Sunday, 13 December 2015

Adios Chavismo y Kirchnerismo

Over the past month we witnessed two major political changes in the South American continent. Venezuela and Argentina have ousted their long-lasting socialist parties and have turned center-right. The scope of this change is even greater considering the fact that two dominant Latin American political economy ideologies were punished at the polls: Chavism and Kirchnerism.

However, to be honest, the defining figures behind these political and economic ideologies weren't themselves punished by the voters. Chavez died, his successor Maduro still remains in power, but it was the Socialist party that lost the parliamentary elections (by a landslide), while Cristina Kirchner had to step down after serving two consecutive terms in office - it was her chosen successor that lost the November Presidential run-off. The Venezuelan elections can still however result in a blow to Maduro since the opposition gained a two-third majority in Parliament, meaning they can change the constitution limiting the President's power or call a referendum on Maduro's leadership if he blocks the opposition's amnesty law (a lot of opposition leaders are - surprise, surprise - in prison). In fact prior to these elections it was said they represented a pre-referendum for Maduro. With a turnout as high as 75% this was indeed a huge blow to Chavismo, but not yet its final demise. 

Economic voting: incumbents punished due to a declining economy

Either way these two events could mark an end to an era, not only in these two countries, but possibly in South America in general. What happened at the elections was actually a very simple case of economic voting - both the Argentine and the Venezuelan economy were in dismal states after a decade and a half-long socialist experiment. 

In Venezuela inflation in 2015 was over 150% (projected to go over 200% in 2016), GDP fell by 10% with a further 6% projected decline in 2016, and with unemployment soaring at 18%. Price and currency controls were imposed causing shortages of basic goods (food and medication) not to mention huge queues in supermarkets (the price controls are primarily responsible for such high inflation rates). The percentage of people living in poverty is a whopping 73% (up from 23% only a few years ago), while the health system has completely collapsed. It's easy to see why this happened. Venezuela's socialist "Bolivarian revolution" agenda was based almost exclusively on its vast oil reserves. The revenues from oil were used to fund social welfare programs as well as buying power and influence abroad. As oil prices have fallen dramatically over the past year and a half, the government simply couldn't afford all of its expenditures. While poverty was declining and living standards improving during Chavez's reign, all this was funded thanks to high oil prices and large government revenues. The socialist mindset has reached an impasse once more - they ran out of money. Naturally the economy collapsed. 

Source: The Economist
In Argentina, the situation was only slightly better, although there too the economy was crumbling. After another default on its debt in July 2014, and following a slump in commodity and oil prices, their foreign currency reserves have been drained, making it even more difficult in attracting foreign investment. The fact that Kirchner nationalized the biggest domestic oil company YFP taking it away from the Spanish Repsol, in addition to nationalizing the airline company, the railway system and the largest pension fund, didn't help either. Furthermore, similar to its like-minded socialist leaders in Venezuela, the government persistently misreported the key statistics about the economy. 

Inflation is also high, officially estimated at 14%, but with independent domestic economists calculating it to be around 25%. It too is a consequence of capital, currency and price controls, and it too is denting domestic purchasing power and living standards. Arguably one of the most devastating economic decisions by Kirchner was to implement the so called "supply law". Under this absurd piece of legislation the Argentine government has prohibited companies to set prices too high, thereby generating "too much" profit, or producing "too little", thus successfully constraining them from both ends and literary pushing them into bankruptcy. Of course the concepts of "too high" or "too little" are not defined, as long as the "extraprofits" can be detained. Nothing embodies Kirchnerism more than this move - after nationalizing all the biggest industries, the small and medium-sized businesses were also contained by a typical central planning agenda. Couple this with other laws that undermined legal contracts and basic property rights, not to mention Kirchner's capture of the justice system, it's also easy to see why things went so wrong in Argentina. 

Source: The Economist
Limited access orders 

Underneath their populist surface both Chavism and Kirchnerism were nothing more than rules of Robin-Hood-like, extractive elites which have designed and perpetuated a system of cronyism, corruption and personalization of power and key institutions. They are an almost perfect depiction of the North, Wallis and Weingast (2009) limited access order (LAO). Let me remind the readers of what LAO implies: "an institutional framework in which well-organized ruling elites manipulate the economy by generating privileges based on the personalization of governing institutions. They define such societies as natural states, or the more precise limited access orders, in which intrapersonal relationships between the powerful and the political elites serve as the base of all political and economic outcomes. The elites are then successful in preventing the development of the civil society and ensure a long-run constellation of existing political relationships."

Or in the framework of Acemoglu and Robinson (2012) this is a typical example of an extractive political order, which necessarily designs economic institutions to be extractive as well. It can also be extended to fall under the iron law of oligarchy, since the pattern of governance of these countries resembles their former autocratic regimes, the very same ones they fought against. But just like under any extractive political system, there is a limit to its growth and expansion. In both cases it was the natural resources (oil in Venezuela and land in Argentina) that held the elites in power, allowing them a chance to expand their socialist agenda when prices were high and money was pouring. 

Many dictators in the world depend on the availability of resources. If they have no resources to exploit then they form alliances with global superpowers (US, EU, Russia, China) and depend on their foreign aid. In some cases the dictators are ruthless to everyone and take all the money for themselves. This is a shortsighted strategy as it often leads to the leader being deposed and, well, murdered (Gadaffi, Caucescu, Saddam, etc.). In other cases they are more socially sensitive and only kill and imprison those who directly oppose them, while giving huge populist concessions to their voters. This strategy, only seemingly better, is also misguided as it places a too high emphasis on the country's natural resources. When prices start to fall, it's good as over for the dictator. This is why Putin's biggest challenge thus far was the rapid decline in oil prices that began last year, which evidently hurt Russia's economy. However Putin was clever enough not to put all of his eggs in one basket, plus he faced different circumstances. Kirchner and Maduro on the other hand, they didn't even have that choice. 

As for their legacy, it will be extremely hard for the opposition to fix the dismal state of their economies. Even more so as expectations are certainly riding very high from the voters. This is why one shouldn't exclude the scenario of Kircherism and Chavismo returning to the big stage after a few years. Hopefully this won't happen as the voters have learned their lesson. But in politics, just like in economics, it's never that simple. 

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