Blow to Oil-Fueled Socialism

Stephanie Hanson
Council on Foreign Relations
Monday, December 3, 2007; 3:34 PM

Venezuela's December 2 referendum on constitutional reforms followed street protests (CSMonitor) by thousands of Venezuelan university students. They proved to be a galvanizing force in the surprise defeat of the referendum, which would have broadly expanded President Hugo Chavez's powers (TIME). The Venezuelan government, awash in oil revenues, has shared the windfall -- from the upper-middle class down to the poor in Caracas' barrios. Yet shortages of basic foodstuffs like milk and eggs have increased skepticism about economic reforms and eroded some of Chavez's support among poor Venezuelans (LAT). Chavez accepted the poll's result in a speech on December 3, adding that he would "continue in the struggle to build socialism."

He will now have to contend with an emboldened opposition (NYT). Experts say the vote, Chavez's first electoral defeat in nine years, could further polarize Venezuela's already divided population. The referendum failed by a razor-thin margin of two percentage points, according to the Electoral Commission. Speaking on a panel at the Council of the Americas on November 30, Michael Penfold, an associate professor at the Instituto de Estudios Superiores de Administracion in Venezuela, said the country is headed toward a "governability crisis." Andy Webb-Vidal, a journalist and political-risk analyst, suggested at the same panel that Chavez will continue to do as he pleases, given the enabling law passed earlier this year that allows him to rule by decree.

The president and his followers still control most of the government, including the National Assembly, the state-owned oil company, and the courts. The proposed constitutional changes would have further centralized Chavez's power (Economist), allowing him to be reelected indefinitely, giving him more leeway for declaring states of emergency, and mandating the creation of regions led by vice presidents picked by Chavez. Other amendments called for economic changes, such as allowing the president control over the central bank. A report (PDF) from the Venezuelan government outlines (in Spanish) the sixty-nine amendments in the referendum.

Social programs to bring cheap groceries, medical care, and education to the poor have been the bulwark of Chavez's support, but price distortions from the oil-fueled economy have hit many of these constituents hard. Inflation, officially at 16 percent but thought to be higher, is significantly raising the cost of basic foodstuffs. Journalist Alexandra Starr says Chavez has merely tapped into the Venezuelan belief that the government should help its citizens. "Cheap gas strikes at the heart of the arrangement many Venezuelans feel they have with the state: 'national patrimony belongs to all of us, and I deserve my share of the spoils,'" she writes in The American Scholar.

Chavez's political future will depend on the ability of Venezuela's state-run oil company, PDVSA, to continue producing the heavy crude that fuels his socialist revolution. The president spends billions dollars of PDVSA's revenue on social programs, handouts to foreign governments such as Cuba, and defense. Though the company's financial dealings and level of oil production are largely opaque, many analysts say oil production is down and the company is not investing enough. Venezuela was the ninth-largest global producer in 2006, according to the U.S. Energy Information Administration. Two decades ago, PDVSA was considered a top-notch oil company. Now, it "amounts to the president's $35 billion petty-cash drawer," writes Tina Rosenberg in the New York Times Magazine.

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