Chavez and Bo Xilai Gone: Death of a Political Model?

Venezuelan president Hugo Chavez’s death on March 5, 2013 came in the same week as the “Two Sessions” began in China, when China’s national legislature meets in Beijing. It was also almost exactly a year since the spectacular political demise of Bo Xilai, the former party boss of the Chongqing municipality in China.

Both Chavez and Bo are prototypical examples of the strongman leftist leader, who pandered to the masses at the expense of economic sustainability, and cultivated polarizing cults of personality around themselves. The policies adopted under Bo Xilai’s Chongqing Model and Chavez’s Bolivarian Revolution bear remarkable similarities in many respects and provoke some powerful questions as to whether these models are sustainable, repeatable, exportable, or desirable.

The True Believer

Chavez stormed to power on a wave of popular sentiment. He was a representative of the negro e indio (Black and Indian) masses, a challenge to the privileged classes that called themselves “Spanish.” He promised to confront the powerful interest groups of the Western oil companies and the wealthy elites. He quickly nationalized large tracts of private sector assets, including energy, farms, and banks. His attacks on the private sector collapsed Venezuela’s middle class from 21% down to 3%. And when the big Western oil companies ExxonMobile and ConocoPhillips refused to agree to his tax increases he took the majority stakes in their crude projects in the Orinoco. He also took firm control of the state petroleum company PDVSA. While these antics scared off foreign investment, he gained full control of Venezuela’s petroleum sector, which supplied 50% of government revenues and accounted for 90% of foreign currency inflows.

Chavez used this money to fund ambitious social welfare programs focused on the poor, bringing education, healthcare, and new housing to the slums. He also undertook a large number of construction projects funded through state investment corporations like Fonden, which accounted for one-third of all investment in Venezuela and had absorbed US$100 billion of oil revenues since 2005. This boom in public spending climaxed during the run-up to his presidential victory in October 2012 when he announced a plan to build 3 million homes by 2018. According to Bank of America-Merrill Lynch, government expenditure rose 30% in real terms as a result over the twelve months leading up to the election.

The Opportunist

Bo Xilai, in contrast, was probably less of a “true believer” than Chavez. Bo came from Chinese Communist Party aristocracy. His father, Bo Yibo, was one of the Eight Immortals who ruled China under Deng Xiaoping. During Bo Xilai’s rise to political prominence as party boss of Liaoning and as the commerce minister, he never showed any particular penchant for the extreme leftism for which he was later known.

Feng Li/Getty Images
Bo Xilai at the opening ceremony of last year’s Chinese People’s Political Consultative Conference in Beijing March 3, 2012. Bo has not been seen for nearly a year.

Bo’s leftward turn in Chongqing was likely born of political desperation. Given his need to aggressively campaign for a seat on the Politburo Standing Committee in 2012, or even to unseat Xi Jinping and Li Keqiang from their positions as heirs-in-waiting, Bo realized the political expediency in associating himself with the increasingly influential “New Left” theorists such as Wang Hui, Cui Zhiyuan, and Wang Shaoguang.

Bo, like Chavez, recreated an old class enemy, but rather than targeting the extractive oil companies, his focus was on the private sector entrepreneurs—the new “bourgeoisie.” A number of commentators believe his “dahei” campaign, targeting local mafia, was a way to clear out the local power base that might stand in his way to promotion. It also allowed for an incredible scale of corruption. According to the estimates of Li Zhuang, a lawyer persecuted under Bo Xilai, likely over RMB 100 billion in assets was confiscated from private sector entrepreneurs accused of being gang bosses during the crackdown, yet only RMB 930 million is registered in the state treasury.

Under Bo, rural peasants were reimbursed for their land at well below market rates and moved into large public housing estates of questionable quality. These huge tracts of land were loaded up into Chongqing’s local government financing vehicles (LGFVs). The government then exploited their control of the property market to ensure continued price increases. Large amounts of loans from state banks were taken out using the highly questionable projected increases in land values as collateral. The LGFVs then funded the rapid construction of infrastructure, public housing, and a number of prestige projects, such as Bo Xilai’s expensive gingko tree planting campaign and the Mao-era rallies of his “sing red” campaign.

Death of the Leftist Strongman Model?

Chavez’s regime achieved some stunning growth numbers on the back of record oil prices and confiscation of private sector assets—such tactics boost growth numbers in the short term, but over the long term the foreign capital and private sector were scared off and did not produce new assets that could be confiscated.

Corruption was also rampant during Chavez’s reign. The primary state development fund, Fonden, spent hundreds of millions of dollars on half-built or unfinished projects including a paper mill, an aluminum factory, and a fleet of unused buses, as well as an undisclosed annual US$10 million payment to the president’s office. Venezuela’s battle with an over-valued currency led Chavez to engage in a series of dramatic devaluations. This, coupled with huge amount of oil money being poured into the economy, had led to Venezuela’s inflation rate to be consistently above 20% and destroying the possibility of low-level entrepreneurship. The combination of inflation and high government spending with Venezuela’s strict currency and capital controls has also led to an expanding deficit of 9% in 2012. In an interesting parallel to Bo’s Chongqing, the deficit led the Venezuelan government to increasingly rely on loans from the China Development Bank (CDB), with the CDB lending them US$42.5 billion over five years. Venezuela’s debt is now ten times higher than it was a decade ago, at 50% of GDP. This still compares favorably to the E.U.’s average debt in 2012 at 82.5%, but it means imminent problems if this rate of debt growth were to continue.

Similarly, Chongqing’s stellar GDP growth over Bo Xilai’s term was heavily financed by fixed-asset investment, of which the majority can be attributed to the big eight LGFVs and their accumulated debt doubled to RMB 345 billion in four years. The Chongqing government was also running a budget deficit of 10% in 2011.

The dire straits of Chongqing’s finances were thrown into sharp focus when only a week after Bo Xilai’s dismissal, the local NDRC and finance bureau jointly issued an “urgent notice” for the city to “clean up” government investment projects. Then only three days after a new party boss was appointed in November 2012, he announced a new investigation into local government and LGFV debt.

The highly expensive construction and development projects under Bo and Chavez depended on short-term financing options, such as peak oil prices and a property bubble. Also, despite these convenient funding avenues their regimes still accumulated incredibly unsustainable growth of debt rates.

The populist policies of both Chavez and Bo garnered great public support, and for a short period of time showed success in a number of key development metrics. But the resurrection of the private sector as a class enemy under their regimes did serious damage to the institutions that create the structures for a sustainable path out of poverty beyond subsistence.