The Venezuelan Model of Development: The Path of Solidarity

If one were to define the model of development using a standard terminology, one would say that what we have is “development from below,” or “trickle up” economics, as opposed to “trickle down” economics.

By Felipe Pérez Martí
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If one were to define the model of development using a standard terminology, one would say that what we have is “development from below,” or “trickle up” economics, as opposed to “trickle down” economics. Given that the vast majority of people in Venezuela are impoverished, attention to the social problem is a matter of life or death. Since the break-down of the Bretton Woods agreement in the 70's, Venezuela has had a very volatile external sector, and about two hundred billion dollars, more than eight times its external debt, have fled the country since then, and investment, employment, and production have plummeted, with a distribution of income that has placed the country among the most unequal countries in the world (third, above South Africa and Brazil). Second and third generation growth theories argue that very unequal societies stagnate, and that human capital (including education, health) and strong and good institutional design regarding public administration make the difference with regard to long term growth, political stability and sustainability. Venezuela has chosen to take this into account in its development program, but placing a special attention on “moral” capital, that is, solidarity.

True love, or “solidarity,” means caring for others. In Economics, the literature on altruism, in the sense of true love, beginning with Chicago's Nobel laureate Gary Becker, has shown (see Marhuenda and Pérez-Martí) that caring for others implies transfers without a counterpart and that actually solve market failures. In an uncertain environment with incomplete markets, families, groups of friends, and entire communities experience voluntary transfers from members of the group that have good income to members hit by bad luck. Similarly, when the market fails due to the existence of public goods, communities benefit from caring relationships in order to improve upon the market’s suboptimal allocations. It is worthwhile to mention the example of the Free Software movement, whose trademark product, GNU/Linux is cheaper, better in a number of important characteristics, including security and reliability and with similarly user friendly capabilities as the leading market oriented provider of a legally privatized public good: Microsoft Windows (which has been accused of employing non market measures, and of the abuse of market power to impose it reign, hurting the economy where the best is not chosen because of those activities). Another very common example is when employees meet to share information, a public good by nature, in order for the firm to perform well. Even Wall Street firms, the core of capitalism and of individualism, you could say, in particular Lehman Brothers, experienced substantive improvements in a famous case in which the manager of capital investments organized a team of brokers who had very good, caring, relationships. It is not a coincidence that since some time ago, firms invest in “moral capital” formation, such as spending on courses on “emotional intelligence” for employees. Cooperatives, which solve the principal-agent problem, based on existing asymmetric information both between owners and managers, and managers and workers, are a natural place for efficiency gains due to better production and distribution of operation information in the production process. This is to stress that the key characteristic that sets apart efficient and long lasting, from troublesome and short lived cooperatives is the bondage and caring among firm members. Without extending the analysis to other instances of market failure, and even government failures, such as externalities, market power, private information, full rationality, well defined property rights, we will say that solidarity is an important element in human culture that improves efficiency. What the Venezuelan government does is to recognize that this exists, and takes it into account in its policy measures. A whole society, in fact, can be solidaristic in order to solve market or government failures. The application of the equal opportunities principle, implying fiscal transfers, and altruistic private organization shows the truth of this.

Development from below means providing opportunities for the poor regarding land, credit, housing, education, health and social security, in a macroeconomic environment of external stability and fiscal sustainability. Small and medium sized businesses, which are close political allies of the new process, and of course big firms, even though belonging to the traditional oligarchies, will benefic from “trickle up” process of increasing demand and human capital formation. Solidarity is thus the way Venezuela has chosen to put in place government programs of opportunities for the poor, but which realize that society itself can exercise power in order to solve economic and social problems. It has chosen to promote cooperatives among the poor, providing credits, land, technological support, education, health and social security.

Regarding macroeconomic policies, mistakes have been made, marked by the political fights against a network of the previously privileged, who have not realized the social drama of the vast majority of the population. After the coup attempt of 2002, a standard macroeconomic policy design was put in place in order to set a good environment for the social policies of inclusion. A fiscal program of sustainability and of volatility control was designed, dealing with the current situation of highly concentrated internal and external debt capital and interest payments. A stabilization fund was designed to deal with the highly volatile oil income; a modern system of income taxation was designed in order to deal with the structural shortage of non-oil income (that reaches only about 10% of GDP, while in Latin America that figure is 23%, and in the US is 33%); regarding exchange rate, a flexible system of bands around a mobile average was created that validated the market, but controlled sudden flights from and to the economy. For the first time in 35 years, the exchange rate started to stabilize. Unfortunately, the oil industry was shut down at the end of that year by the previously privileged oligarchy, which had control of the state oil industry, and the whole program was only beginning to take effect (the new tax system had only been proposed and the exchange regime was only recently put in place with high success). An exchange rate control was set in place, and the stabilization program was basically abandoned (the minister leading the program was fired).

It is our hope that a sustainable fiscal program is going to be restarted. I understand that the exchange rate regime is going to be relaxed, and there is a possibility that the previously successful flexible regime is going to be made more robust, in order to deal with political shocks, with a Tobin tax above and below the bands (I have proposed this to the government, but I do not know if this is going to be implemented, even though the reality forces the discussion of how to get out of this inconvenient situation more and more).

Regarding institutional design, Venezuela is choosing to substantially improve its public administration with a radical political choice. What makes the difference in Venezuela’s new constitution is participative democracy. This simply means that people govern themselves, at least at the local level. To put it simply, it is as if the sovereign, the owner, no longer contracts managers to administer its properties, like in a representative democracy, but wants to administer it itself. Since each citizen has politically exactly the same power, direct administration by the government means to have a cooperative of owners governing. But the endeavor is very complex.

There is a much deeper sense, in which a “path of solidarity” has just begun in Venezuela. Solidarity is exercised, by definition, by the people themselves. It is something that comes from people's feelings. A government would be able to reflect that through economic and social policy, since that government represents solidaristic people, just like in a conventional democracy. We all know the advantages of decentralization. If people themselves design government policies, those policies are going to reflect people’s preferences. That has not been the case in our kind of representative democracy, not only because of the difficulties of intermediaries in representative democracy, but also because candidates have been imposed by the media, and not really to represent people, but the country’s most powerful interest groups. In a true process of decentralization, people also have a direct impact on management, and exercise social control (I designed a tool through the internet, that allows not only the president to oversee plan implementation, but also any citizen, which is currently being adopted by the population). Governing means, besides the design of policies, managing public community projects, controlling expenditures, and evaluating the entire process; something that has only begun in Venezuela. Corruption is rampant in Venezuela today because institutions have not yet changed. But the enormous energy of the population is being organized in a network of groups, called Conexión Social (social connection) and are starting to put this in place, not only to govern at the local level, but to associate local direct power at the regional and national levels, in congresses of community delegates: a sort of senate, with territorial characteristics, but with much more representation than a conventional senate, and with executive power, sharing power with the executive and regional governments.

This is a big hope for Venezuela. And those who do not understand what is going on in this regard, do not understand what is going to happen in the next 10 to 20 years: great efficiency has already been shown with regard to the “missions”: the active participation of the people demonstrated that very low amounts of money are needed to have a very high impact: bureaucracy will decrease, and expenditures can actually go down in order to make the model sustainable, among other things. I am very optimistic.

Felipe Pérez Martí was Minister of Planning and Development under Chavez and is currently professor at IESA, a business administration school. Pérez is also a leading member of Conexión Social (www.conexionsocial.org.ve)