The Corruption of Democracy in Venezuela

This article appeared in the March 2008 issue of USA Today Magazine.
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Hugo Chavez was elected presidentof Venezuela in December1998 on the strength of three mainpromises: convening a ConstituentAssembly to write a new constitution and improvethe state, fighting poverty and social exclusion,and eliminating corruption. Nineyears later, it has become evident that the ConstituentAssembly primarily was a vehicle todestroy all existing political institutions and replacethem with a bureaucracy beholden to hiswishes. Poverty and social exclusion remainas prominent as before, while the levels ofgovernment corruption are higher than ever.

Today, the nation is locked in an intensestruggle between the defenders of democracyand a president intent on becoming a dictatorfor life. Chavez's latest attempt to push a constitutionalreform that would have allowedhim unlimited opportunities for reelection wasdefeated by a margin that official figures put attwo points, but independent analysts place atfive to 10 points. In negotiating the narrowermargin with a National Electoral Councillargely under his control, Chavez managed toappear magnanimous in defeat, but he is not ademocrat, and he will keep trying to becomepresident for life in any way he can.

Venezuela has been characterized by thepersistent presence of political and financialcorruption in public administration. In 1813and, later, in 1824, national hero Simon Bolivarfelt it necessary to issue decrees definingcorruption as "the violation of the public interest."He established the death penalty for "allpublic officers guilty of stealing 10 pesos ormore," including "those judges who disobeythese decrees." In 1875, the finance minister atthat time confessed, "Venezuela does notknow to whom it owes money and how much.Our books are 20 years behind." One hundredyears later, the General Comptroller underPres. Luis Herrera would describe the state ofthe country's finances in almost identicalterms, as "a system totally out of control."

In the early 20th century, the long dictatorshipof Juan Vicente Gomez was plagued byhigh corruption, but it was limited to the dictator'simmediate collaborators. A similar situationprevailed during the military dictatorshipof Marcos Perez Jimenez, from 1948-58. Thissituation of administrative disarray was replacedduring the 1960s by a period of hightransparency in the management of publicwealth at the hands of democratic presidentsRómulo Betancourt, Raúl Leoni and RafaelCaldera. During these years, Venezuelan democracybecame the political model to be imitatedin Latin America, comparing favorablywith the dictatorships of the left and right thatprevailed in those years, and becoming ahaven for thousands of Latin American politicalexiles looking for freedom.

In the mid 1970s, the management of nationalassets deteriorated significantly, as thecountry experienced a sudden oil windfall thattripled fiscal income. The ordinary men incharge of the government were exposed to extraordinarytemptations. Faced with such riches,Pres. Carlos Perez established a programcalled "The Great Venezuela," a tropical versionof Mao Tse-Tung's "Great Leap Forward"in China that ended in financial and social disaster.The government poured close to $2,000,000,000 into industrial projects designed toconvert southern Venezuela into another Ruhr.At one point, the country was home to morethan 300 state-owned companies, none ofwhich was profitable. As a result of the significantgovernment expenditure and insufficientenforcement of regulations, corruption spunout of control. Up until then, graft had been restrictedto the ruling elites, but now manyVenezuelans started to participate in the abuseand misuse of public funds. By 1980, the countryhad fallen into debt to the internationalbanks, victim of the so-called "Dutch disease"that affects Third World petrostates that dependalmost solely on hydrocarbon exports for nationalincome.

From 1980 onwards, Venezuelan corruptionhas remained high. Particularly grave was theadministration of Pres. Jaime Lusinchi from1984-94, which saw some $36,000,000,000pilfered or stolen mainly through a corrupt exchangecontrol program, according to an estimateby Venezuelan sociologist Ruth Caprilesat the Caracas Andres Bello Catholic University.Soaring corruption during the Lusinchi periodresulted from several factors, includingweak political institutions, lack of administrativecontrols, too much money circulating inthe financial system of the government, and,above all, populist leaders promoting a welfarestate in which hard work and social disciplinewere not encouraged. In 1997, the Caracasbasednongovernment organization Pro Calidadde Vida estimated that some $100,000,000,000 in oil income had been wasted orstolen during the last 25 years.

As the 20th century came to an end, Venezuelawas ripe for significant political change.The main contenders in the 1998 presidentialelection—paratrooper Hugo Chavez and formerGovernor of the State of Carabobo, HenriqueSalas—promised radical political change.Venezuelans perceived Chavez as someonewho looked and spoke like them and could,therefore, represent them better. His electoralpromises were crucial in winning the votes ofthe majority.

In his inaugural speech, in January 1999,Chavez called for a "political revolution" beforetackling social or economic issues. Takingadvantage of the popular euphoria followinghis victory—and in violation of the existingconstitution—he convoked a Constituent Assemblypossessing absolute power to write anew constitution and to "redefine the state."This Assembly, made up of his followers,went on to dissolve the democratically electedCongress and dismiss all the members of theSupreme Court, as well as the Attorney General,the General Comptroller, and most of thejudges in the country, only to replace themwith bureaucrats loyal to the president. In aletter to the Supreme Court, Chavez stated that"the president had exclusive authority on themanagement of state affairs," thus appearingto place himself above the law.

In November 1999, the new Minister ofForeign Affairs, Jose Vicente Rangel, gave aspeech in which he put forward the position ofthe government regarding corruption. He saidthat, from then on, public office would followethical norms, that corruption had already costVenezuela too much in economic, social, andspiritual terms, and that the new judicial systemand the new Civic Power, incorporated inthe new constitution, would combine to combatcorruption. That is not what has occurred,however.

In the nine years since Chavez came topower, an estimated $300,000,000,000 of oilincome has entered the national treasury. Theexact number is uncertain due to the poortransparency of the government accounts, andbecause the national petroleum company nolonger presents financial results to the U.S. SecuritiesExchange Commission or to the Venezuelanpeople. In parallel, during Chavez'stenure, national debt has increased from $22,000,000,000 to about $70,000,000,000. Togetherwith income tax revenues, the total incomeof Venezuela during Chavez's presidencyhas been approximately $700,000,000,000.This formidable amount of money is nowhereto be seen in terms of public works or effectivehealth and education programs.

Three parallel budgets existed—totalingmore than $80,000,000,000—in 2007: the formalone, for some $55,000,000,000 (includingadditional amounts), approved without discussionby the submissive National Assembly; asecond one, amounting to $10,000,000,000,derived from the international monetary reservestaken from the Venezuelan CentralBank, in violation of the laws of the country;and a third, in the amount of $15,000,000,000,built from the funds siphoned out of Petroleosde Venezuela, monies which were required forinvestment and maintenance of the petroleumindustry. None of these budgets are discussedpublicly or subject to accountability.

Irregularities abound in the management ofpublic funds: more than $22,500,000,000 indollar transfers have been made to foreign accounts,maintains the Venezuelan CentralBank, and at least half of that money remainsunaccounted for. Jose Guerra, a former CentralBank executive, indicates that some of thismoney has been used by Chavez "to buy politicalloyalties in the region . . . and some hasbeen donated to Cuba and Bolivia, among othercountries."

According to a Jan. 31, 2006, story in theFinancial Times, a select group of Venezuelanbankers, including those at Banco Occidentalde Descuento and Fondo Comun, has profitedfrom the acquisition of Argentinean bonds bythe Venezuelan government, at the expense ofthe national treasury. The bonds are bought atthe official rate of exchange and sold at blackmarket rates, at considerable profit. Venezuelanjournalist Carlos Ball estimates that bankersloyal to the government could have profited byup to $600,000,000 as a result of the differentialbetween the official and the black marketrates. Former Chavez Minister of Finance JoseRojas has predicted that "the loss of autonomyof the Venezuelan Central Bank and the disorderin the management of the financial resourceson the part of the government will leadto a significant financial crisis."

The nine years of Chavez's presidency haveled to the highest levels of government corruptionever experienced in Venezuela. The mainreasons have been: the record oil income obtainedby the nation, money going directly intoChavez's pockets; a mediocre managementteam working without transparency or accountability;the ideological predilections ofChavez, which have led him to try to play amessianic role in Latin America, and evenworld affairs; and the policies of handouts putin place by Chavez to keep the Venezuelanmasses politically loyal.

Corruption, Inc.

Three major areas of corruption haveemerged during the Chavez presidency: grandcorruption, derived from major policy decisionsmade by Pres. Chavez; bureaucratic corruption,at the level of the government bureaucracy;and systemic corruption, taking place atthe interface between the government and theprivate sector.

Examples of grand corruption include:

The acceptance by Chavez of foreigncontributions for his presidential campaignand even after his election. In 1998 and1999, the Spanish bank BBVA (Banco BilbaoVizcaya Argentaria) allegedly contributed substantialamounts of money to Chavez's presidentialcampaign and, later, after he alreadyhad been inaugurated as president. The formerpresident of the bank, Emilio Ibarra, admittedauthorizing two deposits, one for $525,000 in1998 and another for $1,000,000 in 1999, tofinance Chavez's political activities. In 2006,the government of Spain tried Ibarra for theseand other irregularities.

Expenditures and promises made to politicalleaders and countries of the WesternHemisphere, in order to buy their politicalloyalties. The Chavez government has disbursedor promised an estimated $70,000,000,000 to foreign leaders and their countries.These expenditures include some $2,000,000,000 per year in oil subsidies to Cuba;about $4,000,000,000 in the acquisition of Argentineancommercial papers; an estimated$300,000,000 in cash donations to EvoMorales in Bolivia; the promise of building upto $20,000,000,000 worth of refineries in Jamaica,Paraguay, Nicaragua, Brazil, Ecuador,and nine other countries and a $25,000,000,000gas duct from Venezuela to Argentina; and acquisitionsof about $6,000,000,000 worth ofsophisticated weaponry from Russia, China,Belarus, and other countries. Many of thepromises never will be fulfilled, but the fact remainsthat these expenditures and promiseshave been made directly by Chavez, withoutconsulting the people of Venezuela or followingnormal administrative procedures.

Social programs run by the military in2000-02. Soon after becoming president,Chavez established programs called Bolivar2000 and Central Social Fund run by thearmed forces and designed to do social work.Journalist Agustin Beroes reports, however,that the execution of this program left much tobe desired. It became a vehicle for the personalbenefit of its managers—officers such asVictor Cruz Weffer and William Farinas.Some $700,000,000 was put into these programsand, at least half of it remains unaccountedfor. The Central Social Fund, for instance,gave a $500,000 grant to an organizationrun by the wife of Horacio Perez, CommanderFarina's personal driver.

Acquisition of the $65,000,000 presidentialairplane. After visiting the Middle Eastand traveling in an Airbus owned by the royalfamily of Qatar, Chavez decided he wantedone just like it. In violation of article 314 ofthe Venezuelan constitution and the laws regulatinggovernment expenditures, he bought anA319-133X without budgetary provisions toacquire it and after saying in numerous publicspeeches that he would get rid of all governmentaircraft because there already were toomany of them.

Corruption at the State of Barinas SugarMill. This Chavez pet project is run by the militaryand Cuban advisors. A group of about 17officers and their advisors have been chargedwith pilfering or pocketing some $1,300,000from the accounts of this project. Worse, the62nd Army Engineers Unit has been chargedwith squandering $1,500,000,000 of the$2,600,000,000 appropriated for the project.The Minister of Agriculture admitted tomalfeasance for not revealing these facts whenhe became aware of them. His explanation?"We were in the midst of parliamentary electionsand did not want to create a scandal damagingto our government."

Bureaucratic corruption has the governmentinvolved in bribery, extortion, stealing of publicfunds, abuse of political power, nepotism,and other varieties of illegal or unethical use ofpublic assets. Examples include:

Government contracting is done mostlywithout bidding. Although the law stipulatesthat all government contracting should followbidding procedures, except in cases of nationalemergency properly defined as such, theVenezuelan chapter of Transparency Internationalestimates that 95% of all known publiccontracts during the last decade have beenawarded without bidding. This is a majorsource of personal enrichment for corrupt governmentofficers. An example of this is whathas taken place in the State of Carabobo, whereGov. Acosta Carlez publicly has stated that hehas given some 800 no-bid contracts involvingtens of millions of dollars. His argument? "Weare always in an emergency here."

Corruption at the Supreme Tribunal ofJustice. In early 2006, a major scandal eruptedwhen the Minister of the Interior accused oneof the magistrates, Luis Velazquez Àlvaray, ofstealing public funds in the acquisition of abuilding for the Court. Àlvaray counterattackedand accused Vice Pres. Rangel, as wellas Interior Minister Jesse Chacón and NationalAssembly Pres. Nicolas Maduro, of running agang of corrupt judges called "The Dwarves,"specialized in protecting drug traffickers. All ofthese allegations came to naught. Àlvaray leftthe country, and the bureaucrats he accused remainedin their jobs.

Corruption at the National Electoral Council.The performance of the NEC under the politicalcontrol of Chavez has led to widespreaddistrust among Venezuelans. The decisions ofthis body always have been biased in favor ofthe government, even during the recent referendumwhich the government lost by a margin ofmore than six points. Negotiations by Chavezwith the president of the NEC led to official figuresthat showed a much narrower margin. Reportsby international observers from the Organizationof American States (OAS), EuropeanUnion (EU), and Spanish Parliament during theelectoral events of 2004 and 2005 state that theCouncil lacks transparency and that its membersshould be selected properly for impartiality.

Particularly grave is the situation of the electoralregistry. It has grown by more than2,000,000 voters in the last three years, a statisticallyimprobable figure. Still worse, these votershave no proper addresses or reliable identities,making them "virtual" voters that could beused by the government to swing any electionunless there is very rigid monitoring by the opposition.Uruguayan analyst Adolfo Fabregatfound 39,000 voters that were shown to be olderthan 100 years of age, and one was listed asbeing 175. A man called Jose Gregorio GonzalezRodriguez, born Aug. 4, 1962, is listed 62times under different identity card numbers, andtherefore is able to vote that many times. Exampleslike this number in the thousands and havebeen documented properly and presented to theOAS for analysis, so far without result.

High levels of mismanagement at thestate-owned petroleum company, Petroleosde Venezuela. Corruption here takes manyshapes. It includes the naming of six presidentsand boards in seven years, in an effort to controlthe company politically. This finally wasaccomplished by naming the Minister of Energyand Petroleum president of the company, inviolation of good management practice, sincehe now supervises himself. As a result, oil productionhas declined by some 800,000 barrelsper day during the last decade. In a recent publichearing, Luis Vierma, the firm's Vice Presidentfor Exploration and Production, admittedgiving an oil well drilling contract for some$20,000,000 to a company with only three employeesand no rigs.

Systemic corruption, meanwhile, takesplace when government bureaucrats and theprivate sector interact in a permissive environmentwhere money flows abundantly andwithout controls. Examples include:

The emergence of a new, rich, "revolutionarybourgeoisie" that drives Hummers,sports Cartier and Rolex watches, and wearsErmenegildo Zegna suits. They buy luxuryapartments in the U.S. and Europe, fly in privatejets, and, salesmen say, always pay in cash.Wilmer Rupert was a minor associate of an internationalcompany a few years ago; today, heis quite rich, thanks to obtaining a large share ofcontracts from the state-owned oil company.Rupert has bought a television station and, as apresent to the government, recently spent$1,600,000 to acquire two pistols that belongedto Simon Bolivar at auction at Christie's.

Private corporations that deal with thegovernment are owned by government officers.Government officers own companies thatdo business with the government, but concealthis fact by working through private intermediaries.Kenneth Rijock, a financial analyst, notesthat these types of corporations have sproutedunder Chavez. He mentions major agribusinessorganizations such as ProArepa, the main supplierof food for government handout programs.Rijock also points to a large grain transportgroup "rumored to be owned by Chavez'sbrother, Adan." Officers of record of ProArepainclude Ricardo Fernandez Berruecos, whoseprivate jet recently was detained by the U.S.government at a Florida airport for not havingthe proper documentation of ownership. JournalistPatricia Poleo mentions the case of thebrother of Chacón, who made a $10,000,000offer to buy INDULAC, a large milk producer,without the source of the funds being known.

Drug trafficking. Venezuela has become ahaven for Colombian guerrillas who movedrugs across the country with impunity due tothe absence of border controls. A report byAndy Webb-Vidal for Jane's Intelligence Reviewin May 2006 reveals that cocaine operationsare shifting to Venezuela; he notes thatdrug volumes going through the country haveskyrocketed during the last 10 years. Prominentdrug traffickers of Colombian origin livewithout fear of prosecution in Venezuela.

Chavez obviously has failed to live up to hiselectoral promises to end corruption. Therecord is clear. The Corruption Perception Index,published by Transparency International,has shown a progressive deterioration of theranking of Venezuela, both in Latin Americaand the world. The latest index showsVenezuela in position 138 among 163 countries.This is the worst ranking of all LatinAmerican nations with the exception of Haiti.Vice Pres. Jorge Rodríguez, expressing the officialposition of the government, claims thatTransparency International "was a discreditedinstitution since it charges a tariff for positioningcountries favorably in the rankings." TransparencyInternational is headquartered inBerlin, Germany, and has chapters in morethan 100 countries, including Venezuela. It is ahighly respected organization and its corruptionrankings are accepted by the internationalcommunity as the best source of informationon this global problem.

Meanwhile, the Venezuelan ranking in theEconomic Freedom of the World Index is 126out of 130 nations, above only the Republic ofCongo, Zimbabwe, and the Democratic Republicof Congo. This ranking has been decliningsteadily since Chavez came to power.It has been established that countries with littleeconomic freedom, characterized by exchangecontrols, military influence in government,and predominance of state-owned enterprisesdisplay the highest levels of corruption. Moreover,the Human Development Index producedyearly by the United Nations also chartsVenezuela in free-fall. The country has lost 30places in this index in the last six years.

Promises vs. reality

Chavez's record shows a significant gap betweenhis promises to end corruption and thecurrent reality. Immense amounts of money belongingto the Venezuelan people have beenmisused in furthering an anti-U.S. alliance inthe Western Hemisphere and beyond. Fivecountries of the region—Mexico, Peru, Argentina,Paraguay, and Chile—have expelledChavez's ambassadors for interfering in the internalpolitical processes of their countries.Chavez's policies have promoted corruptionrather than combating it. The concentration ofpower in his hands and the lack of institutionalchecks and balances have led to a total absenceof accountability and transparency in the government.Although corrupt bureaucrats havebeen identified, none have been punished. Notone single person is in prison in Venezuela forcorruption. At most, some have lost their jobs,while retaining their bounties.

It seems clear that no meaningful victoryagainst corruption can be won in Venezuelawhile the Chavez government is in power. Onlya democratic government, fully accountable tothe people, and fully transparent, will be able tominimize this malady. This is why the Venezuelanlovers of freedom and democracy are in forthe fight of their lives and, thankfully, seem tobe making real progress. Chavez's pretensionsof becoming dictator for life came to an end onDec. 2, 2007, when a constitutional reform thatwould have made him president for life was defeated.He still is president, but is starting tolook more and more like a paper tiger.

Gustavo Coronel

Gustavo Coronel, as president of Agrupacion Pro Calidad de Vida, was the Venezuelan representative to Transparency International from 1996-2000. He was a member of the board of directors of Petroleos de Venezuela from 1976- 79. This article is adapted from the Cato Institute policy paper "Corruption, Mismanagement, and Abuse of Power in Hugo Chávez's Venezuela."