Hysteresis or survival?
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...
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.
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