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Tag Archives | Socialism

Aftermath of Venezuelan Socialism

Venezuela is on the brink of a complete economic and political collapse, which has been building up since the early days of Bolivarian Socialism.

How does one know that things are going bad in Venezuela? – By the fact that there are no reliable ways of knowing it. Good economic data about Venezuela is conspicuous by its absence. It seems that President Maduro has made it State policy to not publish data. The last time that the Venezuelan central bank published inflation data was in January 2015 and it was 63% at that time, already the highest in the world. By the end of 2015, it was estimated by the IMF that inflation rates would have reached 275%

The Venezuelan economy and the government is in complete shambles and the only question is, as a Washington Post article points out, is which one will collapse first. A combination of bad policies and global situation has put Venezuela on the edge of the precipice.

The Venezuelan economy is driven by oil. In fact, it has the world’s largest oil reserves and like many oil-exporting countries today, is suffering due to low global crude oil prices. However, this is just the proximate cause. The seeds of destruction were sown with the extreme socialist measures taken by the late populist President Hugo Chavez. When oil prices soared in 2000s, it offered Chavez the funds to pursue a hyper-populist and socialist reforms in the economy. The Chávez government pursued a series of “Bolivarian Missions” aimed at providing public services (such as food, healthcare, and education) to improve economic, cultural, and social conditions. Very soon, fiscal spending ballooned in a view to retain loyal political support. Two cent gasoline, free housing, highly subsidized food from government controlled supermarkets and a whole range of such populist policies were practiced.

The first part of his inequality reduction was to conduct land reforms. Many productive agricultural lands were seized with the belief that land belongs to the state and not private individuals. With this move, a sizeable area of productive land previously owned by individuals were now sitting idle under government control, which led to reduction in food supply.

Further, the Chavez government set price controls on about 400 food items in 2003, in an effort to “protect the poor”. In March 2009, the government set minimum production quotas for 12 basic foods that were subject to price controls, including white rice, cooking oil, coffee, sugar, powdered milk, cheese, and tomato sauce. As it has been throughout history, price controls lead to massive shortages and to the creation of underground economies. In January 2008, Chavez ordered the military to seize 750 tons of food that sellers were illegally trying to smuggle across the border to sell for higher prices than what was legal in Venezuela.

As many socialist countries in the past will bear witness, one set of distortions introduced by the government will lead to many more and an attempt to correct those leads to further distortions. Price controls led to supply shortages. A few of the supermarkets that could manage to get its hand on essential supplies charged a price higher than what was stipulated. The government seized all of these supermarkets and the shelves have been empty ever since. This was a pattern that was found across all industries. A few examples:

  • Price controls caused shortages in the cement industry and led to a downturn in construction activities. The government nationalized the cement industry, including hostile take over of multi-national companies, which completely eroded business confidence in Venezuela, and led to a marked decrease in cement production.
  • The largest electricity producer in Venezuela was a private US firm, which was later nationalized. In 2013, 70% of the country plunged into darkness with 14 of 23 states of Venezuela stating they did not have electricity for most of the day
  • Similar cause and consequences were seen throughout Venezuela. Cable and telephone companies were nationalized – led to government censorship; Steel companies were nationalized – led to drop in production and capacity underutilization; Food plants – shortage of processed food; bank nationalization – a banking crisis in 2009-10, etc.

The biggest development that has led to present crisis is the complete take over off their biggest oil company. Even though the Petroleos de Venezuela was State-owned previously, it was at least run professionally before Chavez took over. People who knew what they were doing were replaced with people who were loyal to the regime, and profits came out but new investment didn’t go in. Accusations of nepotism were ripe. The result was that the company did not receive any new investments, which made the much-required technical upgradation impossible. Consequently, oil production in Venezuela declined by as much as 25% between 1999-2013.

The current economic crisis is a direct result of economic mismanagement in the past decade. Price controls led to reduction in supply and export bans led to shortage of foreign exchange needed for imports. The result is empty shelves on most retail outlets and a severe shortage of food supplies and being on the route to galloping inflation rates. Two to three hour-long lines in front of government owned supermarkets are not an uncommon sight. The government even deployed security personnel to kick out shoppers from the lines and introduced a two day per week limit for buying groceries.

People line up to buy food at a supermarket in San Cristobal, Venezuela. Source: Gateway Pundit

People line up to buy food at a supermarket in San Cristobal, Venezuela. Source: Gateway Pundit

 

Excessive government spending has led to deep fiscal imbalance and huge external debts. Many analysts are betting on a Venezuelan default by the end of the year, which will cripple the economy’s ability to rebound from the current crisis.

When faced with huge debt with no ability to raise revenues and limited borrowing opportunities, countries inevitably resort to one thing: printing notes and Venezuela has been doing it relentlessly. This has caused the Bolivar to drop 95% in the last two years, from 64/$ to 959/$ in the beginning of 2016. Given this, the IMF estimates inflation rate to touch 720% in 2016, which will no doubt intensify civilian protests in the country.

The Bolivar has dropped 93% in the past two years. Source: Washington Post

The Bolivar has dropped 93% in the past two years. Source: Washington Post

The need of the hour is economic reforms in order to dull the pain of an intensifying crisis. However, even if Maduro is prepared to bring in some much-needed reforms (which he probably is not), the opposition will not allow him. The opposition has just won the Congressional elections, which has given it a veto-proof majority, and they are determined to stall any plans that the ruling government may have.

The possibility of the opposition blocking Maduro’s reforms is a moot point. Maduro has far too much conviction in his socialist ideals and doesn’t look like he is too eager to change his policies. In fact, he passed a law, which has made it impossible to remove the Central Bank Governor that he has chosen and surely, he has chosen a remarkable candidate. He has chosen a central bank governor who doesn’t believe in the concept of inflation. As the Washington Post quotes the governor:

“When a person goes to a shop and finds that prices have gone up, they are not in the presence of ‘inflation,’ but rather parasitic businesses that are trying to push up profits as much as possible. Let me be clear, printing too much money never causes inflation. And so Venezuela will continue to do so”.

Please Mr Maduro, ask any Zimbabwean how this went down. Many economies have been on a similar path in the past and it is not pleasant. Venezuela will keep printing money until it runs out of money to buy printing paper. Hyperinflation (with inflation rates in millions) will ensue, before a complete economic and societal collapse, which will include asset stripping, rent seeking, and resource capture and hoarding by those who have power. In the end, generations in the future will suffer.

Anupam Manur is a Policy Analyst at the Takshashila Institution and tweets @anupammanur

Read about Brazilian economic crisis here and the Chinese debt burden here.

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A Socialist Justification for Market Pricing

As a socialist, welfare State, India needs to obtain the best price for distributing public property like roads

 

Car Parking

The average Indian is extremely reluctant to pay for parking. He will prefer parking for free on public roads rather than pay for a spot in a parking lot or mall, even if this involves the inconvenience of parking much further away, and navigating poorly lit and constructed pavements. It is a failure of the State that they are allowed to do this. Roads are public property or part of the public wealth and as such, are meant for the use and enjoyment of all, not just those who can afford their own private transport. There are many reasons to levy a fee on parking – as is the practice in many developed countries – some economic and others moral. While the one with the most popular appeal might be to reduce congestion on roads, the most important is that it is the constitutionally mandated duty of the State to do so. Article 39 of the Constitution of India (found in Part IV: Directive Principles of State Policy) declares that the State shall direct its policy towards securing:

(b) that the ownership and control of the material resources of the community are so distributed as best to subserve the common good;

(c) that the operation of the economic system does not result in the concentration of wealth and means of production to the common detriment;

 The current free parking system clearly violates these two provisions as the failure to distribute the material resource (roads) for the common good has resulted in the concentration of wealth (with private car owners) to the common detriment (traffic congestion). However, Article 37 also states that even though the Directive Principles are “fundamental to governance” and are the “duty of the State to apply”, they are not enforceable by courts. But this issue has been circumnavigated by the Courts in cases questioning the validity of public tenders for material resources.

In Ram And Shyam Company vs State Of Haryana And Ors, the Supreme Court held that because India is empowered to be a “Sovereign Socialist Secular Democratic Republic” by the Constitution, the property of the State is “socialist property” or community property and that every citizen has a vital interest in its effective use and legitimate disposal. The Court clearly differentiates between private property and public property and holds that India’s status as a welfare State means that the latter must be dealt with differently for the following reasons:

Public Property is held in trust

Owners of private property have complete freedom in how to dispose their property as long as they remain within the law. They may gift the property or sell it at a fraction of its full value if they so wish to. But the Court held that a “welfare State as the owner of the public property has no such freedom while disposing of the public property. A welfare State exists for the largest good of the largest number, more so when it proclaims to be a socialist State dedicated to the eradication of poverty…. public property has to be dealt with for public purpose and in public interest” It went on to argue that because the State is merely holding public property in trust for the benefit of the community it must ensure that its disposal is free of any favouritism or untowardness. The Court quoted from one of its previous cases, Kasturi Lal Lakshmi Reddy v. State of Jammu & Kashmir and Anr where it had held that “the Government cannot act in a manner which would benefit a private party at the cost of the State; such an action would be both unreasonable and contrary to public interest.”

There are already a number of judgments limiting the arbitrariness of government actions. When they are read together with the statements delivered by the Supreme Court in the Ram and Shyam case, they essentially make the provisions of Article 39 enforceable in Indian Courts. While the Court may have substituted “material resources” and “common good/detriment” with “public property” and “public interest”, the intention remains unchanged; the State must act for the largest good of the largest number, and must do so in a fair manner.

Disposal of Public Property should be done at Market Price

The Court also interpreted the phrase “public purpose” as a validation of market pricing for public property. It held that if public property was disposed of at the highest possible price, the State would be “able to expand its beneficial activities by the availability of larger funds”. As such, its intention must always be “to obtain the best available price while disposing of its property.” At this point, readers will probably be wondering how this reconciles with the Indian government’s perennial preference for subsidies as a welfare mechanism. The Court did, in fact, take this into account and held that “socialist property may be disposed at a price lower than the market price or even for a token price to achieve some defined constitutionally recognised public purpose, one such being to achieve the goals set out in Part IV of the Constitution.” But even this limitation has the following proviso: “where disposal is for augmentation of revenue and nothing else, the State is under an obligation to secure the best market price available in a market economy”

It has already been established that the “constitutionally recognised purpose” under the Directive Principles, if anything, requires that parking on public property should be charged at the market price. The current framework allows the rich to enjoy public wealth at the expense of those less privileged. Even a relatively small parking charge would go a long way in rectifying this situation. Take Bangalore for example, instituting a simple parking fee of Rs. 7 per hour could yield as much as Rs. 4 lakh per hour for the State exchequer. Such revenue would help finance urban infrastructure projects and result in immediate benefits for payees of the fee.

As India continues to grow and more people migrate to cities, it is imperative that the government gets its act together and charge urban space at a premium. A fear of the negative repercussions from the rich and privileged is insufficient reason for the State to shy away from instituting parking fees. The Constitution requires it, the Courts expect it and the people need it; the onus of establishing is now on the government.

Madhav Chandavarkar is a Research Associate with Takshashila Institution and can be found on Twitter on his handle @MadChap88.

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