Frum Challenges Chavez’s Venezuela

Below is the (slightly abridged) text of a lecture I delivered to Conciencia Activa, a multifaith foundation here in Caracas dedicated to the preservation of ethical standards, headed by Rabbi Pynchas Brenner, chief rabbi of Venezuela Upholding such standards is not easy in the face of the gathering arbitrariness and intimidation of the Chavez regime. I’ll  have more to say later about the regime’s methods of rule – but here below is the topic the foundation asked me to address: “A Vision of 2020.” I took that as invitation to talk not about a specific year, but about the workings of foresight and hindsight under one-man rule. My thanks to the U.S. Department of State for sponsoring my visit.

Click here for all of David Frum’s posts from Venezuela.

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We have a saying in English that hindsight is always 20/20.

But sometimes it is possible to be wise before: to have our 20/20 vision in advance.

Let me offer an especially impressive example, right here in Latin America.

For a decade and a half, Chile was ruled by a harshly oppressive military regime. In 1989, that regime was peacefully pushed from power. Free elections were called, and a center-left coalition prevailed. Many of those who served in the new government had suffered cruelly under the dictator. Nothing could have been more human than to repudiate every action of the previous regime.

Only – the previous regime had proven itself an effective manager of the economy. The free market ideas of the Chicago Boys ignited rapid growth. Chile had lagged behind the rest of Latin America since the early 1960s. Under the dictator, it suddenly zoomed ahead.

Chile’s new democratic leaders could have jettisoned the dictator’s economics along with his repression. But they had the restraint and self-confidence to learn wisdom even from a bad source. They maintained the free economics of the 1980s, and they were rewarded with even more rapid growth in the 1990s. In December, the Organization for Economic Cooperation and Development invited Chile to join, ranking Chile as the first developed economy in South America.

Another example of advance 20/20 vision. In the 1960s, major fields of oil and gas were discovered in Norwegian waters.   The fields were developed just in time for the great oil price spikes of the late 1970s. Norway was suddenly collecting vast new revenues. Norway called itself a social democratic society. It must have been very tempting to use oil wealth to pay for generous new social benefits.

Norwegians however were keenly aware of the notorious “curse of oil.” A state that depends on oil revenues no longer depends on the contributions of the people.  Instead of seeking the consent of the people it can now purchase that consent – or hire force to intimidate that consent. In almost every case, oil states have suffered from authoritarian government or corruption or both.

Worse, oil states lose sight of the great insight of Adam Smith: the source of all wealth is the productive skill of the population. Wealth comes from control of the state. And those who control the state have little incentive to invest in schooling the next generation of citizens.

To defeat these temptations, the Norwegians made an austere choice: all the money from the oil would be saved in a national fund. Today’s spending would be financed – not by windfalls- but by taxes. If Norwegians wanted generous social programs, they would have to pay for those programs out of their own salaries. You may know the famous slogan of the American Revolution: No taxation without representation. Embedded in that slogan is an equally important truth: Representation does not long endure without taxation.

The Norwegians still wanted social programs. So they voted to tax themselves to pay for them.

Today Norway is that rarest of all countries: a democratic and transparent petro-state.

Some years ago, I had a chance to meet a senior executive at Norway’s state oil company. He said it was always a surreal experience for him to attend meetings with foreign oil ministries: Everyone else in the room wore a watch that cost more than his annual salary.

Now let us see whether we can deploy a little 20/20 vision of our own for Venezuela’s future over the next 10 years.

Are there mistakes we can see in advance?

I can see three.

One I am sorry to say you are about to discover here in Venezuela: the attempt to maintain two different values for a national currency. It has been tried before, almost always by authoritarian states. Apartheid South Africa had the financial rand and the commercial rand. Castro’s Cuba has the peso and the convertible peso.

These double rates open obvious opportunities for arbitrage – buy at one value, sell at the other.

To prevent this arbitrage requires considerable repression. Meanwhile, influential insiders can exploit their positions for corrupt advantage.

Even where these systems are very well designed (the South African system was especially ingenious), even where they are enforced by a generally honest and effective civil service (as was the case in South Africa), they end by exhausting the foreign reserves of the country. One crisis, and the whole thing collapses, leaving only waste behind.

The Venezuelan government has made the problem even worse, since neither of the new rates reflects the market value of the currency. Again hindsight is 20/20. The results will be shortages – deterioration in the quality of goods – the shift of business into more reliable currency like the euro or the dollar – and an intensification of inequality between the connected and sophisticated and the poorer people who must use a local currency that is not worth what it pretends.

A second 20/20 mistake – budgeting without transparency. Somebody once defined morality as: what you do when nobody’s looking. We all hope that those in government are highly moral people. Like all of us, however, they behave even better when they understand that their actions can be seen and reviewed.

Rabbi Pynchas Brenner of Venezuela summons us to the life of the active conscience. This is a noble aspiration and a call that must be heeded. The best aide to an active conscience however is an active audit.

Countries with very strong presidencies and weak, overawed or suborned legislatures are especially vulnerable to non-transparency. Who will ask questions? Or enforce answers?  Or check the accuracy of those answers if given? The media can never do the job by themselves – and if the media are also controlled or intimidated, then billions of dollars can vanish into the murk.

Money can be lost without being stolen. In non-transparent systems like the old Soviet Union, there was stealing – billions of dollars of it. But the magnitude of the wealth destroyed was measured in the trillions, not the billions. Nobody ever knew where the money went. It was just gone. In this sense, even authoritarian states benefit from transparency. Singapore is not a liberal democracy. But its accounts are open and honest – and Singapore, a barren rock that nature has endowed only with humidity – now ranks among the richest countries of the world.

By contrast, Argentina is a democracy. Human rights are respected. Yet without transparency, it ranks among the most corrupt places on the planet – and its standard of living, once among the highest in the world, has plunged below its neighbors, Chile and Brazil.

Thomas Jefferson famously said that given a choice between a government without newspapers or newspapers without government, he’d choose the latter. What he meant to celebrate was the indispensability of honest information. A society without information is not governed. It is ruled –and plundered.

A third 20/20 mistake: an executive that controls the legislature.

In our modern world, we have two main systems of democracy. In the United States, France, and Mexico, the executive and the legislature are elected separately. Powers are separated, and each checks and balances the other. In Britain and the British Commonwealth, in Japan, and in most of Europe, the legislature is elected directly and the executive derives its power from the legislative majority.

Political scientists argue about which system is better.

But all agree on which system is worst: a system where the executive controls the legislature. You can call this system by many names: guided democracy, Peronism, socialism with Chinese characteristics.

By whatever name, the system of executive supremacy over the legislature amounts to the same thing: unchecked power. Such power can never be trusted. And those who most avidly seek such power are precisely those who can least be trusted with it.

The destiny of Latin America lies in the hands of Latin Americans. The time for blaming shadowy international forces for your problems – bankers and imperialists; the Jews, the Jesuits or the Freemasons; British, the Spanish or the NorteAmericanos – has long past.

Since 1990, more people around the planet have emerged from poverty than at any time in the whole previous history of the human race. They did so not under red flags and with clenched fists, but by buying and selling in the international economy.

I had the privilege of working with the great Peruvian thinker, Hernando de Soto, on his book The Mystery of Capital. The solution to the mystery ultimately was that there was no mystery: capital is all around you, in the labor of liberated people who are allowed to own for themselves what they create and invent, under accountable governments where power checks power.

I tell you nothing you do not know. I am not here to teach, but to learn. This is a country where you often hear the language of struggle. The struggle that leads to freedom is the struggle of the intellect over the appetite, of dignity over fear, of law over crime, of commerce over violence, of truth over lies.