Leadership on the Gas Subsidy

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Here’s a fun question to ponder: how much do Gasoline Subsidies really cost Venezuela?

Everybody knows the answer, right? With gas fetching just a few US cents a gallon, it’s a no-brainer: “a lot!”

Sure, but is that “a lot” like $6 billion a year, or “a lot” like $26 billion?

A quick Google search turns up estimates that span that range. Which is pretty crazy, really…

Let’s take Simon Romero’s Low but not Crazy-Low $9 billion estimate in the New York Times. If that’s about the right figure, it’s hard to convey just how mind-blowingly, absolutely head-spinningly crazy and impossible to justify it is.

Let’s try to put that number in perspective: Brazil has become a world leader in poverty alleviation schemes through Bolsa Familia, which hands a mere $13 per child per month to the mothers of the poorest quarter of the population.

With its much smaller population, Venezuela could afford a program with similar coverage and similar payments for about $430 million a year. (The math is simple: Venezuela has around 11 million under-18s. A quarter of that is 2.75 million. Multiply that by 13 dollars a month, then again by 12 months in the year to get to $430 mill.)

Killer Fact: $430,000,000 is just 5% of the NYT-estimated cost of the gas subsidy! One twentieth!

With the money we now waste on this fat giveaway to the middle class, we could afford Conditional Cash Transfers worth $135 a month for fully half of Venezuela’s children. That’s about Bs.580 per kid – meaning a poor mom with three kids would stand to make over Bs.1740 a month just by keeping them in school and making sure they get their health check-ups on time. Of course, until we can pin down the real cost of the gas subsidy, these numbers are speculative.

I know what you’re thinking: any proposal to do away with gas-subsidies remains politically toxic in Venezuela. That’s why Chávez still hasn’t dared to touch them.

But leadership is about making people aware of the choices they face.

A gas-subsidy-financed Bolsa Familia could eradicate child poverty in Venezuela within a couple of years. It will take a leader to make that choice clear to people: to establish the trade-off in people’s minds. Because once that linkage is made, once you show people with deeds, not words, that what they get in return for higher gas prices is a guarantee that no single child will ever grow up in extreme poverty again, you “fix the moral economy” of the gas subsidy, making its elimination politically viable on a lasting basis.

[Hat tip: Moraimag.]

Addendum: How far out of whack are Venezuela’s gas prices, in international comparison? This far out of whack:

You’d have to multiply our gas prices by a factor eighteen just to bring it into line with the second most heavily subsidized gas market in the hemisphere!

Hat tip: an accompanying post from Setty. One nifty idea in his post – on Earth Day in Brunei, people are forced to pay international prices, just to see how out of whack their regular prices are.

1 COMMENT

    • Right you are. The link is fixed.

      I still I think a Negative Income Tax is the more radical, more elegant version of this kind of idea. Unfortunately, the administrative obstacles to a Negative Income Tax are so daunting, I don’t think you could get it to work.

      The thing about Conditional Cash Transfer is that it’s proven to be administrable under real world Latin American conditions. No somos suizos, and with CCF, we don’t have to be.

  1. Some more strange legal financial transfers in the Socialist Venezuela:

    1- Subside to studies in USA/Europe: 1000 $/month + college fees + health insurance at 2,6 Bs (2010), now at 4,30 Bs. Beneficiaries: Top 10% in the income distribution, people from University (teachers, students), government. Not nationality limitations, only residency: some French or American parents send their children directly from Colegio Americano or Colegio Francia to NY or Paris, contributing to spread Venezuelan values worldwide.

    2- Mortgage at 12%-14% interest rate (inflation at 30%). Beneficiaries: People able to pay 30% as initial outlay (not the poorest). Interest rates depends on revenues. 12% rate applies for a family revenue around Bs. 15.000 at month (Minimum wage at Bs. 1200). If you get this kind of credit, you can forgot your mortgages repayments after 3 o 4 years, in real terms you are paying almost nothing. It contributes, of course, to our real state bubble.

    3- Social Security contributions: 4% of salary for employee (10% employer) but limited to 5 minimum wages. You pay 4% as secretary, but almost nothing as CEO.

    4- Revenue taxes for foreign revenues: if you are lucky enough to be payed partially in dollars or euros (quite commun in high management in Caracas, and completely legal), you have to declare those revenues in BsF at official rate. So, you official revenues are around 50% of your real revenues, and your revenues taxes go down very sharply.

    • Another subsidy of the rich is (or, at least, was), the ‘Venezuela mobile’ program which subsidized the cost of new cars. Really great to subsidize cars for the small proportion of middle and upper-class people who have the money to buy them in the first place.

      For that matter, just about everything related to cars and driving disproportionately subsidizes the wealthy, just because they’re the ones driving mostly: for example: law enforcement, emergency services, road building and maintenance, etc etc.

      Mike

  2. Surely it could help with the education and nutrition of children…

    But poverty? Poverty is not alleviated, much less ended by giving out cash, or by spending.

    Poverty ends when the poor (parents and young adults) have a job or business, have savings and salaries worth something year to year, and are able and willing to manage their financial future; maybe rent or buy a house, mind their own retirement, provide for their children.

    That said, the subsidy is pure madness, however you decide to spend the money saved. Then, you have to convince poorer people also that their bus fare will go up three to fivefold. Of course, 2 BsF. or so is peanuts to me and you. Except for the ludicrously subsidized and rapidly decaying Metro (subway) systems there’s no real public transport system in most of Venezuela either.

    • Lobo, the point of this type of programs is that it recognizes that poverty is a cycle that perpetuate itself unless you change something and the things that studies (i.e. UCAB Proyecto Pobreza) have found have the most impact and are measurable, are the number of schooling years and nutrition. That generation will then have a chance of finding jobs and doing all the things you mention. It does not work the other way around, you first have to be healthy and have some education to be able to find a job that pays more than mendicancy.

    • Moraimag,

      With all due respect to Loboferoz, I think it is hard to talk to him and to a lot of people who are leading the oppo parties (he isn’t but he has a similar background) because they see it too much from a perspective only: that of the children who got education (in the broadest sense) for granted: nice schools,
      travels abroad, etc, etc.

      May I ask: did you go to a public school or grew up some time in a humble area? I went to public schools and they were the best my parents could find in my state and still there were issues. I then went to a private school for the last two years and saw the differences.
      My parents were a teacher and a professor and I could compare a bit the systems through their stories and some visits with them. My mom had to do some kind of suplencia once and I went with her to another school for some time, also public, and I was shocked to see how low the level was (and I thought mine had a pretty low level).
      Now my sister has a daughter and she sends her to a private school, which is a big sacrifice. A cousin of mine wanted to send her child to a escuela de monjas but they are not accepting children whose parents did not go to school there.
      80% of pupils in Venezuela go to public schools. I have talked to simple workers and cleaning ladies in Venezuela about what they got at school, as long as they could follow classes. It is amazing what differences there were.

      Loboferoz has no idea, I dare say, of the huge advantage one gets when one has a good basic education at home and at pre-university level. And he may say: let parents choose. Well, we can try that to some extent, and yet things are not that simple. Many, many parents have no clue because they have no reference. And you cannot leave everything to parents because unfortunately a lot of them are drunkards or single mothers or the like.

      I saw the Venezuelan news on 2 January. There were stories about the first valenciano, caraqueño, mirandino, etc. Mothers were mostly underage and looked as if they had only a couple of years of schooling.
      Free market won’t solve that. And we need to solve that, else Venezuela goes to pot.

    • I said it could help. And for the record, I am NOT against using government money in infrastructure, education and health care, if no one else will tool up to do it. Those are investments however you look at them.

      No child should be subject to malnutrition. But assisting with nutrition is just that, emergency assistance. Like that received by people in places of the world most persons would run from because of war and oppression. It’s vital that food be produced locally, and that it be affordable. A sane economy and a peaceful environment is a must there.

      Let parents choose is let them choose. Public schooling and many others if available. “Others” that will not be available or affordable inside a national economy that is insane and inflationary, or not peaceful.

      Along with books and the rest. Yes, assistance with school books is good, if you are poor. Better yet, however, is being generally able to afford them, or otherwise obtain them (used sales, public and private libraries…). Which cannot be in an insane economy like ours.

      Without the conditions for ending poverty, even if you manage to educate, you just have a vulnerable person with a lot (or a little of) of useless “knowledge” gained in school, and a real world situation that does NOT fit what she was taught.

      Maybe in the best of worlds education would teach persons to stand up against abuses, to disdain condescension and to eschew begging and alms. Maybe. In the real world, starving and needy people are less likely to feel proud. In the real world, those who can fend for themselves stand a better chance at being free. And prosperous.

      Kepler: Economic stability and freedom is WAY more important to the poor than to the rich. The rich have enough money to jump above barriers of entry. They have connections, and can hire experts, legal or financial. They can find ways around taxation, exchange controls and the most byzantine regulations, or even use them to advantage, legally!. They have businesses and investments, not just jobs and savings, and the jobs they have are international in nature. They can find places with low taxation in the world. They can emigrate and gain citizenship in other countries with infinitely more ease. Not so, not so, not so (idem, twelve or thirteen times) the poor. Being poor costs a lot. In taxes, “progressive” and “regressive”. In prices paid for food and other basic things. In interest not accrued. In inflation and loss of opportunity. Governments only aggravate these situations with heavy handed policies and fiscal irresponsibility.

      Bottom line, invest and spend government money on worthy ends like education, safety, infrastructure and poverty relief. Don’t make the government a fraudster, a delinquent and insolvent banker, and a mafia in the process. The last part does NOT help the poor and negates whatever gain you might have had spending government money.

  3. The numbers on that chart are seriously out of date and way too low. Gasoline in the US is now $3 per gallon or about 80 cents per liter.

    For the lost revenue I get the simple calculation of $80 per barrel x 600,000 barrels per day internal consumption x 365 = $17.5 billion dollars. I assumed that Venezuela gets zero revenue for internally consumed oil which is close to being true and in any event is offset by my 600,000 number which is probably low. Seems like a straight forward calculation to me.

    • Yup, the chart is from 2008. As to the calculation, it’s not that simple: a gallon of gas costs more than a gallon of crude oil. It’s not clear exactly what internal consumption is. And – most importantly – it’s not obvious whether the “cost” of the subsidy is the opportunity cost or the production-and-distribution cost. You could argue it either way.

      That’s where the key gap between the estimates in the $5-10 billion range and estimates in the $17-26 billion range lies: estimates in the lower range are production-and-distribution cost estimates, those in the upper range refer to opportunity costs.

      I do take Miguel’s poing that it would be politically *very* hard to get Venezuelans to pay international prices, so a production-and-distribution cost estimate seems more realistic.

  4. In reference to Luis Romero’s article about a week ago in New York Times and where he spoke about the country club I wrote a letter to the editor that said:

    “Why do you not write about the 50 dollar check Hugo Chavez effectively hands over to the golfers each time they tank their cars, and about what all that free gas does to the traffic and the environment in Caracas and which makes anyone fret about the prospects of seeing buildings taking over one of its few remaining lungs?”

    This issue with gasoline prices has been one of my half-dozen of “obsessions” and I have even posted two youtubes about it some years ago. http://bit.ly/hHWIg3 and http://bit.ly/13mFJ1

    Besides, over the years it has been the most useful argument I have found in order to explain to European leftists why they have absolutely nothing in common with a Bolivarian movement.
    http://perkurowski.blogspot.com/2006/07/so-you-might-all-understand-chavez.html
    http://ourpiedaterre.blogspot.com/2007/05/21st-century-asocialism.html

  5. I’ve always had this idea about each car owner getting a card that entitles them to a limited amount of subsized gas per month, say 150 – 200 liters a month? After that you need to pay full price.

    It’s Venezuela, so people will, of course, find a way to play around it, but at least the introduction of the system paves the way for a future reduction in gas subsidies.

    • I like Maracaiburgh’s idea. It’s not just *that* you raise gas prices, it’s *how* you raise gas prices. You have to do it in a way that doesn’t break the moral economy, that people accept as fair. Per’s solution is more correct, economically speaking, but economic rationality is not the only problem here. Maracaiburgh’s could be a way of both making the subsidy more visible and giving yourself a mechanism to phase it out gradually.

      More than anything, we need more innovative policy thinking. Count me in.

  6. Per Kurowskib, i just wanna say that at the country club we use no golf carts, we walk, gas subsidy is mostly perverse distribution, the only way it subsidizes the poor is through reducing transport costs and food prices, a card for private consumption of gasoline would be even worst kind of distribution because opportunity cost of “el pasaje” and food will have huge price shocks while making a subsidy on the car owners. I don’t think that Venezuelans will desist on there believed given right for free oil, but even if they do, I think it ought to be done partially with increasing benefits for everyone in general. For example if we increase the price of gasoline to 0.2bsf then 0.3bsf, 0.4bsf, 0.5bsf, and so on until international prices, people don’t think they are given up much and then receiving a ccf bigger and bigger as the price of gasoline goes up and up, making Venezuela more equal and efficient.

    • Of course… and I was not referring to golf-carts but to the golfers cars.
      And I am glad you find gas subsidies a perverse subsidy. Having written at least 100 articles in the Universal about it and having received tons of hate mail for it, I am perfectly aware that it is an uphill battle… but winnable.

  7. I just wanna say to Mr. Per Kurowski
    Imagine what this gov will do with the extra bucks?
    Social programs? for venezuelans?
    Sure, that will change eventually.
    I also think, that, if you wrote over 100 articles on this subject, it’s time to move on

    • If the gasoline was correctly priced in Venezuela then perhaps the people would understand the magnitude of the oil income that is being mismanaged by the government… but as gasoline is free few really get it.

      Have the current Indian chief try to charge real gasoline prices and then go on behaving the way he does… the fact is that “The current Indian chief knows himself to be so illegitimate so as not to be able to increase gasoline prices”… !Atrévete!

      Why should I move on just because I have written 100 letters? Do you move on to another religion when you have prayed the same prayer a certain number of times?

  8. Political feasability is a big issue. But it is possible to by-pass this.

    For instance, we can let gas prices unchanged, but create in parallel a new tax over cars ownership, calculated over the estimated average consumption. Only to have an estimated value, 60 ltr x 52 weeks = 3240 liters per year, at 0,50 US$ x 4,30, around Bs. 7000/year

    Bs 7000 for the right to use your car (gas free) is no so expensive, and this tax could be introduced step by step. We can introduce different rates (efficient cars, luxury cars, small cars, depends on gas tank size, farmers, etc.) and let that free for public transportation, ambulances, taxis or trucks.

    It is more and less the same system used in Switzerland in highways. Instead to pay tolls, people pay a tax for the year as “entry ticket”.

    Concerning smuggling, if foreigner cars have to pay this taxe for entry to the country (one year), incentives will be highly reduced.

    In the other hand, a lot of families could think that only one car is enough for them, and you can expect price reduction in used cars/new cars.

    There is around 4 million cars in Venezuela (http://www.canidra.org/index.php?p=parque%20autom%20veneaz%202007.html).

    This taxe could generate ~ 6 billion USD/year, and if we set, by law, that this money could be used only for public transportation projects: trains, subways, etc. in 10-15 years we can change completely our transport network/urbanism.

    • Nonsense! The gasoline price has been increased in Venezuela many times before without anything happening. You just need political credibility to do that… which the current Indian chief lacks.

  9. the country will burn in hell first before ANYONE dares to mess with gas prices. that drug is wayyyyy to powerful to the masses and no one has the power to get rid of those subsidies not even CH!

    for venezuelans it is a god given right to have cheap gas, just ask people on the street, they would kill anyone who tries to mess with that. in a way venezuelans are better off that the rest of the world because they are able to have cheap gas, think about it.

    • It’s all about trade-offs.

      If the question is: “Would you rather have cheap gas or expensive gas?” the answer is obvious.

      If the question is: “Would you rather have cheap gas or a Bs.580 payment each month for every child you send to school?” la vaina cambia…

    • “venezuelans are better off that the rest of the world because they are able to have cheap gas, think about it.”

      Boy you sure are easy to keep content!

      There is no way I can think of being better off than the rest of the world because of having cheap gas… unless of course I am a teenager who has just got hold of his first gasguzzler.

    • I find it hard to believe that a country that has swallowed all the crap the government has thrown at us would have a problem swallowing an increase in the price of gas. What are people gonna do? Demonstrate in the streets? Gee, that’s been so effective in the past.

  10. Venezuela is already organized through cheap oil, habits are somethings that can be change, but what about satellite city’s that only exists because of cheap gas, this people have to go from lets say guatire to caracas to work and bring their kids to school, some of my peers in “la central”, live in la guaira, los teques, san antonio de los altos, my point is that some people wont be better off, and this people are the ones that have their lives built around this subsidy. This is the reason why its so personal, and a money transfer cant be a specific rate for everyone, and why we cant simply think of the long term effect of a gasoline subsidy without thinking about the social cost of the short term after effects of a partial or complete elimination of the gasoline subsidy.

    • When I lived in Caracas I knew a woman who drove alone from the outskirts to her job downtown. It took her a long time, due to the perpetual congestion caused in great degree by the almost-free gasoline.

      Then came the 2002 petroleum strike, and she had ride three buses to get to work. But her commute was faster, because suddenly the roads were clear.

      Then, the free gasoline came back, and she and other car owners returned to their single occupancy vehicles -and to waiting in traffic jams.

      The gasoline subsidy harms nearly everybody, including most of those who believe they benefit from it. Which would you prefer: free gasoline, or good schools? Free gas or law enforcement? Free gas or good public hospitals?

      Mike

  11. The gasoline subsidy is a matter of using the country’s wealth to purchase political power. The previous president did index gasoline prices to inflation; Chavez froze them. Raising gasoline prices isn’t easy, but a poor country can do it – Colombia does it; even Iran did it.

    And Chavez is supposedly a revolutionary dedicated on saving the world, not paying people to pollute it.

    Mike

  12. Ive read quite a lot the schooling argument, and it’s true, education in Venezuela basically sucks, badly.

    I went to a private school (Hermanos Maristas, in Maracaibo), and so did my 2 younger brothers. It’s unbelievable how incredibly LOW has the bar been set in the 7 years since I was a 10th grader like them, not only class content has moved backwards (I mean, instead of being an 8th grade topic, it became a 9th grade), but I sincerely dont (really) know what the hell is going on because they’re not getting anything AT ALL, and still, they get barely passing (or somewhat good) grades.

    Ive said it before (on lasarmasdelcoronel :P), I think we dont need more schools, or schooling programs, I think we need (ASAP) much better schools, much better (and for the love of God, properly qualified) teachers and a much more demanding grading system, it’s ok that you’re not a rocket scientist as a bachiller, but dammit, 9th grade and you still cant sum simple fractions?? I mean, c’mon!

    Ive had several ideas on the subject :p

    a) National Teacher Evaluation Exam: all teachers must be subjected to this test periodically, if they flunk, they cant teach unless they take a course on whatever made them fail, retake the test and if pass, can go back to work again. Think of it as a medical exam, if you’re not in a proper condition to do physical labor, then you’re unable to work, same here, you’re not in a proper condition to do your job (teach) then you’re unable to work.

    b) School is deteriorated beyond any hope? Requires an astronomic investment to be brought back to ok conditions? = its just not worth it to spend the budget on building/repairing 1000 schools a year if the students learn nothing because teachers are useless, or labs are not properly working, or stuff gets stolen. Sure, less people is getting it’s right to education, but the people who does is in a much better condition (at least, theoretically) than if they were sharing those resources with other people. We have to face a cold fact: there is simply no way in hell to solve everyone’s problems at once, at best, we can solve them by stages, it’s better to begin in year 1 with 10 good schools, year 2 with 20 good schools and so on, than begin year 1 with 100 schools that are worthless and the next year add another hundred of crappy schools.

    c) A much more rigid disciplinary system: do you have right to receive education? yes, you do. Do you have the right to use your right to receive education to prevent or diminish others’ right to receive education? hell no = chao pescao. Sure, every class has it’s clown or troublemaker, but when they seriously disrupt the learning process, or incurr in extraordinary disciplinary faults, they should be expelled and dont give a damn about lopna or anything else :p. Zero tolerance is the way to go on this one.

    d) A much more rigid academic evaluation system: to put it this way: it’s not possible for a 9th grader to not know how tu sum fractions. Period.

    Once I had the chance to look at one of my brother’s friend test and I was horrified with the answers, you can see the test (well, there were actually two, a Venezuelan History and a General Geography test) here (venezuelan history) and here (general geography, two pages) .

    That is necessary because, you’re considered to be approved if you have shown that you understand and apply the knowledge that was given to you and if not, then you must repeat the course in order to get a second chance to understand the contents and finally, pass the course. What is failing here is that both the evaluation process is too soft and teachers are passing people that obviously must repeat the whole year without giving a damn about it :p (not to mention the quality of the teaching/learning process)

    e) A much more rigid selection mechanism for university: the elimination of the Academic Aptitude Test was terrible, that was the way that people got filtered out of university, in order to allow better prepared people to enroll into university and move forward, seriously, if you’re bad (like, really bad) with logic and numbers, how are you going to be an engineer? :P.

    More people in public institutions = more teachers (and hours) you need + more money for equipements and materials. Cut down the number of improperly prepared newcomers, and the quality of the ones that did get in will improve, will be less likely to fail or leave, and the reduced demand for teachers will mean less budget needed for the proper functionality of the university.

    f) Build or update important laboratories for academic institutions: Seriously, how can you run a ThermoFLUIDS lab with no water? :p

    The “practical” part of the learning experience is very important because it actually allows you to be part of the phenomena being studied, and it’s no longer an abstraction or a “knowledge with no real utility”. Plus, it can be an experience that will be very helpful once you’re working.

    I recently graduated as a Mechanical Engineer in LUZ and sadly, I couldnt take Mechanics of the Solids Lab I and II because there was no equipement for them, or had to take Control Systems with 486 and pentium I computers to run matlab (no simulink) on windows 95. On the other hand, I could take Parametric Solid Modelling on much more modern Pentium IV Pcs using Autodesk Inventor and that will certainly help me if I ever get into a design proyect.

    g) Stimulate research: we wont make any progress unless we make it ourselves, and AFAIK, research institutions on this country are a) not a lot b) not properly funded, plus, I dont see (much) people motivated to do research on anything.

    Sorry for the long comment :p I hope I get some replies because education is a topic that has been worrying me from a long time ago and I cant seem to understand what is happening or why is it so impossible to fix (people arent moving their rear ends to do that :p)

  13. Here’s the political problem: people have to believe the government can deliver on the new promise (cash transfer or better hospitals or whatever). And most Venezuelans — including many Chavistas — have lost faith in the government’s ability to do much of anything — new programs and projects are announced all the time, only to disappear or collapse. Many may prefer a gasoline subsidy they can count on vs a new political promise.

  14. Quico, somehow I missed this post, and only just came across it because you linked it to a recent post, but I thought to at least mention the following, for the record:

    If you increase prices of gas with the trade off of CCT for 50% of children going to school, then those belonging to the other 50% only suffer the gas price increase with no positive side, right? Ouch! Let’s take a look at the bottom of this latter 50%. Suddenly they are economically *below* the upper portion of the former 50%! In my book, unacceptable.

    I like that we’re thinking cash transfers, but that is one more example, and an enormous one, as to why we should avoid conditions.

    Besides, let’s compare the sellability of:

    “gas prices are going up, but here’s enough cash for everyone that more than make up for it for everyone”,

    versus

    “gas prices are going up, but here’s cash for those that meet criteria A, B, and C, and fill out forms CCFT1548 and CCFT8732, at any of the application centers X, Y, or Z, and get approval, to be reviewed every M to N weeks to ensure compliance.”

  15. A poor country giving away gas at a 1/100th of the price a rich oil country like Norway sells it gas to their motorists, should be a firm candidate for winning the title of the having the worst public policy ever. If we add to that the fact that the opposition does not even mention it as a public policy failure that is when we really can start measuring how deep in the shit our country finds itself.

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