Venezuela's current dilemma has been a long time in coming. For nearly a century following its independence from Spain it was one of Latin America's most backward republics. Its emergence as a major element of the world economy dates from around the First World War, when huge petroleum deposits were discovered around Lake Maracaibo and subsequently developed by British and American companies. For many years foreign investors operated under the benevolent eye of military strongmen, most notably General Juan Vicente Gomez, who ruled from 1909 to 1935, and General Marcos Perez Jimenez, a sanguinary tyrant who was finally ousted in 1957. Perez Jimenez's overthrow was a major turning point leading to the firm establishment of civilian institutions. Indeed, from 1958 to 1998 Venezuela was often regarded as one of Latin America's more exemplary democracies, and certainly it was one of the most stable. (At one point in the 1970s it was the only South American republic ruled by democratically elected civilians.)

In retrospect, however, it is apparent that Venezuela's vaunted democracy had been purchased rather than won. After the overthrow of Perez Jimenez, politics in that country became an exercise in prearranged outcomes. The three major democratic parties divided up the spoils regardless of who actually prevailed at the ballot box, greatly expanding the public sector to accommodate their clientele, which included a large trade union movement. The armed forces were marginalized from politics by depriving the military of the right to vote, but also by granting it generous salaries and benefits, as well as service clubs far more luxurious than anything known to its counterparts in the United States. The Left--the Communists, Trotskyites, and others--was likewise pushed aside, but as a consolation prize was permitted to control the Central University and, to some degree, other cultural institutions as well.

This system worked remarkably well as long as oil prices remained high and the expanding welfare state had not yet grown to devour the sources of its own subsistence. Its palmiest days were the 1970s, when two oil shocks (in 1971 and 1979) doubled, then tripled, the country's cash flow, thus encouraging even more reckless populist policies, now often financed by heavy foreign borrowing. Then, in 1981, the world price of oil virtually collapsed, and with it all of the presumptions upon which Venezuelan politics had rested for decades.

At the same time, another decision taken in 1958 suddenly exacted a damaging price. After the fall of Perez Jimenez, President Romulo Betancourt (1959-1964) decided that no further oil concessions would be granted to multinational corporations. A decade and a half later, foreign-owned wells and refineries were nationalized (with compensation), and a government entity, PDVSA, was created to administer the country's basic resource.

The long-term effect of this policy, which was hugely popular at the time, was to drastically reduce Venezuela's share of the world's oil business, as the multinationals took their capital and expertise to the Middle East. In 1960, at the time that OPEC was founded, Venezuela accounted for 60 percent of the world's total petroleum exports; ten years later, it had dropped by half to 30 percent. Today it represents roughly 4 percent. Thus Venezuela is in a far less advantageous position to exploit the current upswing in prices than would otherwise be the case. Meanwhile, a heavy overhang of foreign debt and a costly and corrupt public sector imposes further burdens on the economy. Small wonder that today some 80 percent of Venezuelans are said to be living in poverty.

Perhaps the most remarkable characteristic of the Venezuelan scene these past few years has been the degree to which solutions to complex economic problems have been pursued through purely political means. In late 1988 President Carlos Andres Perez was reelected to a five-year term on the basis of nostalgia for the years of the second oil shock, which coincided with his first term of office (1974-1979). When Perez attempted to introduce some rationality into Venezuela's public finances, Caracas was shaken by a massive public protest, followed two years later by two unsuccessful military coups, the first of which was led by a (then but never again unknown) paratrooper by the name of Hugo Chavez. Perez was eventually impeached, and in subsequent elections Venezuelans returned Christian Democrat Rafael Caldera to the presidency; his appeal consisted partly in the fact that he had taken loud public exception to Perez's rather timid market reforms, partly that during his first term (1968-1974) he had the good fortune to preside over the first oil shock (more nostalgia).

Perhaps the most important single measure Caldera took during an otherwise uninspiring five years in office was to grant a presidential pardon to Colonel Chavez, who had been imprisoned for his attempt to overthrow Caldera's predecessor. Having failed to revive prosperity through the expedient of conventional politics (and politicians), Venezuelans found seductive the notion of overturning the system altogether. Hence the Chavez administration is merely the latest attempt to achieve prosperity on the cheap--in this case, by the mere expedient of writing a new constitution.

The centerpiece of Chavez's presidential campaign in 1998 was the need for a new basic charter. Indeed, during the early months of his presidency Venezuelans were constantly being summoned to the polls to approve a series of constitutional changes, the effect of which was to dissolve the old bicameral congress and replace it with a single-house national assembly, as well as to revise the prohibition on consecutive presidential elections. On the presumption that a new constitution required new presidential elections, this past summer Venezuelans were invited to vote for Chavez once again, so that he is now in the first months of his new six-year (as opposed to the previous five-year) presidential term. Other than these changes, and a few others more provocative (such as the "right" of Venezuelans to receive "accurate information" in the media), the new national constitution is in most respects rather similar to the one it replaced. It is difficult to see why so much time and energy have been spent on changes that are for the most part cosmetic, except insofar as they make it possible (though not inevitable) that Chavez will rule Venezuela for thirteen consecutive years.

Three other characteristics of the new regime in Venezuela are worthy of comment. The first is that Chavez seems to think that the answer to his country's problems lies largely outside its borders. Since taking office twenty-one months ago, he has made forty-one foreign trips, leading wags in Caracas to argue that "there's no use blaming him for the parlous state of the country: after all, he's never here." The second is a kind of blindness to the deficiencies of his own economic system, as if the answer to Venezuela's problems has to do with the price the world pays for oil, which not unnaturally, he thinks too low. He expects to correct that through astute diplomacy--visits to Saddam Hussein; convincing Russia, Mexico, and Norway to join OPEC; forming a new and more militant producer's cartel; and so on.

So far, however, this approach has not yielded its expected results. Chavez seems not to grasp the fact that even if it did, at best it would produce a short-term (and short-lived) windfall. Demand for oil is not inelastic--far from it. The last oil shocks provoked the United States and Western Europe into new prodigies of energy efficiency; if prices remain at their current level, industrial countries will be encouraged to go further along this line. Moreover, as reported in this Outlook in February 2000, new finds and new recovery technologies presage a new glut of oil coming on stream before Chavez has completed his second presidential term. Finally, Venezuela's state oil company has lost two thousand of its best-trained and most competent employees since Chavez took office, partly as a result of his packing the management with political allies, most of whom have no background in the energy field. The effects of this shake-up on the production side are bound to be felt sooner rather than later.

The third is a tendency for the president to engage in scarifying, even bloodthirsty rhetoric, particularly on his weekly call-in radio and television show, Hello, President. To be sure, the profoundly revolutionary changes he periodically promises never actually seem to occur. (He sometimes sounds like a Marxist, but in practice he seems--to borrow a Marxist term--more like a Bonapartist.) His comments do, however, succeed in one counterproductive way. They frighten not only the business community but also the professional middle class. While these people can at present command no more than a third of the electorate, they can and do vote with their checkbooks. Since Chavez's election, fully $8 billion has left Venezuela, and it has not been replaced by equivalent amounts of foreign investment. Although on his many trips abroad the president continually assures foreigners that they will find a benevolent business environment in his country, his audiences are not encouraged by the fact that their local counterparts seem to think otherwise. Lack of business confidence has produced a recession that has driven tax receipts from the private sector, originally estimated at $13 billion this fiscal year, to $9 billion.

Metaphorically speaking, Chavez is riding on the political equivalent of a highwire with a security net that can disappear at any time. His own finance minister has told him that if oil prices fall below $25 a barrel he will be facing a severe fiscal crisis. At that price the country can expect roughly $27 billion from oil, but only $10 billion of that will be available to the government. The rest will go to reinvestment or debt service, or payments to the Macroeconomic Stabilization Fund, a facility that Chavez critics claim is hoarding foreign exchange to create a boomcito--that is, a mini-boom--on the eve of his third presidential campaign in 2006. In the current fiscal year the government anticipates $32 billion in government expenditures, but, as indicated above, tax revenue will fall $9 billion short. The budgetary gap will have to be closed through foreign borrowing. As of today oil prices are above $30 a barrel, so Chavez is safe for the moment. But no one can say how long that moment will last, or what Venezuelans will do to him when it finally comes to an end.

Historically Venezuela has been a good friend to the United States. It refused to join the Arab oil embargo a quarter-century ago, and it supported the United States and the allies by not raising oil prices in the run-up to the Gulf War. Many Venezuelans know Miami and New York as well as Caracas, most of the business and technical elite has been at least partially educated here, and Venezuela closely follows U.S. consumption habits and tastes.

For many years now, however, the country's intellectual Left has festered in frustration at the alignment of successive governments with Washington. After years of fruitless effort--first in the Communist Party, then in Cuban-supported guerrilla movements, and finally in a virtual monopoly of control over the public universities--the Left has finally found a vehicle to power in Hugo Chavez. Its principal representatives in the government are Foreign Minister Domingo Alberto Rangel, a television journalist and historian, and Luis Miquelena, the president of the new National Assembly.

So far, however, all the Left has to show for its participation in the new government is a change in foreign policy. To be sure, this has been drastic enough--as exemplified by Chavez's recent trip to Iraq and Iran, the OPEC summit recently held in Caracas, diplomatic and economic support for Castro's Cuba, and a wholly new discourse. (Chavez insists that "neoliberalism" is the cause of world poverty and demands that the G7 countries change their economic model.) Above all, it is manifest in a desire--almost a fetish, one might say--to confront the United States on matters large and small. He refused to accept U.S. military and technical assistance to rescue victims of a huge rainstorm and flood on his northern coast. He went out of his way to support Castro at the United Nations Commission on Human Rights and has even promised a special credit facility to allow Cuba to buy Venezuelan oil. When these gestures failed to engender the desired panic in Washington, he rushed off to see Saddam Hussein. (That, too, was unfortunately greeted with equanimity at the Department of State.) His foreign minister recently pounced upon the lease to a private U.S. company of a satellite tracking facility in neighboring Guyana--on territory that, by the way, Chavez insists belongs to Venezuela anyway--to demonstrate American threats to Venezuela's security. At the recent meeting of South American presidents in Brasilia, Chavez attempted without success to get his colleagues to condemn U.S. policy in Colombia as leading to "a new Vietnam." And so on.

The effect of this change has been, to say the least, minimal. Venezuela cannot afford to do without the U.S. market or U.S. sources of credit, and the United States would be ill-counseled, to say the least, to get involved in a spitting match with the government of a country that is its principal source of imported oil. Nor are there major geopolitical considerations--as there were with Cuba in the early days of the Castro government--capable of overriding purely commercial interests. As much as he might wish to be, Chavez is no threat to the United States. He may be a threat to his own people, or even to himself. If he fails, Venezuela will find itself it in a political and institutional void. Unfortunately, success--at least in the terms envisaged by Chavez and his associates--is a virtual impossibility. All who wish Venezuela well can only hope that when the moment of truth arrives Chavez or his successor will prove capable of shifting course--and that it will not be too late to do so.

Mark Falcoff is a resident scholar at AEI.