Economic freedom audit case studies: Venezuela
CEDICE
Venezuela was once the most prosperous country in Latin America. Much of this was due to economic freedom. In fact, in 1970 Venezuela had the highest level of economic freedom in Latin America, and 10th in the world, as ranked by the Fraser Institute’s Economic Freedom of the World (EFW) Index. The prosperity, however, led to ill-advised social and economic policies. The combination of shifting commodity prices, rapidly expanding public employment, and restrictive economic policies resulted in stagnation and then decline, exacerbated by populist political leaders who continued to expand unsustainable social programs.
Poverty levels in Venezuela now exceed 90 percent. Grocery queues stretch around city blocks and require hours of waiting to purchase meager supplies with mountains of devalued currency. Venezuela is the now lowest ranked country in the latest edition of the Fraser Institute’s EFW Report, coming in 159th with a score of 2.92 out of 10. Notably, those scores are from 2016, and conditions have gotten worse since then.
As hundreds of thousands flee to neighboring countries for hopes of a better life, one local think tank is digging in its heels and pressing for reform, striving to realize the hopes of millions of Venezuelans in their own country. CEDICE (Centro de Divulgación del Conocimiento Económico para la Libertad) is a non-profit think tank that has studied the Venezuelan economy since 1984, when it was founded by entrepreneurs unsatisfied with the policy climate of the country. According to the 2017 Global Go To Think Tank Index Report released by the University of Pennsylvania, CEDICE is one of the Top 100 think tanks in the world, ranked 9th in Latin America, and has the 15th most significant impact on public policy.
CEDICE strives to disseminate, educate, and defend the principles of free markets and individual freedom, seeing these values as central to a flourishing society. It employs diverse programs to affect change, but it recently launched an intensive and bold new initiative: an Economic Freedom Audit (EFA). The EFA was designed to do a deep dive into the core issues plaguing the Venezuelan economy and to develop policy solutions to get the country back on the path of freedom and prosperity for all.
Download the full case study for free: "Venezuela."
Country Background
In 2018, economic freedom is almost entirely absent in Venezuela, with corruption, crime, and shortages of even the most basic goods afflicting the country. The country has seen a long and recent dramatic decline in economic performance and quality of life. But this was not always the case.
Rich in natural resources, the country developed extensive agricultural ventures at the turn of the twentieth century, exporting cocoa and then coffee across the globe, facilitated by free trade agreements. The economy later shifted to oil, which further attracted immigrant workers who in turn fueled more economic growth. In the late-twentieth century the city streets bustled with business and shopping, workers enjoyed higher wages than in any other country in the region, and newspapers contained advertisements for Chevy Camaros, which were manufactured in the country. International growth fed an oil boom that the country capitalized on due to possessing the largest oil reserves in the world. But the country’s growth was not exclusively tethered to oil, and as oil prices declined in the 1960s Venezuela’s economy continued to grow.
Following this period of expansion, however, Venezuela began adopting heavy-handed government policies, including the establishment of economic planning agencies, agricultural land redistribution, price and exchange rate controls, tripling income taxes, and nationalizing numerous industries, such as the Central Bank and oil industry. Yet even in 1980, Venezuela was still one of the richest and economically liberal nations in South America, rated 13th by the EFW report — just behind Australia.
Yet by 1990, the effects of bad policy were becoming more evident, with Venezuela falling to 53rd in the EFW ranking during the presidency of Carlos Andrés Pérez, who was later forced out of office, convicted for embezzlement of public funds.
Venezuela is a relatively young democracy, having only adopted universal suffrage in 1959, almost 140 years after independence from Spain. In that time the country has had a variety of political and economic systems, with populist ideas often winning out. This has led to expansive welfare policies, which have ballooned over the years. Socialists and crony capitalists vying for control of a sinking ship have often realized short-term gains by taking on more water. Policies that sprung out of a booming economy and political aspirations are now a key factor hampering the economy.
In 2000, under Hugo Chávez, Venezuela’s economic freedom continued its nosedive, reaching 88th place. Since 2005, Venezuela has been one of the least economically free countries in the world. Under its current president, Nicolás Maduro, Venezuela has increased the money supply without cutting government programs, leading the country into hyperinflation. The IMF expects the inflation rate to surpass 1,000,000% in 2018.
The economic crisis and inability of the government to meet its pledges has triggered widespread distrust of the government. Government leaders have further escalated the tensions. For example, Maduro’s government banned two popular politicians — Henrique Capriles and Leopoldo López — from running against the incumbent president. In the last election, only forty-six percent of Venezuelans even bothered to vote, a far cry from the over-ninety percent turnout throughout the 1960s and 1970s. Political distrust has also taken other forms, and Venezuelans have fled into neighboring countries. Colombia has received more than half a million Venezuelan refugees in the last two years alone.
Due to economic and political instability, crime rates have skyrocketed. As of 2017, the capital city of Caracas is the second-most violent city in the world, with 111 homicides per 100,000 residents. (As a comparison, the most violent city in the U.S. is Baltimore, Maryland, with a homicide rate of 56 per 100,000 people, approximately half as many.) The spike in crime has swamped the courts, with over 70,000 people currently awaiting trial.
While the majority of Venezuelans suffer, many wealthy, connected elites enjoy the privileges of cronyism — using the political system to enrich themselves at the expense of the entire society.
- From 1984 to 1994, President Jaime Lusinchi stole an estimated $36 billion in public funds.
- During his presidency, Chávez purchased a $65 million-dollar airbus, despite it violating the constitution and other regulations.
- Currently, the Chávez family owns 17 country estates – comprising more than 100,000 acres – and Chávez’s daughter is the richest woman in Venezuela.
Download the full case study for free: "Venezuela."
The Project
In light of Venezuela’s rapid decline, it is difficult to capture a clear picture of what exactly is going on and how to get back on track. To address this issue, CEDICE conducted an Economic Freedom Audit (EFA) with the Fraser Institute and Atlas Network in 2016. The purpose of the audit was to identify specific obstacles to a healthy, thriving economy. EFAs are a brainchild of the Fraser Institute and Atlas Network, who have formed a partnership to assist think tanks in the poorest performing countries in the EFW. The Fraser Institute provides the evaluation expertise and Atlas Network draws on its extensive global network of think tanks to make connections in the target countries.
Together, CEDICE, Atlas Network, and the Fraser Institute launched the EFA process for Venezuela. Carlos Goedder, a CEDICE economist and the coordinator of the Venezuelan EFA, explained that, “Our motivation was to verify the dimensions measured in the index, analyzing all the variables considered for the ranking, tracking their deterioration, and making sense of such significant underperformance.”
Prior to beginning their audit, CEDICE staff connected with other organizations that had already successfully completed EFAs in other countries. Arpita Nepal, co-founder and research and development advisor at the Samriddhi Foundation, a free-market think tank in Nepal, shared in detailed her experience and advice for conducting a successful EFA. Gaining insights and learning best practices was an important step before launching such an intensive project. Early course correction and refinement, even before a project launch, is a key way to efficiently manage both resources and social capital.
Next, CEDICE downloaded the 42 individual variables that make up the country’s EFW report score from the Fraser Institute (data are publicly available for 162 countries). Then it verified the results and examined the comparative ranking and historical performance of each variable. Fraser’s dataset mostly comes from two reports, the Doing Business report by the World Bank, which measures the ease of doing business in 189 economies, and the World Competitiveness Report by the World Economic Forum, which analyzes 138 countries. Conducting the literature review and implementing their outreach plan to connect with local stakeholders and invite them to participate in the workshops took a total of five months, from March to July 2016.
Once the appropriate data was gathered, dates were set, invitations were sent, and the panels of experts began a review of each area of the index. From April to June, CEDICE contacted potential stakeholders and organized seven workshops, one for each category of the EFW report.
Recruited experts were grouped according to the different areas of the EFA. CEDICE guaranteed each expert confidentiality of opinions to avoid oppression by the Venezuelan government. Such security was a powerful incentive for turnout and attendance. During these workshops, representatives from 48 organizations discussed the interrelated aspects of economic freedom. Organizations included non-profits, consulting firms, law firms, universities, unions, and even the Caracas Chamber of Commerce.
CEDICE’s success in gathering stakeholders was due to the social capital it has built over the course of the organization’s history. Since 1984, CEDICE has hosted numerous events and published well-known publications. They have also maintained a database of friends, endorsers, and interlocutors who consider CEDICE’s work reliable and serious, even if they fundamentally disagree with the organization’s political positions. The addition of other globally recognized organizations helped give the EFA further legitimacy to attract participants.
Ultimately, CEDICE gathered 108 different stakeholders from July 25-28, 2016. Stakeholders included representatives, leaders, and entrepreneurs from universities, public agencies, unions, media, civil society organizations, banks, and companies. The attending individuals included experts with broad historical and quantitative knowledge, as well as individuals deeply embedded in their line of work, with important qualitative and tacit knowledge of their respective enterprise.
To roll out the EFA workshops, the Fraser Institute’s Fred McMahon joined the CEDICE team to implement the audit. He opened each session with a review of the performance of free economies and explained how they differ from Venezuela’s economic system. McMahon was an important ally during the EFA, since he had already visited other countries for previous audits. Those at CEDICE were worried about the kind of reception someone from a high-profile think tank like the Fraser Institute would receive — after all, government officials and union leaders were attending the workshops — but McMahon’s delivery of information from mainstream sources and good interpersonal skills endeared him to the audiences.
CEDICE and McMahon also visited the Economics and Sustainable Development Unit of the British Embassy in Caracas, which was interested in the report and further dissemination of the findings throughout the business community. Additionally, during the conference dates McMahon visited Consecomercio, a nonprofit local trade association. There, he discussed the benefits of economic freedom with nearly 50 business owners and managers. Partnering with organizations that have deep experience and strong knowledge is a valuable way to support the rollout of a new project.
An important feature of the EFA is that the workshop discussions were not overly “wonky,” or focused on examining purely quantitative data. To help supplement the numbers, individual citizens struggling through the repressive Venezuelan economy presented their own personal testimonies.
One participant, Oswaldo Bonillo, shared his story. Bonillo was the owner of a mechanical workshop that had been expropriated by the Venezuelan government in 2011. Although he was never formally sentenced or charged, the government seized his property with impunity. After 50 years of hard work, an arbitrary decision by a government agency robbed a man of his livelihood in a mere 48 hours. “I began to take notice of private property when I was the victim of an expropriation,” said Bonillo during the workshop on the legal system and property rights.
Bonillo’s story is not uncommon. According to the Observatory of Property Rights, sponsored by CEDICE, the Venezuelan government closed 28,000 private enterprises in 2015 and seized over 4 million square meters of private land. Bonillo was never compensated, and he has yet to hear from the judiciary.
“Owning private property is a crime in Venezuela,” said one attorney attending the workshop. In 2015, there was an average of 256 attacks on small businesses per day. In addition, this disregard for private property is enshrined in Articles 115 and 116 in the Venezuelan Constitution, including the statute, “Property shall be subject to such contributions, restrictions, and obligations as may be established by law in the service of the public or general interest.”
A series of policy proposals emerged from these workshops to help increase Venezuela’s property rights protection score and provide positive change to real people impacted by government takings. A group of law students suggested the creation of property courts. Currently, Venezuela lacks specialized courts to settle property disputes. Like Bonillo, those whose property is expropriated have no viable channel for legal recourse. These newly established property courts would return confiscated property and have the sole authority to grant expropriation orders. Furthermore, to help address the broader, cultural disregard for property rights, participants suggested the creation of housing titles for beneficiaries of housing subsidies, based on the idea that creating more homeowners could help imbue Venezuelans with respect for private property.
Speeches and discussions during the other workshops resulted in additional public policy proposals. The focus for these was on “quick wins,” the kind of pragmatic adjustments that could have a big impact while being implemented with relatively few difficulties or costs. These small adjustments could result in marked improvements for the living standards of Venezuelans.
To help engage with a potentially hostile audience at the workshops, CEDICE and McMahon wrote quick introductions that utilized facts, figures, and recent news to provoke and start discussion. For example, during the session on Sound Money, they collected and presented the most recent numbers on inflation, monetary base growth, and alternative measures of CPI inflation. This culminated in a proposal for the “dollarization” of the economy — a total pledge to the USD — similar to policies enacted by other South American countries. In a country with rampant inflation and a monthly minimum wage hovering around $3 USD, such an idea is attractive to a broad spectrum of audiences. In fact, once the Sound Money workshop concluded, union leaders requested photographs with McMahon.
A key to the success of the EFA was the willingness to hear all voices and not insist on ideological purity to draft policy recommendations. Although the ultimate goal is the dismantlement of exchange rate and price controls, short-term policies are also important, and providing an atmosphere of engagement has the potential to more effectively impact policy in the long term.
Additional policy recommendations included easing registration for private companies, unifying export/ import documentation and tariffs in a single official webpage, privatization of non-strategic assets under control of the Government, and allowing a fraction of shares of public companies to list in the stock market, domestically or abroad.
Bonillo’s story, the workshop discussions, and the participation in forming policy recommendations demonstrate the way CEDICE’s EFA succeeded. The audit worked through the combination of expert testimony, quantitative data, personal stories, and policy proposals for each one of the categories defined in the Fraser Institute’s Economic Freedom of the World Report.
Download the full case study for free: "Venezuela."
Conclusion
The social and economic state of Venezuela has gotten worse than anyone could have predicted fifty years ago, and getting on the road to recovery is more important than ever. While present and future prospects are still dim, the fact that an Economic Freedom Audit was not only possible but had such strong participation is telling. Participation by leaders in Venezuela, ranging across sectors, demonstrates that citizens recognize the problems of a socialist regime and are willing to fight for change. The success of the EFA is also a testament to impact a small think tank full of hard-working and committed advocates can have when equipped with effective programs, operational expertise, and an actionable network of contacts.
The policy recommendations developed by the cross-partisan, diversely affiliated EFA workshops are a strong and positive first step toward returning Venezuela to prosperity. The report generated by the audit provides further intellectual credibility to CEDICE as it continues to push for social change. CEDICE’s exemplary implementation of the EFA, in the face of great hostility, offers inspiration and a replicable playbook to other advocates of economic freedom.