Hysteresis or survival?

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Survival
Venezuela’s government and its private industry, working together for the sake of the country.

I sometimes wonder why anybody would choose to be an entrepreneur in today’s Venezuela. The risk is enormous, the stress of dealing with the layers upon layers of regulation must take years off your life, and the rates of return … well, they must have been large at some point, but I’m sure by now they don’t justify the heartburn.

Economic theory helps us understand why, though. There is a somewhat obscure concept in international trade called “hysteresis.” The term is an adaptation of a well known property in physics which says that the state of an output depends not just on current inputs but on past ones.

Without getting too technical, in the trade context the application goes something like this: if a foreign firm enters a market, and the exchange rate conditions mean that it begins to incur a loss, the firm will remain in the market and sell at a loss in order to avoid the cost of having to exit and re-enter later.

Let me give you an example. A foreign firm enters a market trusting it will be able to repatriate its profits at a rate of 6.3 “pesos.” An exchange rate shock occurs, and the rate goes up to 188 “pesos.” The firm is bleeding money, yet it decides to stay put in the hope that the exchange rate will reverse back to 6.3, or something close to it. Leaving the market and re-entering later would be much too costly.

In essence, this is what foreign airlines in Venezuela have been doing. I dare say it’s what every private company in Venezuela does. Aguantar … selling at a loss and bearing it, because exiting the market altogether becomes much too costly. When things begin to look up, it’s not like you can easily re-enter. So they wait, biding their time.

I think the time has come for these people to ask themselves whether they are being wise or foolish.

Venezuelan firms are having a really tough week. The managers of Farmatodo, Venezuela’s largest drug store chain, have been mercilessly jailed. This is more galling when you realize that Farmatodo was one of the most willing enablers of the government’s rationing schemes. They have never been vocal about supporting the opposition, keeping a low profile during these troubled times.

Another grocery store chain, “Día a Día,” was also occupied. The owners of these companies have also been detained, and it’s not clar what the company’s legal status is. Coffee companies have had their merchandise confiscated. The airlines operating in the country have been informed they will not be receiving any more foreign currency. And yesterday, Minister Elíias Jaua stopped a truck loaded with food and began selling the cargo at “fair prices.”

In light of all of this, one has to wonder about the wisdom of the strategy of private business.

Until recently, talking to any private company in Venezuela meant getting more or less the same story: everyone was making the best of the situation. Many were incurring heavy losses by being forced to sell at regulated prices, but they were buying time, waiting for the tide to turn for them to make a profit again. Everyone from airlines to pharmaceutical companies to grocery stores were going through the same process.

This week has changed all of that.

Like the tale of the scorpion and the frog, the fact is there can be no peaceful coexistence between private industry and chavismo, and if there is, it won’t last for long. The people in charge can decide to take over your business on a whim, and if they do, watch out. After all, the reason Farmatodo was swallowed up by the government was because some chavista douche-bag went to a store and found two of its cash registers were not open, causing huge lines. (Perhaps the douche-bag in question should have asked himself what role Venezuela’s arcane labor legislation, which rewards absenteeism, played in all of this)

These people are not stable, period. It is time to think whether it makes sense to continue risking your business and, more importantly, your freedom for the foolish task of serving Venezuelan customers, in the vain hope that things will get better somehow, some way. What is preventing chavistas from, say, seizing Polar and jailing Lorenzo Mendoza?

No matter how enchufado the business, no matter how well behaved, this week has shown us that nobody is safe. First they came for Daka, then they came for Farmatodo, and then …

The hysteresis model makes sense … if you assume that the risk of going to jail for running your business is zero. Plug that into the model, and it will probably tell you that you should do one of two things: a) bail, sell, shut down, change into dollars at whatever price, and leave; or b) conspire to overthrow the government … for real.

If business has any survival instincts, they are probably doing one (or both) of these things. The coexistence between Venezuela and private industry is simply gone.

More than a relationship, chavismo and private industry are engaged in a death match, and only one of these two groups will emerge alive. And in this battle to the death, “holding out” for the moment things will get better is a one-way ticket to the SEBIN dungeons.

1 COMMENT

  1. El principal problema de nuestra lucha contra el chavismo es no entender su verdadera naturaleza. Intentar subsistir con un grupo de criminales comunistas con ideas estancadas en los años 60’s es la principal razón de lo que está pasando en Venezuela actualmente.

    Hace años estoy convencido que nosotros, los opositores clase media, somos los principales culpables del infierno socialista. Nunca entendimos que esta “gente” no venía a coexistir, ni a mejorar las cosas, ni a cambiar las condiciones del país. Ellos siempre han sido claros: quieren arrasar con todo lo que existe y hasta que no lo logren (o los detengan antes) no cesaran en su empeño

    El sector privado tiene mucha culpa de todo esto, lástima que tengan que darse cuenta de esta forma.

    • Lo peor es que aun hoy, en los comentarios de esta pagina, en la política alrededor de la MUD y en la opinión publica, se le “exige” al gobierno que “trabaje”.

      Nadie quiere realmente aceptar o entender que el chavismo no es inepto ni ineficiente: Este es el plan, y ha salido perfectamente.

      • or b) conspire to overthrow the government … for real.

        Yo creo que esto es lo que cualquier opositor, que se precie de serlo, debe de estar pensando en este momento (eso si no lo tuvo claro desde la ley de tierras por alla en 2001)

        En cuanto a la mud… Bueno, creo que ellos están seguros que van a ganar las parlamentarias (Guanipa dixit). Igual que íbamos a ganar el revocatorio, todas las presidenciales, 90% de las regionales desde hace 15 años, y un largo etc. Siempre terminamos con lo mismo: Baruta, Chacao y Sucre; 3 Gobernaciones o menos del 40% de los diputados. Así podemos seguir 16 años mas

      • El mayor peo de Venezuela en estos momentos, es su negativa rotunda a tocar al culpable de todo el desastre que se vive actualmente, el fiambre de cera.

        Los “líderes opositores” no se atreverán a poner un ápice de culpa en el fiambre por tres razones igual de absurdas y ridículas:

        1) Todo muerto en Venezuela es un santo, excepto Gómez y Pérez Jiménez, y si te atreves a decir lo contrario y dices la verdad sobre lo basuras que fueron en vida, pues serás de inmediato acusado de que “te estás metiendo con un pobrecito muerto que no se puede defender ¿Por qué estás tan lleno de odio y miseria? ÑÑÑAAAAAA Dx”.

        2) Para el chavista, la única justicia que reconocerá y que le resultará en la satisfacción de su complejo de superioridad, es que todos aquellos que hemos sido tratados como mierda durante los últimos 16 años, tenemos que ir a pedirles perdón y esperarlos con los brazos abiertos, olvidando todas las palizas, burlas y asesinatos como si nada, en pocas palabras “Por tu culpa perdí mi negocio, perdí a un hijo, perdí un ojo en un atraco y tú te cagabas de la risa por eso, pero bueno, dale que aquí no pasó nada…”

        3) El fiambre se encargó de taladrarle varias estupideces en el cerebro a la gente de Venezuela, entre las que está aquella huevonada de la fulana “relación religiosa con el líder” y la otra es que “todo aquel que no es chavista, no es venezolano porque es un enemigo de la patria, y la patria es shiabbe”

        Mientras no se desmonten esos tres lastres del cerebro de los venezolanos, el chavismo se convertirá en el peronismo edición Venezuela.

    • I think a lot of the private sector behaves like the hyena, picking up the scraps when the regime decides to gore someone. That is to say, capitalism is flexible enough to co-exist with authoritarian regimes, whatever ideology they call themselves, although it might not be someone’s ideal notion of capitalism. We’re now at the point when there is not a lot left to gore, so the hyena is also at risk. When the hyenas are running out, the regime will start eating its own.

    • Well, yes.You can say that.

      The real pickle is that Venezuela has become a country that does not produce anything, except crude oil, a declining revenue and mortgaged to the hilt by the regime. And that’s not something you can fix overnight.

      The country is going to turn into an “interesting” and fairly unprecedented socioeconomic experiment in the coming months. It will be the first time that we are going to see a fairly large, modern and urbanized country constrained to turn back to a subsistence economy outside of a war context.

  2. Part of the reason that the Hegemon is so willing to strangle private enterprise (except for those in their hands via straw men) is their, some would say well founded, fear of money from business funding coups/de-stabilization/etc.

    Add to that their fanning of class hatred flames and the everpresent Communist “paja” they spout and you end up where we are today.

    Only when the business class finally understands that it’s a fight to the death will there be any kind of reaction. So many still harbor the idea of not just “it may cost too much to re-enter” but also, “it’s better to keep a low profile lest we be the next ones to be shut down/expropriated”

    A lot of this Farmatodo saga is designed too make the business class continue to question whether or not they should act, after all they went after Farmatodo who have been nothing but helpful to the regime.

  3. Many well known companies have been advancing an exit strategy for years , Polar and Farmatodo among them , setting up a paralell system of stores and factories in places like Colombia and Mexico , they know the score and where its headed but they figure that for a time at least they can make something from what they have in Venezuela , more at least than if they totally abandoned their interests here.

    Until quite recently the Venezuelan business has been profitable, even for some transnationals with paralell systems of stores all over latin america , the operation of their Venezuelan business is a headache , demanding more effort than business elsewhere , their top people admit it , but the profits for a long time have continued to be good . That may be changing now , the country is going down with a thud but the hope is always there that maybe things will improve in time .

    The basic stance is to go short on any Venezuelan investments , seek opportunities in other countries , maintain a basic presence transferring what they can to other places . They are not in the business of subverting countries so there is not much they can do on the political side except make a bit of noise but nothing further than that . Its the Chavista rampant taste for epic paranoia which makes them fearful of business covert intrigues , plots and the like .!! Meantime every one knows that what they do to upcase their punitive revolutionary credentials only harms our daily lives .!! Quite sure there is an invoice waiting to be collected for that. !!

  4. I dunno, I think it’s a very partial analysis. The risks associated with doing business in Venezuela have been *extremely* high for a long time, and guess what, so have been the profits! One thing logically flows from the other: the higher the risk, the more risk-averse businesspeople exit the market, the more the risk-averse exit the market, the less-competition there is for the ones that remain, and the higher the rents.

    If it being really, really, *really* risky to do business could destroy a market altogether, surely there would be no cocaine to be found in the U.S. or Europe. I mean, that’s a *really* risky business, orders of magnitude riskier than running a pharmacy in Venezuela. It’s *so* risky that the only way to keep some very risk-seeking players in the market is with absolutely enormous profits…and guess what, there’s still coke for pretty much everywhere in North America and Western Europe.

    Risks are going up, yes. Firms are exiting the market, yes. The ones that remain remain not because they don’t know it’s risky, but because they’re risk-seeking. Because they’ve calculated they can plough their profits into local real-estate and sell it on down the road at enormous profit. Is it risky? VERY. That’s the point. That’s why they’re there.

    • Good points, Francisco.

      But it’s one thing when you are the manager of a local outpost of a Transnational and a different story when you are the manager of a local concern with no foreign presence.

      Both types of businesses can take risks, but I submit the local concerns have much higher risk since there is no other “parts of the empire” to absorb the hit if it comes.

      I have relationships with many business owners in Venezuela, and most will tell you they are against Chavism, but they feel trapped into keeping quiet and letting sleeping dogs lie.

      A few that I have had relations with for decades decided early on to play both sides of the divide. For the most part they seem to be doing well, and a few even have made more profits from playing the exchange rate game than from actual business. A couple have stated that the government is more than welcome to take their factories if it comes to that, given that they have made 10,20 even 30 times what they could have made by arbitraging FOREX, double and triple invoicing imports and all the rest of it as opposed to simply doing what they do.

      Like many things Venezuelan, there is a healthy dose of hypocrisy involved. They’ll march and shout and say the right things amongst their peers, and then turn around and do business with the regime.

      It’s hard sometimes to remain civil while talking to people like this, but you also know that if not them, someone else would step right in………………………

    • Francisco,

      I agree, except that the very high payoff on that risk only gets realized once there is a change of government. All of the profits put into real-estate will only become “real” once law and order is reestablished and a sane currency exchange system is implemented. The “down side” of the gamble is that the regime stays in power long enough to finally dispense with the concept of private property. For this reason, Juan’s description of this as a fight to the death is accurate.

    • “If it being really, really, *really* risky to do business could destroy a market altogether, surely there would be no cocaine to be found in the U.S. or Europe.”

      When you outlaw private enterprise, only outlaws will be entrepreneurs…

      If chavismo is going to treat every businessowner like the US treats coke dealers, then every business is going to be run by mafias. That is a pretty bleak scenario, but it is not completely crazy for, say, 2017.

      If all major legitimate distribution chains are shut down or taken over (same effect), the black market of stuff will become the main venue to get them. Bachaqueros will be the main suppliers of these nekworks, colectivos and gangs will be the main enforcers and settlers of trade disputes, and politicians will be either bribeb or threathened to stay out of it.

      Bad neighborhoods will have street-corner-type dealers AKA buhoneros (street vendors), setting their booths or blankets full of powdered milk, diapers, medicine and food.

      More affluent customers will just text a guy whose service includes delivery to the home or office.

      Meanwhile, no taxes are being paid, public supermarkets will be losing money and incidents involving tampered merchandise, counterfeiting or expired products might rise significantly.

  5. Agree with Toro on his last comment here. High risks high rewards!

    however the central argument of the post is also bullet proof, The Regime (please be disciplined with words!) is not in for the nation’s interest, just their own. It will not stop until it has sucked all the private industry dry, as it has done with the public treasury.

    The chavista movement is just a bunch of high way robbers, piratas del caribe, criminales organizados that have taken control of the state and are pillaging everyone in town.

    Solo las putas y los criminales prosperan en al venezuela de hoy.

    So with many notable exceptions, hard working Venezuelan private citizen and corporations are at the mercy of the lawless state, and the regime in power. People do not want to realize and avoid facing these truths becaus it scared them to death!

    Then what? what do I do when I realize I live in the wild wild west? Well they decide if they are going to be abused or be abusers and the whole value system is reinforced.

    One problem with Venezuelans is their little seriousness about serious situations, ” no vale, yo no creo…, Venezuela no es Cuba” and the like… Time to grow a pair or face the disintegration of the nation.

  6. Cocaine, risky, isn’t price-controlled. Polar can try to balance corn flour losses against beer profits. Most large international businesses in Venezuela are still skeleton-represented, if at all, to preserve a presence, not to invest increasingly-worthless bolivares in, say, real estate.

  7. I know we are talking higher level business here, but my 75 year old mother in law had to stand in line for 6 hours yesterday for food. They have no toilet paper, they have limited toiletries, and no water filters to clean their water. She has difficulty getting medicine for her health issues. Those in her household who can work have largely stopped working because they have to spend so much time getting basic supplies and the pay is largely worthless now. There are armed guards at the lines to make sure that no one takes photos. Armed guards while families with children stand in line. It is hard to get milk for these children while soldiers have bullets and keep people from taking cell phone pictures. The lines are getting worse. Things are declining rapidly.

    How much more will (or can) the people stand? I’m disgusted by all of our leaders that have allowed this situation to get to this point. The frustration level on the streets is very high. While they are putting business owners to jail, the rest of society is falling apart around us.

    I’m just trying to keep things real. It’s ugly on the ground.

    • Sorry to hear this dingdong, sometimes I feel dysfunctional writing in this blog about “growing a pair” when I am not the one in Venezuela, facing the hardships you report.

      I made my choice and got the hell out of dodge almost 10 years ago, but many family and friends remain back there, its amazing (not in good sense) to see how social control works so well and people (se adecuan y evaden) their realities.

      What I hear and see on FB and social media is that the party goes on, … etc. and a complete suit of avoidance and coping discourses and actions by them.

      Its going to be a hard awakening, and a disastrous hang over there!

      So sad. disgraced by our leaders rings close to my own thoughts.

  8. I guess that daka is owned by some relatives of the drug kingpin tarek al salami (He was the guy behind the 1,5 ton cocaine plane), so they got 6,3s to buy all the stuff they sold in the infamous “dakasos”

  9. The past 5 years has been the most profitable time in Polar’s history. This is not a gossip, my wife works there.
    There is no such things as poor “empresarios”, high risk high return. Go somewhere else and try to get the same profit margins you get in Venezuela, competition will eat you alive.
    The real question is: How much profit is enough so you are willing to risk personally safety? In Venezuela, a Corolla is considered a luxury vehicle. How much money is your safety worth?
    I personally know Pedro Angarita, he was very stable in Miami 2 years ago when he decided to take the Farmatodo offer. He did not need the money but he was willing to take the personal risk for the personal gain, that simple. I tried to convince him but he said it was an offer he couldn’t refuse.
    I’m saying he deserved what is happening right now? No, he doesn’t deserve to be in jail as he was not doing anything illegal. He is innocent and I am really concern about his safety. In the other hand, he was aware of the risks and decided to assume them, he knew exactly how powerful the other side was.
    The gorillas pictures is very accurate, the next 4 month will be times of personal revenges and dirty games. The strongest and more agile will be the side that will win the power war in Venezuela and define the next 10 years of our country.

  10. And all those so called business men who made, and are making, a fortune in the manipulation of the exchange rate mechanism need to be named too. They are on par with the narcotraficante scum when it comes to the systematic destruction of Venezuela.

    • So, if they open the shop that says they are selling $20 bills for $1, you won’t get in line? Did you never buy cheap plane tickets? Yes, it was stupid economic policy, but people are human. They are only responding to the rules of the game. Yes, the people getting rich are unscrupulous and unproductive, as well as being the types of people I wouldn’t invite into my home. So, change the rules of the game so that productivity is rewarded instead.

      • What would happen to society if price controls were eliminated tomorrow and the currency made freely convertible? Would prices go up so high that a good portion of society could not buy food?

        • I believe that in such a scenario an initial rise comes before a settling down.

          Such a step should not be taken unless productivity also rises, along with some mechanism to palliate the erosion of purchasing power temporarily

          • I agree completely. A sudden and abrupt end to the currency and price controls would be disastrous for the vast majority of Venezuelans. There must be a gradual easing, published in advance, and scrupulously followed. It will still be painful, but it must not cause actual starvation.

        • Removing price controls and making the currency freely convertible wouldn’t make the situation radically better overnight. But at least, it would replace scarcity – no stuff to buy at all, at any price – with high prices – each consumer having to choose what they can buy according to their budget.

          It wouldn’t be great but it wouldn’t be that bad either. With $50 to $100 monthly income, which is about what minimum wage would amount to, and country access to basic staples at international prices, you don’t eat well but you can feed a family of four and each have their 2000 kcal/day.

          The real benefit of removing price controls and making the currency freely convertible would be elsewhere, simply in bringing back the semblance of a functioning economy, something Venezuela doesn’t have right now, and less and less so.

        • It would kill like 90% of the mafias overnight.
          At international prices, no smuggler’s gonna create a line to buy any first-need product to engage in hoarding and monopoly.

      • No, I never jumped on the cheap airline tickets with upgrades at giveaway prices too. Neither did I claim the dollars a la internet.
        Just didn’t seem correct to me. So I avoided that which I could avoid and feel at ease with that, very much at ease.

  11. The stats show that there are not fresh investments being made in Venezuela , some are announced but when it comes to actually bringing the money in and starting the business nothing happens . Those already here are wary of making investments and only do so very ocassionally because they cant take their money out .

    The country is not investment friendly , quite the opposite all business in the end are paranoically seen as predatory and criminal and persecuted . I know of quite a few cases.

    Those already trapped inside can sometimes manage to survive and some few to even thrive if well connected or unscrupulous in their gaming of the system,

    Then there are some businesses which are very difficult to sink because they are almost automatically profitable . One of them the beer business . Remember that when el Cojo Velasco in Peru took over the banks people who needed financing had only one place to go , the beer companies , every one else was broke but the beer companies were doing great. and accummulating cash they didnt know what to do with .

    • I don’t understand why there is so little choice for beer in Venezuela, particularly for something so easy to make. And the supply remains so resilient. Does the virtual monopoly represent some kind of market failure that pre-dates Chavismo, and how has the beer hegemony survived under Chavismo to date, untouched and unchallenged? And last I checked, it was relatively affordable still, but unregulated. I don’t get it. The world could come to an end and there would still be beer in Venezuela, supplied by a private company.

      I think one of the other commenters here had some interesting observations on this issue a while back, but I am still puzzled.

      • Beer surely is easy to make but extremely hard to distribute. That’s why it’s so difficult to compete. It’s a brand and logistics game, not a manufacturing one.

        • At one point decades back there were only two brands of beer in Venezuela , Polar was by far the most popular and Regional mostly sold in Maracaibo was the second , when Regional had a hard time continuing Polar bought it and instead of shutting it down made it mandatory for wholesale buyers to Polar beer to buy at least some cases of Regional thus ensuring its survival . There is a beer brewers ethos or mistique which is very peculiar. In Polar they used to brew a special kind of beer only for the initiated which wasnt sold to the public but could be consumed inhouse . In hot weather countrys beer is the most basic of stapples , nothing can compete with it . !

          • All the original brewmeisters Polar started out with came from Czechoslovakia.

            I have been lucky to be able to taste some of those “private” brews. They usually used the old green Polar bottles to bottle them in and many times would leave some of the yeast in every bottle too.

            Good stuff!

            As to why so little choice, I once asked Felix Scheuren, who used to head the food side of Polar that the Venezuelan palate for beer was pretty unsophisticated and that straying from what was then either Polar or Solera was not a great formula for sales.

            Cerveza Zulia was for a long time Polar’s competitor, but it fell by the wayside due to Polar’s superior distribution and sales. As Bill Bass stated, Regional also.

            Brahma tried for a while, but never really caught on.

          • When I came to Venezuela (2006), there was intense competition in between Polar, Regional, and Brahma. Some of the marketing stunts were so extreme that I used to call it “Beer Wars”.

        • You talked about logistics/distribution, but how is the online shopping in Venezuela? Do you know? Can people buy groceries online? Any sort of products online? What are these sites?

          Because one thing that certainly brings prices down and increases availableness is online shopping.

  12. ” b) conspire to overthrow the government … for real.”

    Queue #UNO and #RAV promotions? “Oposicion” vs Oposicion?

    Man, this is almost funny if I hadn’t called it a month ago. Expat-strat is an open book.

  13. For some reason this Farmatodo ordeal has really impacted me. I think it has to do with the fact that we have Farmatodos in Bogota and they’re part of daily life, so imagining that this is happenning in a place just like my corner drugstore makes it feel that much more real.

  14. Last night from the BBC: Venezuela Maduro: State seizes supermarket chain

    The Venezuelan President, Nicolas Maduro, has ordered the takeover of a private supermarket chain by the state food agency.

    Speaking on television, he accused Dia a Dia of hoarding food during huge shortages in the country.

    This week, soldiers and government workers were sent to branches of a large supermarket and pharmacy chain to supervise sales.

    Venezuela’s economy has been heavily affected by the drop in oil prices.

    Analysts also say currency controls that restrict the availability of dollars for imports has played a key role in creating the scarcity of many items.

    Directors and executives from both Dia a Dia and pharmacy chain Farmatodo were arrested on charges of destabilising the economy.

    Speaking on television, President Maduro did not say that the takeover of the Dia a Dia chain would be permanent.

    He said the chain “was waging war against the population” and the national food distribution agency would take over its running.

    Mr Maduro has said many businessmen are conducting an “economic war”, colluding with the political opposition to oust his government.

    What will be left of Venezuela by year’s end?

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