Monday, January 12, 2009

Politics and economics in Venezuela

The two most powerful processes that will affect Venezuela this year will come together at the beginning of 2009 – the constitutional referendum to allow President Chavez to run for a new term and the effects of international economic crisis which will strike every country in Latin America.

The two are inextricably intertwined. The socialist orientation of Venezuela gives to the country the possibility to defend the living standards of the Venezuelan people and the national economy from the extremely negative trends of the international financial crisis. The victory of the ‘opposition’, and the ending of Venezuela’s socialist orientation, would expose Venezuela to the full force of the international financial crisis with consequent severe fall in the living standards of the Venezuelan people and great damage to the national economy.

The reasons for this stark and simple choice may be clearly understood. Venezuela’s economy, as with all countries in Latin America, will be attacked by the international financial crisis. Every major country in the world is being forced to, and is, meeting this crisis by increasing the role of the state in the economy - Venezuela’s socialist orientation therefore gives the best opportunity to confront this economic crisis.

In contrast ‘the opposition’, by weakening or dismantling the role of the state in Venezuela’s economy, would, first , lead to enormous hardship for Venezuela’s people as the economic crisis would then be resolved at their expense and, second, it would leave Venezuela’s national economy weakened and defenceless confronted with the greatest financial crisis for eighty years.

The victory of President Chavez in the referendum is, therefore, vital not only for social, political and moral reasons but for directly economic ones. To explain the relation between the referendum and the choice for Venezuela in facing the international economic crisis is therefore also crucial.

The detailed working out of the implications of this choice between defending the living standards and national economy of Venezuela, though the socialist orientation of the economy, or of leaving Venezuela’s population and national economy to be struck by the international financial crisis due to the policies of the opposition, will now be considered.

The reason that the socialist orientation of Venezuela is a decisive advantage confronted with the international economic crisis is easily understood. The core of any recession, in particular a very serious recession such as the present one, is the decline in private investment. In a privately owned economy companies will cut investment – causing the economy to enter a deep decline. A socialist economy, such as China or Cuba, however, does not have to let investment decline. Whether Venezuela follows a socialist orientation, which means decisively intervening in the investment process to prevent it falling, or whether it fails to follow a socialist orientation, and allows private companies to drag the economy down through their lack of investment, will therefore determine Venezuela’s fate during the current economic downturn.

What happens in an international recession in an economy dominated by private ownership is shown in Figures 1 and 2.

Figure 1 shows the development of the different components of US domestic GDP in the most classic of all economic downturns – the Great Depression in the US following 1929.

Figure 1

Figure 2 similarly shows the domestic components of US GDP as it enters the current economic recession - the similarity between the two graphs is evident. The dimensions of the economic decline after 1929, so far, are of course far greater than in the current downturn, but the pattern of the current recession is entirely classical in its character.

Figure 2

Stating these trends in more detail during the Great Depression the fall in US GNP (Gross National Product) was 29.7 per cent. Government consumption spending increased throughout the recession. The decline in personal consumption expenditure after 1929 was severe but less than the overall decline in GNP. The driving force of the recession was the extreme collapse of US investment, which declined by 73.9 per cent from its 1929 level. This was by far and away the most severe element of the depression - which, by economic multiplier effects, spread its consequences through the rest of the economy.

Figure 2 shows the same pattern in the current economic downturn in the US. US GDP and US consumer expenditure continued to rise until the second quarter of 2008, while US final government consumption expenditure is still rising. However US fixed investment already started falling following the first quarter of 2006 and by the third quarter of 2008 US fixed investment had fallen by almost six per cent – a decline that will accelerate significantly in the fourth quarter of 2008.

The reason the decline in investment drives the economic downturn is that the different components of 'demand' in the economy are controlled by quite different economic mechanisms. It is investment which is the strategically vulnerable element due to the private ownership of the means of production.

· The level of government consumption spending is controlled by the state - and therefore direct decisions can be taken to prevent any decline. In this sector Venezuela's socialist orientation gives a particularly good opportunity to maintain demand during the international recession. The desire to cut programmes of social protection by the ‘opposition’ would, in contrast, create a severe fall in demand in the sector of government spending – leading to a decline in the living standard of the population and significantly deepening the tendencies to recession in the Venezuelan economy.

· Personal consumption is determined by the aim of the mass of the population to have as good a living standard as possible - the most powerful issue affecting personal consumption is the level of income and employment, not the desire to consume. The commitment of the Bolivarian government to maintain the living standards of the Venezuelan population, and the use of state policy to achieve this, therefore gives the best opportunity to maintain consumer demand. The policy of the ‘opposition‘, by failing to use the state to maintain the living standards of the population, by creating conditions in which unemployment would sharply increase, and by allowing export of capital abroad, would lead to a worsening of the living conditions of the population – not only undesirable in itself but producing a decline in consumer demand that would also deepen the tendencies to recession.

· Private investment decisions, however, are not controlled by consumption but by profit. Therefore investment is not controlled by the same mechanisms as personal and government consumption and can fall to almost any level. As already shown it is this decline in investment which drives the economy downwards in a recession . A government committed to a privately owned economy cannot intervene directly to stop the decline in investment because of private property in the means of production. However if the government takes decisions on investment out of the hands of private owners of the means of production it, in fact, limits or abolishes that private ownership of the means of production. Therefore, in circumstances of deep economic crisis such as the present, if a government accept a framework of dominance by the private ownership of the decisive means of production in a country it will be unable to halt the investment decline. In contrast if the government is determined to halt the decline in investment it must have sufficiently strong instruments, in terms of the weight of the state owned sector of the economy, in order to prevent investment declining.

Consequently, if confronted with the severe international financial crisis, the decisive sectors of Venezuela´s economy are privately owned and controlled, and a non-socialist orientation is followed, it will not be possible to halt the investment decline and economic downturn - Venezuela´s economy would go into severe recession. The fact that in Venezuela important sectors of the economy are state owned, and it has a socialist economic orientation, on the contrary means that the government can directly intervene to keep up investment levels. This is why Venezuela is in a much better position to resist the international financial crisis than if did not have a socialist government.

These mechanisms also show the way in which a country with a socialist market economy, such as China, can intervene to prevent, or greatly limit, the economic downturn – because it can directly intervene in the investment process to maintain high investment programmes.

The weapons available in such an economy to prevent such a downturn in investment are multiple, and not possessed in an economy dominated by private ownership. In particular:

· State owned companies can be directly instructed to maintain or increase their investment programmes.

· State owned banks can be instructed to maintain their lending programmes companies.

· These steps indirectly aid small and medium enterprises, which should not be part of the state sector – that is the activity by the state sector also aids the private sector.

Such instruments are not available in an economy subordinated to private ownership. Therefore at present in economies dominated by private ownership, such as the US and UK, the following extremely negative processes are instead occurring.

· Due to the financial crisis privately owned companies are severely cutting their investment programmes, deepening the recession.

· Privately owned banks put the interests of their shareholders before those of the economy as a whole and thereby cut lending – again further deepening the recession.

· Because of this inability of the state sector to either prevent the investment decline or to maintain bank lending small and medium private enterprises are thrown into crisis.

The conclusion is therefore that to withstand the international financial crisis Venezuela must have a sufficiently large state sector to be able to control the investment process in the country – that is it must have a socialist orientation. This must be a decisive part of action in all three areas of ‘demand’ in the economy. This involves action in three areas:

· In order to avoid an overall decline in demand personal consumption must be maintained at a high level.

· Government social spending must be maintained, and increases may be necessary, in order to complement the high level of consumer demand.

· Most important, strong state measures must be taken to maintain and increase the level of investment in order to compensate for the decline in private investment due to the effect of the international economic recession. The aim of such investment, in addition to its immediate effect in maintaining demand in the economy, must be both to increase the long term efficiency of the economy and to improve the quality of life of the population. In most countries, some of the most effective means to achieve this is a sharp increase in spending on infrastructural investment (transport, housing, communications etc).

In short at the beginning of 2009 politics and economics comes together decisively in Venezuela. The victory of President Chavez in the referendum campaign, by maintaining the socialist orientation of the economy, will permit Venezuela to confront the international financial crisis. A victory for the ‘opposition’, by opening Venezuela to be struck by full force of the international financial crisis, would mean a sharp fall in the living standards of the Venezuelan people and severe damage to Venezuela’s national economy.


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