Ban the poison

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The object of one's addiction
The objects of one’s addiction

After an eleven-year course on currency exchange controls, it’s time to take our final exam boys and girls. The test has a single question: what have we learnt about currency exchange controls? Is it that …

  1. they are ineffective at stemming capital flight;
  2. they create huge distortions;
  3. they usually lead to an overvalued currency;
  4. they are a breeding ground of corruption;
  5. they are incredibly painful to dismantle;
  6. all of the above.

As you can see, I’ve made this easy for you.

Exchange controls have been pretty much the norm in Venezuela ever since oil wealth struck the country – perhaps even before then, but you’d have to ask a historian about that. Aside from a few experiments in the last few years, the currency market has never been allowed to work.

Isn’t it time we convinced ourselves that they are simply bad policy? Together with the policy of giving away gas for free, they constitute the dynamic duo – policies that are, simultaneously, overwhelmingly frequent and dramatically mistaken.

I understand the reasons why someone might think a currency control is a good idea. Capital flight is a scary thing, so the temptation to stem it by, well, simply stemming it is always enticing. The problem is that capital flight shouldn’t be so scary.

Capital flight is usually a sign of a disease, not a problem in and of itself. When capital flight occurs, it’s because something is wrong in your economy, and imposing currency controls is not the way to fix it. Furthermore, when capital flight occurs, you prevent the pricing mechanism from working, and you impede the valuable reallocation of resources across the economy.

Say, for example, oil prices take a prolongued hit. With currency controls, you prevent society from internalizing this shock. If the market were to function, society would shift to producing things we could export and that the world can now afford. Local consumers would shift away from expensive imported goods and start buying locally. Gradually, society would adjust.

But adjustment is a scary thing for a politician. It´s always more tempting to force the issue, to “control,” to “assert” some non-existent power and appear to be doing something. Control de cambios has become such a regular phrase in our public sphere, I doubt people in other Latin American countries even know what it means. It’s become the poison pill of our policymakers.

Now, I am obviously not arguing for a “clean” currency market. Countries can and do intervene in currency markets all the time, and that’s a good thing. The market is simply too risky, and it’s not efficient to transfer all of that risk to households. So yes, some intervention is in order.

But currency exchange controls, with its discrete rules and its black markets, always transmogrify into a corrupt system that benefits a few. They always overstay their welcome.

The other problem with currency exchange controls is that they always lead to a severly overvalued currency. Have we ever had a time when a currency control has been in place and this has lead to an under-valued bolívar? (Crickets chirping)

We’ve had currency controls forever. Its time to stop and go cold turkey. The only way to show real commitment toward this is to pass a Constitutional Amendment banning them. I hope some politician with a vision proposes this, for the sake of our embattered country.

1 COMMENT

  1. I was unaware that Venezuelan currency controls have such a long history. Has anyone ever produced a study of their effect in Venezuela over the period beginning with the discovery of oil? Also, I am not sure that making free exchange of currency a constitutional principle would be such a good idea. In Canada, where I live, we had exchange controls during World War II, for example, and I am unable to conclude that was mistaken policy. Rather than preventing governments from resorting to exchange controls, ever, wouldn’t it be better to have economically informed governance?

  2. ” The market is simply too risky, and it’s not efficient to transfer all of that risk to households. So yes, some intervention is in order.”
    Boah! Are you more to the left than me on this? As far as I know, the EU intervenes sometimes indirectly with interest rates and the like, just like the US.
    China seems to intervene on a much larger scale but only to keep the yuan UNDERVALUED (thus, the absolute opposite of Chavista Venezuela). This is something we should tell our compatriots.
    Are you sure we ALWAYS had controls? What did we have after Caldera 2 and until 2002?
    Was that also some pegged thingie?

    • “So yes, some intervention is in order.” Er, ah, might I further suggest that ‘outside intervention’ already takes place in the case of Venezuela by means of high interest rates on bond sales. The lack of foreign investment is also a form of intervention. After all, who in their right mind would invest in a country run like a pasty-faced, snot-nosed Justin Bieber driving around drunk in a Lamborghini with an unlimited credit card in his wallet?

  3. The big difference between f currency controls in Venezuela and elsewhere is that in Venezuela almost all of the f currency is generated by Oil, an activity which under the Constitution is controlled by the State, so that up to a point the govt is just deciding how to dispose of a resource it legitimately controls .
    The State of course has obligations vis a vis the population which require it to manage its resources (including its oil generated f. currency ) so as to protect and promote the well being of that population which in turn requires it to manage the f currency under its control in line with such objective.
    Its different when the f currency earnings are generated by private activity for then State control implies an intervention in the way private individuals manage their own resources.
    One take on the whole business is that the govt has an obligation of selling the resources it controls at a fair price, and thereafter use the profits so obtained for the benefit of the whole population ,
    A fair price to me is the market price , thus what the govt might do is sell its f currency earnings to the public at whatever price or exchange rate the market determines and thereafter use the profits thus obtained to fund such public policies as may best protect and promote the well being of the population .
    That way the price of the resource ( the f currency) is not distorted by taking it out of the market and the benefits to the population can be cleanly apportioned depending on the priorities which (democratic) political process determines .
    Of course that doesnt guarantee that the income obtained from the selling of f currency at a market price will be wisely spent , even if a democratic processes determines priority because the temptation will always be there to spend it in things that sattisfy most people short term but which really doesnt improve their lives and that of their children long term . But that again is another problem.!!

  4. Currency controls have been conquered and surpassed
    by our Glorious Socialist-led Leadership.
    Boooyah!
    Back to the Future.
    Back to the Crawling Peg.

    Peg avoids economic stability as a result of frequent adjustments
    (quasi-fixed exchange rate).
    Minimizes the rate certainty and ignites volatility
    since the fluctuation in the exchange rate is kept
    in a tightly Pressure Pot conditions.

    • Merentes back to BCV
      Back to CONTROL the crawling.
      Because everything
      needs the CONTROLLING touch.
      A full circle has been traced.
      It did not work.
      Now a full RED STAR will be traced!
      And THAT will guarantee the
      recurring nightmarish dream.

      [ok Teach, did I fail your test?]

  5. I don’t think laws stipulating bounds on application of currency controls have a place in the constitution. But you could start by giving the central bank free reign. And yes, freeing up the currency markets. And trimming the bloated bureaucracy. Adopt the dollar. Sign a free trade agreement with the USA. I say forgo talk of constitutional reform. If the history of venezuela demonstrates anything it is that the problem is with enforcement of the law, not its creation.

  6. The patient has a fever. A high, out of control, hallucination-inducing fever. The “doctor” called in – really a shaman from sorte – applies cold compresses. They sort of work, for a while, but then stop. A debate ensues – add more ice? less ice?

    Dr. Juan, who has a proper medical education, finds the whole discussion insane.

    “Why are we even talking about compresses? It’s not about the cold compresses! They don’t do anything to address the underlying issue. I know it’s scary, but it’s time to take the damn compresses off and burn them!!!”

    Is Dr. Juan wrong? Of course he’s not wrong. It’s just that in the process of being right, Dr. Juan is still talking about the damn compresses, instead of focusing on the friggin’ Septicemia that’s killing the patient.

    I humbly submit that what’s really hurting the patient is the fact that the debate on cold compresses has gotten so overwrought, it has totally drowned out any talk of septicemia. Hell, even the people who understand the underlying problem aren’t talking about it. It’s all cold-compresses all the time!

    This isn’t a debate worth having, because it isn’t a debate worth winning. Realistically, if you took serious steps to address the underlying infection, the presence(/absence) of cold compresses wouldn’t do much to hurt(/help) anyway.

    • The problem, Quico, is that we have a cultural inability to learn. Fiscal adjustment is all good, but there is an inherent problem in that we have yet to learn the lessons of our mistakes. People really need to understand currency controls are bad for Venezuela. Once they do that, a fiscal adjustment becomes more easy to implement, because you are really left with no choice – or, well, with less choice, since no Constitutional amendment will ever prevent a government that *really* wants to tamper with the market from actually doing so.

      My other concern is the signal it sends. A constitutional amendment barring exchange controls tells foreign investors that we have turned a page in our history.

      • The argument you seek is that is bad hiding the symptoms, because it makes people lose interest in curing themselves.

        It’s like when carpenter gets an elbow ache, for using the hammer improperly. If he takes pain killers he can work a decade, maybe two, but then suffers a lesion that disables him from working, because his body was telling him that he shouldn’t hammer as he was, but he silenced his body.

        If he doesn’t take pain killers, the pain grows a little, and then he has to see a fisiotherapist or another specialist in ergonomics who instructs him to handle it properly or directs him to a more ergonomic hammer. The carpenter corrects his harmful habit, and doesn’t lose use of his arm.

      • Sadly, said foreign investor, in the face of such a constitutional amendment, would probably conclude from recent history that laws and constitutions in Venezuela are at best, symbolic and aspirational only.

  7. Mmm… I’m no economist, but I believe that back when we had the silver backed Bolivar, there wasn’t any currency control shenanigan. It was just silver pieces in standard weights, freely convertible for other silver pieces following the same standard, without any exchange control mechanism, as we know them today (http://en.wikipedia.org/wiki/Latin_Monetary_Union).

    To my knowledge, they only country that’s had something like what Nagel proposes is Panamá, in it’s 1904 Constitution, had an article (117), that said:

    “No podrá haber en la República papel moneda de curso forzoso. En consecuencia, cualquier individuo puede rechazar todo billete u otra cédula que no le inspire confianza, ya sea de origen oficial o particular.”

    It’s a fairly used example by libertarians to advocate cutting back on central banking (http://libertadyrazon.wordpress.com/2006/01/21/100-anos-sin-banca-central-el-dolar-en-panama/).

    Which, I think, forbids the establishment of a legal tender. It’s my understanding that such a clause prevents anyone from being forced to accept a currency they believe to be worthless. It does impose some theoretical difficulties in trade, since not only price but also currency are subject to negotiation. Nowadays, the dollar is the legal tender in Panama.

    I would be okay with a Venezuelan currency whose value comes from being the only way to pay Venezuelan taxes, but that isn’t forced on everyone if they prefer their savings in dollars, or their debts in euros, or trading in Colombian pesos. But that’s a cause I hadn’t advocated since my more libertarian years.

    • Few people know this but in Venezuela, under the Ley del Banco Central ,the use of the Bs is of ‘legal’ tender but it is not mandatory so that unless a specific law forbids it parties can freely agree to monetize their transactions in other currencies . In other words you can contract out the use of bs if you want to . Some laws have been ennacted which limit this rule and which mandate the use of bs in certain kind of transactions , but the general principle is that people are free to estipulate the currency of their choice .

  8. “Control de cambios has become such a regular phrase in our public sphere, I doubt people in other Latin American countries even know what it means.” < a bit of an exaggeration, seeing how our Argentinean brethren are now experiencing a case of cadivication as we speak… but this did bring to mind something RafRam said yesterday that I found odd:

    “La providencia dirá exactamente, lo estamos finiquitando, estamos tomando de referencia a otros países, vamos a ver nuestra realidad, los montos en las tarjetas, los destinos, los días de duración, ya veremos”, indicó (Ramírez)…

    my question is, which countries could possible be used as reference other than Cuba? NoKorea, maybe?

    • Good question.
      As far as I know the government officials have never been asked basically what economic model – we know, we know we always will follow our own, specific model- they see as worth imitating or following, at least in part and in what we would differ.

  9. Venezuelan Bonds continue to skyrocket. If Maduro wants to borrow money, he needs to pay. Someone (smarter than I) needs to build a model which shows at what point the cost to borrow simply exceeds capital requirements.

    • In the real world, that would be easy: the point where the total investment performance (which includes normal/economic profits of the investment) is greater than the real cost of capital is the point where you want to borrow.

      In Venezuelanomics, which functions more or less in opposition to economics that the rest of the world uses, pretty much all investments devolve to NPAs, so you simply don’t borrow. Ever.

      Alternately, you add about 400%-800% to the cost of capital because of the government’s personal version of the raspado, and then see if there’s an investment opportunity that makes sense.

      Unfortunately, no one with decision power seems to realize this.

      I honestly am trying to think of a single investment decision made by the government where they’ve ever had a positive return. I cannot think of one.

    • The only way the regime can get foreign currency loans is by collaterizing their payment with future oil deliveries or by issuing bonds that are used to extort unpaid creditors into accepting them as the only way of getting paid . Dont believe the regime can issue saleable bonds unless it sweetens their purchase with huge discounts or ultra high yields.

  10. One and a half years ago I first heard my Venezuelan friends talking about Cadivi, and it seemed so weird to me that’s what got me really interested in Venezuela. It seemed kinda shallow at first (¡qué ladilla armar las carpetas!), but as time has gone by it becomes clearer and clearer it’s a serious issue that is related to so many structural issues about Venezuela. It just seemed so weird to me, for me it’s part of normal life to take my Colombian debit card and put it in a Canadian ATM and get dollars. Or you know, to walk into a foreign exchange office in a mall in Bogotá.

    • Yes unfortunately the retards that be (Chavez, Maduro et al.) believe that an individual can travel the world with a measly $3k USD per year and they are privileged to be able to exchange their Monopoly Money at a rate of 6.3 vs the real rate of 78.

      As it turns out, Argentina’s currency made a run for the shitter today as well.

      Maybe just maybe in the next 200-300 years human civilization will eradicate itself of terds who think this type of crap can actually work.

      • I read that Argentina just placed a moritorium on the black market exchange. Does anyone have details? Is this something Maduro might contemplate if things get more desperate?

          • It’s something I read a few days ago… can’t find it now, however. It seems hard to believe anything anymore. It’s really confusing. Today, we looked to buy a house that was being offered for Bvf 5.200.000. When we were ready to make the purchase, the price was re-quoted Bvf 13,000.000! Confusing, isn’t it. There are many similar houses we’ve seen at about Bvf 5.000.000. So, what gives? Is the same thing going to happen again?

  11. Juan or Quico (or anyone else, for that matter)

    So what would happen if say, tomorrow, the powers that be decided to eliminate the controls and let the BsF. float freely?

    How would that affect the country 3, 6 and 12 months from now?

    • It would drop like a stone compared to the dollar/euro/rmb. The initial adjustments would be, more or less, catastrophic at least for the first few months. It would likely create similar issues to what you are seeing now: massive inflation, shortages, etc, but initially worse. The upside is that it would help correct the BOP thing (the issue of reserves being sufficient to see through storm is something else entirely).

      The real fixes would come later on, a few months down the road after the bolivar stabilizes. Although by that point, the bolivar may have actually declined, at this point to some ridiculous level, or stabilized at around the black market rate. It all depends on the policies.

      Consider it this way: Venezuela has cancer. A simple amputation of the offending limb/excision of the tumor won’t quite solve the problem. Rigorous and the best professional treatment is required: chemotherapy, radiation, surgery (including amputation), nutrition, exercise… In a really weird way, Chavez is Venezuela. And much like Chavez, the country is being “treated” as he was (and I don’t just mean with Cubans making the decisions).

      The thing is, a simple float won’t solve the problem. It has to be a float with a raft of other economic reforms and the resolve of the government to stand behind it and support its currency through the correct macroeconomic decisions. Do you think this government a). has the will b). has that sort of wisdom and strategic capacity?

    • Most Economists would say it isn’t. Countries lose flexibility and independence when they adopt a currency which they don’t control.

      Currency adjustments are necessary and healthy sometimes. Look at what has happened in Europe. Part of why it has taken so long for some countries to get back on track is because those countries don’t have independent currencies that would allow them to adjust distortions.

      If we dollarize we would be subject to the priorities of the Fed which we may or not be in alignment with.

      In principle I agree with the economists. But this supposes that we would have responsible, knowledgeable, and effective people running things in the Central Bank. That seems to be the exception rather than the rule in our Venezuela. We just don’t seem to be able to take care of ourselves. Also, even if we are real smart and responsible, sometimes things just happen (oil price collapses). Devaluations may be necessary under those conditions.

    • Doolarization? No way. This means you cannot devalue to reduce your internal debt – especially when almost all your income is in petro dollars.

    • @ ECG: Eliminating the the “flexibility” to shred people’s savings is an advantage of dollarization.

      @Arturo: I think that our economy being dollarized makes dollarization a more logical measure. It’s more rational for a country whose income is in dollars to spend dollars responsibly, than it is for it to have its income in dollars and then go on an expending binge of monopoly money.

      In Europe countries like Greece, spent money they didn’t have (some of which went to the Athens Olympics), Greece going as far as hiding and faking financial information, until it became clear they couldn’t pay their debt. If they had devalued, they might just gone the way of us, with continuous devaluations and no spending cuts or tax hikes.

      I support dollarization for pragmatic reasons. LHC’s Black Friday happened on February 18th 1983, almost 31 years ago. That’s practically two generations away, given Venezuela’s high rate of teen pregnancy. After more than 30 years of continual failure, I say maybe monetary policy is not our strong suit, and maybe we ought to use currencies handled more responsibly, it could be the dollar, the euro, or any other stable currency, but I think the dollar is the most sensible choice given that our income is in dollars.

  12. Bloomberg reports that Empresas Polar SA, Venezuela’s largest privately-held company, said in an e-mailed statement that foreign suppliers of food, packaging, and equipment have closed credit lines because of the government’s delays in giving the company dollars at official rate. Empresas added that dollar delays are now the longest since the introduction of currency controls in Feb. 2003.

  13. Trying to make a rough back of the envelope calculation on the govts foreign currency income using govt figures something doesnt quite add up .
    1.- Govt says Pdvsa will be exporting 2.528 tbd of oil which if we take the price of a bbl to be about 95$ multiplied by 365 days makes for an annual income of 86.680 mm $
    2. they also say that they have a budget of $42.000 mm to cover all imports and loan payments for the year which leaves $24.000mm unacounted for .
    3.- they also state that Pdvsa will contribute 83.180.000mm Bs to the Govt ( $13.174 mm) this year which if we add to the above figure leaves us with a surplus of $10.000 mm still unacounted for . Assumme that at least part of this money goes to feed cadivi and sicad .
    4.- Not calculable are the cost to pdvsa of the easy oil program for Cuba and the caribbean and its contributions to Fonden. Could this explain where the rest of the money goes to ??
    Of course this is all very rough and amateurish but does anyone have data that make sense of how much f currency the govt recieves and how it spends it ??

    • You have to correct 2 mistakes in this calculation; it is not 2.528 but 2.329 Mbd (OPEC secondary source) and you need to take out the internal consumption of about 0.7 Mbd and that goes down to 1.629 Mbd of exports (0.8 USA, 0.6 China and the rest goes to LATAM). Condensate and Non conventional oils may or may not be considered there and there is where the lie is… Also look at what PDVSA claim 2.894! This is a Pandora box…. Our Oil industry is in very bad shape and every company still working there is charging (us the Venezuelans) the highest prices in the world for services (no payment) as our efficient management destroyed the capacity, expertise and competitiveness build on our industry on the last 100 yrs. We should talk more about this but how you get reliable data to do a proper analysis is the challenge.

      Here is OPEC January 2014 report;
      http://www.opec.org/opec_web/static_files_project/media/downloads/publications/MOMR_January_2014.pdf

      • AP , I just went by the figures which Ramirez reported to the press (which i dont believe in anyway ) , The report stated that the 2.528 Kbd export figure already excludes domestic consumption volume which was given as a bit beneath 700 kbd , By the way the export figure is some 100 kbd above the export figure which comes out of subtracting the domestic volumes from the official production figure . Unless the data was misreported the official figures just dont match with the income which should have been obtained from those export sales , there is quite a lot of money missing which no one knows where it went ?? . I suspect that the income includes not actual income recieved but the billable income of which a large part never enters Pdvsa coffers (Pdvsa is taxed on billable income not on recieved income) so that would include the income billed but not collected from petrocaribe and alba clients ,deliveries tied to the Chinese loans etc. .
        I totally share your assesment of Pdvsa’s situation and poor performance but am curious about whats happening to the money that officially we are supposed to be getting from Venezuelan oil exports. My own take is that most official oil figures are doctored or concocted by the govt using outright lies and convoluted accounitng ruses and that they don tell the story of whats really happening in the oil industry . Same as you I also recognize that the opacity of the official numbers make the task of figuring out the truth very difficult. Still I wish I knew more.

  14. OT: Vecchio criticizes the Paquetazo and enunciates two proposals.

    [Carlos Vecchio] explained that Voluntad Popular has to distinct economic proposals. The “Made in Venezuela Plan”, to reactivate the economy, create jobs and strenghten our financial system; and secondly, to become the World’s largest oil producer at 6 million oil barrels a day, in order to boost the economy.

    ‘El dirigente progresista explicó que Voluntad Popular tiene dos propuestas claras en materia económica que ya ha presentado al país. “El Plan Hecho en Venezuela, con el cual es posible reconstruir el aparato productivo nacional para impulsar la generación de empleo y fortalecer nuestro sistema financiero y, en segundo lugar, convertirnos en el principal productor de petróleo del mundo alcanzando 6 millones de barriles diarios para que con esos ingresos se pueda fortalecer e impulsar a todos los sectores productivos”, puntualizó.’

    http://www.eluniversal.com/nacional-y-politica/140123/vecchio-medidas-economicas-de-maduro-hacen-mas-pobres-a-los-venezolano

    Good for him. I hope we see more politicians actually saying what they would do differently.

    • J. Navarro, I do hope we see more politicians stating as clearly what they would do, but I hope it’s not always along the lines of, let’s keep upgrading the Ring of Power so that, this time, *with ME wielding the power* you can trust that the money will not be misused.

      I insist, a system that depends on the honesty and professionalism of its leaders –especially in a nation with some dubious education and values– is not a dependable system. I hope we see an honest and professional politician realizing the system must change, not just its faces.

  15. I sort of hate to interrupt the discussion on monetary policy and foreign exchange policy. Or whether we should dollarize the economy or not. To me the real problem of Venezuela lies elsewhere. We have had in place a system that dates back to colonial times when the Spanish crown was the undisputable owner of any mines existing in their realm. Dictator Gomez further reinforced this paradigm by passing a law effectively giving sole ownership of any minerals found in Venezuelan territory (historians may help by giving the name of the law.) Henceforth the government became the most poweful economic entity in the land. Gomez doled out concessions to his close friends who in turn sold them to foreign oil companies. But by passing this law, the government had its income assured and independent of whatever taxes the private sector had to pay. In most countries private citizens and private corporations by paying taxes actually finance government spending. Therefore the government depends on their well being and their willingness and capacity to pay taxes. In Venezuela it is the other way around. The government does not depend on the well being of the private sector because it has its own revenue independent of them. Furthermore, it is the private sector that is dependent on the government’s oil revenue for most of their business and foreign exchange. After Gomez this imbalance became even worse by the passing of different laws that increased taxes and tariffs on the oil sector. Finally, when CAP nationalized the oil companies (which everyone happily applauded) now the government not only had the taxes but the management of the oil companies also. Mind you, there is nothing else in Venezuela, that approaches the economic size of the oil sector. Everything worked almost ok for the privates for some years, until “el malandro” came along. And being the undisputed “owner” of the government which is the undisputed owner of the immense oil riches he said something like: “why should I give part of MY wealth and DIVISAS to the oligarcas, I will keep it for myself and my friends”………..My point is that until Venezuela does not get rid of this paradigm inherited from medieval times, all discussions about best exchange systems for Venezuela seem a waste of time.

      • Brilliant piece !! still I feel that the roots of Venezuelans sick relationship/attitude towards government may have deeper cultural historical roots than the state being the recipeint of huge oil wealth . Venezuelans have a warped attitude towards impersonal authority , norms and institutions that predate the 20th century, that , may even go back to colonial times The fact of the matter is that I suspect that Venezuela as a modern viable state needed the arrival of oil wealth to be born , Before oil we never developed a private productive capacity to generate enough wealth to create a stable State. Tax revenues where minimal , insufficient to allow for the creation of a modern functioning state , The assumption that all ordinary people if given the chance will naturally become high performing businessmen and entrepeneurs just because that happened in the US and in other european countries may be wrong.. Maybe left to our own resources we would never have developed the kind of high powered economy that would have allowed enough taxes to fund a modern functional state. people forget how during the century that predated the arrival of oil we remained a very poor country and poor countries seldom provide the tax base a modern state needs to be organized and operate.. also people dont really think of collective resources as belonging to them , people dont have a sense of ownership for collective goods which they have not personally earned through their own efforts . Res omnium res nullius the romans used to say , this explains how people take good care of their personal property while misusing or neglecting what belongs to all . Topic needs more space which a blog cannot provide , still the topic needs further reflexion .!!

        • bill bass, happy that you liked the article. The argument that the petrostate model developed the supplicant relationship with the state nowhere precludes the effects of other historical roots. Those may need addressing from other perspectives, I would venture via education, but the need to address them should not diminish the importance of the need to eliminate the petrostate model.

          I don’t know from where you get that there is an assumption that all ordinary people would become businessmen and entrepreneurs. Quite the contrary, I believe that many people would choose not to work anymore. The assumption is that even those who don’t work would be helping the economy by voting with their money for goods and services provided by those who do, and that their spending would be a more efficient distribution of money to those providers than through government programs attempting to provide market incentives, and that this all would happen in a poverty-less environment.

          I challenge your historical examples because the kind of distribution I support is far from all past examples, while many current studies from all over the world are supporting, even to a surprising extent, the benefits of such distributions, at all levels, personal, social, economic, sustainability, unconditionality, cost/efficiency, etc.. I refer you back to the many links I have provided, and many new ones that others have brought recently to our attention, in this very blog.

          • Ex: I really have to thank you for all the fun I have reading you , and I mean that very respectfully , if any one has a steadfast one track mind thats you (which I sort of admire ) . I agree with you on the need to change the current petrostate model , but Im not at all enthranced with the advantages of substituting it for a nation of state maintained lotus eaters living from their oil rent . I find that both lacking in credibility and morally hideous. i really believe that what makes us human is that inner drive to work , to be productive , to accomplish things, that work is the fundamental source of human dignity , that to be deprived of work is a curse regardless of a ones ability to eat and drink and be merry without doing anything useful or productive or worthwhile . I call this fundamental human drive the demiurgical urge, the need to project our personality and talents into tangible results which benefit us, those close to us and sometimes humanity at large. Giving money away turns people into molly colled consumers unless you give it to people near the inanination line in which case the money can be well spent in some cultures. Not going to waste your time preaching these ideas to the irretractably unconvinced . Please dont be offended I really respect your position although not sharing it.

          • bill bass, glad we agree on the need to change the petrostate model. That is the point.

            About the rest, there are holes in your argumentation.

            You claim giving money away to people can turn them into molly colled consumers, but you don’t explain why you don’t equally reject giving it to the people in government. Doesn’t it affect them in a similar fashion?

            As to the money, what is worse for the nation, a handful of government people wasting 40% of the oil money, or 100% of the citizens wasting the same 40%?

            Here’s the biggie: your alternative is also a cash distribution. A kid and his father go into a bookstore. The kid says, “dad, can I have money for a book?” If the dad buys the book, that is an indirect distribution of cash to the kid. If the dad would be willing only buy a book and not anything else, then it is also a conditional, indirect cash distribution. And that is what you suggest be the model for Venezuela. A conditional, indirect cash distribution.

            There are several problems with such a model. One of them is that Venezuelan adults are not kids, for a dad figure to be deciding for him. Another problem is that setting up a conditional and indirect system wastes much of the money on overhead, which also takes many people out of the market to work for the overhead bureaucracy.

            Your rejection to unconditional, direct cash distributions is no morally different, and much more efficient than the current alternative, or the alternatives to which you point.

            You may continue to think I am one track minded, though you’d be way off, but consider that such a track may be the only one that actually fulfills the main point: eliminate the petrostate model, which you agreed we need to change. Do you have a better track that also achieves that goal?

          • Ex torres , I guess the best thing (from your perspective) is not to have a govt but rather to license the exploitation of all public resources to private businesses and then hire a private administrator to apportion all of the resulting license income among the whole population which would recieve the various public services (rendered also by licensed business ) against payment of a fee by each beneficiary or service recipient . (like the tv license people pay in the UK to fund BBC) . thus you get rid of govt and convert everything into a business . we would then cease to be citizens to become rentiers and consumers . There would be a central professional body entrusted with the job of awarding licenses to private business on a competitive bid basis , which would recieve a percentage comission on all licenses awarded . You could then hire your army , your court system , your legislators (something by the way which they did in ancient greece when the legislation was too complicated for ordinary poloi to draft) , your police . We would then avoid being a Republic and become a Corporation , which is really the best functioning human organization there can be. Thats a fun vision , think about it !!

          • bill bass,

            Your guess is wrong, and there was no need for it since you could have simply asked me for my perspective, rather than attributing incorrect stances to me. Not only will you find no support in my comments for your guess, I can flat out tell that I would be against such a vision. So, no, I would not convert everything into a business. The question now is whether you have it in you to marry the previous statements with the other information I have provided in the past regarding my position.

            What’s strikes me the most about your comment, however, is not how wrong it is, but about how you unsurprisingly diverted from replying to the topics in my previous comment:

            A) Giving money away to government people affecting them the same way it does to non government people.

            B) A handful of government people wasting 40% of the oil money, versus 100% of the citizens wasting the same 40%.

            C) The morality, inefficiency, and ineffectiveness of your conditional, indirect cash distribution, versus that of unconditional, direct cash distribution.

            D) Your proposal that also eliminates the petrostate.

          • Ex: The ‘eutopian’ exercise I drew for you fits all your requirements , there is no government to speak of , people get their money direct and pay for public services with it , no money is wasted , no more petrostate . Why dont you like it ??

          • bill bass, I don’t like it for several reasons. For starters, the “eutopian” proposal seems to fail to distinguish the difference of roles between government and business. I will gladly discuss this and other reasons with you *if*:

            A) it is a proposal that you are supporting, not one that you incorrectly guessed I do, and
            B) it does not excuse you from replying to the topics at hand before you brought this up.

          • Dear Ex, If you search back in time we had this same discussion ( a very extensive one) in the past , my answers to your queries are in those exchanges which you have apparently forgotten , no need to repeat them now.. Your position is that govts which have oil are always INEVITABLY corrupt, evil, wasteful etc . That they will always become Petrostates , so that we ought to take away from govts their capacity to access oil wealth and instead distribute it unconditionally to all individuals thus reducing govt to its minimal expression.. The corollary is clear , if govt are such irredeemably wicked ,institutions lets reorganize society so that govts are basically done away with and replaced with nice efficient corporations . Govts might remain as small stumps of what they now are but the public functions they now pretend to fulfill are transferred to other kinds of institutions which are dependent of the publics payment of a fee to fund their activities . From your perspective whats wrong with that .?? I know that it streches the envelope of conventional thinking but you are an adventurous spirit and shouldnt balk at that . Taxes are always odious and if the govt is incapable of handling resource wealth why should they be trusted with handling any tax money ??. whatever govts do coprorations can do better!! so following your line of thinking lets privatize govt.!!

          • bill bass,

            I have read our past discussions, several times. As you have done in the past, you are now again incorrectly describing my position. How about you stop trying to describe my position, leaving that to me, and focus on describing yours? For the record, no, I do NOT hold that oil governments “INEVITABLY” become corrupt, etc.. Because I do not hold that position, the corollary you describe is also a false assumption. Not only will you *not* find support for such statements in my comments, I flat out clarified my rejection to the corollary: government should not be “done away with and replaced with nice efficient corporations”. Like I said, I have many reasons to be against that corollary –your incorrect guess of my position– but, for starters, because it seems to fail to distinguish between the differences in roles of government and business.

            You state: “if the govt is incapable of handling resource wealth…” I disagree, government is capable; handling tax money is one of the roles of government.

            You state: “whatever govts do corporations can do better!!” I disagree, exceptions aside, government performs government roles better than corporations, and corporations perform corporation roles better than government.

            You state: “so following your line of thinking” Wrong, for the Nth time of my pointing it out, my line of thinking is contrary to that which you are attempting to attribute to me.

            You state: “let’s privatize the govt.!!” I disagree, government should not be privatized, nor should the inverse.

            I’m thinking your writing is with ill-intent, perhaps because you feel backed into a corner. Noting that you have AGAIN avoided the topics that were previously on the table, I predict you will very soon bow out, rather than facing the holes in your position:

            What is worse for the nation, that government waste 40% of the oil revenue, or that 100% of the citizens get to waste the same 40%?

            How do you explain your position that goverment people would not be as adversely affected by the oil money as you claim non government people would?

            How do you explain your position that indirect, conditional cash distribution is right, but direct, unconditional cash distribution isn’t.

            Describe how *your* proposal, not a strawman, eliminates the petrostate model of Venezuela, which you agreed was needed.

          • Ex. I enjoy reading your responses although sometimes I get the feeling that YOU feel cornered in trying to respond to my comments , in part because your answers reveal some of the incongruencies of your own position . (govt good at using tax revenues but bad at using resource revenues such as oil) . Be it as it may one thing I dont do is ;let someones skewed questions (preguntas capciosas) put me in a corner . I prefer money not to be wasted . period . be it by the govt or by individuals . Whoever can handle money competently and with profit should be favoured to handle it. The dilemma you pose is false because there is a third option you dont mention because you ve given up on the possibility that a reformed system of governance might allow a competent govt to make better use of any public resources than invididuals. You think that the vices of the petrostate are inevitable , I dont !! I do have some idea of what kind of govt one should favour , but of course dont have the space here to develop my ideas in full detail. Funny enough the vision I drew for you ( a bit tongue in cheek I must admit) does reflect part of my ideas about the kind of govt that needs creating , one in which the tasks of government are decoupled form the antics and miseries of partisan or ideologically distorted politics , where non partisan professional technocratic institutions freed from the fetter of demagoguic populist politics can do their job pragamatically and professionally without interference . The army , the courts , the civil service , the management of oil resources should operate as totally independent technocratic bodies . The application of ‘partisan democratic’ principles to the FUNCTIONING of institutions that need to do a job where popularity does not contribute but rather hinders good performance is something that needs considering .!! Politized bodies might help CONTROL those institutions but not have any hand in RUNNING them . You CONTROL abuses but your RUN a results oriented operation . In the first case public opinion is important , in the second case its not only worthless but too often harmful, You dont take a poll to tell a medic when its wise to operate a sick person because polls cant tell the medic whats best . You dont take a poll of all the the students at a university on what kind of grades they think they deserve or a poll of the employees of a large corporation to determine what basic business decisions should be adopted by that corporation . Thats absurd, and yet we apply such principles to the running of public life . Of course such summarized rendering of my ideas ( which by no means pretends to be absolutely right for every circumstance) may sound disjointed or injudicious . There are certain subjects and notions that have become taboo in our culture . but to give you an idea of what kind of model I favour I might point out to Singapore ( not without some important reservations) . Ex, Im sure that if the above comments threaten your deeply rooted views on the virtues of that idol of Unconditional Distribution which so totally occupies your mind , you will discard them without spending a minute to think them through . I understand . But i invite your tolerance to giving them a bit of thought in case there is something in them that ‘in the silence of the passions’ might help expand your perspectives.

          • bill bass,

            I did not say: “govt good at using tax revenues”;
            I did say: “handling tax money is one of the roles of government”.

            nor did I say: “bad at using resource revenues such as oil”;
            I did say: “government is capable of handling resource wealth”.

            How do you explain your translations?

            If I ask what would make a person look thinner, horizontal or vertical striped clothing, I am not implying that stripes is the only thing one can wear. It is not a skewed nor capciosa question. I would prefer to wear solid colors myself, but that is not an answer to the very valid question. So the dilema of the 40% waste is not false. I never said these are the only two possibilites. We both prefer a third option with no money wasted, but that doesn’t answer the question. I wish to establish which of those two waste scenarios would you say is economically worse for a nation.

            You are *again* wrong about my position. I do believe “that a reformed system of governance might allow a competent govt to make better use of any public resources than invididuals”. I do *not* believe that the vices of the petrostate are inevitable. Why is it you keep attributing to me the opposite of my position?

            The ideas you describe regarding your proposed government do not sound disjointed or indjudicious. I would be very interested in more detail, and I can already tell I agree with many of the underlying fundamentals, again seemingly contrary to your opinion regarding me and my views.

        • So I don’t see why we would lack a proper tax base. Gomez didn’t even collect meaningful taxes on oil, and that’s when Venezuela stopped being just a montonera and became a proper State.

          There’s no reason to think that without we’d have nothing. We could have a strong agricultural-agroindustrial sector plus Tourism like Uruguay, Costa Rica, Dominican Republic, Argentina, Colombia or Brazil. It’s my understanding that before Venezuela got oil, its economy was very similar to the Colombian economy,

          Today we could be exporting cocoa, chocolate, coffee beans, gourmet coffee, meat, pork, beans, rice, corn, beer, rum, sugar, clothing, leather, shoes, belts, etc.

          • J, maybe you are right and Im being overly pessimistic , however if we compare ourselves with other countries , we arent necessarily the richest in agricultural resources , Climate , soil fertility, etc give Argentina , Uruguay Brasil , even tiny Costa Rica many advantages we dont have. Most of the soil in the Llanos and Guayana is very poor . Then again most of the crops that we can grow dont earn much money in international trade . Ive looked it up .Just a hundred of barrel of oil compares very favourably to the value of the produce from dozens of acre of cultivated land . The size of our economy even in the best of cases would be a fraction of what it is now. What gives a country an advantage is having a host of productive hard working entrepeneural orderly disciplicined people who love making a buck and I rather expect we are a bit short of that .!! Never been part of our culture except for a minority who are now pilloried by the regime precisely because of their success. Oil has been or curse but also in many ways our door to a better life . I suspect that in the absence of oil we would have an economy much closer to that of central america .

          • Why not closer to that of Colombia?

            Colombian soils can’t be that different from Venezuelan soils. We have lots of crops in common: banana, plantain, coffee, cocoa, corn,etc.

            I think Venezuelan climate/soil allows to breed the same animals as Colombia: cows, pigs, chicken, goats, etc.

            It’s just that economic distortions on our side of the border have bankrupted lots of farmers and made importing a better business than producing. But there wouldn’t be so many incentives to distort the economy in the absence of oil.

          • J , I agree that distortions our side of the border have deeply affected our capacity for economic growth , Still if you look at Colombian economy and specially at its exports its not really as independent of oil as we might believe , Their non oil/ coal exports account for only arround 11 billion $ a year (i.e about 1/3 of total exports) , Agro business exports in turn account for 1/3 of their non oil exports . Their two main agricultural cash crops are coffee ( which having a much larger mountain area than Venezuela they can produce more of ) and meat products , which main market has for years been Venezuela . In fact much of their agricultural export income has tradditionally come from food and some manufacturing exports to a Venezuela which pays the highest prices , higher than ordinary international prices ( yes there is something about the ‘esta barato’ that still percolates our culture ) .
            Having said that they are economically and commercially much better organized than us, their govt is smart in how it foster long term economic activity and growth within the country and they have a work culture which favours hard work .
            They have historically always counted on an historical elite of wealthy , innovative well organized people, who are very succesful in their role as leaders of commercial and public endevours , not just get rich quick profiteers. (our elites got massacred during the wars of independence) .
            They have also had huge disavantages but generally they are well organized economically . An example: In the 90’s Ecopetrol got to pay less interest on their international bond issues than Pdvsa, even though the latter was a much larger and productive company . The reason as per the international financiers: . Pdvsa was ( then) a great company with the wrong address . Venezuelan economic policies were erratic and unpredictable which spooked the markets while Colombia despite its ongoing violence and internal strife was a model of stable no nonsense economic policies which made investing in its bonds more attractive.for international bond buyers.
            People dont normally understand the huge advantage that oil represents , how 40 odd percent of international trade is oil , how agricultural products account for only a fraction of a countrys over all wealth , how dependent it is on climatic and soil factors for its developement.. I dont think that we can forego the advantages that oil gives us , but agree with you that its not enough,, that we must develop a culture and economic policies that allows us to become a more productive and healthy society. Thats part of the challenge . .

  16. I didn’t read CC back then. Should have. Great article BTW. Still, the argument stands. No matter how much good thinking we throw in Venezuela’s direction, it’s all to no avail unless we tear down the medieval paradigm. It impedes the normal functioning of the relationship between the state and it’s citizens. Quick definitely was right! On the other hand think for a minute of the possibilities. Just imagine a Venezuela having thrown away the medieval paradigm and correcting the relationship citizen-state.

    • I rather think on how soon Venezuela would be all that you imagine if we corrected the relationship now. What is sad is how much pushback there is to such a change of paradigm.

  17. I think its a double edged sword. One one side, waiting until Venezuela becomes a failed state. On the other side, pent up demand and opportunities waiting to be seized, as Venezuela has enormous resources and a huge competitive advantage over most of the countries around the world. It’s a painful thing to live through, but once it is over… it will be sweet!

  18. I agree that the currency control is toxic and the cause of many of our economic problems. But the problem in Venezuela is not that currency exchange control are not forbidden, is that we have been governed by people who still applies currency controls after the’ve been prove a failure everywhere else.

  19. In week three in Indy, Jacksonville outscored
    the Colts 19-3 in the second half after trailing 14-3 after the intermission to take a 22-17 win.
    Come to think of it, a vile character directed man’s version:
    Satan. ”  Rather, what so negatively stood out was the kind of typically decadent demeanor to which, alone, the beer and cigarettes had been, therefore, incapable of doing anything but detracting so much more.

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