How much economic damage did the ¡Exprópiese! Era do to the Venezuelan economy? How much of the blame for the country’s GDP implosion should we assign to expropriation as such, and how much to the rest of the government’s crazy economic policy framework?

These aren’t rhetorical questions: the answer isn’t as obvious as it seems. Of course, nobody except a graduate of Patrice Lumumba University would confuse expropriation for sensible policy. But saying something is bad policy is not at all the same thing as saying it’s the main culprit for a given problem. These are burning practical questions with direct policy consequences.

The view of Primero Justicia is clear: Julio Borges’s flagship proposal for the new National Assembly is the Bill to Activate and Strengthen National Production – an ambitious plan to undo the legacy of the ¡Exprópiese! Era.

The Bill’s central idea is for the National Assembly to set up a commission to review the accounting of every nationalized farm and business in the country. If the committee finds that a given nationalized business has increased production, it stays nationalized. If it finds that it has decreased production, it auctions off its management to a new team of administrators who earn the right to buy the firm outright after one year, provided they can show they’ve increased production in that time.

It’s a beguiling idea: nationalized companies suck because the new managers are a bunch of funcionarios, bureaucrats with no skin in the game who don’t know what they’re doing. Put those same companies under the control of better managers who have something at stake, and they’ll do better.

That’s the pitch, anyway. But does it make sense?

I don’t think it does.

Why? Because Venezuela’s economic implosion has relatively little to do with microeconomic problems like who owns and manages firms. Venezuela’s mess is basically macroeconomic. In fact, we’re a textbook example of the Macroeconomics of Populism. 

In other words, Venezuela’s expropriated firms have gone into a productive deathspiral for the same reasons its private firms have: out of control spending leading to runaway deficits financed by printing money in the context of rigid price controls over everything, notably including currency.

 
In a perverse way, MUD needs the Constitutional Chamber to strike down this bill to save it from itself.

So let’s just think about what happens if you try to apply something like Primero Justicia’s National Production Law in the absence of serious macro reforms: first, you’re going to find that every nationalized firm has to be spun off to new private managers, because in the context of a hardcore recession lasting two years now, you’ll be hard pressed to find any firm – nationalized or not – whose production has gone up in real terms.

Let’s look at this chess game a few moves ahead, though. Now you’ve spun off all these erstwhile nationalized firms to new private sector managers and given them a year to turn them around.

They get into the office on the first day and find out half the machinery on the balance sheet has been sold off, the other half doesn’t work for lack of spare parts. They still can’t get dollars to bring in spare parts because the official dollar is still at Bs.10, DiCom isn’t really supplying all comers on the secondary market, and the black market rate remains unaffordable.

They’ll find that even if they could somehow sidestep all these problems to increase production, it wouldn’t be worth it, because Price Controls would bar them from selling at a profit. And they’d find that while the prices they can charge for products are frozen, their wage costs are still going up every couple of months as new, executive-branch wage increases are passed.

They’d find, in other words, that they’re running businesses that aren’t viable – and not because of anything they’re doing. They’re not viable because the macroeconomic climate is so hostile, virtually no business could be viable, no matter who’s running it. Within 12 months, they’d surely fail to increase production, and the firms they’d taken over would go back into state management.

I do grant that the National Production Bill is a decent piece of political salesmanship. It positions the opposition as pro-private property, worried about jobs and income, etc. The marketing it top notch, no question.

But just imagine – and I’m not suggesting chavismo is clever or imaginative enough to do something like this, this is a pure Gedankenexperiment – that the Supreme Tribunal’s Constitutional Hall does let this law take force, and you’re forced to implement it while Maduro is still in power. It’d be an enormous fiasco! Within 12 months, the Assembly’s Committee would be re-nationalizing firm after firm, each having failed to raise production, as promised.

In a perverse way, MUD needs the Constitutional Chamber to strike down this law to save it from itself.

Is this really what we were fighting for when we fought for control of the National Assembly?

Let’s be clear: there’s a high chance Venezuela is facing political transition this year. The new government, if it comes, will need to hit the ground running: on the basis of worked out plans and legislative strategies, of an actual idea of what they’ll do in month one, month two and month three. With a road map. Because once you’re in power, a marketing pitch is about as much use as an ashtray on a motorcycle.

There’s a discomfitting sense that the boring prep work it takes to get ready to run the country is not work the opposition is really interested in. That they still see what they’re facing as basically a sales job: a persuasion operation where you win the game if you win hearts and minds. It’s as though they’ve been out of power so long, they’ve forgotten what it means to prepare to govern.

I want to be proven wrong about this. Very much. I read the National Production Bill heartily hoping to be proven wrong – much like I read the Central Bank Law Reform Bill. I keep hoping behind one of these proposals, the opposition’s hidden technocratic heart will be lurking.

So far, no luck.

17 COMMENTS

  1. Reforms within an overall economy of insanity won’t work.

    Grilling the managers of nationalized firms might be a useful tactic, though, if we forget about the privatization option this Bill proposes.

    I think it would be fun to hear–and publicize–their answers to questions like: “What would need to change in order to make this firm a success?” Or “At what price must you sell your widget so that we don’t have to spend money to keep you in business?”

    I’m sure we could all think of some good ones.

  2. I agree that this law is deeply flawed. It’s mostly a well-meaning law, with a flawed execution. Political marketing gone awry. It has become quite clear that MUD’s legislative efforts are almost entirely focused on getting rid of Maduro, and not on changing the system. The reform of the BCV law is a good example: they focused on putting the BCV back under the control of the AN, as a way of cutting the government / Maduro’s revenue streams. These are tactical moves, not nation-building moves. The latter have been put in the back burner.

    On the other hand, I don’t agree with part of the diagnosis. While it’s true that the macroeconomic mess affects both public and private companies, that doesn’t mean public companies are broke because of the crisis. Public companies already had a terrible record before the money-printing madness started (in 2009, but didn’t kicked-in in full until circa 2011). I reckon most would still be broke even under excellent economic conditions, simply because companies can’t function properly if managers constantly empty the coffers to enrich themselves, strip assets, and in general don’t give a shit. Companies so mismanaged go broke in any country, under any conditions. As an example, consider the company in the picture, Agroisleña. A well-functioning company was destroyed in a matter of months. It was the work of the new managers, not the economic crisis.

    Actually, I would argue that public companies, under proper and non-criminal managers, should have a better survival rate in the current conditions than private companies. Why? Because while both face almost inescapable losses due to price controls, public companies have the State behind them to cover these losses. Private companies don’t.

  3. Good practical comments to this bill, I guess that what the bill if ennacted would do (if its not shot down by the TSJ with some made up argument), at least in its first stage, is to reveal and advertise that nationalization of productive private businesses is a failure , adding to the breakdown of the countrys productive capacity and to the current state of scarcity that the country is suffering under……that the regime rethoric about the need to increase production is farcical because in the past its done everything to destroy production thru its nationalization policies.

    The review of the details of each company can be a lenghty process , probably concluding in a years time or more , maybe by that time the regime has fallen and the recovery process is already under way allowing for conditions to permit the de-nationalized companies to start operating in a normal commercial fashion again.

    One thing I would suggest is creating a team of experts (non partisan) to decide how much time to give the prospective purchaser to restore the company´s production , for some 1 year would be too little , for others it would be too much, Much depends of the kind of company it is…and its state of disrepair. Restoring a Sidor is one thing , restoring a Fama de America quite another……

    • The production increase issue can be easily managed by the reglamentation of the act, p.e. by doing the accountability in business size by monetary units. Much of the companies would have bigger business volume in the future as inflation grows the amount of monetary units. In the case of agricultural properties it could take in count the monetary value of the potential services (fertility yielded over time, environmental services to be provided, etc).

      In the case of the Guayanian basic industries the effect of the shut down of operations because of the power shortcut is possible bigger than the real loss of operative capacity of the facilities.

      It depends on how it got reglamented by the next government if the proposal isn’t blocked by the TSJ.

      • You are right in that there are things which shouldnt go into the law because they are too specific and instead should be put in the regulations, among them the exact manner in which they will be audited , and if returned to private management under what specific conditions . What worries me is that there be a one year fixed period in which to increase production , a one size fit all rule is not realistic considering the many different business which have been nationalized and the many variables to be considered from case to case …for example a more practical method would be to auction the business so that every party wanting to buy it proposes its own plan for its full restoration , allowing for the best proposal to be chosen , subject to the condition that if the proposal is not met then the business is open for acquisition by someone else.

        What however is good about the law is as a way of making public how all the nationalizations have failed , led to lower production thus proving the states ineptness at the productive management of formerly private businesses .!!

  4. Again Toro is mixing badly the things.

    As Pedro Rosas stated, the diagnostics is not correct, Toro misses or avoids the previous and continous methodology of destruction and defalcation of the nationalized companies, whose effects came into play well before the macroeconomic collapse, as a proof, why not all the private sector is ruined in the same way as the nationalized one?.

    We can see this project as one of two agendas: a) as a part of and integral plot to restore the functionality of the economy, being just that, a part of a whole; or b) a mermaid’s call to please the pro-oppo voters with no connection with any kind of economic policies.

    I guess it is being worked as agenda (a) would suggest, because the political cost of a big fail after the promise would lead to the dissapereance of the current pro-oppo politicians, i don’t think they would be commiting suicide in the very top of the tide. The big scope is to mitigate the collateral damage of the expropiation policy of the Chávez govt, and to set the basis for a retaking of the companies at the momment the prices and currency controls and the current economic (macro and micro) get dismantled.

    Avoiding an long lasting series of complaints needs a legislation basis, and letting the previous owners to retake control of their properties in a non costly way for the State could be the other side of this legislation project.

    By other hand, I hate the populist name for the project, it should be clearly name “Property restoration and Bolivarian government’s natiolization reversion act” , but the use of political euphemisms is an affliction venezuelan opposition has to start to deal with.

    • Saying anything against “shiabbe’s legacy” is considered taboo as it might hurt the sensibilities of the little unique delicate snowflakes that the chavizta base are.

  5. Venezuela está infestada de populismo asqueroso hasta la médula, y no es para menos, es algo que viene desde los años 60, donde a la gente se le vendió la idea ridícula de que podían tener estándar social de vida de multimillonario con un trabajo de sueldo mínimo que no requería ninguna preparación ni experticia, y que si algo salía mal, el gobierno podía venir a salvarte de tu propia estupidez.

    Falacia que se la metieron hasta por debajo de la cédula a la gente más ingenua los comunistas castristas asentados en el país, pavimentándole el camino a cualquier títere de esos desgraciados para que se agarrara el poder en el país y esclavizarlo para desvalijarlo y dejarlo como cascarón seco.

    Alguien tiene que decirle a esos carajos de PJ que la ley no va a servir para un carajo si no se destruye el control de cambio y le metes una purga monumental a los organismos de fiscalización de los comercios seguido de una toma total de conatel para impedir que el régimen siga diseminando sus mentiras asquerosas.

    • Asi lo veo yo. Las cosas empezaron al mal mucho antes de que este corriente fracazo completo se iniciara. Yo le pondria en los 70 con la “nacionalizacion del petroleo” – es que la forma de eso inicio un exodus de forajiros queines sabian como “to manage and produce.” Y con eso empezo un desagramiento de capital, fiscal y humano. Fueron los primeros dominos a caer, y no fue por accidente. Ahora teinen sus “resultados,” pero posiblemente hoy “el pueblo” va entendiendo que todas las promesas era falsan, unas mentiras enteras. (Me perdonas mi Espanol – hace much no lo practico.)

  6. The Bill’s central idea is for the National Assembly to set up a commission to review the accounting of every nationalized farm and business in the country.
    ———-

    I’ll bet any person on this list a dollar that the AN will never see one piece of true accounting on ANY nationalized firm, one, because it never existed, and two, the Government has no intentions of ever honoring any request by the AN.

  7. Agree w/ Juan Largo. I imagine opening the books on all state firms would expose many power-brokers’ apple carts, which would not only run the risk of losing the apple cart but any shady dealings that went through U.S. banks / soil will expose them to asset freezes and/or criminal charges. This bill may have been written to look sincere, knowing it would never pass.

  8. nstead of selling them off, maybe they should give them back to the original owners who actually paid for them with compensation for their loss of wages and suffering

  9. I agree with Bill Bass that there are legitimate questions about the one-year time frame for all companies. However, I see this bill and the issue in itself as ‘planteado’ by Quico in a very different way. You see, I believe that when the MUD obtained the NA in 6D, they had one of two options:

    1.- Forget about changing the government and focus on trying to govern, or
    2.- Assume the government will not allow them to givern and focus on regime change.

    Fortunately for the MUD, the government very quickly announced its intentions not to allow the AN to govern effectively and we have seen how they have used every means to block any type of legislation, control, or statement the Assembly puts forward. Even this bill, which has real shortcomings, is probably going to be blocked by the TSJ. For that reason, it is logical that the FIRST step to solving this crisis HAS to be to change the government. And that in itself requires positive media and positive marketing which this bill gives you.

    Furthermore, I truly believe this bill in some way or another is necessary to incentivize production, but as a part of a much larger national plan that gets rid of exchange and price controls. However, as stated above, the opposition knows that they will not be able to accomplish that type of change until they are in power. There is just no way. So right now their objective and path forward are clear: create the necessary conditions to change the government, THEN focus on solving the issues. The second can simply not happen unless the first does.

  10. If they were serious about reform, they would have amended the Ley de Precios Justos and the Ley de Ilícitos Cambiarios, but there seems to be no one with anything remotely resembling a decent macroeconomic plan (how to lift the currency and price controls and how do yo do it without creating banking and humanitarian crisis while paying debt),

  11. Very sensible article. How is a transition going to be accomplished? The theory is there, but how are the nuts and bolts going to be placed? The recent encuesta (one smart move in the right direction) revealed that the three major concerns of the population are 1) food, 2) prices, and 3) internal security (crime).

    It seems to me:
    – Some transition with continued food subsidies. If you price goods at world market prices in a one-shot move (i.e. float prices), there’d be plenty of incentive to supply, and production would jump, bachaqueo would vanish (no profit), but the prices would probably increase three to ten times or more. Subsidized meats are priced at about 3% of world market, ridiculously low. The only products I’ve heard of at world prices now, are what you would call “direct to consumer” import items like soda. Floating the currency would probably increase the value of the black market bolivar (ease supply), relieving inflation even with new bills to recognize the already factual devaluation. Other South American countries’ experiences with this would be instructive.
    – Freeing imports of parts and machinery – even a one-time subsidy or permanent tax credit for them.
    – The big silver lining is the potential difference between reasonable 80% capacity utilization, and the current estimates of 30% capacity utilization – production could double.
    – Restoration of expropriated private property, guarantees of private investment, so that potential can be realized.
    – Priority on getting the chavista wreck out of the road (or no policies, no matter what they are, can be implemented).
    – Priority on freeing political prisoners.

  12. While A. Dow’s reasoning makes sense, one wonders how the AN would ever be able to push the government out when the the TSJ blocks anything resembling a non-party line issue, all the while Maduro yelling that he will NEVER be driven out. If the AN is ever going to wield any true power, one wonder through what process or mechanism. What happened to the suspended three from the Amazonas? Not that it would matter since the TSJ would simply block anything anyway. But if the AN has or is going to show any effectiveness, I’m not seeing how. So regardless of the sage and well-reasoned political commentary from here and elsewhere per solutions to a failed state, they all are for naught lest the AN gains some power to execute change. The question being: By what possible means can the AN gain sufficient power to to do more than simply talk to themselves?

  13. I feel the same way… They took the “give a little to get a little” idea of meta-negotiations with chavismo entirely the wrong way…

    And not a one among them seems to be on top of the real strategy at hand: sneak by some boring, effective policy now while theyre too weak to discredit you too much for it and cash in when some positive change is visible in time for new elections.

    But no. Everybody wants to be the return of the jedi.

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