Populist redistribution isn’t working

I remember reading an article in The Economist sometime last year (I can’t remember the exact issue) which was reviewing the impact/results of the various populist political movements in the past 50 years which have cyclically swept through Latin American countries. They all generally followed a similar model … an elite group was governing politics and enriching themselves and their friends through corruption … a charismatic leader arises promising to shift the power (and wealth) back to the average poor citizen to right this wrong … this charismatic leader is swept into power based on their promises of nationalizing important industries and progressive redistribution of wealth back to the people. Eventually, the charismatic leader gets caught with their hand in the cookie jar and loses power back to a more centrist or right wing politician.

What The Economist was interested in was whether the working poor were actually better off after this process. They were actually expecting to find a mix of results. What they found was that in 100% of the cases that the working poor were actually worse off after these populist cycles. That is, while some of the working poor were helped out temporarily by the hand-outs, ultimately they (as a group) were not better off as the unsustainable welfare services were scaled back.

This is happening again in Venezuela. Chavez is funneling increasingly nationalized oil industry money into food and other subsidies for the working poor. He is instituting price caps on certain food items which is resulting in empty store shelves and a thriving black market. The currency is now trading at 50% of its official exchange rate on the black market. All of this is causing inflation … which hurts the poor the most as they have the fewest options to hedge inflation. Wealthy and middle class people are converting their wealth to physical assets and even borrowing in bolivar currency to buy more assets/dollars through various schemes … increasing their wealth.

There is also widely-recognized decline in oil production (although not admitted by the government) as Chavez pushes out the skilled oil company management replacing them with his cronies plus a decline in adequate oil infrastructure investment (due to his funneling of oil incomes to other schemes.) Chavez’s policies are currently achievable because of the high price of oil. But, of course, this is not sustainable long-term and because oil revenues are not properly being invested in the country’s infrastructure, there will be no pay-off at the end … especially for the poor.

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