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?

Institutions:

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.

Markets:

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.

17 COMMENTS

  1. “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 the crime. For 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.”

    If even the so ‘advanced’ and educated Europeans can’t still not get very well that very strict labor regulations backfires, creating unemployment, disinvestment and lower productivity, imagine making people in Venezuela/Latin America understand that. I wouldn’t touch that vespiary (“improve the balance in labor relations”, as you say), specially as one of the “first reforms”. But all the rest is imperative to be done asap! Economists in general, but a bit more when they are of the left-wing kind, have this tendency of focusing only on the macro, while the easy reforms that would really increase productivity in a relatively short-amount of time, the low-hanging fruits almost asking to be picked, are neglected. It’s frustrating.

    By fixing the price system, you would fix of one the most cruel and absurd aspects of the Venezuelan crisis: the lack of medicine. Imagine the amount of productivity lost due to workers being sick and not being able to be cured for lenghty periods of time, or even dying because they couldn’t find the medication. It’s a silent genocide that unfortunately doesn’t get the attention deserved. It really blows my mind…

    • Marc,
      Silent genocide is correct. Maduro et al should be charged with mass murder. It is more than a lack of medicine. It is a lack of nutrition, of health care, of safety from crime, of clean potable water, of electric power, of safety in roads, and more. Maduro’s policies are murdering Venezuelans. He needs to be held accountable.

      • It’s certainly more than “just” lack of medicine, I agree with you, but the lack of medicine is the problem with potential to kill more people, in my opinion.

        If murders kill 30,000 every year, the lack of medicine has potential to kill millions, even more than lack of food — because you can’t grow, say, insulin, in your backyard. I won’t be surprised if the next census shows the Venezuelan population decreasing a lot, and not due to emigration.

        “Maduro’s policies are murdering Venezuelans. He needs to be held accountable.”

        Oh, definitely. May Trump helps us with that. This absurd situation can’t go on for another ten years.

  2. Months ago (in an interview for a news article) a cattle rancher estimated it would take a year to recover. I don’t know anything about cattle ranching, but it makes sense that crops take a year to grow. So this does not have to be decades of slow, painful, recovery, or generations of humans. Just seeds and fertilizers and some law and order, for goodness sake’s.

    Just the removal of hiring and firing “controls” alone would probably result in a surge of new jobs, because most people are sane, and would like to work in a company that is well-managed, in the company of other productive workers. It makes it so much easier when you know you can rely on the guy next to you in the production process. The magic of free markets, where people can do what’s rational.

    The government views these free market recommendations as “sabotage”, but just as bribes get paid (ignoring laws), other laws can be ignored, too. Perhaps a strictly Venezuelan form of civil disobedience? If the AN can take a stand, in all its visibility and vulnerability, why can’t thousands of “invisible” common men and women take a stand, too? As Bruce Lee said (maybe) ~~ You cannot fight water! ~~

  3. For me, one of the most important points to address will be the decentralization of political power and tax collection. State and municipal governments need to fully fund themselves through a combination of VAT and property taxes. I am especially a fan of property taxes, as these force property owners to put their property to work or sell it to someone who will.

  4. Very interesting report, but poor editing is a problem. Just to name one example, the nonexistent word “refractions” is used three times. The english word for “refacciones” is actually “spare parts.”

  5. Looks to me that SEZs with special rules that subsidize/streamline investment would be a good first step to take. Margarita would be a nice place for one.

  6. So… are you implying that we need less state and a freer market? So… you mean Capitalism?
    I would not have thought that.
    Now, seriously, a new government first move must be to dissect the legal framework constructed by the chavism – and even the 4th Republic – and start thinking in a XXI Century country based on economy freedom and competitivity. And the society needs to understand and support the idea that these regulations, bureucracy and morals based on robbery require to be demolished.

  7. It’s like a guy once said: “We need to get rid of the fucking ‘enchalecadito de mierda’ that always uses his badge to fuck up with the workers’ lives.”

  8. The problem here is that Chavismo seems to have been doing a textbook example of the sort of power play described in “The Dictator’s Handbook” — that far from being an accident born of misguided ideology, the dysfunction of the Venezuelan economy is engineered for an elite to keep a tight grip on the country. Simply pointing out which policies would make things better does nothing, because it doesn’t address the real reasons the behind this.

    Perhaps the original reasons were more altruistic, and only later morphed into the parasitic system there today; but this hardly matters now.

    First, the weird three-tiered exchange rate is *genius*. At a single stroke, and with the excuse of prioritizing essentials over luxuries (something almost everyone agrees is a good thing), Chavez gave himself and PSUV an enormously powerful means of directing money to their supporters. Cronies were now totally dependent on the government to reap the rewards from state-assisted companies, and if any of them got out of line, they could even be prosecuted for corruption which was their reward in the first place!

    Second, the Missions were another great way to shore up the electoral base of PSUV. Under the guise of caring for the poor (and someimtes actually helping them), PSUV constructed a system whereby the spoils of the vast natural resources of the country could be channelled for political gains. If PSUV really wanted to help the poor, simply paying a dividend from oil (heck, even naked redistribution — a dividend from taxes) to all citizens would have been fine, and not created the shortages. Why bother with the subsidized food, subsidized gas, etc. when this system would be more effective and less complicated, and not created the mess we have today? Precisely because this system would have negated the possibility of selectively directing funds to PSUV supporters (whether poor voters in the slums or fat cronies).

    Third, even if efficient companies are forced to pull out of Venezuela, this is fine too — simply seize the operations, or arrange for a fire sale to crony Bolibourgeois businesspeople.

    The point is that the Venezuelan economy was *optimized* to help the PSUV control all the levers of power — which in practice simply means the ability to keep all the people on which it depends on a tight financial and legal leash. The only mistake Chavez and Maduro made was that they went too far, provoking a mass popular revolt. But the fact that PSUV (and Chavez) maintains any sort of popularity and is still firmly in power, amidst all this chaos, is a testament to how well the system functions.

    • This must be said over and again: “The problem here is that Chavismo seems to have been doing a textbook example of the sort of power play described in “The Dictator’s Handbook” — that far from being an accident born of misguided ideology, the dysfunction of the Venezuelan economy is engineered for an elite to keep a tight grip on the country. Simply pointing out which policies would make things better does nothing, because it doesn’t address the real reasons the behind this.”

      Though many disagree with the results, not one Venezuelan disagrees with the public policies of the last seventeen years. Until Venezuelans repudiate Chavismo and radically change their philosophy, the future only holds more and ever more suffering.

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