The Bear’s Lair: Kleptocracy beats Communism

Recent reports suggest that the Venezuelan economy has enjoyed a modest uptick after its collapse due to its following Presidents Hugo Chavez and Nicolas Maduro’s Communist economic policies from 1998-2018. Russia and China also have benefited, not from a move to democracy, but from a move from Communism to Kleptocracy. The lesson is clear: a regime that allows some elements of the free market to operate and then steals the result is preferable to even an honest Communism.

Maduro has clearly realized that his previous ideologically Communist policies did not work, and that he was frittering away the resources that Venezuela naturally enjoys through its bountiful oil deposits, both conventional and tar sands. With President Trump no longer in the White House, the opposition leader Juan Guaido is also no longer a significant threat (I would argue that the United States had been mistaken in backing such a feeble socialist figure in the first place). Hence Maduro has “dollarized” the economy and is attempting to lure tourists by renovating some of the country’s luxury hotels. Of course, ordinary Venezuelans still get paid in bolivars that are subject to hyperinflation, but at least the shops now have a certain amount of goods in them and starvation does not loom, except for the poorest.

For ordinary Venezuelans, if Maduro continues his opening to kleptocracy, life should improve somewhat. There will no longer be an acute shortage of foreign currency, as competent managers will ensure that the state oil company PdVSA works at something close to its optimum output, and foreign investment will be allowed to modernize it where necessary. Food will be available in the stores, albeit at prices inflated by the Maduro administration’s corruption. Foreign exchange will be available for imports, albeit with some being skimmed off. Venezuela is a large enough and rich enough country that Maduro and his cronies can skim off billions of dollars and still leave the rest of the populace enough for survival. Life will not be pleasant for ordinary Venezuelans, and Maduro’s police state will ensure an almost total lack of freedom, but it will no longer be totally un-survivable.

Probably the clearest long-term examples of an honest Communism (or as honest as is possible in the circumstances) are Stalin’s Soviet Union and Mao Ze-dong’s China. Neither Stalin nor Mao got rich in the way that Vladimir Putin and his cronies have, or the kleptocratic Chinese billionaires of recent years. Yet their honesty did very little good for their countries; tens of millions of people were killed in both experiments and the populace went in fear of its lives. Furthermore, living standards in both countries were abysmal, with millions of people starving to death through the sheer ineptitude of the economic system.

Now consider the regimes to which both Communist systems have given way. In Russia, Vladimir Putin is thoroughly corrupt; indeed, he and his cronies run one of the purest kleptocracies on earth. Yet if you are not an opposition leader or an oligarch who has fallen out with the regime, life is very much better than under the Communists. The country runs a 13% flat tax, so for small businessmen taxes are lower and tax compliance much easier than in the United States, with its complex and multi-rated state and Federal tax systems. No doubt small businessmen also have payoffs to make to local service providers and mafias, but there has never been a time in Russian history when this was not the case.

Truly Russians may wish that their government was less corrupt and brutal and that the oligarchs around President Putin did not seize so much of the state’s produce and sequester it away in foreign bank accounts. Yet if they look Westwards, they see countries with very much higher tax rates, and governments less corrupt but also far less effective and prone to seize their citizens assets for regulatory or, worse still, environmental reasons.

In China also, life is still hard, but it is much less hard than under Mao. There is very little freedom, and for China’s ethnic minorities life may indeed be no better than it was under Maoist Communism. But to some extent, our greater awareness of the hardships of the Uighur and Tibetan communities may simply reflect the greater openness of today’s China, or rather, the greater penetration of it by Western businessmen and other travelers.

For ordinary Chinese, at least of the Han people who form the great majority of that society, life is somewhere between moderately better than under Mao and unimaginably better. The cruelty of the regime is only a little less than under Mao, and the openness to which it appeared to be moving in the 1980s has reversed but on the other hand its corruption is somewhat less than that of Putin’s Russia, and certainly the contrast between the people’s living standards 50 years ago and their living standards today is more extreme. As in Russia, the ordinary citizen can reflect that, while the regime may seize more of the country’s output for itself than in Western societies, it wastes far less of that output on “climate change” and other such fatuous initiatives.

If Venezuelans are very lucky, their regime may evolve into an approximate copy of those in Russia and China, in which case the natural wealth of its economy is such that its people will enjoy Russian or Chinese living standards, albeit with Russian or Chinese lack of freedom. Their life will not be as pleasant as it was before 1998, because the pre-1998 government, almost equally kleptocratic, was nominally a democracy. But that is what you get when you were foolish enough in 1998 to vote for a Communist strongman in the form of Hugo Chavez.

The Communist economic system is uniquely inefficient, and systems that approach it are unnecessarily impoverishing their people in the long run. So effective are market mechanisms in allocating resources optimally, that even a system that allocates resources through the market, but then allows the rulers to imprison their subjects and steal their wealth is better than an honest Communism. Of course, if the kleptocrat is Mobuto Sese Seko, former ruler of Democratic Republic of Congo, he can make it impossible to operate. But any ruler more intelligent than Mobuto knows that his own wealth is maximized if he allows the free-market system to operate, merely skimming a substantial portion off the top for himself and his cronies. That is why Vladimir Putin has personal wealth beyond Stalin’s dreams or even Mobuto’s.

It also follows that Western systems in which the free market is undermined move rapidly away from the optimum and in the long run impoverish their people, even if they stop short of Communism. Thus Britain in 1950-79 did not share the “economic miracle” of its Continental European neighbors, even though it began the postwar period richer. It is also why the Gosplan approach to monetary policy, as followed by the world’s central banks since 2008, in which interest rates are set artificially far from their natural levels, is impoverishing the planet at a rapid rate, causing productivity to decline, even where other elements in Western economies remain free.

It is also why the leftist approach to regulation, environmental or otherwise, is so appallingly damaging to productivity. Each Keystone Pipeline that is prohibited by regulators adds costs to the economy far in excess of the direct economic effect of its cancellation. Other equivalent projects are abandoned, as their sponsors assess the appalling cost of possible arguments with the regulators that tie up the initial investment for decades and prevent even a project that is “fully permitted” from being completed. It is much cheaper and more efficient to cut Vladimir Putin and his cronies in on the profits of a project, than it is to deal with a politicized environmental bureaucracy.

The ideal society to live in is one with a small and honest government, political freedom and a Gold Standard. Kleptocratic and tyrannical regimes such as Russia, China and Venezuela are very unpleasant compromises from that ideal, only marginally better than fully Communist states. However, the funny-money, socialist nominal democracies that are in fact controlled by mad politicized bureaucrats are much closer to the kleptocracies than they are to places where you would want to live.

(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)