Why Andes Crisis Hurts Chávez

Latin American leaders are still struggling to resolve the crisis triggered when Colombian forces crossed into Ecuador and killed guerrilla leader Raúl Reyes earlier this month. The attack on the second in command of the Revolutionary Armed Forces (FARC) led to Venezuela and Ecuador deploying troops to their borders and--along with Nicaragua--severing diplomatic ties with Colombia. Tensions were further aggravated when Colombian officials announced that they'd found evidence in Reyes's computer suggesting close connections between the FARC and the governments in Caracas and Quito.

Ricardo Hausmann, director of Harvard's Center for International Development, is a former minister of planning for Venezuela who later served as chief economist of the Inter-American Development Bank. He spoke to Maria Cristina Caballero about the broader economic impact of the standoff; why the U.S. Congress should sign the Free Trade Agreement with Colombia and how the controversy could sink Venezuelan leader Hugo Chávez. Excerpts:

Caballero: Why do you think Chávez decided to move 10 battalions to the Venezuelan-Colombian border after Colombian troops killed Reyes in Ecuador?
I believe that the real reason was that some other Colombian guerrilla leaders, [perhaps] even Manuel Marulanda Velez, the top leader of the FARC, [whose nom de guerre is "Tirofijo," or "Sure Shot"] probably were in Venezuela. In that scenario, Chávez probably was afraid that Colombia could launch another military operation into Venezuela. To me, Chávez tried to deter the Colombian Army forces from doing that. The decision by the Colombian government to not send troops, not to respond to the provocation, was wise.

How do you evaluate Chávez's role in the crisis?
Chávez has gotten us used to not underestimating his capacity to astonish us. The information found within the laptop of Reyes, though, shows a level of Chávez's cooperation with the guerrillas that represents a violation of many human and divine laws. From my point of view, the documents found indicate the existence of a conspiracy to destabilize the Colombian government. In that regard, Chávez has been acting behind the back of the Venezuelans.

What surprised you the most?
It is unacceptable that Chávez decided to give moral recognition to a top leader of the FARC, treated him as a hero, and even asked for a minute of silence in his honor. Reyes was involved with many criminal activities. Terrorist activities. Chávez's attitude is outrageous.

The first country to cut diplomatic relations with Colombia was Venezuela, but soon afterward Ecuador and Nicaragua announced the same decision. Do you think that Chávez orchestrated this?
Chávez obviously asked the leaders of those countries, to which he has provided support, to cut relations with Colombia. Why would Nicaragua need to cut relations with Colombia because that country had a military operation in Ecuador? Nicaraguan President Daniel Ortega behaved as a puppet. To me, the evidence found in Reyes's computer regarding the support of the Ecuadorian government toward the FARC justifies the unilateral decision made by the Colombian government to attack a guerrilla camp there.

Colombia's main daily paper has reported that Interpol Colombia had been giving the Ecuadorian government details regarding the presence of Raul Reyes within its territory since 2007.
It is outrageous that having the information about Reyes the government of Ecuador didn't do anything. Documents found in Reyes' computer indicate that representatives from the Ecuadorean government even had meetings with Reyes to formalize relationships. The alleged messages for Chávez from leaders of the FARC and vice versa also need to be investigated. To me all this scandal will have a political cost for Chávez. It has weakened him inside the Army forces, among the people who live in the regions close to the border with Colombia who have already been punished.

Are you referring to reports that members of the FARC have kidnapped Venezuelans?
Partly. They have also been complaining about the shortage of food and other basic goods. The theory of the Venezuelan government is that there is scarcity of products in Venezuela because they are being sent to Colombia.

Colombian-Venezuelan trade is worth an estimated $6 billion a year. There are also estimates that Colombian exports to Venezuela grew about 90 percent between 2006 and 2007. Why this unusual growth?
Trade between Colombia and Venezuela has grown a lot because as the price of the petroleum has gone up, Venezuela has been spending more. It has also partly grown because Venezuela has a crazy exchange-rate system: there is an official exchange rate for the U.S. dollar at 2.15 Bolivars and a black market rate that has been hovering over 5 Bolivars. [On Jan. 1, Venezuela dropped three zeroes from its currency and renamed it the Bolivar Fuerte.] Hence the black-market dollar costs more than twice the official one. If you have access to the official dollar, most things in Venezuela are much more expensive than in Colombia and it is cheaper to import. But if things are calculated at the black-market rate, many things in Venezuela are cheaper than in Colombia, and it makes sense to export them to our neighbor. This creates distortions in trade, since you can make money by round-tripping: If you can buy a good in Colombia by purchasing the dollars at the official exchange rate, you can make money by selling that good back in Colombia and converting the dollars at the black-market rate. In addition, there are many products whose prices are controlled in Venezuela: milk, gasoline, poultry, eggs, etc. The producers prefer to sell them in Colombia. All this creates unnatural trade as a reflection of the distortions in the Venezuelan economy.

What are the consequences of exposing Venezuela and Ecuador's apparent cooperation with the FARC? Will this unite Latin America and strengthen antiterrorism measures?
To me the reaction from some Latin American presidents was not strong enough. For example, Chile's Michele Bachelet condemned the military attack of Colombia in Ecuador without putting it in context and referring to a terrorist group such as the FARC illegally crossing borders. To me this is shameful. The Brazilian and Argentine governments of Lula and Kirchner have not taken a strong moral stand either. I am concerned that Latin America doesn't have the capacity to confront and control terrorism.

What about the FARC saying that it wants to continue with the humanitarian swap of prisoners with the Colombian government?
It may be just a strategy from the guerrillas to advance their political agenda. [French President Nicolas] Sarkozy has been manipulated by the FARC. His intervention has not been positive. Indeed, it diminishes the probabilities that the FARC will release [Colombian-French kidnap victim, and former presidential candidate] Ingrid Betancourt. For them, Betancourt has more value as a prisoner, because they have the attention of President Sarkozy.

Will Chávez lose legitimacy and political support as a consequence of this crisis?
Chávez has been progressively losing legitimacy. He is already very nervous about the governors' and mayors' elections in November. Many Venezuelans are not interested in supporting the FARC while they face serious problems of insecurity, unemployment, shortage of goods and a growing inflation. The collapse of Chávez's social programs has also been dramatic. They were designed more as public-relations programs that as real policies oriented to solve problems. Chávez will probably lose big in the November elections. What the Venezuelan opposition fears is that Chávez wants to stop those elections because their result won't be convenient for him. Now Chávez has [the backing of] 22 governors [out of a total of 24] and has the mayors of the main cities.

What do you expect to happen in the election?
If the results from the November elections are similar to those of the referendum, Chávez won't have the mayor of Caracas, or the governor of Miranda. Chávez would lose the state of Carabobo, the city of Valencia. He would also lose the state of Lara or the city of Barquisimeto. He would also lose the state of Zulia and the city of Puerto La Cruz. He would lose in Nueva Esparta. The political map of Venezuela would be transformed.

Have Chávez's policies hurt the Venezuelan economy?
He has seriously scared the foreign investors. No one wants to invest in a country where the president has already nationalized many companies and where he announced this past week that he was planning to nationalize Colombian companies.

Why have Chávez's economic and social policies failed?
Because they are a mix of failed macroeconomic populism--based on a mix of demand policies coupled with price and exchange controls--with severe limits to property rights and entrepreneurial initiative, which come from the Marxist traditions of communist countries. The result is a phenomenal long-run stagnation such as in Cuba, where income per capita today is lower than in 1959.

Chávez, though, has expressed his admiration toward the Cuban policies.
What he likes about the Cuban model is that it has been successful in guaranteeing that the leader remains in power.

Some commentators say that Chávez's aggression toward Colombia's [Alvaro] Uribe is a smokescreen to divert attention from Venezuela's internal problems.
I believe that Chávez would prefer a Colombia governed by Tirofijo. To me, Chávez wants to destabilize Colombia and promote his Bolivarian revolution. I think he at least wants to help the FARC to accumulate more power.

Can Chávez advance that agenda through his oil policy?
Some Latin American presidents have been selling their soul for a plate of lentils. A press agency calculated that in a 12-month period last year, Chávez formally announced gifts that exceed $9 billion a year. This list is probably incomplete as there is covert aid and also implicit aid in the many barter deals that the government has been signing with many countries: oil for doctors, oil for food, etc.

President Bush said this week that U.S. congressional approval of the Free Trade Agreement with Colombia has become a matter of national security. Do you agree?
Colombia is a front-line state in the war against drugs and terrorism and is struggling against a new Latin American communism. It is not understandable that a treaty already negotiated between the U.S. and Colombia doesn't receive the approval from the U.S. Congress. To me this is an insult to the most important U.S. regional ally.

Many, though, question the results of the free-trade agreements, saying that they've harmed the U.S. economy.
That is false. The economic crisis is derived from an irresponsible macroeconomic policy. Commerce, on the contrary, has helped the American economy. There has been a significant increase in U.S. exports. There would be much more unemployment if the free-trade agreements would not exist.

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