The roadmap, part II: welcome to the world

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embrace(This is the second in a series of posts on where Venezuela stands on the list of characteristics shared by high-growth economies, as highlighted in The Growth Report; see background here)

Why do high-growth economies need the rest of the world? Before globalization became a buzz word, England and France were already powerful. Is it really true that the world economy helps a country develop?

The answer is: absolutely. The thirteen high-growth countries identified since the end of World War II have all exploited the world economy to their advantage.

There are two main things globalization makes available. First, it makes knowledge available. As many economists have said before, it is easier to learn something than it is to invent it, and copying something is the best way of learning.

One time, in the late 1980s, I was at the CCCT mall in Caracas and I saw a couple of poorly dressed people, staring in sheer fright in front of the escalator. They were Cubans; they had never seen an escalator before.

Obviously, if you’ve never seen an escalator, you can never make an escalator. Globalization helps you know what the latest technology is – whether an escalator, an iPad, or an FMRI scanner. Without it, you’re simply left behind. Just ask North Korea.

The second thing globalization provides is a market. For countries such as Venezuela, shutting yourself off from the rest of the world is simply not an option. Our domestic market is tiny, and our economy could never survive without international trade because, generally, the larger the market, the less it costs to produce one unit of something. This is what economists call “economies of scale,” and it is the main reason why producing cars en masse leads to lower costs per car than producing them a pedido.

The other thing the world market provides is clear information on what’s in demand, in the form of prices. Whether you’re producing aluminum or microchips, the price in the world market indicates which of the products you are producing is most valuable, which you should focus on producing, and which you should consider abandoning.

Without those signals, you end up with inefficient producers that become a drag for the state – using $10 worth of lemons to make $9 worth of lemonade. Without these signals, you are basically navegando por instrumentos, and economic decisions are produced on the whim by an out-of-touch bureaucrat. Without price signals, we end up with Chávez-like figures announcing new factories to produce Walkmans. (Eje Orinoco-Apure, anyone?)

How can Venezuela integrate more fully into the world economy?

I think the main roadblocks to our joining the globalized world are two-fold, and let’s call them “hard” and “soft.” Hard obstacles involve, mostly, infrastructure. Put simply, our ports, airports and roads are not built to integrate our products into the world economy, and to bring the world economy home.

The proximity of world markets is less a function of geographical distance, and more a function of the time and money it takes to get a product from the point of production to the consumer.

My brother-in-law, for example, works for the Chilean salmon industry, way down in Puerto Varas, 1.000 kms south of Santiago. He tells me it takes less than 24 hours between the moment a fish is harvested and the time it’s on the shelves in some Costco in Central Florida. That’s because Chile has invested in infrastructure – salmon packaging firms are right next to the airport, and LAN, the Chilean airline, has seized the market opportunity, so its logistics operation is top-notch. The fish leaves Puerto Montt airport, connects in Santiago, is in the US in the morning, and is hitting store shelves in the afternoon.

In Venezuela we don’t have that. Our ports and airports are so creaky and inefficient, we might as well live in Antarctica. It doesn’t matter one bit to be physically close to major consumption centers if unloading a container in La Guaira takes 19 days. And bringing the world economy closer to home means nothing if our factories are going to suffer from constant blackouts.

Of course, the next thing we need to take care of are the “soft” constraints, those that have to do with tariffs (the taxes we pay for imports, and the taxes that our exports pay in other countries) and exchange rates.

I think it’s no secret that, if Venezuela is going to develop, we are going to have to get rid of Cadivi at some point, but that’s the subject of another post. Our nation should have a stable exchange rate environment, and that means an undervalued currency, or more likely, a currency that takes into account the fact that $100 a barrel of oil is an extraordinary situation, not a permanent one.

Given that we should move to a situation where our currency is undervalued, we would do well with harmonising our tariff structure. There are way too many exemptions in our tariff code, and these need to be simplified. For example, did you know that imported cereals pay an 85% tax, while imported fruit pays 36%? What chavista genius came up with that decision? Harmonising and decreasing tariffs sends a signal to the world that we mean business, and that our business is trade.

I also think we need to focus on using the tools at our disposal to learn to export. For example, supermarkets in the Dominican Republic, Cuba, Jamaica, Nicaragua, and in all the other countries that live off our oil wealth should be stocked up with Venezuelan goods and services. By using our oil as leverage, we can gain access to valuable markets that can teach our private companies how to export.

Finally, we need to learn to use technology. The government’s role, here, is crucial. We need to come up with a number of industries in which we have comparative advantage, and provide the incentives for technology adoption (and hopscotching) on a massive scale. The government needs to use oil rents to help our country accumulate capital that will make us more productive in the future, and stop using it to finance the raspaítos.

For example, there is simply no reason why Venezuela is not a world-class plastics producer. There is simply no reason why we are not leaders in oil consulting services, refining, drilling, or in the production of machinery for these activities. No reason at all.

That, in a nutshell, is what we need to do: invest in infrastructure – and use the private sector for that! -, harmonize exchange rates, lower tariffs, open markets for Venezuelan firms, and bring technology home.

Easier said than done, I know, but that’s the way to go.

Note: I am not an expert on these topics that I write about. The point of these posts is to get a conversation going, so I welcome any criticisms or half-baked ideas that will surely be the norm. I also would love to hear what is missing from the list of things I highlight. This holds for future posts as well.

1 COMMENT

  1. Well, I can speak to the plastics part.

    Being a derivative of the oil refining process, the feedstocks to make the more common plastics (polyethylene and polypropylene) are more than abundant in Venezuela.

    For a long time, back when PEQUIVEN was actually exporting these resins, we enjoyed good quality raw materials, albeit sold at international prices. One loophole existed due to a trade deal with Colombia wherein any raw material exported to that country enjoyed a discount that made it attractive enough for one firm, that shall remain nameless, and that competed against us, to simulate export to Colombia by paying off National Guardsmen at the border to pretend the material ended up in Colombia when it actually ended up in their plant in a certain border in Venezuela, but I digress.

    Today, Polimeros del Lago, producer of Polyethylene, does not only not keep up with demand thanks to non existent or deficient maintenance, but actually imports resins (plastics) to supply the national market. Not only are these raw materials 3rd rate, off spec resins, they are sold at a Bs.20/$$ exchange rate (at international prices for 1st rate resins) and are used to supplement our purchase of national product. Plastics producers are not allowed to import their own resins; we are forced to go through PEQUIVEN and buy from them. I am pretty sure that they are obtaining the BS @ 6.3/$$, and are buying the resins at 3rd rate prices.

    This has several consequences.

    1) Plastics processing requires 24x7x365 operations in which the quality if the raw material and its processability are fundamental in obtaining good results and reducing waste. You don’t just stop an extruder once it gets going without generating lots of waste. Quality of raw material and the temperature profiles, speed of production and finished product are inextricably linked. WE find oursleves dealing with multiple brands of varying hallmarks to produce a homogenous product, and in the process generating more waste than we should as we adapt production characteristics to each batch of 3rd rate crap that PEQUIVEN throws at us. Increased waste means we should charge more for our finished product, if we can. We do recycle, but the point is not to produce so much waste in the first place.

    2) Local producers find themselves jockeying to obtain as much local stock as possible, and by jockeying I don’t mean playing the 5 y 6 (local horse races), although sometimes PEQUIVEN does feel like La Rinconada (local horsetrack) where you bet to Win, Place or Show

    3) Off spec materials tend to produce lower quality products, affecting the downstream behavior of the product, whether we are printing it or whether our customers are using it in their processes. Increased inefficiencies mean increased costs, all down the line.

    Fortunately, BANDES and BANCO DEL TESORO are enabling local producers to upgrade their machinery by making credit available to go out and purchase new, more modern machines, but it feels a bit like buying a Lamborghini only to have 83 octane as the only gas in town. They have also conveniently forgotten or dropped some of the more restrictive clauses in the contracts, making them a decent deal for all involved.

    So we will take the plunge an execute a buying program, hoping for a future where Venezuelan plastic resins once again have the quality to compete on the world market along with the Exxon-Mobils and Dow Chemicals of the world.

    • “Being a derivative of the oil refining process, the feedstocks to make the more common plastics (polyethylene and polypropylene) are more than abundant in Venezuela.”

      This basic assumption is wrong . At the start of the chain for producing the feedstocks needed to manufacture resins, you must have methane gas produced by Pdvsa . Methane gas production has become increasingly insufficient to meet local demand and its extraction much more difficult and expensive . The availability itself of methane gas is much less abundant than is generally believed . Methane gas ( and the feedstocks produced from it ) are supplied to the petrochemical industry at a heavily subsidized price which is a fraction of what it costs to produce and transport , basically causing a big whole in Pdvsa/Pequivens finances . So the supply of methane gas / feedstocks produced from it , needed by Pequiven (both produced locally and imported ) bears a huge price tag which does not allow Pdvsa /Pequiven to recover the cost of obtaining it . Launching of Petrochemical industries to supply the countrys rising resin demand (using methane gas) have become uneconomical , aside from the product quality and operating problems Pequiven already faces. There is a chance of substituting methane gas with other refinery by products to allow these new industries to be built but the investment is huge and the international market /opportunity price of such by products so high that it involves a large price subsidy for pequiven. anyway. Pequiven is pressing on with new projects to meet resin demand on terms which might allow it to come out even or even make a profit by producing together with the resin raw material other products which have a good price in international markets but even them price of petrochemical feedstocks for sale to local resins industries will need to be hiked up considerably to make the projects feasible. The complications are endless !!.

      • Thanks Bill:

        Just goes to show you, you learn something new everyday!

        I was unaware that methane played a role in resin production, I thought ethylene was the only feedstock needed.

        Well, now I know that getting back to the good old days of Polimeros del Lago and the wonderful Lagotene are certainly farther away than I thought.

  2. All good Juan, asides from the fact that just because you have seen an escalator does not mean you can make one either. Good sound byte though. I think the 3rd road block (three fold not two fold) is also “soft” and its mental. Since I can remember Venezuelans have been brainwashed into believing that they are ‘la verga de Triana’ / ‘the dogs bollocks’ / ‘la ultima pepsicola del desierto’, incredibly rich (natural resources), etc. This leads a large segment of the population to expect some sort of Saudi model where they sit on their ass and wait for their share of this incredible wealth to be handed out to them. For me this is the first barrier to Venezuela becoming developed: how to (forgive my criollo) “sacarle ese mojon mental a la gente de la cabeza” because even today that mojon is poking out from both ear ends…..

    :-p

  3. Before the discussion goes much further, I want to jump in with a few remarks about raw materials, mainly because we Venezuelans loooove to talk a lot about how rich our fatherland soil is.

    Let’s start taking about chocolate. Many say our cocoa is the best of the world (I would say it maybe WAS, but that is my personal opinion), and indeed the “Gran Cacao” expression is in our language as a witness of how important cocoa was once for our economy.

    But let’s indeed talk about SWISS chocolate. No one in his right mind will argue against Swiss chocolate being one of the best of the world. However, very few people stop to ponder that there is not a single f**king cocoa tree in Switzerland (apart from those in very specialized botanical gardens, of course). So, how it is that Swiss chocolate is one of the best, and they don’t have raw cocoa?.

    This same example repeats over and over: Italian espresso roasted coffee, Japanese metal mechanical industry, German petrochemical industry, etc, etc., all over the world.

    One important thing we Venezuelans must get is that having raw materials is very close to having nothing. With globalization, what it is important is to be able to get raw materials, transform them into something that it is valuable somewhere else, and send the product there.

    And in order to achieve that, what we REALLY need is freedom, organization, and brains.

    • Well: I would argue Switzerland might have a rather good cheap chocolate but
      if you want to have good quality stuff:

      I knew there are some Belgians trying to produce Belgian-quality chocolate in Venezuela itself, I don’t know what has happened to them in the last couple of years: the murder rate in Venezuela is about 60 times higher than in the kingdom of Chocolate.

      • Venezuela has the capacity to produce 1st class cocoa beans , so good that traditionally they are blended by European chocolate makers with cheaper, less savoury , more abundant African cocoa beans to add flavour to the latter . Used to be that Cocoa growers got very efficient financial and other support to do their planting etc from private companies ( e.g. Beco Blohm) who also bought the cured beans largely at international market prices . Then the govt took over the support of Cocoa Growers activities and monopolized the purchase of Cocoa Beans with much less efficiency , and more erratic payment practices . The result: a big drop in the production of Cocoa . A large part of the work was done by women , specially older women because they were more dependable and hard working than their male mates , they had a very Venezuelan fetish for cleaningness,and had to be provided with good shower accommodations to be induced to work , As labour rules became more stringent and onerous and the country side became more criminalized in places like Barlovento the incentives to grow cocoa have become nill . Cocoa crops would get stolen all the time or the money recieved from its sale robbed by organized gangs. The state of Cocoa production farming is now at a very low point .

      • Yeah, I forgot to mention the Belgian chocolate…

        But don’t let the tasty chocolate divert our eyes from the main point laid out before: There are neither many cocoa trees in Belgium.

        Owing raw materials is a very secondary thing in our modern world.

  4. Good post. I thank Roberto also for the insights on the plastic industry. “PEQUIVEN” is a name I used to hear a lot as a child and my immediate family was not in the oil-related industry. People would speak with pride about the companies appearing around…the hopes, etc.
    I wonder, Roberto, how things evolved at the end of the nineties. I know back then there were some small companies that started to produce such things as a Venezuelan radio…and Rualca, producing aluminium wheels, was exporting over 95% of its productions and wanted to diversify (now it exists no more).

    Also along the Jota thought: it takes more than looking at a lift. Venezuelans have a strong belief in the Cargo Cult.

    I suppose things are half-way. We need to get rid of Cadivi for the cargo cult to have less power…this would be good for most Venezuelans on the middle term but that would mean losses for the “revolutionaries” and a few oppos. They’d rather have a new Caracazo and explain people this is not the way to go.

    • As far as the plastics industry went, then nineties was OK. PDVSA/PEQUIVEN was still in the hands of the good managers and while we complained about havong to pay international prices for raw materials (opportunity cost ruled ,was what we were told) the supply was steady and the quality up to 1st world standards.

      Even after Chavez won in ’98 there was still the drive to open all kinds of companies that waned to export food, consumables etc.

      We would get weekly several inquiries from both new and existing customers about packaging meant to be used in products for export.

      Today, ni de vaina…………………

  5. Dago I hear you, your point complements very well the final part of mine. It is the ability (human capital) of people to transform raw materials what makes a country rich. Wealth is embedded in people not materials (example think of what happens when stupid people win the lottery….in three years they are back to square one)

  6. Generally our state controllled heavily subsidized system creates a false image that raw materials are always super cheap and abundant which is often not the case, the subidization itself fosters the creation and survival of industries and productive neworks which are disorganized and inneficcient and wouldnt survive a day without all the hidden subsidies . Foreign investors often come with the idea that they will invest here because the State will guarantee them large amounts of raw materials at give away prices . First task : find out the real costs of those raw materials , how abundant they are and what it will take to produce them more cheaply and in greater quantities so that producing them become profitable . There is this mirage that just because we have the biggest oil reserves in the world that automatically makes those reserves easy to produce and process at minimal costs thus affording a huge opportunity for the creation and growth of all kind of productive industries which is a far from the truth.

  7. This bit…

    “Our nation should have a stable exchange rate environment, and that means an undervalued currency, or more likely, a currency that takes into account the fact that $100 a barrel of oil is an extraordinary situation, not a permanent one.”

    …reminded me of the hilarious set of hoax instructions on how to make a nuclear bomb that the CIA famously found on hard drives in Bin Laden’s compound in Abbotabad. It started:

    Step One: Secure 150 kg. of highly enriched uranium.
    Step Two…

    I mean sheesh, if only beating Dutch Disease was that simple…

    • Step 1 in overcoming a disease is recognizing you have it.

      If you’re going to quibble over the obvious, seeming impossibility of overcoming all our deficiencies, you will find this series of posts *extremely* frustrating.

      • http://home.earthlink.net/~enigmaep/annihilation/buildabomb.html
        Ah no, era:
        1. First, obtain about 25 pounds (~10 kg) of Plutonium239 at your local supplier

        ———————-

        I guess what I mean is that you’re making the hard part sound easy and the easy part sound hard

        Things like fixing the infrastructure and adopting new technology are operationally hard, but they’re not conceptually hard. There’s no mystery to how you build a properly working airport. It’s not easy, but it’s not a problem-without-a-solution.

        Overcoming Dutch Disease on the other hand, may very well be a problem without a solution: the tendency of oil producers’ currencies to appreciate is sort of hard-baked into the international economic system. At any rate, it needs more than half a paragraph!

        • There’s another section in the roadmap related to “stable macroeconomic environment,” I figured I could put it in there.

          • In fact, it’s the next one up:

            2. Provide a stable macroeconomic environment, avoiding unpredictability in fiscal and monetary policies.

            Wanna write it? It really boils down to a few things, things we’ve written about before.

          • I don’t think I know how, is the thing! I mean, “stable” in a petrostate context means “with a consistently appreciated exchange rate”, ¿no?

            Mebbe we need to recruit a macro guy for this one.

            Where have you gone, @Econ_Vzla, a blogger turns his lonely eyes to you….

          • “Our nation should have a stable exchange rate environment, and that means an undervalued currency”
            Juan, do you mind to elaborate a little bit more on this? Why you equate stability with undervalued?

          • Because if it’s overvalued, it means that you’re letting the bolivar be strong thanks to high oil prices. When oil prices fall, so will the exchange rate, and you lose stability. ¿No? The only way, in my way, to have “stability” is to assume the worst case scenario in the oil market and save any “excedentes.”

            Es como una familia a la que a veces les va super bien y a veces super mal. La única manera de asegurarse un ingreso estable es gastar como si todos los meses fueran malos, y ahorrar en los meses buenos.

          • But really that’s a control-de-cambio-al-revés. As pdvsa sells oil and hands them to the BCV for bolivars, the tendency to real appreciation becomes Chronic. To fight it, you’d have to fix an undervalued exchange rate leading to a…shortage of bolivars?!?! El mundo patas p’arriba…

          • I agree, in principle, on the social value of having stability in the flows received by the Venezuelan economy, but I think there are diferent aspects to be considered here:

            1.- Stability doen not mean stability in the exchange rate -like in a fixed exchange rate-
            2.- In a petrostate, stability in the monetary/exchange rate front has all to do with the fiscal side of the problem
            3.- You can either achieve stability in the US$-denominated inflows -by for example, creating a true stabilization fund- or you can try to stabilze the stream of local currency you receive from abroad by having a shock absorver exchange rate, which means let it float. Of course you have a range of intermediate options here
            4.- In general what the economic agents badly need is predictability, stability is in some sense a way to predictability, but is by no means the only way to achive the latter

          • BTW, this is the quintaessential macroeconomic debate in Venezuela since Alberto Adriani introduced for the first time the topic in 1931. The topic of the monetary dilemmas of the oil economy has been for decades subverted by the other grand debate of the Venezuelan economy: the need for economic diversification, and sembrar el petroleo.
            I think that the fact that most economist defend the idea of having a competitive exchange rate as the only way to diversify away from the oil, has clearly shaped the policy choices in the past -and not necesarilly in a good way-.

            I’m in the minority side of this issue, BTW.

          • In general terms, I think Manuel and Omar really underline why macro stability in a petrostate context is very far from “boiling down to a few things we’ve written about before.”

            The specifics are way beyond my area of competence, but the challenges don’t seem anywhere near simple: oil prices are volatile and unknowable, the relevant metric for “stability” isn’t even really clear.

            And, stepping back, I don’t think there’s even a single example, internationally, that we can point to of a middle-income resource dependent country beating the trap and building a diversified export base – even assuming we could all agree that “building a diversified export base” is the relevant policy objective, which apparently, we can’t.

          • GC – Because then you become trapped by the monetary policies of the nation’s currency (U.S.) with which you supplant your own. Beyond sovereignity, patria, etc., if you are willing to accept that their economic interests may not always align with your own and that, as a nation, you have been effectively captured by their currency, then its all good. However, if you happen to have a reasonably largish economic output, it isn’t always the best choice, since if they decided to crater their currency (or make any other monetary policies that adversely affect your nation), you will be stuck riding the currency down with them as well, rather than see appreciation against that currency.

          • What about adopting a “Peg the export price” scheme? It´ll provide a predictable Nominal GDP. And if the basket is well defined, it might take into account new-exports price movements.

            Anyway, I believe that fiscal myopia is a bigger issue regarding venezuelan exchange rate instability.

          • JPLF > One could make the rather cogent arguement that the majority of Venezuelan exports, at least 90% of them, are already pegged to the dollar. On the global markets, oil is transacted and often (but not always) settled in greenbacks.

            The other stuff is so small compared to oil, building a sufficient basket will be difficult until exports are less skewed to give a reliable determinant of GDP.

          • >pitiyanqui I think you misunderstand my point. A “peg the export price” scheme consists of setting a stable price in bolivares for the oil barrel/commodity basket, and letting the exchange rate respond to real price shocks in order to attain that nominal anchor. The goal is similar to that of an NGDP Target: neutralizing aggregate demand shocks. It doesn´t matter the currency into which the oil barrel price is set internationally.

        • Quico, Dutch Disease is not a problem without a solution. There exist standard economic policies in order to avoid or mitigate the real exchange rate appreciation. These policies depend on the type of the underlying shock. Namely, it depends on whether this shock is permanent or transitory. In the latter case, for instance, the central bank could intervene in the foreign exchange market and build up foreign reserves. Of course, this might create other challenges like inflation. If the underlying shock is permanent, the gov’t might as well do nothing since the seemingly overvalued currency actually corresponds to the new equilibrium real exchange rate. However, the policy makers might want to manage the transition to the new equilibrium trying to avoid overshooting of the foreign exchange rate and overheating of the economy. In either case (transitory or permanent shocks), the fiscal policy should tend to be “prudent”, which would tend to mitigate the adverse “spending effect” of the Dutch disease.

          The real challenge here is to correctly assess the nature of the underlying shock. If we treat the shock as transitory when it’s permanent, we’re only delaying the necessary adjustment the economy needs to go through. On the other hand, if the shock is transitory and we treat it as permanent, the economy might experience lower growth since the real exchange rate not only will overvalue but also will be more volatile, which also hurts economic growth.

          • 1-It seems to me fundamentally unknowable whether a given movement in the oil terms-of-trade is permanent or transitory, ex ante.

            2-It may be “macroeconomically correct” as a response to a permanent shock to let the exchange rate appreciate to the new equilibrium – it’s just that that new equilibrium renders diversification impossible.

            I don’t speak the jargon well enough to make myself clear on the first try. But I guess *that’s* the problem I fear may be without a solution – ya dig?

          • I am with Quico on this one. The distinction between transitory and permanent condition of the shock works well in text books, but is very complicated in real life. And, if it were to be a permanent shock, then you can either: (i) target a weaker than equilibrium real exchange rate and keep a current surplus forever (renouncing to higher levels of consumption the country could afford, as in the case of the family Juan is presenting, or a la China in the last decade or so) or (ii) let the real exchange rate appreciate (increase consumption – btw, a good thing, if you were in doubt) and kill most of the remaining tradable goods sector. I will not take sides on this dilemma right now. But lets acknowledge there is a dilemma!
            I will finish by saying that there are very significant issues about the dynamic implications of letting the non-oil tradable sector die (Hausmann has worked very extensively on that issue for the last 10 years),

          • Ok, there’s a dilemma. However, this kind of dilemmas is that Economics lives for! How do you solve this dilemma? Well, you write down a sensible DSGE macroeconomic model, calibrate it and simulate it under the available policy prescriptions available. That’s going to tell you which policy you should implement. Or even better, although more difficult, solve for the optimal policy. Of course, this is not the ultimate solution because we know that the model economy has underlying assumptions that might be iffy. However, it’s a big step forward in the discussion, that hopefully narrows down our policy options. Beside this methodological approach we can use empirical evidence and even the experience of other countries.

            Speaking of empirical evidence, there is no conclusive evidence that Dutch disease lowers growth. The empirical literature focuses more on the effects of this phenomenon on the real exchange rate and the reallocation of resources between the tradable and non-tradable sectors. There is evidence, however, that overvalued exchange rates do hurt growth. Why the disconnect between this two pieces of evidence? It could be that an “appreciated” exchange rate due to Dutch disease doesn’t really mean an overvalue currency because its appreciation is an equilibrium adjustment and, therefore, the exchange rate is by definition not overvalued. It could also be that the Dutch disease positively impacts growth through other channels. For instance, the booming sector might create spillovers and growth-enhancing effects in the tradable sector.

            As for the dynamic implications of letting the non-oil sector die, I need to ask what non-oil sector. I guess you refer to the non-oil tradable sector because the non-tradable sector tends to thrive. I do agree that letting any sector die has some bad consequences. For instance, the sectoral labor reallocation might be painful and unemployment might be high. We probably don’t want that. But that doesn’t mean either that we should let the rest of the economy carry that dead body for long (i.e., subsidies, tariff, etc.). This might create more harm than good. The question is what to do with the “losers” (sectors that die). If we keep them alive artificially, we avoid reallocating resources to more efficient activities and even prevent dying sectors to reinvent themselves and be productive. This obviously hurts growth. If we let them die quickly, that might bring very high unemployment and political instability. Clearly, this is another dilemma which need us to tread lightly! But this is a very similar dilemma that close economies face when opening.

          • Let’s put this one in the current Venezuelan context: President Capriles just seize power and name you Minister, you just passed legislation to implement a credible fiscal rule (let’s say an structural superavit target of 0,5%), also an stabilization fund, also returned independence to de Central Bank. Manuel the new BCV Prezt decided to implement a credible inflation targeting mechanism with a floating exchange rate. Nagel, the new PDVSA prez has an ambitious plan to develop the vast oil resources of la faja opening PDVSA to foreign investors….

            What would you expect to happen with the exchange rate?

            What in the tradable sector would exactly die? What is left of the non-oil tradable sector after 15 years of chavismo?

            My point is -and you, Manuel and I has discussed that in the past- in a world full of distortions, controls, corruption, fiscal and parafiscal burdens, expropiation risks, labor absentism, murders, kidnappings, and a big long etc. The appreciated real exchange rate plays only a little role in inhibiting the appearance of profitable tradable activities…there MUST be non existent activities for whom the real exchange rate is not the binding constraint

          • Omar, you’re absolutely right! There is a humongous list of problems in Venezuela that make the real exchange overvaluation look almost a second order problem. However, I’m not so sure about that. Suppose that we are able to solve all those problems in a second. I’m sure that non-tradable sectors would surely thrive. As for tradables, the current very overvalued exchange rate would not allow the tradable sector (with maybe very few exceptions) to grow. At that exchange rate, it’s simply impossible to compete with imported goods, especially if you eliminate the exchange control (of course, under no exchange controls the currency would surely depreciate…but this is an counterfactual exercise…so bare with me!)

            Let me reiterate that I do agree that without solving those other problems and distortions, even an otherwise optimal exchange rate policy has not much effect.

          • Not at all Manuel! If productivity gains are neutral, they will show in increasing real wages, not on greater competitiveness for the export sector. You need relative prices to move against non tradables so that the tradable sector becomes more atractive relative to the non-tradable and therefore undo some of the dutch disease effect. Productivity growth is no solution for dutch disease.

          • Rei, if labor productivity increases at the same rate in both sectors, then both the real wage and the relative price of tradable goods increase. That’s exactly what makes labor shift from the non-tradable sector to the tradable one. As a result, output and consumption of both goods increase. You can easily see that in a static model with two goods. Forget about the equilibrium problem and solve the centralized economy problem (e.g. Planner’s problem). The intuition of why the economy shift resources to the tradable sector is simple. As aggregate labor productivity increases, the wealth effect makes agents increase consumption of both goods. If labor does not shift across sectors, consumption of non-tradable goods would increase relatively more. Why? Just look at the resources constraints for each sector taking into account that the economy receives an “endowment” of tradable goods coming, for example, from the oil exports. Since consumption of non-tradables increases relatively more, the relative prices of tradables increases which leads to a further increase in production in the tradable sector. If you had no endowment of tradable (oil sector), then the same productivity gains in both sectors has no effects on labor (and other factors) allocations across sectors.

          • Well…there are clear-cut cases where it’s pretty obvious whether a shock is permanent or transitory. For instance, if a country all of a sudden discovers that it’s floating on oil then that’s a permanent shock in the sense that its wealth is larger. Of course, it’s still subject to other transitory (income) shocks due to, for example, oil price fluctuations. In that case, you better adjust to the new reality and let the real exchange rate appreciate to its new long-run equilibrium. As I said before, you might want to manage the transition to the new equilibrium in order to avoid overshooting of the exchange rate, fast sectoral transformation which could lead to high unemployment, etc.

            In the case of Venezuela during the current oil boom, it might be very difficult to know weather the oil shock is permanent or transitory. However, there are statistical methods that can be used in order to assess whether there is a structural change in the oil market that it’s going to keep oil prices high for a long time. These tools also could also tell you what percentage of the shock is permanent and what percentage is transitory. Of course, these are all estimations. But that doesn’t mean we shouldn’t use them to guide our macroeconomic policies. The problem in Venezuela is that economic policy is not guided by any technical consideration and that’s why we see the mess we have today.

            As for diversification, you’re also wrong. Diversification is still possible. First, you still have the whole non-tradable sector (services) which is a viable source of diversification. Second, in a long-run view, you can still compete in some tradable sectors if you increase labor productivity sufficiently. In other words, you need to decrease unit labor costs. For that, you need to improve education, deregulate the labor market, etc.

          • Well Manuel, I disagree. First of all, I do not see it as a pure economic problem. There are several distributional/political economy issues at play. The dilemma I am taking about is first of all between consumption today and consumption in the future, but also between consumers in general and producers of the alternative tradable sector. There we do not have much to say, it is a political issue.
            Second, it is true that there is no consensus about the efect of dutch disease (I am not arguing otherwise), but it is important to distinguish the effect of static dutch disease (allocation of resources) from dynamic dutch disease (potential externalities associated with growth in tradable sectors – also open to debate)
            Regarding your point on labor productivity: increasing it is not enough to compete on some tradable sectors. The problem here is not how “competitive” is our tradable sector compared to the rest of the world, but how “competitive” is the tradable sector to attract labor away from the non tradable sector. So, it is not that you need to increase labor productivity, but that you neet to increase labor productivity at the tradable sector relative to the non tradable

          • Omar, considering this policy actions, I would expect a trend towards real appreciation. And that would be a challenge on top of everything else to develop other productive tradable activities.
            Venezuela does not have a non-oil export sector, but contrary to what many could believe, there is a tradable sector in Venezuela (it just does not export).
            Many of the constraints the venezuelan economy faces (infrastructure, rule of law, economic instability, unpredictable tax rates, etc) are common to both the tradable and the non-tradable sector. However, we see a very clear trend towards a reduction of tradable sector share of GDP. Why is that? My guess is that at least some of it is related to real exchange appreciation.

          • I guess then the real dilemma is not about the real exchange rate…because you KNOW that if you are to succeed in fixing the oil sector, the infrastructure, rule of law, economic instability, unpredictable tax rates, etc…you should expect massive capital and FDI inflows that would appreciate the RER…

            The dilemma is you let it appreciate, allowing a consumption boom, and assuring some years of political stability for the otherwise weak capriles presidency or…oh wait! there is no dilemma here, the other is not an option 😉

          • Rei…Of course it’s a matter of how competitive the tradable sector is with respect to the rest of the world. That’s the only way to attract workers away from the non-tradable sector. As workers become more and more productive some tradable sectors can compete with imports and will start to produce. The only reason these sectors didn’t produce before was because we could get the stuff these firms produce cheaper in China, Mexico, etc. Once it’s profitable to produce domestically, firms only need to pay the equilibrium wage to attract workers from the non-tradable sector or any sector for that matter.
            We could even have labor productivity growing faster in the non-tradable sector but once labor in any tradable sector becomes sufficiently productive to be competitive in the international market, it will start to produce! It only need to be able to break even (in an economic sense not in an accounting sense) at current prices (international price od the corresponding good and domestic wage rate).

          • And BTW, the part of the tradable sector still alive after the pass of Huracan Hugo must be an inmortal tradable sector…imagine if you sytart fixing the policy/business environment for them

          • My short aswer to that is> yes. I guess the diversification debate is more a medium/long term issue. Plus from my observation, in our region there are good examples of natural-resource-abundant economies capable to grow for a long periods of time with both a floating real exchange rate that tend to appreciate -but buffer the shocks during bad times- and cosiderable expansions of non-natural-resource tradable activities. I’m talking about Peru, Colombia and Chile…

            I don’t wanna be Singapur..I wanna be New Zealand

          • @Econ_Vzla oh sorry, my bad! I thought this discussion was about strategies towards long term economic development of Venezuela, did not realize it was about securing reelection for President Capriles! 😉
            On becoming New Zealand, good luck with that. We have two options if that is the goal. One, turn the clock back to 1940 and make sure Venezuelans of the time stop making so many babies (thinking of it, Venezuela was the New Zealand of the 40´s and 50´s). Second option: to close the GDP gap, considering current oil prices you would need Venezuela to increase oil production by a factor of 9, that means producing about 25 million barrels a day, almost the combined current production of Saudi Arabia, Russia and the US (30% of world production). So, forgive me if I am not too optimistic about the New Zealand road.

          • Rei,
            Forgive me if I thought the debate was about policy priorities for the short, medium and long term. And for thinking political stability is important in that discussion. And for thinking you where the Rei that above said “this is not a pure economic problem. There are several distributional/political economy issues at play”.

            Fuera de broma, I think this dabate has depicted very well the dilemmas and the policy options Nagel will have to write about in the next chapter of this series

            Can we aspire at least to be Peru? Peru!…:)

          • Yes, when arguing I had in mind the standard tradable-non tradable model (with no endowment). In that case, as you also point out in your last response, there is no shift in labor as a response to neutral productivity gains. But I agree with you, here we need to look at the case with an endowment. Even in that case the effects of productivity gains are limited (the exchange rate will always be more appreciated than in absense of the endowment and therefore the share of labor going to tradables will be lower), and if we think there is a dynamic reason to develop a strong tradable sector (some kind of externality) we would have to find a way to enginering some kind of real depreciation.

  8. If the obvious but unspoken target in the distance is that of becoming a mainland version of that Caribbean Island, what have these reflexions – based on a logical focus on prevailing circumstances and their improvement – got to do with anything? Does anyone doubt the target’s being just that?

    As for Belgian chocolate, I was under the impression that top-of-the-line stuff always incorporated a fraction of “Venezuelan”. And weren’t those Belgian practitioners here in country the ones making “Praliné” brand chocolates, available at all good chockie shops and in a separate kiosk in the Maiquetía Duty-Free (whence my last purchase)?

  9. The sad part: I have had this discussion with friends in Venezuela, 20-30 years ago. Including the parts about Pequiven and manufacturing oilfield equipment. Before that, we noticed that mangos cost about $1 each in the USA. At the time, our house had about 14 mango trees, and hundreds of dollars worth of mangos rotting on the ground at any time. That’s why this story sticks in my mind: there was an initiative to export mangos, which involved building a facility at Maiquetia so that they could be inspected by the US Agriculture department before shipment. I think it was in service about 18 months, before bureaucracy killed it.

  10. Good post. I differ with some premises.

    In an unenriched country (i.e., no natural resources to speak of), the government’s budget comes from taxations. Its incentive, then, is to get its population and its market to succeed economically so that it reaps greater taxes and more votes. The market’s incentive is also to provide goods and services most competitively to the buyers. The population’s incentive is to get the most for their money, and to get the governments that will help create an environment that gets them more money.

    The things you speak of in the post (i.e., infrastructure, exchange rates, tariffs, open markets, technology) all become consequences of the above proper incentives. It would be silly to think in the unenriched example, above, that a government would spend so much money building ports and airports that take 19 days to process fish, or that a government would create conditions that would cause a producer to bribe government officials to pretend their product is coming from abroad. The incentives simply do not lead any unenriched nation to create the conditions that we have in Venezuela.

    In an enriched country (i.e., petrostates), if chunks of the government’s budget comes from the lucky enrichment, not as a result of competitive success of its population and market, then the greater the enrichment, the greater the chunk and the greater the incentive to focus on *it*, rather than on its population’s and its market’s success. The market’s incentive also changes. The greater the ratio of government:consumer buying power, the greater the incentive of the market to focus on government officials rather than on consumers, whether they be local or external. Even the population’s incentives change. As Quico described it so well, they become supplicants rather than citizens. Instead of picking governments that create the best environments for their own success, they start choosing governments that best “plugs them into” the chunk source.

    This is our Venezuela.

    People who criticize UCT are right when they claim that people’s incentives to work harder diminish, but they seem to fail to see the same applies to whomever receives the oil money, whether it’s the people or the government or businesses hired to build infrastructure. The question then becomes where can the money be injected to cause *least* change to the natural order of incentives that would exist without the enrichment. The answer is at the citizen level. The government would still try to get its people to succeed and the market would still try to be competitive and the people would still vote for the governments that create the environments that make it easiest to succeed.

    Focusing spending on infrastructure and technology is good, but if the money is coming from oil then the reason that they are problems to begin with would not be addressed and the money would not be spent most efficiently since the incentives are counter to efficiency. It is wishful to think that Venezuela’s problems will be addressed by finding leaders that will manage to surround themselves with the number of necessary people to do things correctly *against all incentives*.

    Looking at the aspects of exchange rates, tariffs, and open markets, the government should not benefit from any market activity other than its local success (i.e., taxation), otherwise the incentives get befuddled. Thinking this through, a proper government will tend towards a unilateral free trade agreement with the world where its only meddling at the borders would have to do with the same regulation of controlled products that it imposes locally.

    In a nutshell, we must fix the incentive structure to one of unenriched countries before continued wasteful spending on a broken system.

    Dame mi plata.

    • As usual, I’ll add a little bit on the UCT issue:

      I can grant our fellow economists commenting here that UCT is not the optimal economic solution. I may even accept that UCT maybe is not within the 10 best economic solutions for Venezuela.

      But UCT solution is systemic, attacking several problems at different levels, and most importantly, it is FEASIBLE to apply in the Venezuelan case. Probably not totally, but surely partially feasible.

      An “Alaska-type Fund” or a “Monaldi-like Alternative” may be economically superior (i.e., more efficient) but guys: They are not feasible.

      They are not feasible because, when you dissect them, those options consist in substituting a bureaucracy by a technocracy. In the eyes of the Venezuelan people, it is just substituting a bunch of guys by another bunch of guys… and that’s not going to happen, no matter how “good” or “efficient” the new bunch of guys may be.

      And, as a frustrated blogger commented before, beating, or at least alleviating, our Dutch Disease is right at the crux of our issues. And we must look for feasible solutions for that.

      • Dago’s got it right to emphasize FEASIBLE. Included in that word is how sellable UCT is to the very people supporting the current mess and getting them up and out to vote, en masse, in favor of this change.

  11. What I’m going to say may sound derisive, even though I’m not trying to be, but every time I hear people talking about how to make Venezuela a (more) developed country, and then I think about the mentality so many Venezuelans have, and the ongoing disaster we are currently experiencing, inevitably this comes to my mind:

    • Yes, we suck, we’ll never get out of the hole. These posts are not for you. Duly noted. Not everyone is a fan of science fiction.

      • Sorry if I sound pessimistic. Believe me, I want to be an optimist, but I guess it’s true what someone once told me: “an optimist is nothing but a pessimist who is misinformed”.

        I have lived long enough in Venezuela to know that most people don’t even realize we are in a hole, let alone realizing we need to get out of it. As long as there is beer and beaches…

        Want to do something about developing Venezuela? Start with education. No amount of economic reform or infrastructure is gonna do a thing unless people change their mentality. I wonder if after 14 years of chavismo that’s even possible (changing peoples mentality).

        • That’s the thing – education alone is not going to make us richer! Capital accumulation will. China didn’t embark on its transformation by focusing on education, it began by focusing on factories, and infrastructure, and trade. Education was part of it, sure, but we need to set our priorities straight.

          • I don’t know enough about Chinese culture to have a completely clear picture about the way they think, but I bet they didn’t (don’t) have the same problems with the mentality of their people that we have in Venezuela, so probably it was easier for them to begin “by focusing on factories, and infrastructure, and trade”.

            However, I’ll admit that focusing on the things you say we need to focus is easier and may give palpable results sooner than improving education. In any case, I don’t even know what would you have to do in the classroom to change the kind of mentality problems I’m thinking about.

          • there are many cultures with very similar “mentalities” that have made progress. There are also cultures with chinese mentality that have not. Also, Venezuelans in the US are the most successful Hispanic group, but we aren’t the most successful country.

          • Unlike people from other Latin American countries, such as, for example, Mexico, the overwhelming majority of Venezuelans that emigrate are professionals, so no wonder they are the most successful. And the Venezuelans who do emigrate are probably the ones that are as frustrated as you and me with the way things are in our country, so the fact that the very same people who would like things to be different are the ones who leave can’t be seen as a good sign.

          • What were the incentive strucures of the thirteen high growth countries? Were their enrichment chunks of money as large a portion of their budgets as oil is of Venezuela’s government’s budget?

          • I think the difference resides in the origins of the incentives, the first comes through hard work and smart investments, the second literally just seeps out of the ground.

          • That’s the very distinction I mention in an earlier comment. In unenriched nations (i.e., those with no natural resources), the government lives off of taxation, so the incentive structure is one of hard work and smart investments by the citizens and the government. In enriched nations, if the maximizing the reaping from the seeping is at the government level, rather than the citizenry level, then the incentive structure is one where the government begins to ignore the citizens other than as a means to remain in power, and the citizens begin to “plug into” the government, instead of hard work and smart investment.

            My point is that attempting to get hard work and smart investments as JN proposes is pointless within an enriched nation incentive structure, unless the reaping of the seeping is at the citizenry level, via UCT. By doing this, the incentive structure remains as in an unenriched nation even if the intensity of the incentives may diminish.

        • The problem with the “let’s start with education and mentality” approach is that is equivalent to say that we are not going to do anything: Any education change will take at least a couple decades to start being effective and durable, we are not talking about “don’t liter the Metro” education here, but something way more encompassing.

          We must definitively invest in education, but that’s not the ladder to get out of the shit hole, but the foundation to build on once we are out of it.

          • I agree with you on most of what you say. Yes, education won’t take us out of the hole over night, I know that. And let’s not even talk about how to implement an effective educational program capable of changing people’s mentality, because I’m not sure what that would be. So, you’re right, education is probably “not the ladder to get out of the shit hole”, but without education we’ll keep destroying any ladder we might start building.

            See why I’m pessimistic?

        • Getashrink, the thing is, the lack of education (i.e., the “mentality” of which you speak) is a symptom, not the root cause. There is no incentive to change mentality when one’s current mentality is sufficient to get a lucrative living by just regurgitating the government’s latest slogan. If, instead, the incentive were, to have a more lucrative living than the persons next to me, to work more successfully than them, then I would spend my day trying to “think” new ways of being more successful (i.e., change my mentality/education).

          The root of the problem is that of a backwards incentive structure.

          • The problem I see here is that the country the people comenting in this blog want is not the same the majority of Venezuelans want. I think I’m not the only one here who is very frustrated with the present state of affairs, but remember that we are one of the happiest countries in the world, according to recent polls. You say we need to change the incentive structure, but what’s gonna be the incentive to change the incentives? Hitting rock bottom? Didn’t we already? I think at least morally we did hit rock bottom, and that’s a damage very difficult to repair.

          • Getashrink, I think you may be misinterpreting the measure being used for happiness in those polls that you mention. Just because Venezuelans seem to find happiness even in a context of adversity does not necessarily imply that they are blind to their adversity, nor that hope isn’t a considerable factor. But that’s a digression.

            You ask: “what’s gonna be the incentive to change the incentives?” For different people it’s different things. For poor people, it could be the possibility of receiving unconditional cash. For those who see the waste of money in hands of corruption, it could be the taking the source money out of the corruption loop. For those who see the vote buying, it could be the taking the source money out of the abuse of power to remain in power loop. For economy minded folk it should be elimination of distortions.

            For you, it could be your conclusion that we hit moral rock bottom together with your education/mentality letting you see that the only FEASIBLE option that would replace the currently damaged incentive structure with a healthy one is the UCT of all non tax income.

          • Daniel Kahneman the Noble prize Winner has something interesting to say about people who declare themselves happy and really aren’t happy but want to believe themselves happy or have people think that they are successful in being happy and not bear the shame of having to admit to themselves and the world that they lead failed , maimed ,mediochre, shitty lives. If most people are really happy why change anything ?? Why bother with economic development , of course as conditions deteriorate really bad maybe the’ll have to confess to being a really miserable lot ?? This whole statistical happiness bit I suspect is pure self delusional make believe . Maybe fools are always happy because they live in a false world . who can be happy if he doesn’t have a home , a real job , is always exposed to being mugged or murdered , leads hand to mouth existences , when ill lacks decent medical care, cant get the food he needs to eat etc ?. Things are not getting better they are getting lots worse very quickly but because people are so stupid as to feel satisfied with they sorry lives now we must assume that they are going to remain peremnially happy.in the future !! There are lots of Venezuelans who like ourselves are not happy at all with the conditions that now prevail in Venezuela and that believe that life can be made better for ourselves and for most of our country men. But statistically we don’t exist so there are none . what nonsense!!

          • bill bass, you may be interested in the latest studies of brain plasticity and joy. They have found that one can readily change the structure and activation of joy in one’s brain, one way being through meditation. Buddist monks were tested and consistently came up as more joyous than other populations by measuring those areas of the brain that activate with feelings of joy. One of the monks close to the Dalai Lama has been determined via this method to be the most joyous person in the world. The effect of their mediation, in fact, is permanent, regardless of context.

  12. It still amazes me, I am witnessing the destruction of a Venezuelan country, the plundering of natural resources on the scale never seen before. It has happen under our noses, while we sleep and to the image of a smile that promises grandeur to the masses, Chavez. Chavez will go down in history as the pied piper who played his flute and the rats followed. The bad part is the rats followed him not out of town but into positions of power. I am originally from Mexico and my father had a saying which taught me to question everything. Granted I didn’t realize it until later in life. Siempre me contaba,”Gordo, ten cuidado que no te monten en un cerdo y después te convenzan que es caballo.” Its sad…because the hole to which Venezuela must climb out of is deeper than one thinks, so deep it might be easier to keep digging and come out in China.

  13. Great post, but oh my Juan, how could you forget that Venezuela MUST become a producer of Satellites and Smartphones to be somebody in this globalized world. I am sure these industries will be great examples of success. Who cares about being unable to produce enough toilet paper to cover the domestic demand…

  14. If developing an export capacity is important to achieve economic development we should begin by looking at the products which represent the largest percentage of world trade, if we do so well find that a very large percentage of world trade consists of the export import of fuels ( oil) , followed by Non Pharmaceutical Chemicals ( many derived from oil) , trailing far behind are cars, manufactures , electronic goods, agricultural goods , iron ore and metal products , textiles etc.
    We have huge hydrocarbon and mineral resources and thus an enormous export potential if we concentrate on having a well run oil, petrochemical , and iron ore and metal products export industry . What we lack is the systems and people that can take maximum advantage from optimally organizing and running these businesses at optimum profit.
    We think that manufacturing and electronic goods and cars are the top international trade items . they are not !! The best business in the world is a well run oil business , the second a a badly run oil business , the third a badly run oil business . Same goes for certain forms of Petrochemical business and other ancillary industries surrounding the above two businesses . If we had 1st world businesses running our oil industry and a net work of well organized petrochemical companies running our petrochemical industry and our bauxite and iron ore and methalurgical industries and an agriculture and manufacturing that meets local demand we d be on the right track . Thats on the income side , what kills us is that on the external costs side we have a spendrift wastrel corrupt intrusive petrostate and a host of clientelar interests syphoning off and wasting all that wealth that we can produce. !! If we organize ourselves to run healthy oil and petrochemical and metal mining and manufacturing operations without the interference of corrupt political influences we would be well on our way towards achieving development . Of course missing is the key element which is represented by the people angle , people who can manage industries rationally and people who simply let them do their job and people who know how to spend the proceeds also rationally and with balance.

  15. Another products that you could export in the late 80 and early 90 were aluminum processed products (for example die casted parts), in fact Alcasa sold 3g0 alloy aluminum at lower than international prices (I thing 15% less) to give exporters an incentive. But later in 92 – 93 they started to sell locally aluminum at International prices because some companies were cheating and exporting raw material, and eventually made the export of die casted parts business uncompetitve. Then Alcasa started demanding a minimum of 30 tons of alloy aluminum per month purchase which eventually kille dthe busines…

  16. There is another “soft problem” to be remedied before Venezuela can have real prosperity,

    That is the prevalence of bad attitudes among Venezuelans. Such as:

    Grafting and thieving is normal; anyone who doesn’t steal as much he can is a fool.

    One is entitled to a plush life without working.

    Pseudo-socialist hostility toward employers, managers, and customers; treating any expectation of productivity and responsiveness as attempted exploitation.

    Trying to operate a business under these conditions would be a nightmare. Until they go away, the nighmare continues.

    • Rich Rostrom,

      I don’t share the bad attitudes to which you make reference, but I can see from the perspective of those who have it. Consider a girl in a machista society of a slum in Venezuela. She sees candidates for partner, A and B. A is a hard worker and B is a thug. In a normal country, A and B have high likelihoods of success and failure, respectively, so it is normal for her to seek out candidate A to father her children and to hope that they turn out like daddy juniors. But in Venezuela, the likelihoods are almost switched. So, even gaming algorithms would consider candidate B, let alone a girl that wants to improve her lot.

      This decision reversal is not lost on the guys, who start considering being Bs more than As, so the girl’s options get reduced further and further.

      The current faulty incentive structure causes this. We can’t blame the animals that human beings are for responding in a predictable way to this screwy Pavlovian reward system. I don’t worry about changing the people; if we change the system, the people will change with it.

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