A Venezuelan Recipe for Poverty and Corruption

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Caracas, Venezuela -- Latin Americans are fed up with corrupt democratic governments and, almost as often, the market rhetoric they espouse. Those sentiments are most clearly on display in Venezuela, where popularly elected President Hugo Chavez came to power last year after failing to do so in a 1992 coup attempt. Chavez, now campaigning in favor of a new constitution he calls the "Magna Carta," speaks fondly of Cuba's Fidel Castro and condemns "neo-liberalism" as "the road to hell."

Venezuelans are becoming increasingly nervous about such oratory as the constitutional referendum on December 15 approaches. But it is easy to see why Chavez still enjoys widespread support, especially for his anti-corruption initiatives. Venezuela, after all, consistently ranks among the most corrupt countries in the world according to Transparency International.

Venezuela is also among the least economically free countries in the world according to a study by the Cato Institute and the Fraser Institute. In the past two decades, it is the country that has experienced the largest decreases in economic liberty. If Venezuela is so far away from laissez faire, why do Venezuelans appear to back Chavez's attacks on market liberalism?

Since the late 1980s the ruling elite has done much to avoid serious reform.

As in post-Soviet Russia, moreover, half-hearted policy changes have resulted in negative growth rates. About two-thirds of Venezuelans now live in poverty -- twice the number of the early 1990s. It has not helped that the International Monetary Fund has been preaching the virtues of the free market while financing administrations reluctant to reform. If the 1990s represent a reliance on the free market, as Venezuelans have been misled to believe, it is no wonder they reject it.

The relationship between corruption and the lack of economic freedom in Venezuela is not coincidental. Research by Alejandro Chafuen and Eugenio Guzman for the Center for Public Studies in Chile shows a strong connection between the two factors: the most corrupt countries in the world also tend to be the least economically free, and the freest countries experience the lowest levels of corruption. Government regulations and controls over the economy, it turns out, provide ample opportunity for officials to take advantage of their authority for personal gain.

It is ironic then that Chavez has placed the newly proposed constitution at the heart of his efforts to eliminate corruption and rejuvenate Venezuela's economy. The Chavez constitution, with its 350 articles, enlarges the role of the state in virtually every aspect of society. It is a recipe for both continued underdevelopment and corruption itself. A few examples should suffice to make the point.

• Articles 12, 300 and 301 enshrine the concept of public ownership and management of oil and other "strategic industries." Numerous studies have found that countries with a wealth of natural resources in the hands of the state tend to have poor economic performance compared with countries with few such resources -- contrast Nigeria with South Korea, for instance. Venezuela's own dire economic condition can be largely attributed to its state-owned oil monopoly that the proposed constitution will make nearly impossible to privatize. A recent IMF study, furthermore, finds a positive correlation between natural resource wealth and corruption in developing countries.



• The "Magna Carta" creates a one-chamber legislative body and centralizes power under the president by giving him the ability to dissolve congress when he wishes and by removing congressional review of military appointments.



• The central bank loses much autonomy: it must "coordinate" its monetary policy with the executive branch and be "accountable" to other political bodies. That arrangement has almost always and everywhere led to inflation and currency instability.



• The state guarantees housing, health care and retirement pensions to all Venezuelans. The constitution does not mention how a bankrupt nation will pay for those services.



• The state guarantees a job to every working-age Venezuelan and "will do whatever necessary to limit all forms of unjustified dismissals." The scope and vagueness of those articles virtually guarantee an increase in official unemployment, now at 20 percent, and growth of the informal economy.



• Article 58 guarantees, "Everyone has the right to information that is opportune, truthful and impartial." Presumably, opinions critical of the government could be considered partial.

Chavez has branded critics of his Magna Carta as "irresponsible" and alluded to "chaos" and "civil war" if the document is not approved. Yet Chavez may well be doing Venezuelans a favor. Increasing numbers of Venezuelans are seeing much truth in the words of Peruvian novelist Mario Vargas Llosa who on a visit here warned Venezuelans not to "let the fight against corruption turn into a fight against liberty itself." If Venezuelans reject the constitution, their rejection may help create a more sensible debate on the real causes of Venezuela's current maladies.