12 Mar 1979 - 02 Feb 1984 - Luis Herrera Campins

Between the vast increase in oil revenues before 1976 and the immense foreign debt incurred by the government, the Pérez administration spent more money (in absolute terms) in 5 years than had all other governments during the previous 143 years combined. Perhaps inevitably, a lot of money was squandered in mismanagement and corruption. Despite expansive overseas programs to train managers of the new public entities, the lack of competent personnel to execute the government's many sophisticated endeavors became painfully evident. The delays and myriad cost overruns that ensued formed the backdrop of frequent malfeasance by public officials. Overpayment of contractors, with kickbacks to the contracting officers, was perhaps the most rampant form of graft. Featherbedding and the padding of payrolls with nonworking or nonexistent employees also became common practices.

By the time of the December 1978 elections, these issues had brought serious doubts to the voters as to the competence and the probity of the AD government. AD's candidate Luis Piñerua Ordaz lost to the Christian Democratic (COPEI) Luis Herrera Campins by a little over 3 percentage points. The loss had less to do with the program presented by either candidate than with the public's rejection of the free-spending, populist style of President Pérez. Otherwise, the 1978 campaign was most notable for the vast sums spent by the two major candidates on North American media consultants. More than any previous electoral contest, this campaign was conducted on television, increasing the relative importance of image over substance. The two major parties captured almost 90 percent of the total vote; a divided left shared 8.5 percent of the total among four candidates. In the subsequent June 1979 municipal council elections, however, the MAS, MEP, PCV, and MIR presented a united slate that captured a more impressive 18.5 percent of the vote.

Announcing during his March 1979 inaugural address that Venezuela could not continue as a "nation that consumes rivers of whiskey and oil," President Herrera promised to assume an austere posture toward government fiscal concerns. Public spending, including consumer subsidies, was ordered cut, and interest rates were increased to encourage savings. When the Iranian Revolution and the outbreak of the Iran-Iraq War caused oil prices to jump from US$17 per barrel in 1979 to US$28 in 1980, however, Herrera abandoned his austerity measures before they had had a chance to yield results.

Early on in his term of office, President Herrera also pledged to pursue policies aimed at reviving the moribund private sector. The first of these measures, however, the elimination of price controls, only contributed further to rising inflation. As with his commitment to austerity, the president failed to persist in his pledge to business; yielding to political pressures from the AD-dominated Confederation of Venezuelan Workers (Confederación de Trabajadores de Venezuela--CTV), in October 1979 the administration approved sizable wage increases. Meanwhile, the number of those employed by state-owned enterprises and autonomic agencies, which Herrera had promised to streamline and make more efficient, proliferated instead. The administration initiated, among other projects, a huge coal and steel complex in the state of Zulia, a new natural gas plant with 1,000 kilometers of pipeline, a new railroad from Caracas to the coast, and a bridge linking the Caribbean Isla de Margarita with the mainland, running in the process a deficit of some US$8 billion between 1979 and 1982. A retired Venezuelan diplomat, writing in The Miami Herald in 1983, noted that, "There must be examples of worse fiscal management than that of Venezuela in the last eight or nine years, but I am not aware of them."

The lack of confidence in President Herrera's economic management by the local business community contributed significantly to a precipitous decline in the growth of real gross domestic product ( GDP--see Glossary) from an annual average of 6.1 percent between 1974 and 1978 to a sickly -1.2 percent between 1979 and 1983. Unemployment hovered around 20 percent throughout the early 1980s.

An unexpected softening of oil prices during late 1981 triggered further fiscal problems. World demand for oil--on which the Venezuelan government depended for some two-thirds of its revenues--continued to decline as the market became glutted with oil from newly exploited deposits in Mexico and the North Sea. The resumption of large-scale independent borrowing by the decentralized public administration came amidst publicly aired disagreements among various officials as to the magnitude of the foreign debt. Not until 1983 did outside analysts agree on an approximate figure of US$32 billion.

Compounding growing balance of payments difficulties, rumors of an impending monetary devaluation precipitated a wave of private capital flight overseas in early 1983. While the Central Bank of Venezuela (Banco Central de Venezuela--BCV) president argued with the finance and planning ministers over what measures to adopt to meet the growing crisis, some US$2 billion left the country during January and February alone. At the end of February, the government at last announced a system of foreign exchange controls and a complicated three-tier exchange system. Under this system, the public sector retained the existing rate of US$1=B4.3, selling bolívars (for value of the bolívar--see Glossary) to the private sector at a higher rate of US$1=B6.0 or more, while a free-floating rate was established for tourism, "nonessential" imports (luxury items), and other purposes. At the same time, price controls were reinstated to control inflation. The annual increase in consumer prices, which had hit a peak of 21.6 percent in 1980, fell to 6.3 percent for 1983.

Seeking a way out of the dismal economic situation, the Herrera administration decided to transfer a greater share of ever-growing government expenses to PDVSA. The Central Bank of Venezuela appropriated some US$4.5 billion of PDVSA's reserves to pay the foreign debt, thereby throwing the petroleum corporation's autonomy to the wind. Partisan politics began to play a larger role in the selection of members of PDVSA's board of directors. In September 1983, Ravard was forced out as head of PDVSA and replaced by Humberto Calderón Berti, who as minister of energy had spearheaded the effort to bind the oil giant closer to the central government. The rapid politicization of PDVSA drew criticism both at home and abroad and cost the government credibility as well as its good credit rating with foreign banks. The unceremonious firing of the highly respected Ravard was condemned by both candidates for the December presidential election and was reversed by the new administration the following February.