The Tragically Forgotten FIEM


People don’t like to hear it. It’s technical, impersonal, dull. It doesn’t serve up an identifiable bad guy you can blame. But economists who’ve looked at the question seriously agree: the reason the Venezuelan economy has done so badly since the 70s has everything to do with the instability of the world oil market.

With our exports massively concentrated in oil, swings in world oil prices wreak havoc with the economy. Worse still, a governing class that chronically overspent when prices were high only to find itself hanging from the brush when prices fell magnified the destabilizing effect of the cycle.

I remember listening enthralled to my Tio Pepe (that’s Jose Toro Hardy to you) tell me this story when I was just 15 years old. (OK, I was a weird teenager – you’d probably already guessed as much.) Back then, Tio Pepe had a dream. “If only we could put in place some sort of mechanism to even out oil revenues between high-oil years and low-oil years, we could smooth out the swings and turn oil revenues from a liability to an asset for the country.”

In 1998, Tio Pepe, along with Luis Giusti, persuaded the Caldera administration to put the dream into practice. They called it the Investment Fund for Macroeconomic Stabilization – FIEM, after its Spanish acronym.

The rule was disarmingly simple: first, compute the average price of the Venezuelan oil export basket over the last five years. When current prices are above that five year moving average, save the difference. When prices are below the average, make up the shortfall from your savings.

For example, if the average selling price of Venezuelan oil over the last five years is $20/barrel but the price today is $25/barrel, you can spend $20 but you have to save the other $5 in FIEM. And if the average is $20 but the price today is only $17, you’re allowed to spend $3 from your FIEM savings.

That way, when oil prices head south public spending doesn’t have to contract so brutally. And when oil prices go up, you don’t go on a destructive “Gran Venezuela” style spending binge.

FIEM might have become the most significant piece of economic legislation in Venezuela since Medina Angarita’s Hydrocarbons Law…except, of course, Chavez won the election later that year. By late 1999, the government was already fiddling with FIEM, making the save and spend rules much more complicated. By 2000, the government was violating the new rules they themselves had set. In 2002 we had the FIEM scandalet, when Chavez publicly admitted to misappropriating $1.4 billion earmarked for FIEM and, predictably, faced no consequences.

By now, hardly anyone talks about FIEM anymore…which is a crying shame, because oil prices are sky-high again, and the government is spending it all as fast as it comes in…again.

With the Venezuelan export basket hovering at an astronomical $35-$50/barrel throughout this year, FIEM has hardly budged. Right now, the balance in FIEM is at $728 million – basically unchanged from the last couple of years. Once again, we’re not saving when times are good…which guarantees yet another brutal series of cuts in public spending when (not “if”) oil prices drop. Actually, given Chavez’s spooky radicalism, foreign creditors may be especially tight-fisted with Venezuela when oil prices drop – which could make the retrenchment particularly harsh.

But nobody talks about this anymore. It’s sad, really…

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