How to Break the Tyranny of Oil Wealth


If Chávez believes the nation’s oil billions belong to the people, why not give it to them directly?

In the 12 months ahead of the October 2012 Venezuelan presidential election, government spending increased 40% from a year earlier in real terms, according to Francisco Monaldi, a visiting professor at the Harvard Kennedy School who studies the Venezuelan economy.

Total spending in 2012 was equal to a stupefying 51% of gross domestic product, and it generated a fiscal deficit of 17% of GDP—the highest in the country’s history, Mr. Monaldi reports. More troubling: The spending boom was carried out largely at the discretion of the executive.

This data put to rest any doubts about how Hugo Chávez won re-election despite his country’s deteriorating living standards. Ahead of the balloting he simply flooded the economy with patronage and other favors for supporters, much as he did in 2004 and 2006 when there were important votes. Whether or not he rises from his sick bed in Havana and returns to power, this past could be prologue for years to come.

The Venezuelan state took in more than $60 billion in oil income in 2011, making black gold the main source of financing for Mr. Chávez’s patronage schemes. Opponents of chavismo have long planned for the day when oil prices collapse and elections can no longer be bought. In the meantime, they have tried to make the case—as opposition candidate Henrique Capriles did last year—that they would be more capable than the chavistas of administering the government’s myriad social programs. This is getting them nowhere—and lower oil prices may still be a long way off.

Mr. Monaldi, along with Venezuelan economists Pedro Rodríguez and José Morales, have a better idea. In a paper published in September by the Center for Global Development, they propose offering Venezuelans a plan to replace many of the government’s social programs and subsidies funded by oil revenue with direct, “universal, transparent and regular payments” to citizens.

The authors argue that this “direct distribution mechanism” (DDM) would be a more equitable way to distribute the wealth from the country’s vast oil reserves, and it would make Venezuelans better off. Marketing the idea to the electorate may be one of the few cards the political opposition has left to play.

It is hard to deny that Venezuela is now a dictatorship. But ideas still matter, because dictatorships fall when the masses turn against them. As the economy stalls this year, the government might have to admit that Mr. Chávez is not coming back. Whether there is a new election, as the constitution requires, or not, the ground will be fertile for sowing the seeds of change.

Purists prefer ending the domination of the state-owned oil company and opening the oil sector to full competition. But a free-market solution to Venezuelan decay is not likely to sell in a country where dependency on the state has become a way of life, and where the good name of capitalism was badly damaged by years of cronyism and corruption prior to Mr. Chávez.

A saleable alternative is the DDM, which would ensure that the population is benefiting from the country’s oil wealth while at the same time addressing what the authors call the “corrosive effects” of oil in the hands of the state.

When the state uses oil taxation from a narrow group of producers to run the government it breaks the connection that voters normally make between what they pay in taxes and what they expect back in services—what the authors call “positive governance dividends.” Also, when the state has discretion to distribute the fruits of oil extraction without accountability, it is likely to use them to reward political allies.

Under the DDM, the direct payment from the oil income is subsequently taxed. In this way, the cost of running government programs hits the taxpayers. According to the authors, the cost of running the large off-budget development fund known as Fonden and “various social programs,” including what Mr. Chávez calls “the missions,” amounted to almost $125 billion from 2003-2011, or some $480 per person per year.

Are Venezuelans likely to go for the idea? The authors say yes, notwithstanding that opposition candidate Manuel Rosales offered a variation of the proposal in 2006. They ran a series of focus groups with low-middle- and low-income households and found significant support for a system that deposited the payments in the personal bank account of every citizen rather than the Morales idea of issuing a debit card. There was even more support for a system that provided vouchers “that could be used at the institution of choice” for health and education. In both cases respondents strongly backed the “universality” of payments.

The authors cite a recent poll that found “67.5% of Venezuelans don’t believe that they have benefited from the country’s oil income during the Chávez administration.” That spells opportunity for his opponents, unless of course they want to preserve the existing system for their own purposes and only change the players.

A version of this article appeared in the U.S. edition of The Wall Street Journal, with the headline: How to Break the Tyranny of Oil Wealth.

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