The roadmap, part IV: saving our way to prosperity


???????????????????????????????(This is the fourth part in a series of essays exploring the common policy choices made by high-growth countries, and what Venezuela needs to do to implement them. The motivation for the series can be found here. In Part II, I tackled the importance of inserting Venezuela into the global economy. In Part III, Quico discussed getting the macroeconomic fundamentals right.

I know we are all focused on the street protests, but we need to remember that once the dust settles and the tear gas canisters have been put away, we still have a country to rebuild. In my view, there is never a bad time to discuss these issues).

A few years ago there was a highway construction boom in Chile. As some of you may know, highways in Chile are incredibly modern, and they are all privately owned and managed.

I recall a great sign I saw on one of these highways while it was being built. The sign had a piggie bank, and it read:

“Your pension is helping build this highway. This highway will help pay for your pension.”

That, in a nutshell, highlighted the link between savings and investment, the third characteristic of high-growth economies listed in the Growth Report.

Notice how the two are linked together – in order for firms to have available financing, there needs to be savings, either by the government or by households. High-growing economies have both high levels of savings and investment. In the words of the report’s authors:

“In the mid-1970s, Southeast Asia and Latin America had similar savings rates. Twenty years later, the Asian rate was about 20 percentage points higher. China has saved more than a third of its national income every year for the past 25 years. This saving has been accompanied by prodigious rates of domestic investment.”

High savings rates make investment – roughly understood as the buildup of capital and technology in a society – more available and, hence, cheaper. It allows for new machinery to be built. It helps firms expand and increase their productivity. But if the government is taking up what little savings there is, little investment will take place.

This is not to say that only private investment is necessary. The report highlights the role of public investment in infrastructure as a critical component for growth – the roads factories need, the ports exporters want, and the electricity grid everyone demands. But when the government is more focused on selling rationed household staples, there will be little funding left for investing in infrastructure.

How do you get the economy – households, businesses, the government – to save more? Part of it is fiscal sanity, which we covered already. Part of it is taming inflation, since unexpected inflation is basically stealing from savers to give to people who took out loans – as anyone with a savings account or a fixed-rate loan in Venezuela can attest to.

Yet another part has to do with creating incentives. It’s not that Venezuelans save too little – it’s that we don’t really know how much they save because most of their savings are in foreign currency. Macroeconomic stability will go a long way to helping Venezuelans save in their own country, and domestic savings are better for fostering long-term growth than fickle foreign investment.

Take the Chilean example. Chile’s financial system is highly sophisticated. But in order for a system such as this to grow, it needs an institutional framework, such as the one that practically forced Chileans to save in their pensions and feed the economy. We need something like that in Venezuela. Luckily, we have oil wealth to help us set it up.

There are other things involved in fostering a “savings” culture. One of the main ones, obviously, is a monetary policy that fosters savings. When inflation is low, interest rates will encourage people to save no matter what their ethnic background is.


Another thing that a healthy savings policy does is decrease the cost of risk to households.

I am reminded of ten years ago, when I took my first and only trip to Margarita Island.

One of the things that caught my eye as Katy and I were travelling across the island was the sheer number of unfinished homes. I don’t know if this has changed or not, but there seemed to be an inordinate amount of houses with bare beams sticking out of their roofs, as if they had started to build a second floor but had to stop and leave it at that.

I asked a few of the locals why that was so, and they confirmed what I suspected: in boom times, people on the island do well, and they begin renovating their homes, adding a second floor to their restaurants, or making their small posadas a bit bigger. But then, sooner than you can say “exprópiese!” the bad times come, the funding dries up, and the beams are left there as makeshift concrete-and-metal monument to the oil cycle, a viga pelá.

No Venezuelan needs reminding that our economy is highly dependent on the oil cycle. When the price of oil is high, we all enjoy the benefits. Subsidies seem to spontaneously materialize, and we even have a term for it – “fat cow time.” But then the oil market dries up, the fat cows quickly start looking famished, and we start “tightening our belts.” This affects not just the government or some arcane macroeconomic variables – it affects homes, businesses, and livelihoods directly.

It shouldn’t be this way. One of the points of having a government is that it is big enough and (supposedly) wise enough to do what homes and small businesses cannot do: isolate the population from the risks that emanate from natural economic cycles.

We all dislike risk. Human beings are naturally risk averse, and the only reason we agree to take risk on is if there is some reward that comes with it. But there are ways to safeguard yourself from risk – to diminish the cost of risk. Households do it, and so do governments, but the tools at the government’s disposal are much more powerful.

Think of it this way: what resources do you have available if you hit on hard times? For most of us, the list is short. A few savings here and there. A few connections – family, friends – and some assets that we can sell to stay above water. Perhaps some of us can get loans from a friendly bank. But once that stops, we’re on our own.

Governments are different. The magnitude of financing and the variety of instruments available to a petro-state means that it is much better placed to ride out tough times than households are.

However, in order for governments to act as a buffer, they need to get their finances in order: save in good times and only take out loans in bad times. This requires fiscal discipline. If our government spends more than it earns both in good times and in bad ones, it ends up eating up precious resources that would otherwise be used to build up the economy. It also ends up transferring the risk to households. This only perpetuates the cycle and creates huge costs for society.

There is a term in economics for the effect that a rapacious government has on businesses and households: crowding out. Available funds in the banking system are limited. If the government continuously spends more than it earns, it will need to borrow from local banks in order to pay its bills. In effect, the government ends up competing for available loans with the private sector. The more the government borrows, the less that will be available for businesses.

The unfinished homes in Margarita tell the story. They should be able to ride out the wave, They should focus on the long term, and if the addition to their homes makes sense, they should be able to borrow even if times are bad in order to get the addition done.

But they don’t … because borrowing is expensive, or the funding is simply not available. The government needs to be financed, and that’s the top priority. In effect, a profligate governments means the oil cycle arrives at your doorstep. The few financial tools needed to ride out the storm are simply not available.


There are other regulatory changes we need as well. For example, the government should discourage loans for consumption in favor of investment loans. We need more funding for machinery and technology, for factories and physical capital, and less funding for credit cards. 

Currently, we don’t have that in Venezuela. Overbearing regulations mean that banks are desperate to lend to anyone, for practically anything. Just to give you an example, my brother-in-law just got a loan for a large amount of money that he is going to use to … buy up dollars and pay for my niece’s wedding. You don’t need to be an economist to know that this is not how you build up GDP.

In essence, the third ingredient in the “recipe” for growth is unsurprising. Frugality begets a healthy financial sector, one that will help companies and households ride out the oil cycle and make available the funds we need to invest in the future.

That is an essential element in buidling a country up, and one we must tackle.

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  1. I agree with you on all this frugality stuff, even if I might disagree on what needs to go to the private sector or to the State.

    “It’s not that Venezuelans save too little – it’s that we don’t really know how much they save because most of their savings are in foreign currency. ”
    Well, I don’t know about that. What percentage of Venezuelans have accounts abroad or in dollars? 5%? 10%? And the rest 90%?
    The savings rate in crisis-plagued Spain was about 13% in 2013.
    It would be interesting to know how saving rates – for the average citizen – have developed in Venezuela in the last 70 years…of course, we are the land of the Unrecorded.

    • Kepler,

      Even in 1980’s Sweden, poorest 50% of the population had 10% of wealth (assets, not income), and the 10% richest near of 50% of wealth. Wealth of poor and middle class is essentially composed by their own house and cars (almont nothing if you take into account debts and morgages), so I think it is a good hypothesis to consider that a huge part of liquid savings in Venezuela belongs to people with accounts abroad, and most of savings are in foreign currency.

  2. Juan:
    Since you live in Chile, is it possible for you to reach Mrs. Bachelet’s office with some solid data on Maduro’s regime, on his murky legitimacy, on ethe situation of our country? She does not seem to know much about what is going on in Venezuela (or prtends not to know). I hear she is very accesible

      • Juan, do you think Camila Vallejo can become the new president of Chile after Bachelet? That woman supported Chávez and now supports Maduro (ironically, she’s against the Venezuelan student movement), and just as Bachelet, she’s not that bright either. I’ve always been relaxed about Chile, but now I’m kind of worried about Chile’s democracy and economy. From an investor’s point of view, would you keep betting hard on Chile?

        • I would say she’s not a threat now, nor in the near future. But if the Chilean model sputters and frustrations keep mounting, watch out. She’s got the charisma of a certain snake charmer I used to know, and 100 times his looks.

  3. Im not sure people in venezuela have ever had any taste for saving , if they get a bit of extra money the consumerist instinct is to spend it as quickly as posible on whatever takes ones fancy, by and large we tend to be frivolous spenders . The ta barato dame dos of the boom years is a reflexion of a feature of our national ethos , we think short term , always people are coming up with reasons why there is no sense to saving. ( I can die tomorrow , a mi que me quiten lo bailao, mejor estar endeudado que con plata guardada. I say these things from careful observation of the savings and spending habits of hundreds of relatives friends and acquientances throughout many years . the US is the same because they are counting on a system that will take care of them come rain or shine , The souther europeans specially the young ones who have never lived through a time of need have the same attitude . The asians are great savers because life is not so secure and they feel a need to shore up and secure their lives against stormy times . The Venezuelan short termism is a well verified feature of our national character and that implies no slow accummualtion of long term savings . Add to that the long periods of deep inflation that strike our lives so regularly and the incentive to save is close to zero. There is a cultural handicap that makes Venezuelans generally poor savers.

    • Interest rates have been negative for most of the last 30 years. So people don’t save. So we look at that and think “wow, people don’t save, it must be due to their deep seated cultural identity.”

      Bull. Friggin’. Poop.

      People follow incentives, here and in Cochinchina and everywhere in between.

      • Francisco Im sure you are right in that chronic inflation doesnt help people develop savings habits , but I also think that at least for a large part of the population who live for the now and who are chronic shopaholics there is a cultural factor that cant be discarded . Maybe the two factors reinforce each other .

        Ive been for a long time (more than 30 years) surrounded by people ( friends, relatives , acquaintances, colleagues , subordinates etc) who have made enough money to save despite the inflationary disincentives and yet very few of them have had the patience and discipline to engage in any serious savings . they buy nice cars, splendid clothes , go to fancy restaurants if they are well off or spend it on silly bric a brac purchases that offer instant consumer gratification and leave little behind if they are less well off .

        I have friends who work in multinational retail chains and its always a source of amazement to them how people in Venezuela being more exposed to inflation and other problems buy like there is no tomorrow as compared to their counterparts in other countries , making the Venezuelan outlets more profitable than outlet elsewhere , this despite their recognition that Venezuelan business environment is one of the most challenging in the world.

        many serious Economists have this tendency to think people are almost always more rational about protecting and advancing their long term patrimonial interests than they really are . Plenty of studies now that show other wise .

        Mind you, with the toilet paper shortage becoming so acute in these parts ,there is too much poop going arround for me to add to the problem. This regreatably is not Camada. !!

        • “The researchers say their experiments indicate that living in poverty is itself enough to cause people to make decisions that would seem contrary to those looking in from the outside. Because of that, they say, programs to assist the poor should focus on ways of extracting people from their environments and then providing assistance, rather than offering assistance that serves only to allow those living in such conditions to maintain their way of life.”

        • – “Ive been for a long time (more than 30 years) surrounded by people […] who have made enough money to save despite the inflationary disincentives and yet very few of them have had the patience and discipline to engage in any serious savings”

          To my knowledge, Venezuela has had rampant inflation for 31 years, since February 18th 1983.

          – “they buy nice cars”

          Buying a nice car is a sensible savings and investment vehicle, there’s no safer way to stash VEF 1.5 millions than a Toyota truck (save for an offshore account), is a more liquid asset than real state (and also safer from squatters). This option is more sensible than buying USD in cash, without an offshore account where they can be deposited, because a truck can be insured.

          Interest rates are worth a look: 24% for credit cards , 12% for savings, 18% for bonds; with 50%+ inflation rate means that maxing out credit cards to purchase assets (instead of current spending) is also a sensible financial path, while keeping VEF in savings account long term is financially irresponsible.

          – “[they buy] splendid clothes , go to fancy restaurants if they are well off or spend it on silly bric a brac purchases that offer instant consumer gratification and leave little behind if they are less well off”

          This IS an incentive-caused irresponsible financial behauvior. It’s “I might as well mindset”. Suppose a minimum wage worker exercises fiscal discipline and saves 2 monthly wages (the entirety a common Christmas bonus) for three years in a row. That would be 2 * VEF 2973 for 2013, 2 * VEF 2047 for 2012, and 2 * VEF 1548 for 2011; a grand total of a little over VEF 14000, including interests.

          This worker would be sacrificing celebrating Christmas, in order to save. At black market rates, this worker would have had saved a total of more than USD 300 by 2011 (VEF 3096), more than USD 400 by 2012 (VEF 7500+), an little more than USD 200 by 2013 (VEF 14000+). So by 2013, he had LESS real money than he did when he started in 2011. What’s the point of saving (in VEF) then? He might as well blow it on presents, party, clothes or anything, instead of having inflation blow it for him. Unfortunately, that worker may not have much access to inflation-proof investment vehicles for lack of credit.

          The same principle applies to someone earning 10x minimum wage in 2011, except that by 2013 that person is most likely earning 7x minimum wage, but could have access to inflation-proof investment, due to credit eligibility.

          • From the above comments I guess that no one , absolutely no one in Venezuela has ever managed to save o accumulate any money for the last 30 years and that before that time Venezuelans were universally known for their exemplary thrifty savings habits . That rather than invest in anything else Venezuelans were ‘wise’ to spend all their money in fine luxury cars with lots of trinkets , eat in the finest restaurants , break world records in cosmetic surgery and the purchase of fancy beauty products , drink the finest whiskeys in record volumes , buy trinkets and clothes galore , always rush for the latest novelty no matter the price . Well, all I can say is that from personal observation and experience I disagre with the notion that all of the above can be solely explained by inflation.

            I fully understand the disincentive that inflation represents for the fostering of saving habits , but I ve been arround for a long time , had a chance of observing up close the spending behaviour of hundreds of people about me from all walks of life , lived in other countries , worked with people of different nationalities and one thing that has struck me is that for a mayority of Venezuelans even when their income allowed them to save and invest almost always went for the cultivation of sumptuary consumerist spendrift behaviour .

            Even in the XIX century Venezuelan visitors to Paris were known for their spendrift habits ( read Angel Rosenblats story how the term ‘rastacuerismo’ was born in France ) , this also fits the description of the Venezuelans of the early XIX century by European visitors to Venezuela . (Kepler know what Im talking about ) . there is in my view a culturally rooted tendency in many Venezuelans to engage in consumerist and spendrift habits of the grossest sort , thats why prices at which imports are sold to Venezuela are always higher because we dont care how much things cost . We are always ready to pay more for things that in other countries have to be sold at a lower price .Ask colombian exporters of meat products to Venezuela . they know .

          • “before that time Venezuelans were universally known for their exemplary thrifty savings habits”

            Why did you have to go all hyperbolic?

            I’ll grant you, that before Black Friday, Venezuelans were going through the Golden Age of “Ta’ barato dame dos”, which supports your argument of a cultural inclination. The term rastacuerismo, as I researched it was applied to latin american oligarchies in general, when did the other countries develop their sense to save?

            It would be interesting to compare spending habits of Venezuelans living here vs expats (do expats save more due to lack of inflation?), or the spending habits in other petrostates (Arabian Gulf Sheiks are known big spenders) to see if it’s a “Nouveau Rich” thing.

            In any case, even if it has cultural roots or is a “Nouveau Rich” mentality leftover from CAP’s Saudi Venezuela, inflation and negative interest rates definitely exacerbate the condition. Wouldn’t you agree?

          • J. Once again I totally agree that generally where inflation is higher than interest rates there is little incentive for savings , also that there have been good years ( The Saudi years ??) where Venezuelans were perhaps enticed into becoming irrationally spendrift , but additional to that I have the notion that even where particular conditions allow some Venezuelans to save most of them dont , instead from long years of personal observation I percieve a tendency for many of them to over spend on frivolities and novelies and sumptuary consumption items . more so that people from other countries , from which I inferr that there is something cultural about our generally poor spending habits. In my personal experience the evidence for a love of spendrift spending by Venezuelans is overwhelming .!!

            I apologize for the ´hyperbolic’ comment , but every so often one come across some testimony from the past which paints Venezuelans as not among the worlds most parsimonous people , if we have the money we like high living and showing off that we have it by throwing it arround . (thats where the reference to the word rastaquere as described by Angel Rosenblat in his ´Buenas y Malas Palabras ‘ comes in , because it points to a Venezuelan origin for the word ( if memory serves me) .

            Venezuela has been an oil country for close to a century now , maybe the sudden transformation from being a poor country to being a rich country in the early 20th century caused us to develop a culture of irresponsible spending, a common enough human phenomena which probably afflicts other countries ‘blessed’ with oil wealth , as you rightly point out .

            There may also be something to ex torres article about how poverty makes people injudicious in how they spend their money , but the thing is that in Venezuela the middle class sifrinos are as big offenders as the most poor unless we admitt that even our middle class still has the mentality of poverty having risen from it so recently .

            Thanks any way for your gentlemanly patience in addressing my evidently idiosicratic observations in this surprisingly polemic topic.!!

          • “From the above comments I guess that no one , absolutely no one in Venezuela has ever managed to save o accumulate any money for the last 30 years …”

            Then you’re not really understanding the comments, maybe not even reading them.

    • que cultura ni que ocho cuartos… el bolivar se deprecia mas rapido que un televisor… o un carro… o una viga… asi que compro vainas como mecanismo de ahorro… no porque sea un botarata, sino justamente lo contrario…

  4. I think Venezuelans save little because they earn little, but many Venezuelans understand the importance of saving, be it in real estate, dollars or other assets. It’s also a problem of incentives – perhaps we don’t save enough because we haven’t had the right incentives.

    One could have made the case that Chileans didn’t save enough either, but the change in the Chilean pension system was revolutionary in that regard. As a consequence, Chilean banks are some of the largest and most solid in the region, far more prominent than the small size of the Chilean economy would allow. Take a look at this ranking …

    Regardless, changing this behavior toward savings appears to be a must.

  5. Not too OT: There’s a question that’s been bugging me on the possible impact of SICAD II in Venezuelan banking, maybe I can get some perspectives from fellow readers with a better grasp on economics

    So far, what I’ve read is Quico saying, in a nutshell, that without adjusting the VEF interest rate, there would be a VEF bank run and it would kill or maim SICAD II; and JC saying, in a nutshell that SICAD II as the first market oriented economic policy of Chavismo was a good sign and that being Ramirez’ baby it might enjoy enduring government support.

    I wonder:

    Since SICAD II will apparently require buyers to use a Venezuelan USD account (there are still contradicting statements in this regard), but even if it didn’t, opening a Venezuelan USD account is way less onerous for middle class Venezuelans than opening an offshore account, it will be popular even if not made mandatory.

    Won’t it be possible for Venezuelan banks to go from using their clients VEF to buy VEF denominated bonds to using their clients USD to buy USD denominated bonds? If that’s the case, I’m thinking that instead of bank run, SICAD II may bring about a bank dollarization.


  6. “I know we are all focused on the street protests, but we need to remember that once the dust settles and the tear gas canisters have been put away, we still have a country to rebuild. In my view, there is never a bad time to discuss these issues.” Very true. Thanks for keeping this in mind.

  7. Chile started their “correcção monetária” in 1967 with the Unidad de Fomento. It was first a quarterly, then a monthly and since 1990, a daily index.

    Today 25% + of Chile´s money supply is even inflation-indexed DAILY – according to an email their Central Bank sent me in 2010. For example, all 90 day bank deposits are inflation-adjusted DAILY in terms of the Unidad de Fomento (UF).

    Inflation may be any percentage per annum, but, the EFFECT of inflation is removed in 25% of the Chilean money supply.

    No-one in Venezuela wants to know about “correcção monetária”.

  8. OK, so bad times are a given, which is why good governments consider saving in good times a must. The problem is that good governments, foreseeing bad times, don’t seem as good as they could seem because so much of the money they could be spending goes into saving.

    The problem is that bad governments are also a given. Bad governments will not just avoid saving, they take advantage of the savings of good governments and make themselves seem, well, not so bad. All their spending makes for a good party, forget the hangover. Following governments are left with the cleanup, making them seem like the bad ones, so people will tend to vote for the government that caused the whole thing in the first place, not the one that saved to begin with.

    Given bad governments, then, we don’t just need a good government that saves in good times; we need a system that forces saving in good times, *even by bad governments*, and overspending by any government. The FIEM was along the right lines, but was under government control, instead of above.

    I don’t think we need to look at what a good government should do. A good government already knows that. I think we need to look at how to change our *system* so that bad governments don’t have the power to undo what good governments do. Heck, we need some best practices programmed into the system…

  9. I am not an economist but there a few things that make me ponder ( I struggle to understand)

    My 2 Boys:

    1. Boy one is frugal and saves in every way possible while earning a middle class salary.His creativity goes mostly into his art.He is fine….debt free, and economically prosperous enough .

    2. Boy two never saves.He concentrates all of his creativity into business and earns beaucoup money.He never worries about money which is why he never saves, and he makes money because he takes risks and invests and never needs to save because he has developed an an enormous capacity for creative business ( and I am talking about all legal above board business)

    I often criticize boy 2 because I think if he were to cut off more lights he could send the extra money to the poor in order to feed their families….but on the other hand he is so generous he helps absolutely everybody and has turned himself into a kind of modern day Santa Claus.

    I have some moral issues with waste,and I think that people who are not willing to put their efforts into earning more money, need to save, and any given population will be made up of the 2 types plus another type which doesn’t save and doesn’t earn

    Both saving and creative investment and development are important I think.

    If boy 2 were to save….he would even be richer( quite obviously)…but .his investments tend to go into helping others become richer which is extremely valuable.

    These themes seem very complicated and touch on the abilities( or lack of) of any given person or group and their personal values and habits.

    I might suppose that solutions need to take that into consideration.

  10. Greetings.

    I’ve been lurking here for quite a while and figured it was about time I expressed my appreciation for the many well-written, thoughtful posts I’ve been privileged to read here.

    Although there’s plenty going on in Venezuela on the political front at the moment worth commenting on, it was the Roadmap Series that induced me to crawl out from behind the hedges.

    I admit that I found this discussion about the causes of and remedies for Venezuela’s economic woes, in some instances, to be somewhat skewed towards the speculative and theoretical and away from the concrete and practical, but I do not in any way mean to denigrate the validity of the excellent points that have been made and am perfectly content to ascribe this perception to my semi-illiteracy when it comes to “the dismal science.” I’m more at home in the even more esoteric discipline pertaining to human behavior within organizations and the dynamics of institutional interaction, and it is from this perspective that I’d like to add my dos puyas’(How that dates me!) worth to this conversation.

    With a few peculiar exceptions, we all seem to agree that Venezuela would be better off with a more diversified economy and one less dependent on the production and export of raw materials, be they grown or extracted. But, let’s face it, within two decades after Zumaque-1 was brought in, the Dutch Disease, mentioned with some frequency in this series, took hold with a vengeance, and petroleum had become the mainstay of the Venezuelan economy.

    BTW, in reference to the DD, this article caught my eye:

    Regarding the above: keep in mind that when a sudden income boost, from gas and oil respectively, hit the Netherlands and Norway, both countries had well-diversified economies, albeit more so the Netherlands than Norway, and both had long-established, democratic governments and well-rooted supporting institutions. Such was hardly the case in Venezuela during the first half of the twentieth century or, as some would argue, despite considerable progress in that regard, even during the second.

    I realize that, given the political realities of the country, nationalization of the Venezuelan oil industry was inevitable, but it was equally inevitable that, despite the best efforts of the exemplarily competent people working at all levels in the industry, political meddling would eventually take its toll on efficiency and prospects for sustained, high productivity. Pemex, at the time, provided a poignant preview of what was to come. Even without the blatant incompetence and corruption so clearly evident under the current regime, I suspect that this insidious process, of which early signs were already evident in the late seventies, would still have taken its deplorable course.

    So, it is all very well to speculate and theorize about what needs to be done to put the economy back on its feet after the current regime has met its demise, but unless we find a way of building a firewall between the oil industry and the government and its operatives, the best laid plans for economic diversification and growth are unlikely to advance much beyond where we were during the first CAP reign, and that is simply not good enough to meet the needs of the current population and to assure the political stability that encourages the private investment needed to stimulate economic expansion.

    I don’t say this because I believe that Venezuelan politicians are more corrupt and/or incompetent than those of other countries, or even that government appointees are inherently incapable of running an industry. It is simply that even the best and most honest of politicians march to different drummers than entrepreneurial and corporate decision makers. It comes down to incentives.

    For a democratic government to win elections its must implement policies and programs that will gain it electoral support. In Venezuela, with a large part of its electorate hard pressed to make ends meet, the most expedient way to achieve this is to subsidize food, housing, etc. and to provide social services. That takes oodles of money, and for the same reason Willie Sutton was drawn to banks, politicians and government bureaucrats stretch their itchy fingers out to the rare government-owned industries that produce juicy surpluses: in our case, PDVSA.

    (I don’t mean to imply that injecting money into the economy at the lowest level is bad. It does alleviate hardship and it multiplies its impact as it circulates rapidly before percolating up to enhance capital formation. At least, that’s the theory as I understand it.)

    PDVSA, however, to remain productive, needs to reinvest a large portion of its income in technology and infrastructure, but when it has to compete with politicians for that money, it will inevitably lose. Why? Because the politicians and bureaucrats have the power to write the rules of the game, and these rules are all to often designed to promote their own, frequently short-term, interests.

    That is not to say that an efficiently managed Venezuelan oil industry cannot produce enough income to meet both objectives, but taxation according to rules that respect the need for reinvestment should be the method for steering cash into government coffers, not a direct pipeline into the company’s Treasury Department.

    One way to enhance operational efficiency and to make direct government intromission in the industry’s management more difficult would be to break up PDVSA into something akin to its original component operating companies. Turning some, or all, of them over to internationals that have the best operating records and the largest cash reserves, with the proviso that they make the initial investments to put the companies back onto their feet, could be a logical next step in the process.

    I realize that national pride combined with justified suspicion of international corporate power abuse would make such an approach a hard, if not outright impossible, sell. Still, a case for the break-up of PDVSA into several competing affiliates under the umbrella of a non-politicized holding company directed by representatives from diverse industrial and civic interests could still be made. In this regard, borrowing some pages from Norway’s Statoil playbook might be useful.

    Frankly, I’m not all that particular about how that firewall between the government and the industry is built. There may be far better ways than the one I’m suggesting. But it has to be built if we are to create the conditions that will encourage the goose that lays the golden eggs to crank up production again to a level that will meet the government’s financial needs as well as to once more become the economic prime-mover for other enterprises that will provide the employment and additional tax revenues the nation so desperately needs.

    Oh, and I apologize for being so exasperatingly long-winded. I promise, at least, to try to not do it again.

    • Mmmmm. This is embarrassing. My maiden exposure here, and my habitual way of providing HTML links doesn’t seem to work here. Care to help me out?


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