A scandal
involving the Armed Forces centered on a large sugar cane plant in the
state of Barinas, with FONDEN funds disbursed without the project ever
being built.46

$FFRUGLQJ WR WKH DQQXDO VXUYH\ RI WKH ZRUOG¶V PRVW FRUUXSW FRXQWULHV
published by Transparency International, a Berlin-based organization,
Venezuela in 2008 ranked 158 out of 159 countries included. Corruption is
defined by this index as the abuse of public office for private gain,
measuring the degree to which the practice is perceived to exist among a
FRXQWU\¶VSXEOLFRIILFLDOVDQGSROLWLFLDQV,Q:RUOG%DQN governance
indicators considered Venezuela to be the second most corrupt country in

45
For example, Ana Julia Jatar estimated private gains of close to 80 million dollars in
the placement of public debt made by the power & light company EDC following its
QDWLRQDOL]DWLRQLQ6HH³*XLVRDOD&KDYH]FD´ El Nacional , April 8, 2008. Other
transactions undertaken by the Ministry of Finance and PDVSA followed similar
procedures.
46
)UDQFLVFR2OLYDUHV³&$$(=6yOR0LOLWDUHV´ El Universal, July 9th, 2008.

69
the region after Paraguay. In 1996 Venezuela occupied the same position in
the region but overall, perception was much better: 25 percent of world
countries performed worse than Venezuela, vis-à-vis 10 percent in 2004.

Public waste and graft notwithstanding, the economy grew by leaps and
ERXQGV,QJLYHQWKHORZEDVHOLQHIURPWKHSUHYLRXV\HDU¶VRLOVWULNH
the economy grew by 18.3 percent of GDP. Expansion continued in
following years, reaching over 10 percent of GDP in both 2005 and 2006,
and 8.4 percent in 2007. By 2008, as world oil prices began to decline, the
economy was still growing. Although the oil sector took a sharp downturn
in this period (±8,1 percent of GDP), the non-oil sector surged by 12.8
percent. Negative growth in the oil sector came about not only as a result of
lower OPEC quotas to forestall the drop in oil prices but also a decline in
PDVSA production capacity. Growth in the non-oil sector was accounted
for by a sharp expansion in aggregate demand, chiefly for non-tradable
items such as telecoms and financial services, which greatly exceeded
growth in the output of goods. This gap between demand and supply was
filled by higher imports and inflation.

Figure 2.5 shows how imbalanced growth became during 2004-2008.

Exports declined annually by 2.3 percent, while imports grew by 25.2
percent. Private consumption rose 14.8 percent, and public consumption
by 7 percent. During this period foreign direct investment experienced a
substantial decline, but overall investment ±boosted by the public sector in
infrastructure projects- expanded by 21 percent.

70
)LJXUH.H\FRPSRQHQWVRI9HQH]XHOD¶V*'3-2008

GDP growth by components

2004-2008

Imports 25,2%

Investment 21,0%

Private Consumption 14,8%

GDP 8,4%

Public Consumption 7,0%

GDP Per Capita 6,7%

Exports -2,3%

-5% 0% 5% 10% 15% 20% 25% 30%

Source: Central Bank of Venezuela and Ecoanalitica.

As 2008 came to a close, currency appreciation coupled with a fixed

controlled exchange rate with high inflation increased local costs, crowding
out local producers and boosting imports. The balance of payments
weakened, with imports rising and oil prices falling. Moreover, capital
flight surpassed 20 billion dollars. Sustaining the fixed exchange rate
offered the regime a choice of two policies: either burning international
reserves to avoid price distortions driven by a parallel exchange rate that

71
almost tripled the official rate, or limiting access to imports at the official
exchange rate to protect external accounts. A combination of both policies
produced almost no results.

As in previous boom and bust episodes in Venezuela, the expansionary

phase soon gave way to macroeconomic maladies: rising local and foreign
debt, inflation, exchange rate distortions, declining oil production,
consumer goods shortages, and capital flight. By 2008, the state had lost
control of the expenditure side as liabilities surpassed revenue, generating
fiscal pressure. The regime responded by tightening price, exchange, and
interest rate controls, and curtailing bank liquidity, all in an effort to avoid
decisive austerity measures, such as severe spending cuts, massive
devaluation, and higher taxes. Tightened controls led, in turn, to consumer
goods shortages, economic slowdown, and greater capital flight. High
inflation coupled with consumer goods shortages is particularly taxing on
low-income groups in almost every country, even when there is economic
growth. This is one reason that poverty alleviation in Venezuela stopped in
2008.

By early 2009 the Chávez regime was in a typical collapse-phase mode:

withdrawing foreign reserves from sovereign funds, repurchasing
international reserves from the Central Bank, curbing foreign currency
available to private actors by more than 60 percent from the previous year,
cutting the budget by 6 percent, raising the value added tax by 3 percentage
points, and defaulting on debt owed by PDVSA to oil service and other
local companies ± many of which were later expropriated.

Barring a downturn in the price of oil, the current collapse phase in

Venezuela should prove less severe than those that had occurred in the past.

72
One reason previous collapses were more distressful is that from 1981 and
2003, Venezuela experienced chronic oil revenue shortages, which
deprived the state of deploying counter cyclical measures to respond to
economic contraction. Macroeconomic strains have not been nearly as
harsh as in the past, for until 2008 oil prices rose to levels never before
VHHQ LQ 9HQH]XHOD¶V RLO KLVWRU\ 2LO SULFHV IHOO EHIRUH VWDELOL]LQJ LQ 
but as of this writing, remained historically high.

NonethelesV ZRXQGV LQIOLFWHG RQ 9HQH]XHOD¶V HFRQRP\ ZHUH VWLOO

significant: one of the highest inflation rates in the world, despite having
imposed the broadest price control system in decades; widespread
consumer goods scarcities despite massive imports; agricultural stagnation
and food shortages despite heavy agriculture subsidies; and a dearth of
credit coupled with real negative interest rates. These distortions were
severe enough to fuel greater social discomfort and some political
discontent. However, oil income was sufficiently high to keep the regime
afloat.

III. Returning to ISI: Growing Nationalization

In the economic, as opposed to political realm, the break with the past has
EHHQOHVVHYLGHQW&KiYH]¶VSROLWLFDOHFRQRP\VHHPVLQVWHDGWREHDFDVHRI
déjà vu: a return to the policies of import-substitution industrialization (ISI)
and oil boom mismanagement pursued by Venezuela in the 1970s. The
LURQ\RI&KiYH]¶VLGHRORJ\LVWKDWGHVSLWHEHLQJVRYLUXOHQWO\DQWL-party and
opposed to policies applied during the Puntofijo era, the regime has closely
IROORZHGHFRQRPLFSUHFHSWVRIWKHFRXQWU\¶VWUDGLWLRQDOSDUWLHVHVSHFLDOO\
under the first administration of Carlos Andrés Pérez in the mid 1970s.

73
Venezuela under Chávez has returned to a modified form of ISI, the model
of economic development that prevailed in most of Latin America from the
1930s to the 1980s. The model employed replicates almost all of the typical
policy rules under this paradigm: a vast expansion of the state in almost
every domain of the economy by means of nationalizations, firm buyouts,
expropriations, direct subsidies, special credits and heavy spending, to
which was added regulation antagonistic to business. The Heritage
Foundation Index of Economic Freedoms, which ranks countries according
WRWKHLUOHYHORIVWDWHLQWHUYHQWLRQVKRZV9HQH]XHOD¶VGHVFHQWLQWRDPRUH
state-centric economy under Chávez: one of the lowest starting scores in
2002, followed by one of the steepest drops by 2008.

State-owned enterprises have expanded in all sectors, sometimes by heavy-

handed means. New state-owned firms include the airline Conviasa.
Nationalizations range from CANTV, the publicly traded
telecommunications firm, to AES-Electricidad de Caracas, steelmaker
SIDOR, and four foreign-owned cement companies. Expropriations include
74 oil service providers, and more than 40 factories and firms. International
oil companies operating joint ventures in the Orinoco Tar Belt were also
forced to turn them over to PDVSA. Also, directly in line with ISI, the
regime relied heavily on price and exchange rate controls ± the latter
leading to two exchange rates± official and parallel. In 2010, a third rate
was announced together with currency devaluation.

The growth of state-owned enterprises under Chávez was often justified

discursively in terms of a need to regain control over sectors deemed
³VWUDWHJLF´%XWDVRFFXUUHGLQSUHYLRXV,6,HSLVRGHVVWDWHH[SDQVLRQXQGHU
Chávez satisfied political rather than strategic purposes. To pave the way
for nationalization, the regime generally relied on support from labor

74
groups. One way to gain such support was to encourage labor actions; by
driving a firm to bankruptcy, the regime justified a takeover, as occurred
with Constructora Nacional de Válvulas (a valve manufacturer for the oil
industry), Venepal (a paper products mill) and Coca-Cola FEMSA.47
Another approach was to promise workers expanded employment and
relaxed productivity standards²which helped overcome electoral
challenges. This was how the regime nationalized the steelmaker SIDOR
IURP$UJHQWLQD¶V7HFKLQW

Whichever way the regime infiltrated labor, the result was the same: the
state became the principal economic agent in a particular region or among a
group of workers, whiFK LQFUHDVHG WKH UHJLPH¶V FR-optation capacity.
:KLOH VRPH DXWKRUV DUJXHG WKDW WKLV SROLWLFDO ELDV PDGH &KiYH]¶V
QDWLRQDOL]DWLRQV ³TXDOLWDWLYHO\ GLIIHUHQW´ IURP SUHYLRXV PHDQV IRU
strengthening state power, this point might be overstated.48 Similar political
intentions have been identified in previous episodes of ISI expansion in
Latin America.49

A political motive behind these nationalizations was to increase the size of

the workforce under state control. Between 2007 and mid-2008, when
nationalizations picked up pace, the state brought in almost 41,400 new
workers into the state payroll, a 7.2 percent increase from early 2007 and a
53.5 percent increase from the start of the Chávez administration ± from
1.4 million to 2.1 million workers. In contrast, the private sector had
expanded its payroll by only 28 percent since 1999 (from 7.3 million to 9.4

47
Veneconomy Weekly, October 2008.
48
Petkoff, Teodoro. 2008. "A Watershed Moment: Venezuela." Andean Working
Paper. Washington, DC Inter-American Dialogue.
49
%DUEDUD6WDOOLQJVDQG5REHUW.DXIPDQ³7KH3ROLWLFDO(FRQRP\RI/DWLQ$PHULFDQ
3RSXOLVP´ LQ 6HEDVWLDQ (GZDUGV DQG 5XGLJHU 'RUQEXVFK The Marcroeconomics of
Populism in Latin America (Chicago: Chicago University Press 1991).

75
million).50 Because private-sector job creation was lagging seriously behind
the public sector, the economy was being left with an astoundingly large
employment shortfall of approximately 8.7 percent.51

1RW RQO\ WKH PRWLYHV EXW DOVR WKH RXWFRPHV RI 9HQH]XHOD¶V FXUUHQW ,6,
seemed to repeat a similar story. The public sector was getting bloated
(with labor), while productivity was plummeting. PDVSA provided the
best illustration: in 2009, the minister of energy and president of PDVSA
DQQRXQFHG WKH FRPSDQ\¶V SD\UROO KDG LQFUHDVHG E\  SHUFHQW JRLQJ
from 30,000 to 80,000 employees since 1998 the time Chávez took office.52
But measured in terms of barrels per day pURGXFHG WKH FRPSDQ\¶V
productivity declined.

Despite similarities, there are at least two major differences between classic
,6,DQG&KDYH]¶V,6,)LUVWWKH&KiYH]UHJLPHPDGHOLWWOHHIIRUWWRUHVWULFW
imports. Tariffs and import quotas did exist (e.g., in auto parts), but these
were not high, widespread, or rigid. In fact, the government relied on an
avalanche of imports to fight inflation (by exerting downward pressure on
prices) and mitigate recurring consumer goods shortages. To the extent
import limitations existed, they were implemented by means of exchange
control: importers had to apply for dollars at a designated government
agency, and the agency restricted the number of dollars it sold. Hence
Venezuela experienced an import boom that was inconsistent with classic
ISI, although consistent with the import spree that took place during
9HQH]XHOD¶V ILUVW RLO ERRP XQGHU &DUORV $QGUpV 3HUH] ZKHQ LPSRUWV

50
Tejero Puntes, Suhelis. 2008. "Sector público absorbe a 41.400 trabajadores por
estatizaciones." El Universal . Caracas.
51
Veneconomy Weekly, April 20, 2008.
52
ABNInfolatam, July 19th, 2009.

76
registered an average 33.7 annual growth from 1973 to 1978.53
Interestingly enough, during the market-reform period of the second Carlos
Andrés Pérez administration (1989-93), often billed as a period of trade-
induced deindustrialization, imports in fact declined.

An even greater departure from traditional ISI under Chávez was the dearth
of private investment in manufacturing and other industrial activities. This
contrasts sharply with policy during the decades spanning 1960-90. During
this period investment in industrial activities expanded, in defiance of
traditional resource-curse theories that predict export booms yield de-
industrialization.54 The decline in private investment under Chávez was
noteworthy in both oil and non-oil activities.

By neglecting private involvement, the state was shifting onto the public
sector the entire burden of shoulderinJ WKH FRXQWU\¶V LQYHVWPHQW QHHGV
Private investment was not forthcoming, largely because the government
did very little, other than offer a fiscal stimulus, to create a business-
friendly environment. The World Bank Doing Business Index, which ranks
countries in terms of domestic investment climate, had by 2008 placed
Venezuela near the bottom of the list.55

These industrial policies²openness to imports combined with unfriendly

business regulations²led, of course, to fewer private industries. From
2001 to 2006 the number of private manufacturing firms in Venezuela
declined by 13 percent, while food- and beverage-related industries

53
Echevarría, Oscar. 1995. La economía venezolana, 1944-1994. Caracas: Editorial
Arte/Fedecámaras.
54
Di John, Jonathan, F rom Windfall to Curse? Oil and Industrialization in Venezuela,
1920-2005 (forthcoming). University Park, PA: Penn State University Press.
55
World Bank. 2008. "Doing Business." from www.doingbusiness.org.

77
declined by 8.4 percent.56 Another outcome was capital flight following
2006. This combination ± decline in firms coupled with increased capital
flight ± was unheard of in a country undergoing the biggest consumer
goods boom in decades. But it was highly predictable in the context of a
pro-imports/anti-investment economic model. The worst economic
outcomes from the resource curse²oil booms leading to de-
industrialization²had never transpired in Venezuela, at least until the
1980s. Under Chávez, these effects were in full swing.57

Like most heavy-handed statist models, the chavista political economy

contained a built-in mechanism for generating its own demand. The regime
created poor business conditions for many sectors, thus leading to
unemployment or capacity underutilization, or both. The government then
used this outcome as an excuse for taking over. In a famous critique of
capitalism, Charles Lindblom argued that the private sector could hold the
government hostage because it can always threaten politicians with
unemployment and thus force them to adopt business-friendly policies.58
Chavismo discovered that a petro-state could reverse this relationship: the
state can afford to corner the private sector into underperformance and thus
generate demand for more state intervention. In a non- resource-based
economy this model would be unsustainable: at some point the state would
run out of funds. In a petro-state enjoying an oil-price boom such as
Venezuela in 2003-08, the model was impossible to break because both
supply and demand were feeding on each other.

56
Pérez, Felipe. 2008. "Revisión, rectificación y reimpulso económico." Reimpulso
Productivo, ed. Ministerio del Poder Popular para la Comunicación y la Información,
Caracas: Ministerio del Poder Popular.
57
Di John, op. cit.
58
Charles Lindblom, Politics and Markets: The World's Political-Economic Systems,
New York: Basic Books, 1977.

78
2QH ILQDO GRPDLQ ZKHUH WKH UHJLPH¶V SROLWLFDO HFRQRP\ H[DFHUEDWHG SUH-
Chávez political vices was cronyism, or state economic favors for the
privileged. Almost invariably, state contracts awarded to the domestic
private sector were undertaken without any form of bidding. In addition,
mergers and acquisitions flourished in the 2004-08 five-year boom, where a
good many buyers were individuals and firms politically linked to the
government. Some of these mergers and acquisitions took place in the
financial sector. Following is an example: in mid-2009 a leading insurance
company, La Previsora, was acquired by Baninvest, an investment firm
headed by Arné Chacón, brother of Minister of Science, Technology and
Intermediate Industries Jesse Chacón.59 The transfer of state and private
assets to private hands that were closely linked to the government²locally
known as boliburgueses² OHG SUHVV UHSRUWV WR UHIHU WR &KiYH]¶V
robolución. The former term is a play on the Spanish words for
³EROLYDULDQ´ DQG ³ERXUJHRLV´ WKH ODWWHU D SOD\ RQ WKH ZRUGV WKHIW DQG
revolution.

IV. The Crisis of the Exchange Control

%\ HQG  WKH H[SHFWHG IDLOXUHV RI &KiYH]¶V SRSXOLVW PDFURHFRQRPLF
policies had surfaced. Freezing the exchange rate and expanding aggregate
demand by means of unsustainable fiscal spending fueled capital flight and
high inflation. As already mentioned, an overvalued exchange rate
promoted a level of imports the Central Bank was unable to fully
accommodate. This became clear when oil prices turned and revenue began
to decline, creating further pressures on the balance of payments. Soon the
authorities had no choice but to allow the private sector to buy dollars to
pay for imports in the parallel exchange market, generating enormous
59
El Universal, June 19, 2009.

79
inflationary pressures as the unofficial rate soared. A resulting decline in
consumption curbed growth. By 2009, the economy waned by 3.3 per cent
of GDP.

Moreover, the regime was facing a fiscal crisis that could only be addressed
through a massive devaluation. Mounting expenditures owed to costs
ranging from the rise in public sector payroll and benefits, to payments for
successive nationalizations and expropriations, support for misiones and
other social outlays, and covering the growing deficits of badly managed
state-owned enterprises. Equally as important, for PDVSA a frozen
exchange rate combined with high inflation implied a huge increase in local
currency operational costs, with little left to support fiscal contributions. By
the final quarter of 2009, the projected fiscal deficit reached 5.7 per cent of
GDP, and the prospect for funding the deficit by issuing additional external
debt was limited by the state of world financial markets.

Further fiscal pressures evolved as the year came to a close, stemming from
inadequate regulatory controls over the financial sector. Persons closely
linked to the regime managed to deploy deposits from several small banks
to self-finance the acquisition of these institutions. Soon the banks were
intervened, but according to informal accounts the government had to
replace more than several billion dollars in private and public funds on
deposit at these banks. 60 The banking crisis that ensued triggered a conflict
among chavista factions, forcing President Chávez to crack down on some
of the boliburgueses, jailing Arné Chacón (brother of long-time minister

60
According to one account the fiscal cost of the financial crisis in these small banks
due to the fraudulent extraction of public and private deposits reached over 7 billion
dollars. 6HH =DSDWD -XDQ &DUORV  ³(O )LQ GH OD +LVWRULD %RQLWD´ El Mundo
Economía & Negocios, p. 26.

80
Jesse Chacón) and Carlos Fernández Berruecos (a leading agribusiness
figure closely linked to the Armed Forces). 61

Early in 2010, Chávez announced a devaluation of the official exchange

rate (until then fixed at Bs. 2.15 to the dollar) and established a dual rate
(an official rate at 2.60 and a second official rate at 4.30), plus a floating
unofficial rate the government announced would be held down.62 Although
devaluation was expected, economic agents were forced to further adjust
prices. Strict measures against price changes by retailers were announced,
leading to the expropriation of a large chain of supermarkets owned by the
French multinational Grupo Casino. Except for the recent expropriation of
a shopping mall owned by a leading construction firm, Grupo Cohen, such
takeovers at the retail level were unprecedented. The outcome was an
increased sense of state expansion in the economy and an even more
deteriorated investment climate.

In tandem with devaluation, Chávez announced the need to rationalize

consumption of electricity. A dearth of public investment in thermal
generation, together with a drought brought about by the weather
SKHQRPHQRQ ³(O 1LxR´ DIIHFWLQJ LQVWDOOHG K\GURHOHFWULF FDSDFLW\
WKUHDWHQHG WKH FRXQWU\¶V DELOLW\ WR PHHW H[LVWLQJ GHPDQG IRU SRZHU DQG
light. As electricity outages increased, even offices and shopping facilities
shut down. Further damage was inflicted on existing industry and the
HFRQRP\DWODUJHGDPSHQLQJ&KiYH]¶VVXSSRUWUDWLQJV

61
Ibid.
62
The parallel rate would presumably be held down by issuing dollar-denominated debt
or allowing PDVSA to sell foreign exchange on the unofficial market in order to expand
the amount of local currency available to cover the cost of operations.

81
V. Economic Sustainability and Regime Survival

What are the implications of the economic context presented above for the
VXVWDLQDELOLW\ RI &KiYH]¶V UHJLPH" $Q\ GLVFXVVLRQ RI UHJLPH VXUYLYDO LQ
Venezuela must address the issue of economic sustainability, which in turn
entails discussing oil flows. Chávez has been able to build his economic
model thanks to oil. Nobody disputes this point. The key question is
whether the regime will collapse in the event of a severe oil downturn. Our
DQVZHU LV ³QRW QHFHVVDULO\´ Change will probably become more gradual
following internal cracks from within the official coalition.

There is no question that the Venezuelan state remains dependent on oil

revenue, more so now than at any other time since the 1970s. Insofar as the
world price of oil fluctuates regularly and sometimes sharply, dependence
on income from oil exports entails considerable volatility. Hence
Venezuela experienced a steep rise in oil revenue in the 1970s, a swift
decline in the 1980s, volatility and decline in the 1990s, and another steep
rise following 2003. It is worth asking what would happen²economically
and politically²in the event of another sustained downturn in oil revenue.

During the global financial crisis oil prices indeed declined, but remained
high from an historical perspective. From July to December 2008, prices of
Venezuelan crude declined by 68.5 percent from a peak of $129.54 per
barrel. The full impact of this decline may dissipate should oil prices
recover, but this shows that the prospects of a severe exogenous drop are
entirely possible.

However, an oil bust will not necessarily bring about the rapid demise of
9HQH]XHOD¶V FXUUHQW SROLWLFDO PRGHO 7KLV LV EHFDXVH RLO IORZV IHDWXUH

82
different impacts on economic and political sustainability depending on the
kind of regime in place. Massive oil booms, we argue, risk weakening
democracies but have a good chance of strengthening other types of
regimes, while massive oil busts can produce the opposite effect. 63 To
understand these different impacts, it helps to review the effects of both oil
booms and busts along three regime dimensions: economic policy, checks
on the executive branch, and societal response. Consider oil booms first.

Oil Booms

Economic policy: Under both democracies and autocracies, as both Terry

Karl and Fernando Coronil clearly noted, oil booms have an inebriating
effect on heads of state.64 Oil booms drive state leaders to overspend,
W\SLFDOO\ RQ ³PHJD LQIUDVWUXFWXUH´ SURMHFWV RIWHQ LQ XWWHU GLVUHJDUG RI
macroeconomic and financial viability. One key difference is that in a
democracy, hyperactive state spending is channeled through (or takes place
under the scrutiny of) political parties, whereas under a regime with
concentration of powers there is no mediating institution between the
executive branch and economic agents receiving public funds. Oil booms
can therefore promote party competition in democracies, at least initially,
since large parties, not just the ruling party, can benefit from state
largesse.65 In a regime with concentration of powers, on the other hand,

63
For a similar conclusion with a different causal argument see Smith, Benjamin
(2006), "The Wrong Kind of Crisis: Why Oil Booms and Busts Rarely Lead to
Authoritarian Breakdown." Studies in Comparative International Development 40(4):
55-76.
64
Karl, Terry Lynn (1997), The Paradox of Plenty: Oil Booms and Petro States.
Berkeley, CA: University of California Press; Coronil, Fernando (1997), The Magical
State: Nature, Money, and Modernity in Venezuela. University of Chicago Press.
65
Levine, Daniel. 1973. Conflict and Political Change in Venezuela Princeton, NJ:
Princeton University Press; Karl, Terry Lynn. 1987. "Petroleum and Political Pacts:
The Transition to Democracy in Venezuela." Latin American Research Review 22, no. 1
22(1): 61-94.

83
because the incumbent has a virtual monopoly over state spending and its
accompanying policies of clientelism and cronyism, the chances of rival
forces capturing oil resources to challenge the incumbent are minimal.

Nonetheless, oil booms in a democracy may eventually result in political

party collusion, as traditional parties begin to cooperate with one another in
sharing the spoils of office.66 To compete, parties overemphasize patronage
to the detriment of sound capital investments, which is especially
unfortunate for development,67 may impede economic adjustment,68 and
can lead to antiparty/anti-status quo sentiment.69

Checks on the executive branch: Higher spending expands the capacity of

incumbents to co-opt political actors (especially in the context of weak
institutions). Incumbents thus become harder to defeat electorally or
restrain during oil booms. Their enhanced power to spend inadvertently
leads to declines in key democratic features, such as notions of limited
government, transparency in fiscal affairs, fair treatment of the dissenting
parties, and reduced asymmetry of power between incumbents and the
opposition. The key point is that these trends are detrimental for democratic
governance but not necessarily for other regimes, since they obviously do
not base their legitimacy exclusively on democratic features.

66
Norden, Deborah. 1998. "Party Relations and Democracy in Latin America." Party
Politics 4(3): 432-434; Monaldi, Francisco Monaldi and Michael Penfold. 2010.
³,QVWLWXWLRQDO&ROODSVH7KH5LVHDQG'HFOLQHRI'HPRFUDWLF*RYHUQDQFHLQ9HQH]XHOD´
in Hausmann, Ricardo and Francisco Rodríguez, eds. Venezuela: Anatomy of a
Collapse, Pennsylavia, Penn State University Press.
67
Collier, Paul. 2007. The Bottom Billion: Why the Poorest Countries Are Failing and
What Can be Done About It. New York: Oxford University Press.
68
Naim, Moisés. 1993. Paper Tigers and Minotaurs. Washington, DC: Carnegie
Endowment for International Peace.
69
Myers, David J. 2007. "From Thaw to Deluge: Party System Collapse in Venezuela
and Peru." Latin American Politics and Society Forthcoming.

84
Societal response: In many petro-states, a consistent economic response by
societal actors to oil booms is to become addicted to rents. 70 To extract oil-
based rents, economic agents focus their energies on searching for them.
Because the state controls the oil sector, this societal response translates
into demand for greater state power. In democracies, the rising demand for
oil-derived rents does not necessarily erase political competition: political
parties will compete for votes in their quest for state power, with each party
advocating its own view of what constitutes the fairer or better way to
distribute rents. But ideological competition among parties does decline: all
parties end up defending one version or another of a strong state.

Some analysts have openly complained that in Venezuela there is no one

(no political party, media group, or politician) openly defending any
economic ideology other than state power.71 In a democracy, where both
incumbents and opposition forces share rent revenues, rent seekers can
indulge their appetite for rents by capturing both incumbent and opposition
forces. In a setting with no checks and balances, by contrast, there is only
one way to satisfy the appetite for rents²to bandwagon with incumbents.
Because the opposition, if at all active, has almost zero chance of winning,
there are weak incentives for rent seekers to side with the opposition ± a
hopeless and possibly dangerous gamble. From the time oil came to be
extracted in Venezuela in the 1920s, well-connected citizens and economic
agents have warmed up to public officials in order to obtain progressively
better deals from oil rents: a generous scholarship to study abroad, a
70
For Venezuela see Romero, Aníbal. 1997. "Rearranging the Deck Chairs on the
Titanic: the Agony of Democracy in Venezuela." Latin American Research Review
21(1): 7-36.
71
Faría, Hugo J. 2007. "Socialismo democrático contra socialismo totalitario."
Retrieved December 13, 2007, 2007, from http://www.hacer.org/current/Vene221.php;
Faría, Hugo J. 2008. "Hugo Chavez against the backdrop of Venezuelan economic and
political history." The Independent Review.

85
government post, a tariff to protect infant industry or better yet a tariff
waiver to start a business, a government subsidy or, best of all, a lucrative
contract with the state.

In sum, oil booms risk weakening democratic regimes, if not right away
then down the road. Booms lower checks on the executive branch and
LQFUHDVH VRFLHW\¶V GHPDQG IRU UHQWV 3ROLWLFDO SDUW\ FRPSHWLWLRQ IRU
electoral office may still endure, but collusion expands, and ideological
competition wanes. Consequently, over time, oil booms also risk
weakening political party competition and provoke voter disaffection, as
citizens turn increasingly against parties. In political frameworks with
greater contraction of powers, these same effects combine to strengthen the
regime, since executive power, by definition, thrives in contexts of societal
demand for state controls, bandwagons, and declining respect for individual
liberty ± including that of politicians. Moreover, oil booms allow these
regimes to embrace a greater degree of clientelism and cronyism, which
expands the number of regime supporters and fosters greater hegemony
over the distribution of rent benefits ± compounding the bandwagon effect
and the extent to which the head of state can turn into a totally dominant
actor.

Oil Busts

By the same token, collapses in oil revenue can jeopardize democracies far
more than other type of regimes.

Economic policy: Because petro-states have few sources of public revenue

other than oil, they are particularly susceptible to oil busts. Oil busts tend to
produce severe fiscal crises and recessions, which force the executive

86
EUDQFKWRLPSOHPHQWVSHQGLQJFXWEDFNVZLWKVHULRXVFRVWVIRULQFXPEHQWV¶
popularity. For democracies, economic adjustment measures are especially
painful because most reforms (e.g., reducing spending, raising taxes,
privatizing, deregulating, and at the worst devaluation or default) require
adherence to the law.72 For most of these reforms the executive branch
must seek legislative approval, which in turn requires support from political
parties and their constituents, all of whom are highly addicted to oil rents
and are thus reform-adverse. By contrast, in a context where the executive
branch has no institutional checks, it can more easily get away with ruling
by decree, or at least writing off certain constituencies. This provides these
types of regimes a greater probability of surviving oil busts and may be one
reason why some studies find that autocracies survive economic crises
more often than do democracies.73

Checks on the executive branch: Faced with the urgency of addressing a

severe fiscal crisis but hindered by a congress/society that is unwilling to
accept the cost of adjustment, presidents in democratic petro-states will feel
tempted to carry out profound reforms by fiat, often circumventing existing
democratic channels (e.g., by governing through decrees, bypassing
consultations with parties).74 To the extent the executive branch is
pressured to concentrate more power and consult less, oil shocks hold the
potential of weakening democracy.

72
Haggard, Stephen and Robert R. Kaufman. 1995. The Political Economy of
Democratic Transitions. Princeton, NJ: Princeton University Press; IDB. 2005. "The
Politics of Policies: Economic and Social Progress in Latin America, 2006 Report."
Washington, D.C. and Cambridge, MA, Inter-American Development Bank and the
David Rockefeller Center for Latin American Studies.
73
Przeworski, Adam, Michael E. Alvarez, José Antonio Cheibub and Fernando
Limongi. 2000. Democracy and Development: Political Institutions and Well-Being in
the World, 1950-1990. New York: Cambridge University Press.
74
2¶'RQQHOO*XLOOHUPR'HOHJDWLYH'HPRFUDF\ Journal of Democracy 5(1):
55-69.

87
Oftentimes in democracies, societal demand for greater concentration of
power in the hands of the executive branch can increase during economic
downturns. For instance, a public opinion survey of Venezuelans taken in
1995 and 1998 (a period of poor economic performance) shows
UHVSRQGHQWV ZKR VXSSRUWHG ³JRYHUQPHQW LQWHUYHQWLRQ LQ WKH HFRQRP\´
skyrocketed across all income groups ± from 29 to 80 percent among
upper-income Venezuelans and from 68 to 86 percent among lower income
strata.75 7KH VKDUH RI UHVSRQGHQWV VXSSRUWLQJ ³UDGLFDO SROLWLFDO FKDQJHV´
expanded as well, most remarkably among upper income respondents, from
8 to 17 percent.76

In other political contexts, oil busts hinder the capacity of the

administration to be generous (i.e., to spend heavily on clientelism) but do
not technically make the regime less democratic, since the starting point
was not a competitive political regime. Demand for radical change across
the population may very well increase, especially among those who most
bear the cost of economic reforms, but the disaffected groups will lack
institutional avenues to channel their discontent or will fear the costs of
protesting.

Societal response: In democracies, economic adjustment harbors two areas

of political conflict. One area of conflict arises between the state and the
cost bearers, i.e., societal actors who bear the brunt of economic

75
Corrales, Javier. 2000. "Reform-Lagging States and the Question of Devaluation:
Venezuela's Response to the Exogenous Shocks of 1997-98." Exchange Rate Politics in
Latin America, ed. Carol Wise and Riordan Roett, Washington, DC: Brookings
Institutution Press.
76
Canache, Damarys. 2004. "Urban Poor and Political Order." The Unraveling of
Representative Democracy in Venezuela , ed. Jennifer L. McCoy and David J. Myers,
Baltimore, MD: Johns Hopkins University Press.

88
adjustment.77 The second area of conflict emerges between the executive
EUDQFKDQGWKHSROLWLFDORUJDQL]DWLRQVWKDWUHVLVWWKHDGPLQLVWUDWLRQ¶VHIIRUWV
to concentrate more power.78 $VHYHUHFODVKEHWZHHQVRFLHW\¶VGHPRFUDWLF
forces and the state may occur in situations where powers are delegated, or
³SDUW\-QHJOHFWLQJ´ SROLFLHV GHSOR\HG ,Q VHWWLQJV LQ ZKLFK WKH SUHVLGHQW
monopolizes power, adjustment will mainly engender conflict with cost
bearers. Conflict with political organizations is less significant. Either it
pre-dates the oil shock or has already been resolved ± assuming the
UHJLPH¶VSRZHUKDVVWDELOL]HG

For a democratic regime, the most likely impact of an oil bust is greater
risk of regime decay or collapse. All institutions come under strain ± as
indeed occurred in Venezuelan politics at the close of the twentieth
century. Economic adjustment in the 1980s and 90s generated policy
paralysis and muddling through. State-society conflict pitched citizen street
protests, especially among the urban poor, against top-down efforts to
reform the economy. Traditional political parties suffered voter defection,
driven by rising voter discontent with professional politicians. Because the
economic crisis was prolonged (from 1979 to 2001), resentment about the
status quo and politicians became especially acute. No body politic likes
austerity measures, any more than politicians who appear immobile before
a crisis. From almost every angle, the politics of adjustment in democratic

77
Nelson, Joan. 1989. F ragile Coalitions: The Politics of Economic Adjust ment . New
Brunswick, NJ: Transaction Press; Przeworski, Adam. 1991. Democracy and the
market: political and economic reforms in Eastern Europe and Latin America . New
York, NY: Cambridge University Press; Haggard, Stephan and Steven B. Webb. 1994.
Voting for Reform : Democracy, Political Liberalization, and Economic Adjustment .
New York: Oxford University Press; Eckstein, Susan, Ed. 2001. Power and Popular
Protest: Latin American Social Movements. Updated and Expanded Edition,
University of California Press.
78
Geddes, Barbaa. 1995. "The Politics of Economic Liberalization." Latin American
Research Review 30(2): 195-214.

89
petro-states risks jeopardizing the quality and institutional foundations of
democracy.

In a setting that lacks division of powers, an oil bust can lead to either of
two outcomes. One is for the executive branch to survive in office, perhaps
becoming even stronger. This can occur if the regime intensifies
authoritarian features, e.g., by repressing protests of cost bearers and
preventing cronies from defecting. Another possible outcome is for the
executive not to survive in office. This occurs if cost bearers become too
hard to repress or cronies abandon the regime.

Which of these two outcomes is more likely in the case of a prolonged oil
bust under Chávez? Many analysts contend that an oil bust will promptly
SXW DQ HQG WR WKH UHJLPH¶V SRSXOLVW VSHQGLQJ WKHUHE\ GLVDUPLQJ &KiYH]
But a number of reasons suggest this may not happen. First, even if
austerity provokes protests by cost bearers, it could very well be that
Chávez will find himself with a stronger capacity to repress, given the
UHJLPH¶V HQRUPRXV VSHQGLQJ RQ ZHDSRQV DQG PHDVXUHV WDNHQ WR LQFUHDVH
loyalty within the armed forces. Second, the regime controls important
institutions that would not likely court the opposition, fearing a backlash if
pROLWLFDOFRQGLWLRQVFKDQJH7KLUGWKHUHJLPH¶VVXSSRUWLVQRWH[FOXVLYHO\
linked to clientelism; it also relies on cronies, who need to extract rents,
and on other supporters, usually radical partisans who receive intangible
rewards through ideological commitments. Thus an oil bust will not
QHFHVVDULO\ XQGHUPLQH WKH UHJLPH¶V FDSDFLW\ WR SURYLGH WKHVH RWKHU IRUPV
of rewards, although it can certainly provide an opportunity for new groups
to pressure in favor of economic and political change. Oil busts can
undermine the hegemony of the incumbent and could well do so for
&KiYH]¶VUHJLPHEXWQRWQHFHVVDULO\HQVXUHLWVsudden departure.

90
VI. Reflections

³5HYROXWLRQ´ FDQ PHDQ HLWKHU RI WZR WKLQJV UDGLFDO FKDQJH RU UHSHDWLQJ
F\FOHV&KiYH]¶V%ROLYDULDQUHYROXWLon encompasses both meanings, but in
different realms. In politics, Chávez has introduced radical change, e.g.,
greater restrictions on and obstacles for the opposition, less transparency in
governance, and heightened power concentration. In the economic realm,
on the other hand, he has repeated old vices ± dependence on oil for state
revenues, politically minded state power verging on classic ISI, and ax-
relax-collapse economic policy cycles.

Economic mismanagement can impact different regimes in different ways.

:KHQ 9HQH]XHOD¶V GHPRFUDF\ PRUH RU OHVV IXQFWLRQHG DQG WKH SROLWLFDO
regime was less restrictive, economic mismanagement had a detrimental
effect, leading to corruption, political party collusion, voter distress, and
XOWLPDWHO\ UHJLPH ³XQUDYHOLQJ´ By the 1990s, few citizens in Venezuela
found their democracy to be credible, responsive, or worth defending. That
is why so large a share of the public voted for Chávez.

Under the current political regime, characterized by excessive presidential

discretion, the impact of economic mismanagement may do less damage to
the regime: oil dependence, state power, and ax-relax-collapse may not
prove lethal. During an oil boom, economic agents in this type of settings
are tempted to bandwagon with the administration, for siding with the
opposition offers no payoffs. During a collapse phase, the regime can
repress the cost bearers (if they protest), blame exogenous actors for
economic misfortune, and continue to offer cronies and ideologues much of
what they like²impunity and radical ideology. These steps can lead to
regime survival or regime stress ± not demise.

91
Paradoxically, the Chávez regime owes its consolidation to high
dependence on oil flows, yet its sustainability in office may not depend as
much on oil as could be expected. An oil bust ±or an economic downturn ±
will certainly force cracks in the system and even spawn political
opportunities for opponents, but will not necessarily mean that chavismo, at
least in the short term, can be dismissed outright. It just means that
Venezuela will enter into another cycle of political and economic
instability that will only come to an end when institutional issues are
adequately addressed.

92
 C hapter 3
Institutional Resource C urse: Seizing Political Control of PD VSA

2LO KDV SOD\HG DQ RYHUDUFKLQJ UROH LQ VKDSLQJ 9HQH]XHOD¶V SROLWLFDO
HFRQRP\ ,WV LPSRUWDQFH GLG QRW ZDQH GXULQJ &KiYH]¶V GHFDGH-long
regime. The scale and length of the oil boom following 2003 are too
obvious to overlook.79 Nonetheless, entertaining a causal relationship
between oil and political development is too simple an equation, especially
if the issue is addressed from both an historical and institutional
perspective. Thomas Friedman, in an effort to capture an image that links
both these dimensions SRUWUD\V LW DV ³WKH ILUVW ODZ RI SHWURSROLWLFV´ WKH
price of oil and the degree of freedom invariably move in opposite
directions.80 Recent statistical studies have found a significant correlation
reaffirming this perception.81

Oil has also been viewed aVD³UHVRXUFHFXUVH´IRUHFRQRPLFJURZWKDVZHOO

as political development. Economies dependent on natural resources suffer
chronic problems in economic performance, altering their capacity for
long-term growth. Ways in which this curse manifests itself are numerous:
exchange rate appreciation, high levels of indebteness, overspecialized

79
+LGDOJR0DQXHO³$3HWUR6WDWH2LO3ROLWLFVDQG'HPRFUDF\LQ9HQH]XHOD´
5HDO ,QVWLWXWR$OFDQR:RUNLQJ3DSHU6HULHV+LGDOJR0DQXHO³+XJR
Chavez´s Petro-6RFLDOLVP´ -RXUQDO RI 'HPRFUDF\ 9RO  1R  -92; Francisco
0RQDOGL DQG 0LFKDHO 3HQIROG ³,QVWLWXWLRQDO &ROODSVH 7KH 5ROH RI *RYHUQDQFH LQ
Explaining Venezuela´s Economic Decline 1975-´ LQ Venezuela: Anatomy of a
Collapse, ed. Ricardo Haussman and Francisco Rodríguez, (Pennsylavia: Penn State
University Press, 2010)9HUD/HRQDUGR³3ROtWLFDV6RFLDOHV\3URGXFWLYDVHQXQ
Estado Patrimonialista Petrolero 1999-´1XHYD6RFLHGDG1R0D\R-Junio.
80
)ULHGPDQ 7KRPDV  ³7KH )LUVW /DZ RI 3HWUR 3ROLWLFV´ )RUHLJQ 3ROLF\ 0D\-
June 154.
81
Ross, Michael L. (1999) "The Political Economy of the Resource Curse," World
Politics 51 (2, January), 297-322 and Ross, Michael (2001) "Does Oil Hinder
Democracy?," World Politics 53 (3, April), 325-361.

93
production, eroding institutional capacity, and widespread corruption.82
Public policies aimed to correct this situation are equally diverse and,
largely for political reasons, difficult to implement. Among these policies
are macroeconomic stabilization funds, fiscal responsibility rules,
transparency in oil contracts and institutional strengthening programs83.

)URPDUHVRXUFH FXUVHSHUVSHFWLYH&KiYH]¶VVSHFWDFXODUHOHFWRUDOUise and

consolidation is relatively simple to explain. Oil has made available to his
revolution both preconditions and opportunities to concentrate power in the
presidency ± hence the possibility of financing expansive fiscal policy that
in other types of economies would prove unsustainable.

In this chapter we propose to partially revisit the resource curse

perspective, particulary in regards to political development, and show that
oil is instead influenced by multiple variables, many of them institutional,
making for outcomes that are not necessarily the same for all countries ± or
even for any given country at different historical points in time. In doing so
ZHGLVFXVVWKHLGHDRIDQ³LQVWLWXWLRQDOUHVRXUFHFXUVH´PHDQLQJWKDWRQO\
when institutional conditions previously allow for the concentration of
power in the incumbent is the outcome so underscored by this literature
observed. Accordingly, existing institutional conditions at the time a
country enjoys an oil boom are particularly relevant to understand a
FRXQWU\¶VVXEVHTXHQWSROLWLFDOGHYHORSPHQW
82
Jeffrey Sachs and Werner (1993) Natural Resource Abundance and Economic
Growth, NBER Working Paper 5398; Manzano, Osmel and Rigobón, Roberto (2001).
³5HVRXUFH &XUVH RU 'HEW 2YHUKDQJ"´ 1%(5 :RUNLQJ 3DSHU  &DPEULGJH
National Bureau of Economic Research; Rodríguez, Francisco and Jeffrey Sachs (1999)
³:K\'R5HVRXUFH-Rich Economies Have Slower Growth Rates? A New Explanation
and an Application tR9HQH]XHOD´Journal of Economic Growth 4 (3); Sala-i-Martin, X.
DQG $ 6XEUDPDQLDQ  ³$GGUHVVLQJ WKH 1DWXUDO 5HVRXUFH &XUVH $Q ,OOXVWUDWLRQ
IURP1LJHULD´1%(5:RUNLQJ3DSHU1R
83
Humphreys, Macartan; Sachs, Jeffrey and Stiglitz, Jospeh, editors (2007) Escaping
the Resource Course, New York: Columbia University Press

94
Curiously. oil revenue has usually been linked to the evolution of
democracy in Venezuelan history. In fact, oil has been said to explain
virtually every type of institutional configuration in the country¶V KLVWRU\
from kind of regime in place (democracy or authoritarianism) to nature of
the political party system (uni-, bi- or multi-party). No matter what the
political outcome, the explanation given centers on oil. We consider this
reasoning faulty. Leading qualitative studies of Venezuelan democracy
have shown time and again that oil interacts with a variety of institutional
configurations, impacting as well development of the political system and
the economy.

Terry Karl, for example, noted the makeup of the Venezuelan state at the
WLPHRIWKHVRLOERRPZDVDNH\IDFWRUWRH[SODLQZK\WKHFRXQWU\¶V
institutional capacities were weak, and continue so.84 Other analysts, such
as Juan Carlos Rey and Daniel Levine, found that oil facilitated democratic
transition in 1958 only because firm and relatively on a par political parties
were able to reach a pact favoring democracy after a conflictive historical
process.85 Moisés Naím and Ramón Piñango viewed oil income as a
SROLWLFDO LQVWUXPHQW WKDW IDEULFDWHG ³DQ LOOXVLRQ RI KDUPRQ\´ XQGHU WKH
control of political parties that had created a cartel for the distribution of
rents.86 In short, to provide oil with directionality and explanatory capacity,
the institutional variable must necessarily be taken into account.

84
Karl, Terry (1997) The Paradox of Plenty: Oil Booms and Petro States, Berkeley:
University of California Press
85
Rey, Juan Carlos (1980) Problemas Socio Politicos de América Latina, Caracas:
Editorial Ateneo de Caracas; and Levine, Daniel (1973) Conflict and Political Change
in Venezuela, Princeton: Princeton University Press
86
Naím, Moisés and Ramón Piñango, editors (1984) El Caso Venezuela: Una Ilusión de
Armonia, Caracas: Ediciones IESA

95
Events taking place at the time Chávez reached power bear out this
institutional approach. A decline in oil revenue coupled with collapse of the
previous political economy was what allowed justifying the need to
UHVWUXFWXUH WKH VWDWH¶V SRZHU UHODWLRQVKips by calling for a National
Constitutional Assembly and designing a magna carta with strong
presidential powers. Had this change not been enacted, it is difficult to hold
that at the point oil revenue undergoes a spectacular rise following 2003
Chávez would have been able to rearrange the relation between the state
and society in the manner he did. Moreover, we propose to carry this line
of argument a step further by examining the type of political control the
president had over the oil industry and the state-owned company
responsible for its development (PDVSA).

Before Chávez reached power, PDVSA enjoyed considerable autonomy

IURP D FRUSRUDWH JRYHUQDQFH VWDQGSRLQW 7KH FRPSDQ\¶V %RDUG RI
Directors was designated by the Executive, but operating control was in the
hands of management. Following the 2002-03 oil strike this changed; the
SUHVLGHQW WRRN IXOO FRQWURO RI WKH HQWLUH LQGXVWU\¶V RSHUDWLRQV DQG
GLVPDQWOHGWKHFRPSDQ\¶VPDQDJHULDOFDSDFLW\7KLVFKDQJH± an outcome
of both the strike and the oil indusWU\¶VRSHQLQJWRIRUHLJQLQYHVWPHQWLQWKH
1990s ± ZKLFK OHG WR WKH FRPSDQ\¶V UHRUJDQL]DWLRQ± was what allowed
&KiYH] WR DVVXPH YLUWXDOO\ XQUHVWULFWHG FRQWURO RYHU 9HQH]XHOD¶V ILVFDO
revenue. This institutional change guaranteed the decisive displacement of
technocratic management, leading to political control over PDVSA´s
operations. Had PDVSA retained the kind of autonomy it enjoyed before
Chávez, the effect of the oil boom on political change in Venezuela would
not have been the same.

96
 I. Oil, Institutions and Governance

A broad and rich range of arguments can be found in the literature on the
relation between oil and political regimes. Global empirical evidence
shows that, in principle, the lineal relation between level of oil revenue and
level of democratization is negative.87 Considerable debate surrounds how
to measure the importance of oil in the economy, but apparently robust
statistical results emerge when determining significance among different
countries to explain negative impact on democracy. Other empirical
evidence also suggests that oil negatively impacts the quality of economic
and political institutions in general.88 Nonetheless, certain recent
econometric studies have begun to question this correlation on the grounds
of specification problems, finding it spurious, especially because this effect
should be measured in long historical time series within countries, not only
among them.89 Other studies have tried to highlight the contingency of this
relationship and the conditions under which oil can produce a authoriarian
or democratic outcome.90

87
Ross, Michael (2001) "Does Oil Hinder Democracy?," World Politics 53 (3, April),
325-DQG-HQVHQ1DWKDQDQG:DQWFKHFNRQ/HRQDUG³5HVRXUFH:HDOWKDQG
3ROLWLFDO5HJLPHVLQ$IULFD´&RPSDUDWLYH3ROLWLFDO6WXGLHV9RO1R-841
88
Sala-i-0DUWLQ ; DQG $ 6XEUDPDQLDQ  ³$GGUHVVLQJ WKH 1DWXUDO 5HVRXUFH
&XUVH $Q ,OOXVWUDWLRQ IURP 1LJHULD´ 1%(5 :RUNLQJ 3DSHU 1R  ,VKDP - /
3ULWFKHWW 0 :RROFRFN DQG * %XVE\  ³7KH 9DULHWLHV RI WKH 5HVRXUFH
Experience: How Natural Resource Export Structures Affect the Political Economy of
(FRQRPLF *URZWK´ PLPHR :RUOG %DQN :DVKLQJWRQ '& DQG 5RVV 0LFKDHO /
(1999) "The Political Economy of the Resource Curse," World Politics 51 (2, January),
297-322
89
Haber, Stephen and VLFWRU 0HQDOGR  ³'R 1DWXUDO 5HVRXUFHV )XHO
$XWKRULWDULDQLVP" $ 5HDSSUDLVDO RI WKH 5HVRXUFH &XUVH´ :RUNLQJ 3DSHU 1R 
Stanford University.
90
Dunning, Thad (2008) Crude Democracy: Natural Resource Wealth and Political
Regimes Cambridge: Cambridge University Press

97
Apart from this debate over methodology, multiple potential mechanisms
exist by means of which oil can undermine the functioning of a democracy,
strengthening authoritarian tendencies. A traditionally mentioned
mechanism is that, in this type of economies, the State does not depend on
internal capacity for raising fiscal revenue but turns instead to international
market linkages, which usually ends up distancing public institutions from
citizens. Accordingly, the state in this type of economic system can subsist
without approval and control by the citizenry, which increases the
authoritarian features of petro-states and weakens those public institutions
(among them fiscal and information agencies) that theoretically should be
more closely related to local society.91

Still other potential mechanisms to explain this negative relation are

associated with increases in public spending, especially clientelist
spending, which swells during boom periods but becomes difficult to cut
when revenue falls. Moreover, rent capturing on the part of public and
private agents significantly expands corruption and hence ends up
weakening institutional quality92. In general terms, it would appear that the
authoritarian effect of oil dependence refers to the massive use of
clientelism and corruption on the part of incumbents as a means for
building winning coalitions and/or a capacity for repression allowing them
to remain in power.

Clearly, state control of oil rents expands the stakes of power among
incumbents vis-à-vis the opposition. Political conflict in this type of
economies becomes mainly centered on access to rents, which in some way

91
.DUO7HUU\³3HWUROHXPDQG3ROLWLFDO3DFWV Latin American Research Review
January : 63-94.
92
Sala-i-0DUWLQ ; DQG $ 6XEUDPDQLDQ  ³$GGUHVVLQJ WKH 1DWXUDO 5HVRXUFH
&XUVH$Q,OOXVWUDWLRQIURP1LJHULD´1%(5:RUNLQJ3DSHU1o 9804.

98
is induced by existing institutional arrangements. In authoritarian countries
such access is monopolistic, thus reinforcing the power of the incumbent;
whereas in a democracy access is more open and subject to oversight by
Congress and other public institutions, although it can always be cartelized
by a group of parties93. No doubt political infighting for control of state
institutions becomes a source of increasingly heightened conflict among
different political actors, given the importance of oil rents in defining how
to compete for the political and electoral arena.

Recent studies show the relation of oil and authoritarianism is complex and
can be conditioned both by socio-economic factors, e.g., inequality, as well
as institutional factors, such as party configuration.94 In other words, the
relationship is not necessarily lineal and may be contingent. This type of
argument is fairly consistent with studies undertaken for Venezuela, where
existing institutional arrangements made the democratic or authoritarian
effect of oil become manifest in one or another direction.95 Following this
tradition, we suggest that institutions exercise a decisive effect in
determining whether or not the resource curse materializes.96

93
Ibid.
94
+DEHU 6WHSKHQ DQG 9LFWRU 0HQDOGR  ³'R 1DWXUDO 5HVRXUFHV )XHO
$XWKRULWDULDQLVP" $ 5HDSSUDLVDO RI WKH 5HVRXUFH &XUVH´ :RUNLQJ 3DSHU 1R 
Stanford University; and Dunning, Thad (2008) Crude Democracy: Natural Resource
Wealth and Political Regimes Cambridge: Cambridge University Press.
95
Rey, Juan Carlos (1980) Problemas Socio Politicos de América Latina, Caracas:
Editorial Ateneo de Caracas; and Levine, Daniel (1973) Conflict and Political Change
in Venezuela, Princeton: Princeton University Press; Urbaneja, Diego Bautista: Pueblo
y Petróleo en la Política Venezolana del Siglo XX , Caracas: Centro de Formación y
Adiestramiento de Petróleos de Venezuela.
96
)UDQFLVFR 0RQDOGL DQG 0LFKDHO 3HQIROG ³,QVWLWXWLRQDO &ROODSVH 7KH 5ROH RI
Governance in Explaining Venezuela´s Economic Decline 1975-´ LQ Venezuela:
Anatomy of a Collapse, ed. Ricardo Haussman and Francisco Rodríguez, (Pennsylavia:
Penn State University Press, 2010).

99
Accordingly, interaction between institutional arrangements and oil rent
becomes a central aspect when examining the dynamics of political power
concentration or lack of it. An existing institutional configuration is
generally the outcome of historical and political conflict, independently of
oil; whereas oil revenue hinges on international markets and whatever
fiscal arrangements are agreed to by the state and participating oil
companies. Both aspects must be examined separately.

To be sure, there are situations where it becomes possible to observe an

institutional resource curse emerging whenever institutional arrangements
ensure concentration of power by the Executive, which in turn allows the
incumbent to employ oil rents (available from favorable market conditions)
as a mechanism to remain in power both by electoral and de facto means.
On the other hand, when institutional arrangements draw on a level
political field, the effect may be one where oil does not necessarily promote
such an outcome. Nonetheless, oil rents can be cartelized by both groups,
raising entry barriers for other social and political movements ± as in fact
transpired in Venezuela during its democratic unravelling from 1958 to
1998.

II. Governing PDVSA

When Chávez took over control of PDVSA in 2003 just ahead of the oil
boom, the constitutional process had already widened Executive powers.
$OVR WKH FRPSDQ\¶V JRYHUQLng corporate structure had little resemblance
to that put in place in the 1970s to prevent politicians from meddling with
the oil industry. Hence the existing institutional configuration ±the rules to

100
exercise control over the oil industry±± had greatly changed97. Little
attention has been focused on this change, the underlying reason why
Chávez was able to bar political opponents from sharing VenH]XHOD¶V RLO
rents. This transformation in PDVSA corporate governance was in place
prior to Chávez´s rise to power and was also previous to the oil boom.

Political control over the oil industry was made possible by changes in
PDVSA corporate structure introduced to render the company more
FRPSHWLWLYH 3ULRU WR WKH UHHQWU\ RI IRUHLJQ LQYHVWRUV LQ 9HQH]XHOD¶V RLO
induVWU\ LQ WKH V GXULQJ WKH &DOGHUD SUHVLGHQF\ WKH FRPSDQ\¶V
decision-making process had become increasingly cumbersome. The
president of PDVSA, appointed by the President of the Republic, chaired
the Board of Directors of a holding company comprised of several
subsidiaries charged with running independent operations. Some of the
subsidiaries were in fact remnants of foreign companies that had operated
LQ 9HQH]XHOD SULRU WR WKH LQGXVWU\¶V QDWLRQDOL]DWLRQ DQG KDG WKHLU RZQ
faintly inherited corporate culture. By contrast, under the new governing
structure, operating control was in the hands of the Board and the president
in pratice became both Chairman and CEO. Measures to improve
PDVSA´s competitiveness could now be readily implemented and the
company soon earned world fame as an innovative and efficiently run
energy producer. There was little resemblance to the corporate structure
established decades earlier, when the industry was nationalized. This
transformation celebrated by market forces had nonetheless unforseen
political consequences.

97
For an interesting review of politics and the policy process sorrounding the effort of
internationalization of PDVSA see Baena, Cesar (1999) The Policy Process in a Petro
State, London: Ashgate Publishing

101
Venezuela nationalized the oil industry in 1976, a time when political
power was largely in the hands of two traditional political parties, AD and
COPEI. Party leaders sought to safeguard the industry from political
PDQLSXODWLRQ DYRLG VDFULILFLQJ WKH ³KHQ WKDW ODLG WKH JROGHQ HJJV´ E\
subordinating PDVSA to the state, yet ensure professional management of
company operations. Hence the PDVSA Board of Directors, appointed by
the President, was charged with supervising a holding company of several
national independent oil firms. Access to oil rent would be politically
resolved by the budgetary process and in exchange politicians delegated
operational control to a profesional management in charge of competing
national enterprises98.

A novel arrangement was worked out for newly chartered PDVSA with
major international oil companies to secure seamless management
transition following nationalization. Managers of ExxonMobil, Shell, and
Gulf Oil would stay on for one year, working side by side with newly
designated Venezuelan counterparts at, respectively, Lagoven, Maraven,
and Mene Grande (which also grouped smaller foreign-owned oil
companies and later merged with a long-existing state-owned oil company
to become Corpoven). Each subsidiary had its own Board of Directors
drawn from top management. Accordingly, the functioning of these
operating firms was shielded from the process of political supervision and
control of the industry as a whole. This corporate governing structure led to
competition among operating companies, fostering innovation and effective
control by means of professional management ± without sacrificing

98
For a description of the budgetary process during this period see Puente, José Manuel,
Daza, Abelardo, RíoV*HUPiQDQG5RGUtJXH]$QGUpV³7KH3ROLWLFDO(FRQRP\
RI WKH %XGJHW 3URFHVV LQ 9HQH]XHOD´ Research Network Working Paper , Inter-
American Development Bank.

102
political control of the state over the oil industry. In short, operational
control was decentralized among competing national companies; while
supervisión over the industry was centralized on the Board of Directors
headed by a President directly appointed by the Executive branch.

The new governing structure for PDVSA was established in the late 1990s.
Company president Luis Giusti argued that PDVSA competed both in
Venezuela and abroad with international companies, and the affiliated
operating companies should be merged to make for a single, large, lean,
efficient, and market-oriented oil giant. Independent units were set up to
replace the subsidiaries: services, finance, procurement, gas, production,
exploration, etc. Following this change, the PDVSA Board of Directors
assumed a much greater role over the functioning and control of the
industry. Similarly, the president of PDVSA, who previously served as
Chairman of a holding company, now became in practice both Chairman
and CEO. This change, justified for technocratic reasons, perhaps
unintentioally left the industry without adequate space to protect itself
politically.

Chávez had from the start of his electoral campaign and now as president
championed a nationalist view of the oil industry. Not surprisingly, the
change in corporate structure led to a less than cordial relationship. Soon a
series of confrontaWLRQV RFFXUUHG EHWZHHQ WKH QDWLRQ¶V SUHVLGHQW DQG
3'96$ PDQDJHPHQWRYHUWKHGHVLJQDWLRQRIWKHFRPSDQ\¶VSUHVLGHQW,Q
prior years, before these institutional changes had been implemented, the
designation process had invariably led to some discomfort for top
management; but not quite a threat, for professional managers were ensured
of running the various affiliates autonomously. Once the corporate
government change was under way, control over the Board of Directors

103
implied decisive control over the industry, paving the way for Chávez to
implement his more nationalist vision.

&KiYH]¶V GHVLJQDWLRQ RI VXFFHVVLYH 3'96$ SUHVLGHQWV LQFOXGLQJ +pFWRU

Ciavaldini, Alí Rodríguez Araque, Guaicaipuro Lameda, Gastón Parra
Luzardo and subsequently Rafael Ramírez, generated considerable
uncertainty and tension between management and the new political order.
By and large, most board members appointed by Chávez had little business
management experience, and shared ideological views incompatible with
those of industry-groomed top management. Even in the best of
circumstances, conflict would inevitably arise and prove difficult to
resolve.

The 2003 oil strike handed Chávez a coup de grace. Political control of
PDVSA implied displacing management, and hence a decline in company
productivity. On the other hand it offered Chávez unrestricted access to oil
revenue to firm up his power. From a political-electoral standpoint, the
benefits for Chávez were greater than the costs, at least in the short- and
medium-term even if not the long-term. At the time he was a president
fighting for survival, with a recall referendum coming up, declining
approval ratings, and continuing street protests ± the long term was a mere
illusion. The political decision was too obvious not to be made. And
Chávez made it.

III. Political Control of the Oil Industry

Following the oil strike, Chávez was presented with the political
opportunity to take over operational control of PDVSA. He did not forfeit

104
this option: it was seen as the single most strategic move to firm up the
revolution. To achieve this objective Chávez undertook a battery of moves.
First, he named loyal followers to the Board of Directors and joined the
Ministry of Energy and PDVSA under a single leadership. Second, he
altered the exchange covenant between the Central Bank and PDVSA.
Third, he expanded the range of activities PDVSA could run, beyond
energy. And fourth, he fired some 18,000 employees, including most
members of top and middle management.

Prior to the oil strike, PDVSA was obligated to sell all of its dollars from
oil exports to the Central Bank; the company could only maintain abroad a
revolving fund of up to 800 million dollars to pay its debt and contract
services outside Venezuela. In April 2004, the Central Bank changed the
terms of this covenant; PDVSA was now allowed to expand its hard
currency fund to several billion dollars, and could undertake to finance
social, agricultural and infrastructure projects both locally and abroad.

To attend to its newly expanded role PDVSA set up the Social

Development Fund (FONDESPA), through which it could directly finance
special projects, including social programs (misiones) in Venezuela, as well
as other development projects elsewhere in Latin America. Significantly,
under these administrative reforms PDVSA could now disburse funds
locally and internationally without reporting to the Central Bank or the
National Assembly. The upshot of the move was that PDVSA suddenly
became a key source of direct spending for the central government.

Perhaps the move that did the most damage to the future of PDVSA ± once
FRQVLGHUHGRQHRIWKHZRUOG¶VOHDGLQJHQHUJ\FRPSDQLHV± was substituting
political loyalists for the thousands of highly trained managers, oil industry

105
specialists, and energy research and development staff who were fired.
)LJXUHVKRZVWKDWFORVHWRRXWRIRIWKHFRPSDQ\¶VH[SORUDWLRQDQG
well engineers were expelled from the industry after the strike; about an
equal share of staff was sacked from the human resources and planning
departments, and an even higher share in finance. Lesser but nonetheless
significant firings occurred in departments such as maintenance, marketing,
procurement and operations. The loss of human capital, far and way the
best trained and most experienced of any oil company in a developing
country, was devastating.

Figure 3.1 Percent of PDVSA staff expelled from the company following
the oil strike, by department

% of PDVSA Employees Fired After the Oil Strike

Procurement

Planning

Human Resources

Finance

Operations

Maintenance

Marketing

Exploration

0 10 20 30 40 50 60 70 80 90 100
Source: Gente del Petróleo

Prior to the above moves Chávez had pushed through legislation that
tightened state control of the industry, beyond provisions already included
in the 1999 Constitution. The latter precluded privatization by establishing

106
that, for strategic reasons, the oil industry was an area exclusively reserved
to the state; nonetheless, PDVSA strategic associations with private sector
companies were accepted along with other types of contracts dating from
the late 1990s. The phrasing of the Constitution was flexible enough to
DOORZ FRQWLQXDWLRQ RI WKH RLO LQGXVWU\¶V RSHQLQJ WR IRUHLJQ LQYHVWPHQW
although it raised some concerns among private players over control of
existing operations. The new 2001 Hydrocarbons Law went further.

Under the 2001 law, a single legal instrument for developing the oil
industry was established. The text did not explicitly regulate already
existing projects but left the door open to do so in the future. Moreover,
any future projects developed by PDVSA required at least 51 per cent state
ownership and would not be subject to international arbitration.

The 2001 law also increased royalties from 16 2/3 to 30 per cent for all
projects. Previous legislation had established that under special
circumstances, e.g., developing costly projects in the Orinoco Tar Belt,
royalties could be substantially reduced to ease finance. The new law
contained no such provision. Income tax for oil companies, including
PDVSA, was reduced from 60 to 50 percent, taking into account the
increase in royalties.

When Chávez took over full control over the oil industry and expanded the
role of PDVSA as a spending arm of the central government, no specific
reference was made to existing contracts with foreign oil companies. Given
the sweeping nature of the reforms, the fact there was no provision
announced for these contracts, nor were conditions applicable to foreign
investment in the oil sector specified, triggered legal and fiscal uncertainty.
Foreign companies that had committed billions of dollars to developing and

107
extracting oil from the Orinoco Tar Belt, and operated gas refineries or
other facilities as well as service stations across the country, wondered
whether the new rules contained in the 2001 law could be applied
retroactively.

As foreign companies feared, once oil prices soared in 2003, with Chávez
already holding full political authority over PDVSA, the regime abruptly
FKDQJHG FRQGLWLRQVJRYHUQLQJWKHLUFRQWUDFWV &KiYH]¶V ILUVW PRYH ZDVWR
raise royalties applicable to strategic associations with foreign companies
operating in the Orinoco Tar Belt ± including ExxonMobil, Conoco, Total,
and Chevron ± on the grounds that high and sustained oil prices had
substantially altered market conditions. At the time of this initial change,
heavy oil extracted by foreign companies in the Tar Belt had already
UHDFKHGDOPRVWSHUFHQWRI9HQH]XHOD¶VWRWDORLORXWput.

Even though royalties were jacked up and conditions changed without

previous consultation with the foreign companies concerned, the
JRYHUQPHQW¶VPRYHZDVPDGHVNLOOIXOO\5R\DOWLHVIRUDOOKHDY\RLOSURMHFWV
were raised from 1 to 16 2/3 per cent ± care was exercised to fix the royalty
as established by the 1943 Hydrocarbons Law under which these contracts
were originally granted.

Other changes in conditions applicable to foreign companies operating in

the Orinoco Tar Belt were introduced. On the grounds that these companies
were producing more oil than the amount foreseen in the original contracts,
a first measure was to require payment of fiscal revenue retroactively.
Except for ExxonMobil, the companies accepted the new conditions
voluntarily.

108
The next move imposed on these foreign-owned companies stunned the
world oil industry. In mid-2007, as high oil prices persisted, the regime
announced nationalization of all Tar Belt projects, requiring companies to
join mixed enterprises to be set up under state control. All fiscal conditions
were adapted to the new legislation. After this second round of changes,
Conoco and ExxonMobil exited the country and sought international
arbitration to secure just compensation. Total and Chevron voluntarily
accepted the new rules of the game.

Further tightening was on the way. During this same year, the regime
scrapped service contracts between 32 private firms and PDVSA, claiming
these were contractual arrangements not previously approved by Congress.
As such, PDVSA believed it had the authority to revert these contracts and
asked foreign companies to voluntarily merge to a new scheme controlled
by PDVSA. All of the foreign companies, with the exception of
ExxonMobil and ENI, accepted the new scheme. Rather than challenge this
new reversion in international courts, ExxonMobil was pressured by the
regime to sell its share of the project. ENI opted for exploring amicable
compensation before threatening to challenge Venezuela in an arbitration
process.99

Meanwhile, PDVSA operating capacity had significantly declined from

pre-strike levels. Months had passed since the end of the stoppage, but oil
refineries were not working at full performance owing to a shortage of
technical capabilities and sufficient gas pressure. Technical support was
particularly wanting for extracting oil from mature and geologically
complex fields, such as those under Lake Maracaibo, and for injecting
associated and non-associated gas in fields where it was required to boost
99
The settlement amounts of these deals were never disclosed.

109
output. Numerous oil wells were closed, but even after being restarted
failed to reach previous output levels. Management limitations implied that
some reserves recorded for these wells were probably lost in the extraction
process. Following the strike, oil output had shrunk to just 500,000 barrels
per day. In oncoming months production was restored to 2,800,000 barrels
per day, followed by a constant decline to a daily 2,600,000 barrels by
2005. Thereafter, output slowly continued to decline.

$QRWKHU FDVXDOW\ RI &KiYH]¶V PRYHV Iollowing the oil strike was the
system providing PDVSA information technology (IT). On the grounds
that technical staff had joined the strike, PDVSA suspended commercial
relations with INTESA, its IT outsourcing company, a joint venture with
US SAIC. Only about 5 percent of IT staff were rehired. As a consequence
of the damage inflicted by strikers to the information system and the lack of
managerial competence of the new PDVSA to restore it, attempts made to
account for the vast losses and multiple transactions made by the company
during the oil strike proved virtually impossible. Sales and shipments were
recorded by hand, without needed approvals. Trade and brokerage
instructions were issued manually to traders not directly controlled by
PDVSA. Gasoline was shipped from refineries and delivered to service
stations by the military without issuing invoices, and tankers left ports
without proper authorizations. Auditing the company became well nigh
impossible given the lack of accurate information, back-up records, and
opaque administrative procedures.

The auditing issue became acute and came to light once PDVSA delayed
and subsequently failed to provide financial statements to the Security
Exchange Commission (SEC) in New York. PDVSA was required to
disclose information in order to provide bondholders with financial data

110
about the company. In April 2003 the SEC reminded PDVSA to submit its
financial statements, and the company requested an extension of one month
± until May. In May, an additional 30-day request was made to hand in
financial statements in June. Given penalties for board members if PDVSA
failed to satisfy this requirement, the company bought back its entire 2.7
billion dollars in outstanding foreign debt. The buy-back decision was
strategically leaked to the market, allowing a number of investors to profit
before the announcement was made public.

Nonetheless, PDVSA had provided additional collateral and financial

guarantees for projects not directly controlled by the company, mainly in
the Orinoco Tar Belt. Hence the company was still required to provide
critical financial and operational information to foreign investors. By 2005,
PDVSA had not completed auditing financial and operational statements
for 2003 and 2004. Early in 2006, PDVSA submitted to the SEC financial
statements for 2004, audited by KPMG.

In addition to lacking records, PDVSA was reluctant to reveal information

on disbursements made on behalf of social programs sponsored by the
central government in which the company was now actively involved.
&KiYH]¶V RIILFH URXWLQHO\ RUGHUHG )21'(63$ DQG RUGLQDU\ FRPSDQ\
channels to directly fund and even manage certain social programs,
including Misión Ribas (a continuing education program for secondary
studies) and Misión Vuelvan Caras (training for the unemployed as well as
funding for newly launched co-operatives). Interestingly enough, the
Misión Ribas continuing education program was directly managed by
PDVSA, not placed under the Ministry of Education. This practice
illustrated the new role of PDVSA in implementing social policies in
Venezuela. By 2004, when the recall referendum for President Chávez took

111
place, PDVSA had invested more than 4 billion dollars in social programs,
an amount that continued to grow in years that followed.

YeW 3'96$ ZDV QRQHWKHOHVV ILQDQFLDOO\ VTXHH]HG 7KH FRPSDQ\¶V

contribution to fiscal revenue reached almost 175 billion dollars from 2004
to 2008. Figure 3.2 suggests that as a result PDVSA cost structure
deteriorated, investment projects were delayed, and maintenance spending
declined. In 2001 operational costs had represented 9 dollars per barrel,
doubling by 2008. Total costs for each barrel (excluding social
expenditures and transfers to FONDEN) had climbed from 13 dollars per
barrel in 2001 to 29 dollars in 2008. Were social spending and transfers to
FONDEN included, total costs during that period jumped from 32 dollars
per barrel to 101 dollars. Moreover, financial pressure on the company
during this period was exacerbated by the effect of currency appreciation.

Figure 3.2. PDVSA operating costs and total costs plus social expenditure,
2001-2008
Costs by Barrel (US$/b)

Operating Costs / Production Total Costs + Social Expenditure-Purchases / Production

101

78
75

60

47
41
36
32

18
12 12 12 13
9 9 9

2001 2002 2003 2004 2005 2006 2007 2008

Source: PDVSA

112
%\ WKH HQG RI  WKH RLO FRPSDQ\¶V VKRUWFRPLQJV DQG RSHUDWLRQDO
problems had become clearly evident. Once oil prices declined to levels
below 60 dollars per barrel following the global financial crisis, PDVSA
cash flow faltered. Despite this new financial constraints, PDVSA president
Rafael Ramírez favored transfers to FONDEN and FONDESPA to protect
social spending, together with payments to bondholders, over paying local
and foreign suppliers. In the second quarter of 2009, PDVSA was in arrears
to suppliers for almost 9 billion dollars, putting at risk the entire operation.
These payment priorities showed the true impact of political control of the
industry, even at expense of sustaining the financial and managerial
viability of PDVSA.

Cash flow restrictions in 2009 were such that in May the National
Assembly passed a law allowing the regime to take over oil-service
contractors, including small-sized oil service firms operating in Lake
Maracaibo ± e.g., providers of transportation for workers from shore to
wells or maintenance services for underwater equipment ± some of which
were foreign-owned. Presumably, compensation eventually to be paid to
former owners of these firms will offset almost one year of overdue
payment for services rendered.

IV. A Socialist PDVSA

Remaking PDVSA entailed for Chávez turning the company into the chief
mechanism for distributing rents, privileging social investment over and
above that required for oil output productivity. In fact, PDVSA was directly
charged with channelling resources to social ventures, including strategic
projects in Venezuela and abroad. In practice, PDVSA displaced some
ministries as it undertook to fund social programs. PDVSA had been

113
censured during the puntofijo era as a state within the state; it could now be
said that it turned into another state.

The scale of social effort undertaken by PDVSA meant the company

relinquished its management focus. Its key business initiatives were no
longer concerned exclusively with finding, extracting, refining, and
marketing oil. The company was now also charged with an explicit
mandate for running innumerable social initiatives. Nation-wide activities
directly managed by PDVSA included Misión Ribas for distance-format
continuing education and Misión Vuelvan Caras, which financed and
started out community-level co-operatives to provide, e.g., primary health-
care, road construction, or office cleaning services, or produce foodstuffs
and simple manufactures. PDVSA also undertook to assist Misión Mercal ,
a retail chain selling food at subsidized prices, by setting up PDVAL, a
food purchasing, production and wholesale distribution firm. Additionally,
PDVSA directly financed construction of Barrio Adentro I and II
preventive health-care centers, housed in more elaborate facilities than
those for primary health-care, and directly managed relations with Cuba to
ensure the availability of medical equipment, supplies, and physicians.

From 2003 to 2008, PDVSA spent more than 23 billion dollars in the
management of social programs. &KiYH]¶V ZLGH-ranging social programs
featured an oft-repeated proclamation that PDVSA now belonged to the
people. No doubt the scale of spending gave rise to a feeling of social
inclusion and empowerment that Venezuela had not experienced in
decades. Moreover, the transfer of such vast resources to the poor implied
significant income redistribution. The scale of the population being
favoured by these programs also created a new sense of social
empowerment. But not all outcomes were crystal-clear. Clientelism

114
governed the targeting of expenditures and poverty criteria were not always
applied.100 Programs were conceived under welfare assistance criteria, not a
structural vision for reducing poverty.101 The quality of continuing
education offered by Misión Ribas, which provided students enrolled with a
high school degree, was invariably questioned.102 Barrio Adentro primary
health-care posts were often vacated and abandoned. PDVAL was involved
in numerous corruption scandals significantly weakening the effectiveness
of Misión Mercal. And Misión Vuelvan Caras handed funds to thousands
of co-operatives organized for the express purpose a gaining access to soft
loans. The vast majority of these co-ops were unsustainable, and the funds
assigned to them wasted.

V. The Inevitable Future

The inevitable outcome of politicizing PDVSA and increasing its social

role has been a decline in company productivity. Figure 3.3 shows the
contraction of Venezuela¶V RLO VHFWRU *'3 IROORZLQJ  as well as the
decline in number of drills employed to extract oil. Both variables are fairly
good indicators of oil industry activity and investment. Admittedly, part of
this contraction owed to 9HQH]XHOD¶VFXWEDFNVRUGHUHGE\23(&+RZHYHU
the extent of contraction is significantly greater than mandated cutbacks,
DQG VKRZV D V\VWHPDWLF GHFOLQH LQ 9HQH]XHOD¶V UHDO SURGXFWLRQ FDSDFLW\
)RU 3'96$ WR FRQWLQXH VHUYLQJ DV WKH FRXQWU\¶V FKLHI VRXUFH Rf fiscal
revenue, the company must soon expand investment in oil production.

100
3HQIROG 0LFKDHO  ³&Oientelism and Social Funds: Evidence From Chavez´s
0LVLRQHV´Latin American Politics and Society, Vol. 49, No. 4: 63-84
101
'(OLD <RODQGD DQG &DEH]D /XLV )UDQFLVFR  ³Las misiones sociales en
9HQH]XHOD³:RUNLQJ3DSHU6HULHVCaracas: ILDIS.
102
Ibid.

115
Figure 3.3 Oil GDP and Oil Drills 1998 to 2009

Oil drilling Oil GDP

!+$ +"!$$

+"$$$
!$$

!"*$$

Oil GDP (VEF 1997 =100)

)$
!")$$
Drills

'$ !"($$

!"'$$
%$

!"&$$

+$
!"%$$

$ !"#$$
!**)

!***

+$$$

+$$!

+$$+

+$$%

+$$&

+$$'

+$$(

+$$)

+$$*

Sources: BCV, Baker Hughes, Bloomberg and Ecoanalítica

The problem is that PDVSA no longer boasts the management,

technological, and financial capacity to expand oil production. It takes
billions of dollars and skilled know-how to turn tar into refinable heavy oil,
the only kind of oil output Venezuela can readily expand. This makes the
company increasingly dependent on foreign investment to rebuild the oil
industry.

Happily, Chávez¶V+\GURFDUERQV/DZGRHVQRWIRUELGIRUHLJQLQYHVWPHQW±
it only establishes that majority control of joint ventures in the oil sector
must remain in state hands. But financial structuring of projects with
foreign companies may not materialize if restrictions such as high royalties,
scarce fiscal benefits, and lack of access to arbitration remain in place.

116
Moreover, unraveling these issues will become more difficult given the
political risk of expropriation faced by foreign-owned firms in Venezuela,
especially as respects capital-intensive projects, as required for developing
heavy oil deposits in the Orinoco Tar Belt.

Interestingly enough, late in 2009 PDVSA showed signs of the need to

soften its nationalist rhetoric in order to access foreign investment. The
regime announced a bidding process to grant exploration licenses in the Tar
Belt. For the so-called Carabobo Project, a number of conditions
established by law were eased to increase the appeal of the project to
international investors. These included early output concessions, recourse
to arbitration for project financial flows although not for property, and the
possibility of granting certain fiscal benefits such as temporary lowering of
income taxes. In February 2010 Chevron and Total, among other
international oil companies, showed willingness to consider the project. A
factor favoring Venezuela is that extracting tar from the Orinoco Belt to
produce heavy oil does not arouse world environmental concerns, as does
GHYHORSPHQWRI&DQDGD¶V$WKDEDVFDVKDle deposits.

7KH VFDOH RI 9HQH]XHOD¶V RLO UHVHUYHV ± the Orinoco Tar Belt alone is
estimated to hold some 270 billion barrels ± will always make it possible
for the country to attract investment for its oil sector. But restoring PDVSA
as a leading company in global energy will prove much more challenging.
State-owned Petrobras in Brazil and even Ecopetrol in Colombia are today
better positioned than PDVSA ± which just a few years ago overshadowed
the management and technological capacities of these Latin American
ILUPV 3ROLWLFDO FKDQJHV LQWURGXFHG E\ &KiYH] VKRRN 9HQH]XHOD¶V PDVVHV
from decades of apathy and despair, and brought about an immense
dividend from an electoral standpoint ± some would argue from a social

117
standpoint as well. PDVSA played a central role in making this happen.
Nonetheless, as a result WKH FRPSDQ\¶V SURGXFWLYH FDSDFLW\ DQG
GHYHORSPHQW SRWHQWLDO WR GULYH 9HQH]XHOD¶V HFRQRP\ ZDV VHULRXVO\
compromised.

IV. Reflections

The oil windfall that has benefited Venezuela certainly played a very
important role in undermining democratic governance although it has also
contributed to create a sense of social inclussion among a large sector of
the population. This latter aspect of the oil windfall has been tremendously
important for Chávez in order for him to build a strong social basis
independently of the effectiveness and clientelistic use of these funds. This
has been posible due to the political control that he has exercised over the
oil industry and the ability to freely allocate these resources on a
clientelistic basis. However, the cost of this political strategy has been a
smooth decline in the productivity levels of PDVSA. This cost will
become increasingly evident overtime.

In principle, this political outcome seems to confirm the global empirical

evidence surveyed by the literature on resource curse. However, in this
chapter we have contented that the Venezuelan case illustrates that this
relationship is more nuanced and is intermediated by existing institutional
configurations ±this is what we call the institutional resource curse. In
particular, we have showed how prior to the oil boom Chávez had already
concentrated presidential powers thanks to constitutional change and party
collapse (see Chapter 1); but in addition checks and balance within PDVSA
(between politicians and technocratic management) had also vanished due

118
to institutional changes that had taken place in the oil industry during the
openening period and had finally been disolved during the oil strike. In
retrospect, these changes within PDVSA were crucial, wether intended or
not, for Chávez to finally seize political control over the oil state-owned
enterprise. Thus it was not oil by itself that made this possible; it was oil-
cum-institutions that made this outcome feasible.

119