The Delusions of Venezuela and Argentina

from the Bloomberg View

For about a decade, Venezuela under Hugo Chavez and, to a lesser extent, Argentina under the Kirchners were popular models for leftists seeking an alternative to the neoliberal consensus. The Chavez program of dramatically expanding social spending and the Kirchner refusal to kowtow to foreign investors finally offered alternatives you could point to when the neoliberals started chattering about market confidence and budget balances.

Those neoliberals frequently pointed out the problems with those policies. Chavez and his successor, Nicolas Maduro, diverted oil-investment funds into social spending, causing Venezuela's oil production to fall; the only thing propping up the economy was the rapidly rising price of oil. Argentina cut itself off from world capital markets, and over the years it had to resort to increasingly desperate fiscal strategies; the only thing propping up its economy was a big commodities boom, driven by the same Chinese demand that was causing oil prices to soar. But these arguments failed to convince those who were gaga for Chavismo; all that free-market cant was just theory, and the Chavez acolytes could point to real, tangible advances in reducing poverty and boosting economic growth.

All that ended a few years ago, of course. Both countries are in recession and suffering import shortages, including tampons in Argentina and condoms in Venezuela. Latin America's social progress has stopped, thanks partly to a sharp uptick in Venezuelan poverty. The question of whether government redistribution or a commodities boom was responsible for Venezuela’s advances against poverty now seems to be resolved in favor of the commodities boom. If oil prices don't recover, Venezuela's government is headed for fiscal crisis very soon.

That's not to say that government transfers played no role in addressing poverty. But such transfers do not cause economic growth, at least not in a short enough time frame to cover their costs. And if you want to make people at the bottom better off, there is simply no substitute for economic growth. Policies that undercut the sources of that growth -- such as investment capital or oil production -- will ultimately make the people you are trying to help worse off. And while it's bad enough to be losing ground in the war on poverty, it's even worse that Venezuela has tried to shore up its regime against the resulting popular discontent with such anti-democratic measures as curtailing freedom of the press.

There's a good lesson here for people on both sides of the policy aisle -- I mean, beyond "don't eat your seed corn." That lesson is "never forget that you are not in control of everything." The global economy is far bigger and more powerful than the policy levers you have at your control -- which means that broader trends can fool you into thinking that what you've done must be "working." Unfortunately, when things start moving in the other direction, you're apt to return to reality with a pretty harsh bump.