My epiphany on Sidor

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Make steel, not trouble
Make steel, not trouble

A few years ago I was invited to write the first OpEd piece of my life by the Venezuelan newspaper El Globo.

I was in graduate school at the time, immersed in trying to understand economics, and so I wrote a little piece reflecting what seemed to me a self-evident truth: that industrial policies are the pits. The title of the piece, “El mito de la política industrial,” gave it away.

Many of you might be wondering: política industrial? What is that? ¿Con qué se come eso? Industrial policy is a catch-all term for any policy in which the government decides to support a particular industry.

Let me give you an example. When a goverment decides to spend more money on research and development and technological advancement, they could do it in the generic way: open a public tender for all disciplines, and those deemed most worthy get the funds. The result is that you get funding for many different fields: a bit for engineers, some more for doctors, and a bone or two thrown to anthropologists, etc.

However, if the government decides it wants to prioritize, say, green energy, or research in the oil industry, that means the government is picking an industry and deciding to support it.

That is industrial policy. It can take many forms. Whenever the government actively supports research in particular areas, gives tax breaks to certain firms in certain industries, hands out subsidies, sets up tariffs, or even becomes the owner of a state-owned firm on the basis of its industry being “crucial,” that is also industrial policy.

Industrial policy has a terrible history in Latin America. During the 50, 60s, and 70s, Latin American governments decided the government needed to support this or that industry deemed “strategic,” and we ended up with a bunch of decrepit airlines, factories, steel mills, and other “white elephants” that couldn’t compete in the global marketplace.

During the 90s, I echoed the conventional wisdom of the time, that this was a mistake that could not be repeated. Caldera was President at the time, and our brief experiment with market economics was a receding mirage. As people talked up the idea of a “strategic” approach to development, I tried to write about how it would be a terrible idea, about how the market should be the one deciding what companies survive and which ones don’t. Otherwise, you end up with companies such as Sidor – full of conflict, and downright unviable.

Well, I’ve come around on this topic.

During the last few years, I’ve become interested in finding out more about the Asian experience. By all accounts, these events constitute some of the most dramatic development experiences humankind has ever witnessed. We need to understand them more. As it happens, you simply cannot explain East Asian development without understanding the role of industrial policy.

In Joe Studwell’s encyclopedic book “How Asia Works,” there is an explanation of the history of the Korean powerhouse steel producer Posco. South Korea, a nation with few natural resources, decided long ago it wanted to become a world-class steel manufacturer. Thanks to generous subsidies, a massive infusion of capital, and other incentives, Posco became a global player in this industry. The company was privatized, and it now sells $60 billion per year. It is Korea’s third-largest company.

How did they do it? Why is Posco a world-class company, while our Sidor is practically bankrupt?

The quick explanation is: they’re Koreans, we’re Venezuelans. Or worse, Sidor is governed by chavistas.

But while true, that is also the lazy, unsatisfying explanation. Humans are humans, and we all respond to incentives.

The key, according to the literature, is that a company like Posco was helped as long as it complied with two goals: it generated technology, and it proved to be competitive in the global marketplace. If it failed on either of these two counts, there was a credible threat that support for the company would be pulled. This is the key to the Korean experience.

Think of it this way: when was the last time any owner of Sidor, public or private, demanded that continued support for the company be accompanied by growth in export markets? Have you ever heard of Sidor engaging in research and development? When was the last time Sidor expanded into a different business line?

Sidor, like many of our state-owned companies, was born out of a need to satisfy local demand. Yet selling for the Venezuelan market does not create viable companies – our local market is too volatile, too protected from market forces.

The political situation in Guayana is incredibly volatile. Sidor employees have been striking for days, and the government has repressed them heavily. The company is, by all accounts, bankrupt.

Is there a solution to this mess? Privatization is not an option, because it is politically unviable. And the government cannot afford to continue throwing money at the problem indefinitely.

There are two alternatives for Sidor: either shut it down completely, or engage in “smart” industrial policy, of the type that saw Posco succeed.

The first option is incredibly painful for the people of Guayana. Moreover, doesn’t it make sense for Venezuela to have a large-scale steel producer? After all, we’ve been producing steel for more than forty years, and we have the raw material. Does it make sense to give up altogether? On paper, at least, Sidor makes more sense than Posco does.

The second option is the one we have never tried. Give Sidor a fresh infusion of cash, but set clear performance benchmarks for continued support. Make sure the workers know this. Change the top management, slim the company down, focus on innovation and cost controls, and make sure that everyone knows this is the last train out of Dodge.

The Korean government used Japanese war reparations to finance the construction of Posco’s steel mills. It also let the workers know what was at stake, reminding them every day through loudspeakers of how it would be shameful if they did not give their best effort to make the company succeed.

Sidor is probably going to remain in the government’s hands. But if we’re going to have a state-owned steel maker, we should probably do things right. Do what you can to appease the workers, and then make sure they understand it’s now or never … that they will be judged by how well the company does overseas. If this is not a viable option, then by all means let the company go under.

It would be a shame if this were to happen, but the workers would only have themselves to blame.

1 COMMENT

  1. Good luck with alternative #2.

    Venezuelans are regretfully too “venezuelian” to respond to positive incentives, performance metrics and affected by shame messages/ pride messaging.

    La Meritocracia is a bad word. Together with private enterprise, foreign investment, productivity, etc. malo, malo!

    chavismo has made it their totem to praise socialism, collectivism, and every other -ism, that defies the core values necessary to re float SIDOR, PDVSA and Venezuela at large.

    Our opposition is not very interested either in raisin awareness and praising modernism. Remember Capriles, : yo soy un mejor populista que chavez!” motto?

    I know is a tactical concession to realpolitik and gaining power first before doing what is right (I hope) and all , but some one has to make the point.

    Polar may be the best example still standing…

    • You know, for a person so utterly hopeless on Venezuela you sure do spend a lot of time on Venezuela blogs Luis.

      “Venezuelans are too lazy to respond to incentives” is exactly the kind of non-argument we really don’t need. It’s unscientific and utterly wrong.

      Furthermore, Polar is the exact opposite of what I’m thinking of. Polar is not an exporter. Sidor has to be an exporter to survive.

      • Sorry Juan but I did not mention the word lazy. I said Venezuelans have too many ingrained traits of Venezuelan-ism that hinder any approach similar to your suggestion, without major political , managerial and cultural preparations.

        I have little hope for the country yes.
        Call me a pessimist, or call me a realist or call me what you will I am ok with your labels.

        IMO any solution to the kind of problems you discuss is about incentives, yes. I am a strong believer on that. The point I attempted to make, my apologies for the oversimplification, is that the incentive that drives Venezuelans most is short term easy money.
        Pan para hoy y hamblre para manana….
        Manana! que es manana?’

        Understanding this reality is what made and still makes chavismo’s promise sell-able.

        Regards.

        I do spend some time in these blogs because I appreciate the shared concern for the country and most of your esteem blogger and commenter entries.

        • “Venezuelans have too many ingrained traits of Venezuelan-ism”

          Yes, they used to say the same thing about the Koreans, and the Japanese. It was their lazy culture, their confucianism, etc. etc.

          The difference is that back then it didn’t require such an astounding level of ignorance to spout such nonsense. People didn’t know better, and social science was much less developed so that alternative explanations were fairly underdeveloped. Nowadays though, this level of sheer racist garbage is astounding, only to be found in certain circles of particularly reactionary idiots, such as the Venezuelan opposition.

          JC,

          Glad to see you have finally come to question your neoliberal dogmas. Now you need to attempt to understand what led to the conditions in which Korean firms were able to navigate international commodity chains so as to be successful exporters. They had key geopolitical advantages which Latin American countries do not enjoy, and therefore success came easier to the Asian Tigers. Korea also experienced key changes in the countryside which facilitated market discipline… e.g. land reform, confiscation of large estates (something you strongly oppose in the case of Latin America).

          Keep studying…. there might still be hope for you.

          • “Yes, they used to say the same thing about the Koreans, and the Japanese. It was their lazy culture, their confucianism, etc. etc.”

            When in gods name anybody has said that about Koreans or Japanese?

          • …and the answer is…19th Century Australians! (or convicts, as they then were). My guess was going to be Michegonians in the 1970s and 80s, but Betty beat me to it!

          • The public percepción of koreans is discipline, inteligente and hard work i have never heard people describing Japanese not Korean as you depict

          • Ugh… are you guys REALLY this dense??? The point is that BEFORE Japan and Korea were wealthy developed countries… back when they were poor countries…. people used the same bullshit cultural explanations that people among the Venezuelan opposition like to use to explain Venezuelan underdevelopment today.

            It is completely irrelevant if they were Australian or not (many of the examples are not Australian, but I understand that Canucklehead is incapable of reading past the first paragraph), and it is completely irrelevant that people no longer say that about Japanese or Koreans.

            Christ, this is like arguing with 4-year-olds.

          • Betty, I think you’ve thought about this stuff and I like how you think, in spite of your ‘tude and your snark. Feel free to email me if you’d like to continue chatting in private.

  2. You are totally correct. One leeeeetle problem… The current labor laws make it impossible for even the competent of management to succeed in making such a complex venture profitable. Of course, I could talk about other factors, such as the currency controls, price controls, poor transportation infrastructure, official corruption, insecurity, etc, etc… But, the labor laws all by themselves make any complex industrial venture non-viable in Venezuela.

    My point is that it is impossible to discuss and solve any single problem in Venezuela without simultaneously addressing the global problems.

    • That much is true. There is a lot that needs to be changed to implement this new parameter. But the alternative is bankruptcy for the industry. There is simply no way the Venezuelan government can continue financing Sidor under the current arrangements.

  3. Great post Juan , and one which was needed , the following are some comments on the issue :

    Sidor was created to process Venezuelan iron ore , Iron ore was nationalized ( long before Sidor) and predictably the maintenance and upkeep of installations has been neglected for many years now , as a result the system for mining / transporting iron ore to Sidor has totally broken down , thus Sidor has to import iron ore from other places to meet its needs ( at international market prices) , this is for Sidor a losing proposition . To restart the iron ore supply on an economic footing huge investments have to made to the Iron Ore mining and transportation run down facilities . The govt doenst have the money to make these investments so Sidor is stuck .

    Additionally when the regime discovered that Venezuela lacked the power generation capacity to meet the needs of its population and that blackouts would be happening all over Venezuela it responded by shutting down or curtailing power supply to all Guayana industries in order to have more power available to send to the cities .Shutting power supply to govt owned industries doesnt have the political impact that the blackout of large urban centres has . Even though part of the supply may have been restored to some of these industries , power shortages are handled by cutting the power supplies to guyana industries including Sidor .

    To make matters worse there is a glut of world iron ore in the making , Australia and Brasil are expanding their iron ore production so world prices are probably not going to be great for the future .

    Sidors recovery therefore has to include a first phase which involves restoring the iron ore mining and transportation facilities , the normalization of the power supply to guayana and of course a reorganization and upscaling of its own facilities . The money required for this is not there sdo unless you are able to convince some one with deep pockets to come in and put the money , If none are to be found then the best option may be to shut down the whole thing or reduce the scale of its operations to the basic minimum .

    Maybe the invitation of Chinese involvement in Guayana represents the regimes last ditch efforts to save the industry . Of course before the Chinese step in they will require the regime to put the labour mess they ve created in order . That likely explains the regimes desperate efforts to control somehow the huge labour problems that now existe in Guayana .

    • The problem is that the Chinese don’t transfer technology. If Sidor is ever going to become viable, it needs to *learn* how to make things on its own. It needs to generate knowledge. The Chinese are not going to do that, and neither is any private owner going to do so either.

      • Juan: Your are right in that creating an organization manned by locals that develop the capacity to competently run a complex business such as Sidor requires not only a technological but an organizational and operational culture transfer , a transfer of expertises which the Chinese are not known to do.

        When the oil industry was nationalized , the international companies had created such organizations so that taking over the business was smooth sailing and ultimately resulted in the oil industry being run as a first world industry ( at least until Chavez destroyed it) . The building up of such organization can take decades and entails much more than a simple transfer of technology , it involves forming a generation of career professionals who have command of all the expertises needed to create and run such organizations plus an organizational culture that promotes the prequisite team work values that those organizations need to operate as efficient businesses .

        Can our past experience with the oil indsutry be replicated now that other values , ideological values have become enshrined ?? thats a different question but one that needs exploring because it comes before all others.

      • Sidor knew how to make things on its own, this gobernment and its policies caused the industrial ammnesia Sidor suffers right now

          • Worse yet, Sidor has never even been profitable, when valuing inputs such as water and electricity at their true costs; also, corruption has always been rampant in the Guayana industries. It would have been, and probably always will be, much cheaper for Venezuela to import steel{aluminum, even from the Far East, than it will be to produce it.

  4. Reading the other comments by Roy and Luis F ( which I totally endorse) it appears that before any enlightened industrial policy can be put in place there are other factors which have to be tackled in order to give that policy any chance at success. Including the financial aspects , the labour aspects , the Meritocratic management aspects etc.

  5. It is little wonder that you’re awarded the-best-professor type prizes, Juan. Your style makes even painting walls intriguing and easy to understand.

    As for labor laws that would accommodate changes in industrial policy … these can be changed, with Maudro’s edict and signature. After all, it didn’t take long for a previous (failed) edict to take place: changing ownership of industries to that of the workers.

    But apart from that, the reality is that these simplistic explanations don’t account for entrenched psycho-social complexities, as well as the incentive of too-easy corruption along the way.

    • Thanks syd. I dunno, I’ve come around to the idea that, when incentives are right, you can implement industrial policy successfully anywhere. There is evidence of industrial policy in Asia, New Zealand, Ireland, Finland, the US, even Brazil!

      Here is another example. Embraer was a bankrupt airplane manufacturer in the early 90s, not unlike Sidor today. When it was privatized, the government of Brazil awarded the private company with an infusion of cash (there you go, industrial policy!) on one condition: it set specific export targets for continued financial assistance. The private owners of Embraer remade the company, focused on product development, on streamlining its products, and now … it’s a world-class player in the airplane manfuacturing business. It sells about $6 billion per year, and it’s one of Brazil’s top exporters.

      Do you think the market, left to its own devices, would have led to a company such as Embraer being in place? I highly doubt it.

      • “Do you think the market, left to its own devices, would have led to a company such as Embraer being in place? I highly doubt it.”

        One of us, one of us! 😉

      • I Like your idea, but, don’t you think that the political enviroment plays a part in the scenario you describe.

        Privatize but set goals, sound very nice but all those countries you mentioned have something venezuela doesn’t; the intend, the porpose to encourage industries and businesses.

      • There is an epic and ongoing trade dispute involving Bombardier (a Canadian company) and Embraer. I guess if you engage in industrial policy and you operate within current global trading norms, you are going to have some big legal bills on your balance sheet. I am sure there are many people here that know the ins and outs of this particular case far better than I do (I read the headlines once in a while), but you obviously have to look at broader trading relationships and norms when talking about one particular industry. (By the way, I can’t believe I am saying this, and I don’t support my government spying on Dilma).

  6. In the end, private Sidor was making money, something that public Sidor seldom achieved in its history. So, I think that privatization is the way to go, the question is can it be sold politically?

    • Is the goal to make money, or to develop the firm into a world-class player? The private Sidor was making money. Was it making a difference?

    • I agree that privatization is the way to go, not just for Sidor, but for Alumaven, the cement industry, Corpolec, CANTV, and others. BUT… not until Chavismo is completely discredited will this be politically possible. In the end, all of these will require massive injections of outside capital, and that will not happen unless and until the government accedes to the conditions that the buyers demand. Those demands will include the revisions of many laws, scrapping the currency control system, and the reestablishment of judicial security. In fact, I doubt that, even with the laws reformed, private capital is going to be anxious to jump back into Venezuela. “Once burned, twice shy.” It may require outside guarantors with deep pockets (IMF?) before investors come back. It will be a long time before Venezuela becomes fully sovereign once again.

      • Privatization was not the tool that Korea and Taiwan used to develop. Moreover, it’s politically unviable in today’s Venezuela no matter who is in power.

        • The industrial policy idea is one that has been succesfully tried in other countries and Juan is right to bring it out . the problem with a state owned organization is the way its run by people who dont know how to run a business , more to the point by a organizations which are hopeless at running anything . Creating an organization means bringing one from outside , one which has a record for good management , hiring it to run the company including an incentive for it to profit the better it runs it , and then isolating them from partisan clientelar interference . The company creates an organization using people selected by them alone and after some years its retires to an advisory role while the organization theyve created does the actual management . The secret of course lies in letting them a free hand to run the company on business like terms and hiring and training people who can form an organization which can grow in competence and expertise after a while .!!

          • Bill Bass, yes, the problem lies in that those getting elected are not getting elected for know how to run businesses, not even for knowing to find those who do… Quite the contrary.

          • Ex: Couldnt agree more . That was precisely the point made by such different deep thinkers as Hannah Arendt and Hayek . A system of party politics and good organizational management dont mix . People good at politics are not trained professional managers , When we elect someone to political office we expect them to be good at managing and doing things outside their political spheres and thats seldom the case at all . The thing is to put a moat arround the political sphere and not allow professional pols to jump outside it because all they can do is ruin things prioritizing the political above the rationally pragmatic and functional ..

            A smart pol knows his limitations and tries and choose good trained experts to do what has to be done outside the political sphere . Lincoln didnt take up the uniform of a general and go out to fight General Lee , he knew that he wouldnt be any good at it . That doesnt mean that all trained managers or professionals have to come from the world of business ( although that wouldnt be a bad idea) . sometimes professional managers and technocracies come from outside the business world and do excellent job . one of the unsung heroes of our time (to me) is general Marshall who performed the miracle of creating from scratch a well equiped army to win WW II and later came to rescue the destroyed economies of warn torn Europe with relatively very little money and a staff of some 3 dozen people (The Marshall Plan) . He was not a business leader . Pols can support policies that help a class of technocrats do the job that the country needs of them but they should not think that they are born organizing talents and that thus they can dispense with the latter.

            The french for a while developed a system for training the best technocrats in elite management schools who would serve in private and public organizations ( including state controlled businesses) with brilliance , rotating from one to the other . Business ventures if well organized are better at training and forming good technocrats than Political movements.

            The Chinese ( taking from the Singapore Model) have developed a largely meritochratic elite trained system of officials that are experts at bringing economic growth to their country even though sometimes tarnished with the tarr of personal corruption . They however have created this Mandarin meritocracy at the expense of destroying free politics . They understood they couldnt have both so they sacrificed the latter . Thas a choice that we in the west cannot countenane .!!

          • There is precedent in Venezuela for this type of thinking: one cannot run a pharmacy unless one is a pharmacist. But since we don’t have such a requirement for business knowledge of politicians, why would we be proposing a system in which we put politicians in charge of businesses when we can more easily opt for a privatization alternative in which the politicians simply dictate policy with which businessmen must comply?

  7. So, the proposal is to simulate private incentives without going private? That’s like China deciding to be a capitalistic communist government; let it go, people. The government should strictly be responsible for the sale of the natural resource, and let the extraction and every part of the industry past that be private.

    JCN, you said you used to believe in the market and now turned because of the successes of other nations. Again, I remind you: be careful with small sample sizes. Be sure to include in your learning all the failures of government industrial policies before you conclude that government industrial policy is the way to go. Your post is not too convincing that you’ve been thorough on that. Then again, you’ve shown your lack of respect for statistical basics, so I’m not surprised.

    • “The government should strictly be responsible for the sale of the natural resource, and let the extraction and every part of the industry past that be private.”

      Not gonna happen. Sidor will not be privatized, and no opposition politician, if they ever got to power, would want to privatize it. The question, then, is how do we make a state-owned Sidor viable.

      Of course there are a multitude of industrial policy experiments that have gone wrong. We need to learn from failures, but also from successes.

      • “The question, then, is how do we make a state-owned Sidor viable.”

        By making it as private as politically possible…

        Here’s the problem I see with your post is that you describe a privatization simulation as if you were coming up with something better than privatization when in fact you’re just coming up with something approaching privatization as if privatization weren’t the guiding light. Like that China or Cuba governments pretending that capitalism isn’t their guiding light in fixing their messed up systems.

    • Be careful for small sample sizes? And what are your samples?
      Man, you should get yourself a couple of books on history of the UK, USA, Canada, Norway, Germany, etc.
      What you repeat is what the gringos tell Latinos studying in the US they should do to be prosperous with their country, which is quite a different thing from what the US did with itself (the US is a bit different there than Norway, etc when it comes to energy exports but that was only because the US became prosperous through other means…and to understand that you should learn what the US government did with regards
      to patents – or violation thereof -, cotton, iron, etc, etc since it became independent and through the golden years)

      • Kepler, lol. We’ve gone through this before. You are only looking at the successful countries and seeing that they mostly all used the proposed method. The samples you’re ignoring are the unsuccessful countries who attempted industrial policies, too; there are many, many more of those. Also, just because certain industrial policies worked at some point does not mean other policies would not have worked better. Where have you shown that the methods of another era would be the best methods for catching up in this era? To you I would warn not just about sample size, but also sample representativity.

        What I repeat?! Really, Kepler, you think that my proposals are what “gringos” are telling anyone? Bonus Unconditional Daily Income? Taxation via Seigniorage? Stop making it personal. I think for myself, and expect you to, also.

        • Extorres,

          In history you have this:

          1) EVERY SINGLE COUNTRY that succeeded needed state help as the UK and Britain did.
          That is NECESSARY but not enough. I haven’t said it is enough.

          2) NOT A SINGLE country has succeeded without that, not a single country has succeeded by purely using the free market, etc. You want to be the first one.

          You really do not understand this, do you?

          • Kepler,

            1) I agree that every single success case that you would count as a success case has had state help. I would debate your use of the word derivations of “need”, given that correlation does not establish “necessity”. Remember that correlation *cannot* establish causation.

            2) I could argue that some nations have succeeded without states, but I would certainly agree that not one, at least that I know of, has succeeded by *purely* using the free market. But that’s the key word, purely. I have not, and would not propose a “purely” free market attempt. To be clear, I don’t think a pure free market system is even possible.

            So, I really do understand. Perhaps it is you who doesn’t understand me?

  8. Yes, the age-old development debate between “import substitution” and “export promotion”. It has long seemed odd to see so many detractors of export promotion-based plans when you look at the success of the asian tigers. But in order for an export-promotion plan to succeed, there needs to be a credible threat to the leaders of the companies. Recent events offer some hope in this regard: http://caracaschronicles.com/2014/07/30/one-giant-leap-for-oppo-political-culture/

  9. “Give Sidor a fresh infusion of cash, but set clear performance benchmarks for continued support” …. give it to who?. Would you invest in something managed by someone or something YOU KNOW will fail those benchmarks, someone or something YOU KNOW is is incompetent?

    That’s the problem.

    I’m pesimist, Sidor is a dead man walking, it’s not viable, not with our current legislation. This people killed Guayana and turned into a zombie, it moves but it’s dead.

    May be with a different management, with different legislation.

    May be, if the government creates a new figure, may be lease Sidor, may be give it concession.

    • Yes, of course, there has to be a complete change in the company’s management. What I’m saying relates to general principles for policy, it’s not a recipe. There are obvious problems at Sidor, not the least of which is the people running the company. All I’m saying is that we have other options available besides throwing money at the company blindly, privatizing it, or letting it die.

  10. Here’s another conundrum. Suppose you were to gain power tomorrow, and you were faced with the problem of Conviasa. What would your options be. You could
    a) Privatize it
    b) Let it die a slow death by choking off its finances
    c) Shut down the company
    or …
    d) keep it in the State’s hands, and turn it around by implementing sound target-oriented industrial policies, facilitating its consolidation in the market, streamlining its operations, and giving the company a chance.

    Most of us, when we think of these issues, stop at a). At least I did, until recently.

    • You make sound the option d as the more attractive, but only with a change in laboral legislation, which is imposible if the force correlations doesn’t change noticeably.

      Lets be reallistic here.

      Even if there are shift in power it wont be a big one. The new government will have a very narrow space of maneuver.

      I think, if Capriles, or some other guy from other party, win the presidency then he will be forced to take the option b because he will have bigger problems to tackle. Not because you are wrong, because he wont have more alternatives.

    • JCN, why would you think d) has a better chance than a) when the incentives in the State continue to be counter to the optimization of business? That is, all the arguments you give in providing proper incentive to Conviasa also apply to providing proper incentive to the State, yet we have a petro-state that makes Conviasa want to please the State, not its clients, and makes the State want to please the ones who keep it in power, not necessarily provide what’s best for its citizens.

      • I think what he is trying to say is that privatization is imposible in the current political enviroment, not it is the wrong choice, it is not possible in venezuela right now and i agree.

        • mosquito, he said that privatization is impossible point blank in an earlier comment. But what I am asking in this comment is what makes him think d) will work, given that the same reasons of improper incentives that he mentioned earlier apply to d) not only at the Conviasa level, but also at the State level, so long as the petro-state context exists.

          • In one comment he mention Embraer and he speak of privatization, i think he meant privatize with incentives, or some other figure, yes he is naive but i see what he mean, he is trying to fight the perception public companies have and i simpathize with him, I simpathize with that idea because there are examples in the world of public yet succesfull companies, not in venezuela and not in the venezuelan context but in the world.

          • mosquito, I agree. I do not counter any of that. My only emphasis is the Venezuelan context. We have a petro-state, efficient only at corruption. That’s our starting point.

            Proposing that the solution is to have a group of people in government, who have wrong incentives, and got there via the wrong incentives, to properly manage good incentives for another group of people in an industry for which the government people have no expertise is inherently inconsistent.

            If one truly believes that proper incentives are important, then one must accept that it is necessary to address the improper incentives at the root, the petro-state, and/or propose something that bypasses the bad incentives, via privatization.

        • Exactly. I also understand what he says, I am trying to point out to him that it is naive to think that the d) alternative can succeed, as in the examples he provides of other successful countries, given the incentive structure we have with our petro-state.

    • Opción d is far from the best option. States should not take the place of entrepreneurs. States should only facilitate the way for entrepreneurs to be successful. The venezuelan State has to take care of education, healthcare, infrastructure and many other basic things that entrepreneurs need in order to be successful. What the State may do is to regulate industries. They do not have to sell the whole company to a foreign enterprise. The State may sell shares to venezuelans, to the workers, and so on.

  11. Its more than giving it money , its more than labour legislation , its more than ‘technology transfer’ , its creating an organization that knows how to do things and let it enough elbow room to operate free from petty clientelar inferference .

    Example : Some years ago the rep of a korean textile manufacturer in bangladesh , took a group of 60 selected bangladeshi textile workers to korea to see from the inside how a korean textile company works . they came back two years later , started applying what they learned and founded new textiles businesses which have grown and grown causing bangladesh to become one of the worlds most important exporters of textile manufacturers.

  12. A version of this debate is going on in Canada, at least in some circles, as our steel industry is getting wiped out. We have all the knowhow and the stuff to make it, but we can’t compete in a rigged market. So we disproportionately import steel from the other side of the Globe because it is “cheaper” to do so.

    The complaint is usually currency manipulation (China), unfair subsidies (China, Korea), lack of compliance with or poor environmental and labour standards (everybody else, including China).

    So I guess I am strangely making the argument from the other side on this one. Venezuela should join forces with the rest of the hemisphere and make it harder for China and others to rig the playing field with their industrial and broader economic policies (i.e. keeping their currency low). Venezuela is getting killed by China, which in turn, is loaning it money so it can continue to get killed by China in this area. …Am I right, or what?….

    • I agree with this. Sidor is dead and I don’t see a scenario in which there will be a resurrection of any sort because China has too much leverage. How much money is needed, $500 million or so just to get started? And who is funding Venezuela at this point?

      Even if Sidor were to be wholly funded and incentivized by the government without relying on outside sources of dollars, China would just open the spigot and dump steel at less than market prices to drive Sidor back out of business. Part of their global strategy because frankly, they are bigger and have more money and they capture markets by driving out local competition.

      I do agree with Mr. Nagel’s premise that incentives and industrial policy can create national champions in SOEs, but I do not believe that it will work in this instance. Too many underlying issues and too high of a cost to fix the Sidor issue. Start with something that is at least somewhat viable: PDVSA. (Like that will ever happen…)

  13. Juan: In the end, I think it will be harder to change: a) labor Laws b) Management c) compensation, than to change people’s minds about privatization.

    • Miguel,

      If you don’t change the current rules of the game, who would agree to invest? As Sidor stands right now, the value of the company is the salvage value of whatever equipment is transportable, less the legal cost of shutting it down and paying off the liabilities. Meaning that the company probably has a negative value.

      • I think he propose the state, the country will invest, because is true, nobody el se will.

        The goverment will invest with no pretention of revenieu but for more social oriented reasons, but it have to be to somebody else managing Sidor, it can’t be the government nor the party because it will be the same, it have to be a private company and have to be in other political context there is the naivity of this article

  14. More than an industrial policy, Venezuela needs a government that is willing to let the “success to the successful” arquetype take its course. Asian industrial policy takes an Industry that they are quite certain that it will be successful and creates policy that accelerates that success to levels not imagined before or achieved before. The problem in Venezuela is that “success” is a bad word. Is it possible to take Sidor to a new level and make a new Posco? Yes it is possible. Area venezuelans willing to do it? Not yet…

  15. Great post Juan. But when I read something from industrial policy the first thing that pops into my head is…..Ricardo Hausmann. His atlas for economic complexity is exactly what we should be looking for in this example. I confess myself ignorant about the example of Posco’s rise. Nevertheless, Hausmann’s thesis is not about Government support for certain industries but rather that these inefficient firms should learn from experienced ones, permitting transfer of technology & information between them so that the firm can grow and create new products. The question is how can the Government prop up this exchange of information and support the creation of new industries without distorting economic incentives (e.g providing grants and subsidies to firms endlessly or making them inefficient).

  16. Privatize in Venezuela simply means to give the company to one of the President’s supporters. It will be always be worse than when owned by the government.

  17. There is a fine line between public and private. Even GM was by some arguments in largely publicly held following the bailouts, if only for a short amount of time (and shorter than the government planned). Municipalities have been known to make investments that blur the line between public and private (and sometimes get burned: http://www.nytimes.com/1994/12/08/business/orange-county-s-bankruptcy-the-overview-orange-county-crisis-jolts-bond-market.html)

    The main problems that seem to come through in this debate are that you have to worry about (1) the fundamentals – we are talking large capital small margin (commodity) industries (2) the management.

    Problem (1) also applies to conviasa.

    Oh, yeah, and corruption (or to paraphrase Clinton, “it’s the corruption, stupid”)

    Why is the government involved? It’s social policy, adornos to win political favor.

    You can apply incentives all you want, but incentives cost money. Industrial policy competes with private investment, so you have to ask whether the money would not give a better return elsewhere, and it probably would. You can just as well invest in education and infrastructure.

    My suggestion? Sell off everything. And to handle it politically, use creative accounting and marketing,
    Call the sell-off something else, “an investment partnership”.

  18. In the comments, I am seeing over and over again, the phrase, “politically possible”.

    At the moment, it appears that the only thing that is “politically possible” is to continue exactly as we have been, until of course, we can’t.

    • It’ll take a lot of time to flush the sewage that’s been stuffed into many venezuelan heads, who think that “privatization” means “selling the company at thin chicken price so a capitalist bloodsucker can take all its profits and not give anything back!”

      It’s the “buhonero” mindset, created by the AD idiots who led people to squat the cerros of Caracas first, and then empowered and exacerbated by chavismo to eleven, you might just see a bit of it in the comments of the returned idiotic troll beto.

      It’s in the same group of “antivalues” that constitute the “vivo” way to be, a bunch ofabusive, kleptomaniac imbeciles who praise cheating, stealing, swindling and all sorts of assholery as “acts of supreme cunning and proof of a superior intellect” (Remember beto defending being a shitty bully just because he considers himself one too in another post?), the same people who prefer to fuck everybody else’s lives to get a short-term gain (“Pan para hoy, hambre para mañana, igual el mañana no es mi peo, que se jodan todos menos yo”) instead of building a long-term and even greater gain (A.k.a. capitalism)

      A country eradicates such stupidity through education, which could be fairly easy to expunge such anti values by deeming them as what they are: What compose an asshole, and such assholes must be shunned from society altogether.

      But then again, for now, the first thing that must be done is wiping all traces of chavismo from the government (And several morons and populists from the opposition too), because they are the paragons of the venezuelan “viveza” that’s basically what brought this country down to the shitter it’s now.

  19. About all the “Venezuelans are useless so we are screwed” comments, ex-Sovient countries could rise and me decent after being ravaged by corrupt bureaucrats and military thugs, so can we.

    Besides those comments are useless and unproductive venting, IMO.

  20. Performance runs on competition , in a free market competition is relentless and thus the growth in competence is constant because to fall behind means to go broke or be gobbled by a more competent competitor ,

    In an electoral democracy however competition happens once every five years and the competitors can abuse their command position ( if they control the govt) or retain market by cheap propaganda tricks on an ignorant consumer . Also the profit goal is very clear and makes judging performance easy , not so in the gubernamental arena .

    Thats one of the reasons why private organizations tend to be better performers than government organizations. and yet ….handing activities over to the private sector is no panacea , private organizations can also perform badly specially if they protect themselves by establishing monopolies or oligopolic alliances among themselves or with influential political groups ( the US has a lobby system which sometimes oversteps its boundaries) . For example what can juan say about the Chilean system for the handling of old age pensions ??

    Public organizations can work fine in certain cultural and political contexts if they are protected from political patronage /partisan interference and incentivated to develop a meritocratic culture of high performance , certainly its not easy but doable.

    The problem in Venezuela is that in practice privatization is politically very difficult unless its done in covert form , but that takes imagination , and apparently were lacking in that !!

  21. “Humans are humans, and we all respond to incentives” the best sentence in the article. El Sistema Nacional de Orquestas, Polar, Santa Teresa y la Alcaldía de Sucre are some good examples to support this point of view. Still, I don’t see any logical solution applied by the government once I remembered this http://www.el-nacional.com/economia/Venezuela-precio-justo-metales-exportacion_0_253174756.html … in short, Ricardo Menendez said the following words in regard of the new international prices fixed by the government in 2013.. “Es el Estado el que fija el precio de los productos que se comercializan, no es ninguna mafia que viene a decir cuánto cuesta el producto de cada uno de los venezolanos” … I mean these guys really don’t understand what is a market, even the basics…

    • “… these guys really don’t understand what is a market,”
      It’s because they have a dangerous mix of buhonero and mafia mindsets within their skulls.

      “Es el Estado el que fija el precio de los productos que se comercializan, no es ninguna mafia…”
      What that douchebag didn’t say was “Es NUESTRA MAFIA la que fija el precio de los productos que se comercializan.”

      As you see, they’re just a bunch of shitty hipocrytes.

  22. I second this post. The only possible way for developing a network of productive companies is by a joint effort of public and private efforts. Details matter. There is no easy way.
    Once I’ve read a posting on a peronist blog, where the guy proudly anounced that Argentina now offers small scale atomic power plants. I googled a little and it resulted that it took them about 30 (!!!) years with lots of pauses and lots of public money. Nobody buys this little wonders.
    Volkswagen is owned partly by the land Lower Saxony. Sometimes this close relationship with an political entity even created obscure problems for them. In the 70ties they had to use lower quality steel from the Soviet Union, because of purely political incentives during policy of détente. Other times it helped them through crisis or to support risky investment decisions.
    Even our german labour laws protective especially for employees in big companies or features like unemployment insurance for freelances certainly keeps some foul apples in the basket, but it also may make act other people more cooperative in the nearly permanent restructuring processes and let them take decisions with more hindsight to long term goals. Its complex.

    Development is much more comprehensive than a simplistic believe of the invisible hand. Take the ongoing discussions about reforming the chilean education system.
    This may be exagerated, http://www.estrellavalpo.cl/prontus4_noticias/site/artic/20091017/pags/20091017031114.html , but act like this pupils in Central Europe. First time they give you an embarrassing letter to your parents, who certainly won’t like it, next time you talk with the director and the third time you will become a case for a psychologist. Taking a more comprehensive perspective probably would be much more effective than narrow the discussion to religious believe in “No al lucro” magic or to trust blindly the wonders of decentralization and markets.

  23. The problem with Sidor is that it’s a comodity industry and it’s hard to compete in comodities, except with price. That’s one of the things that made PDVSA stand out among all State owned Venezuelan companies. PDVSA created value, through technology, research, and oil products. PDVSA didn’t just pump oil out of the ground. Until Sidor changes its approach and becomes an organization that adds value, it will forever be just a comodity supplier, and will always be directly affected by ups and downs in international prices and supply. If you grow corn on a piece of land, that land need to be huge and you need to produce a lot of corn in order to get rich. If instead, you process the corn, package it, open areperas where you can sell arepas made with your corn, you will add value in each step and your income will grow accordingly. Sidor needs to do just that in order to survive, either as a State owned, or as a privately owned concern.

  24. I just did a review of the Bolshevik revolution in its early years and the role of the “Council of People’s Commissars” who (among other things) took control of factories and land. Somehow, the factory workers and their unions played important roles in those early years with various committees that made decisions and kept things under control. It was a very different revolution that pushed changed from the bottom-upward. As I see it, the Chavista approach was “centralization” and control. Obviously, centralization and control cannot produce anything; only paralysis of those that do.

  25. I endorse what Luis F says about the importance of Culture in giving economic growth a back wind or a front wind (not as an absolute) , Im particularly concerned not with Venezuelan culture , but with Caribbean culture in general , specially where people are born into unstructured dysfunctional families, were there is no father or any sense of home discipline or any instilled tradition of hard work. Lack of parental care or protection statistically is the kiss of death for personal development . Look at the Asian family and compare it to US gheto families and then see how much better the children of asian inmigrants to the US are doing than the children of typical ghetto families. Culture is a handicap but not an unsurmountable one.

    The puritan work ethic helped North European nations develop quicker than southern european nations, the tradition of strong families with ingrained habits of hard work and discipline does wonder whether it happens in Europe or Asia or even in the Andean countries of South America . Europe after so many years of social colly moddling is slackening off a bit and thats going to have consequences for the future.

    Culture is not the whole story but you cant ignore it as a factor in shaping the economy of countries !!, another pet bias of mine is that I prize women in undeveloped land as being generally better workers and more responsible than most men , we see culture as a unified whole but culture really impact different sexes differently . Many women in Venezuelas poorest segments are Heroes , too bad our machismo makes them into easy victims of worthless lotharios. !!

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