Binding Constraints, or why the Venezuelan Economy is Screwed

An explanation for non-economists on how, even if you solve all the macro-problems, the economy is still going to suck because the micro-framework is screwed up as well.

Imagine you had a friend that runs a small business in Venezuela. You haven’t seen him in years, so you ask him “how’s everything? how’s the business?” That magical question will most likely send him into a ranting rampage about the million obstacles he faces. Even if he vents for an hour he wouldn’t cover every difficulty businesspeople encounter, just his slice of it.

Imagine that! A scientific approach to developing the public policies that start fixing this mess!

But let’s say half-an-hour into his tirade you get overwhelmed, put up your hands and say “ya va, ya va, I get it that there are a lot of problems, but let’s go at this in an orderly fashion. A lot of those things are just annoyances: BS you have to deal with even if you hate it. But others are more serious, things that are actually stopping you from producing more, hiring more people and making more money. Let’s try to set aside the merely annoying and focus on the factors that keep you from growing!”

Before, you were having a conversation about constraints. Now, you’re having a conversation about binding constraints.

It’s a long overdue conversation, and one covered in detail in a recent paper by “Microeconomic binding constraints on private investment and growth in Venezuela” by Richard Obuchi, Daniel Raguá and Caracas Chronicles contributor Bárbara Lira, and published by the Center for International Development at the Harvard Kennedy School.

So how do they go about it? They use surveys and international benchmarks when possible, to get beyond “la vaina está jodía” bromides.

Imagine that! A scientific approach to developing the public policies that start fixing this mess!

Because they’re interested in the kinds of policies directly facing firms, they deal only with micro-policy. According to Barbara Lira: “we were worried that all the discussion about the reforms revolved around the financing: we don’t have money, how do we get it, maybe FMI, maybe partnerships with oil industries… International experience tells us that focusing on macro-policies while forgetting the micro part can be costly, because the usual transmission mechanisms aren’t necessarily working.”

This paper is here to remind us: even if you solve all the macro-problems, the economy is still going to suck because the micro-framework is screwed up as well.

So, according to Obuchi, Lira & Raguá, how’s the business?


Starting a business in Venezuela takes 17 procedures and 144 days in average, the slowest in the world.

Confidence plays a big role in investment, and institutions, being the ones that should provide the framework for economic activity to develop, are the pillar of that. In Venezuela’s case, institutions are doing the opposite. A hostile attitude against private companies combines with the overall inefficiency for maximum making-your-life-difficult effect.

As the paper points out:

Investors face a non-negligible risk of losing their assets to the state, and possibly without a fair process or a fair payment. But beyond the risk of losing formal property of assets, the exercise of property rights is limited: businesspersons in Venezuela are not entirely free to decide how they use their assets.

Even if they spare you and don’t expropriate your company, they’ll still tell you what to produce and at what price you have to sell it.

It gets worse when you compare Venezuela to the rest of the world. The Rule of Law Index, that measures things like accountability of government officials and fairness in the judicial system, puts us last among the 113 countries evaluated. That’s below countries like Cambodia, Afghanistan and Egypt.

Bureaucracy is another big concern. Even if the institutions followed the rules, you’d still have to deal with the complex, ineffective and redundant process to get anything done.

Starting a business in Venezuela takes 17 procedures and 144 days in average, the slowest in the world. The institutions work independently (en esto sí, nojoda) with no effective coordination, so you have to take the requirements for one institution to the other in a slow process that spawns for months. Use the constitutive document to get the RIF, then use the RIF to register in the IVSS (Social Security), use that to pay the tax to the INCES (National Institute of Socialist Education and Training) and so on. This system incentivizes corruption and its common for companies to bribe the officers to accelerate the process. Sometimes the request for permits gets rejected or delayed on purpose for political reasons.


In normal, healthy economies, markets enhance efficiency. Companies compete to offer the most desirable goods and services at the lowest price, this dynamic forces the companies to be innovative and improve efficiency. In the chronic-shortage-diseased Venezuela, that kind of dynamic is nonexistent.

According to the Global Competitiveness Report, Venezuela is perceived as having the least efficient goods market in the world, with low domestic competition and little demand for quality. Brazilian goods are being imported with no sanitary permits and no one bats an eye.

It’s common for smaller firms to stop operating for the lack of raw materials, equipment and spare parts. Some producers try to adapt the production to the available materials to stay operational. That new Coca-Cola without sugar comes to mind.

The price controls are the cherry on top of the dysfuncional-goods-market cake. Making companies sell at a price below the market, along with the huge losses, incentivizes “bachaqueo”, which the government tries to solve with even more controls.

Labor market:

In what country does the labor system reward laziness instead of hard work? In Venezuela.

Take it away, paper:

This entity (the Ministry of Labor) then allows or denies the dismissal. However, in practice, with clear evidence of misbehavior (even felonies such as theft), the entity does not approve dismissals. This allows — and even promotes — misbehaviors such as absences, unwillingness to work or illegal strikes. The result is harmful to productivity, since companies have limited possible ways to penalize misbehaviors, and then there are no incentives for workers to try to excel at any task. Regulation destroys work ethics.

Even with those perks, Venezuela is the worst country to attract talent and the second worst to retain it (Global Competitiveness Report). Many are quitting their jobs to emigrate or to work in the informal markets (I’m talking about the freaking bachaqueo, the less productive you are, the more money you make).

-Ok we get it, markets are crazy too.

-Wait until I get to the taxes and the financial system.

-Crazy I say!

-Ok moving on…

Infrastructure and public services:

According to the Global Competitiveness Report, infrastructure is one of the basic requirements for competitiveness. I guess places with no electricity or roads attract little investment. In infrastructure, Venezuela is the second worst in Latin America (116/140 in the Global Competitiveness Report), only winning over Haiti (137/140).

Many large infrastructure projects, like the second bridge over lake Maracaibo, weren’t finished despite the hefty investments made, and the ones that are already built aren’t properly maintained.

In what country does the labor system reward laziness instead of hard work? In Venezuela.

For some, scheduled power cuts continued up until recently, even though the “el niño” drought it’s been long gone. And the unscheduled outages are still there.

Services in Venezuela are deficient in general, but the most concerning for companies is personal security. In agriculture, for example, kidnappings are common, and some producers reap the crops with the National Guard for protection.

So yeah, businesses are screwed in three different fronts, institutions work against  companies, the markets are dysfunctional, and the infrastructure is falling apart. How do you even start fixing this?

According to the authors, the first step is to change the approach of public policies. Most policies are implemented for the short-term political gain over the long-term economic benefits. Defining long-term investment as a goal for the public policies will ultimately bring wellbeing to the population, increasing the real income and employment while reducing poverty and inequality.

The first reforms should address the most harmful institutional constraints, the functioning of the markets, price system, improve the balance in labor relations, improve the provision of infrastructure and public services and reduce crime. To strengthen the rule of law, it’s necessary to recover the trust in the law and public institutions, with clear rules and less control over the economy.

It’s a long list, and we can’t solve all those problems overnight, the harsh truth is that, there are no shortcuts for economic growth. We’ll just have to water the plant and wait for it to grow. Once the obstacles for production are eliminated, the economic incentives can address the shortages and quality problems, allocating the resources where the demand is.

Carlos Hernández

Ciudad Guayana economist moonlighting as the keyboardist of a progressive power metal band. Carlos knows how to play Truco. 4 8 15 16 23 42