[Note: For critical context on the —ahem— hidden agenda behind this post, be sure to read this.]

Venezuela is in desperate need of economic stability. The brutal costs of economic chaos are all around us. As we weather the storm, it’s not too early to start asking what we can do to ensure no such calamity can ever befall us again.

In the short term, Venezuela needs stabilization: emergency measures to reactivate the economy and address the humanitarian crisis. But the conversation cannot stop there. Once the economy comes out of its current, acute crisis, Venezuela will need to get serious about the fundamental institutional reforms needed to make sure economic chaos can never destroy millions of Venezuelans’ livelihoods again.

All of the economic dislocations Venezuela faces today have their roots in the way the state handles money.

The comprehensive reform proposal here will do just that, ensuring economic stability for this generation and generations to come.

Our starting point is a simple but powerful observation: all of the economic dislocations Venezuela faces today have their roots in the way the State handles money. The path to prosperity passes through stability, and the road to stability passes through an ambitious, comprehensive reform of the public sector’s financial management framework.

The impact of mismanaging the State’s finances is all around us. You see it in the queue outside the bakery shop, you see it in the bare cupboards in stores and the stagnant productivity of farms and factories. It’s not just a problem. It’s the problem.

Over the past several months, Caracas Chronicles has conducted a far-reaching analysis of the major problems with Venezuela’s current public sector financial management framework.

Here, we set out the seven most important solutions in language anyone can understand.

Some of our recommendations will strike readers as ambitious. Utopian, even. But this is not the time to think small. If the evidence of the last few years doesn’t convince us that we need a complete rethink of the way the state handles its money, nothing ever will.

Reform 1: Balance the budget over the medium-term

Let’s start at the very beginning. Venezuela’s macroeconomic chaos is a direct outcome of persistent deficits. In the last 17 years, the government has run deficits in good times and bad. It has run deficits with the oil market was in triple digits, deficits that run against any imaginable type of economic rationality.

It’s the need to finance such deficits that has led, first, to the ballooning of the public sector debt, and later on to the collapse in the value of the bolivar, as a cash-strapped government has ordered the Central Bank to create money to finance deficits no lender would cover willingly.

There are good reasons to run countercyclical deficits even in the best run economies.

Ending this destructive pattern of persistent deficits does not mean that the budget needs to be balanced every single year. There are good reasons to run countercyclical deficits even in the best run economies. Over the span of the economic cycle, though, primary balance is essential: running a deficit is fine when things are tough, but only if your commitment to balance it with a surplus during the fat years is credible.

But that means that budgeting on a one-year horizon just isn’t good enough to make sure the nation’s goals are aligned with its budgetary practice.

To fight short-termism and ensure a rough balance, budget planning must be inscribed in a multi-year framework, one long enough to take in the whole of the business cycle. It’s over the medium term that balancing the budget is essential, if not overall — some investment plans take years to bear fruit — then certainly in terms of ordinary income and ordinary spending.

The multi-year framework should play another role too: it should be the moment when we stand back, once every few years, and ensure that we really are devoting natural resource rents to investment rather than ordinary spending. That’s the responsible approach to Natural Resource management. Our oil reserves, the biggest in the world, should lead to the accomplishment of medium to long-term State goals and not just the goals of the current government.

Reform 2: Bring rationality and oversight to public sector debt

A second major driver of the current crisis is debt, or rather, the irrational over-reliance on debt at the peak of the oil cycle. Hunger and disease this year has been driven by a parallel collapse in food and medicines production and food and medicines imports, and the import collapse has been driven by the need to set aside dollars that might have been used to import food and medicines to service debt contracted during the high-oil years.

The State cannot be allowed to take on financial debt without legislative oversight.

This dynamic needs to be short-circuited by ensuring public indebtedness cannot rise beyond what the size of the economy, investment needs and revenue generation capacity can justify. The key here is effective oversight: the State cannot be allowed to take on financial debt without legislative oversight. Secret bilateral debt deals not subject to effective oversight must be explicitly ruled out.

In fact, at the risk of being accused of radicalism, we recommend going further and stating explicitly that the State shall not recognize any debt obligation not previously subjected to a vote in the National Assembly.

Reform 3: Getting serious about the National Budget

The drift away from legality has been so intense these last few years, fundamental reforms will be needed to establish some simple, basic ground rules with regard to the budget. Ground rules like “yes, there has to be a National Budget” and “yes, the president must present it to the National Assembly by a given date,” and “yes, that budget must explicitly set out the longer term goals of fiscal policy and actually explain how the government expects to meet them within a framework of fiscal responsibility and budgetary balance.”

Getting serious about the National Budget means accepting that there is only one budget.

Getting serious about the National Budget means accepting that there is only one budget. It means taking seriously the idea that the State can only spend money if that expenditure has been authorized in a budget law.

It’s a simple principle — too simple, you might think, to need stating. But after 17 years when we’ve seen an explosion of workarounds to this principle — from PDVSA’s social budget to the off-budget funds like Fonden and the Fondo Chino — it apparently does need stating.

Of course, there can be extraordinary circumstances that were genuinely unforeseen at the time the budget was drafted, and any public sector financial management framework must include safeguards to ensure those genuinely unforeseen spending needs can be met.

What must be ruled out, we believe, is the routine use of “créditos adicionales” to cover entirely predictable expenses. Explicitly ruling out this old and destructive practice would constitute nothing short of a revolution in the way the Venezuelan State manages its finances, as would establishing the principle that such “additional credits” must, like the budget law they amend, always be subject to parliamentary approval.

Reform 4: Building accountability into the fabric of budgeting

If accountability is to be more than theoretical, every single line item in the spending side of the National Budget explicitly sets out, in numeric terms, the objective of that expenditure and names — actually names — the flesh-and-bones officials responsible for delivering that result. And within six months after a budget has closed, a mechanism must be established to check which officials followed through and which did not.

Every single official entrusted with the sacred duty of spending on behalf of the collectivity who must be held accountable.

Why? Because budget accountability needs to go beyond the macro-level of allowing people to vote governments in and out. That is far too coarse an oversight device. Accountability must be granular: it’s not just the President who is accountable to the nation in some abstract sense, it’s every single official entrusted with the sacred duty of spending on behalf of the collectivity who must be held accountable. We envision a website to centralize this information, allowing anyone to search out the actual identity of the officials in charge of delivering projects that affect them. Radical? Yes it is. But an idea whose time has come. Some call it “transparency”.

Reform 5: Empowering an Autonomous Central Bank to Target Inflation

Terminology can be confusing, so let’s start with the basics: a Central Bank is not a bank. Not in the usual sense of the word. Its role isn’t to take in deposits and make credit available. A central bank is a regulatory institution that looks after the value of the nation’s currency.

The Central Bank must be formally empowered to focus narrowly on price and monetary stability.

The Central Bank’s autonomy needs to be legally protected so we never again face ‘innocent’ requests for a millardito that becomes six and then becomes a never-ending place source for covering public sector deficits no investor in her right mind would cover by choice. A truly autonomous Central Bank can never become the place the rest of the public sector turns to when it’s running short of cash.

Our call is for the Central Bank to be recognized as Venezuela’s autonomous monetary authority, nothing more, nothing less. The Central Bank must be formally empowered to focus narrowly on price and monetary stability by formulating and executing monetary policies; by participating in the design and execution of foreign exchange policies; by regulating credits portfolios and interest rates, and by managing international reserves.

Autonomy cannot be used as cover for a free-spirited, como va viniendo vamos viendo approach to Central Banking. Autonomy is about having the space to take your formal mandate seriously and guarding it against encroachment zealously.

With great autonomy comes great responsibility. An autonomous Central Bank must be held accountable for its successes and its failures, given that it must focus on price and monetary stability. Let’s not forget that the Central Bank manages the money-printing machines.

It might sound like a lot of work, but Venezuela’s Central Bank should report on the actions, goals and results of its policies, preferably to the National Assembly. It should also issue periodic reports on the behavior of Venezuela’s macroeconomic variables and respective technical analysis.

Reform 6: Coordinating policy in the service of stability

The last few years have established the paramount need for economic stability. What the nation needs now is a clear mandate for the institutions charged with managing the public sector’s finances to coordinate effectively to deliver on that objective.

A call for effective policy coordination must never be allowed to become a pretext to pressure the Central Bank to support irresponsibly policies.

Coordination between the Finance Ministry and the Central Bank is both necessary and potentially problematic. The temptation for Executive overreach will always be there, which is why a call for effective policy coordination must never be allowed to become a pretext to pressure the Central Bank to support irresponsibly policies.

For that reason, we propose to marry the mandate to coordinate with an explicit ban on Central Bank being subject to directives from the Executive Power or of financing of public sector deficits: these goals are compatible, so long as the overall objective — stability — is clearly established.

Reform 7: Ending the Oil Boom and Bust Cycle

We’re endlessly told that the economic cataclysm of the last three years has its roots in the oil cycle. That’s not quite true: it has its roots in the fiscal mismanagement of the oil cycle. Rather than making provisions for the inevitable eventual bust, Venezuela spent all of the proceeds from the 2002-2014 oil boom of close to US$ 800 billion — and then some. Failing to save some of the excedent when the takings were good was the original sin that led to the current disaster. When the oil market soured, Venezuela was left badly unprepared.

The mechanism we propose will include guaranteed payments to state and local governments during oil downturns.

It doesn’t have to be this way. That’s why we propose a radical new mechanism to save excess oil revenues in high oil years and hold them in reserve, to be tapped during low oil years. The system could even out the inevitable booms and busts of the oil market, making the fiscal income from oil more predictable and the impact of oil downturns easier to absorb.

A mechanism to smooth out the oil cycle will need broad buy in, not just from central government but from regional governments too, which is why the mechanism we propose will include guaranteed payments to state and local governments during oil downturns. The operating rules for this fund shall observe the basic principles of efficiency, equity and non-discrimination between public entities. Judiciously applied, this mechanism could end the cycle of oil boom and bust forever.

A Reform Agenda Whose Time Has Come

These seven reforms must be at the heart of any incoming government’s economic agenda. Venezuelans are yearning for economic stability, but economic stability can only be achieved through far-reaching institutional reforms to create a framework for managing the nation’s money responsibly for the future.

These are the seven pillars on which a new, stable, prosperous economy can be built.

Balancing the budget over the medium term, bringing rationality and oversight to public sector debt, getting serious about the National Budget, building accountability into budgeting, empowering an autonomous central bank to target inflation, coordinating policy in the service of stability and ending the oil boom-and-bust cycle are the seven pillars on which a new, stable, prosperous economy can be built.

17 COMMENTS

  1. You know that what you criticized the article about refuting laissez faire economics did, was to provide a more detailed and complete framework for achieving your #7 reform, right?

  2. Francisco has a design for the 50 foot ladder …and it makes quite a bit of sense ………ties in nicely with the previous piece on the inviability of a laisses faire approach to the reform of Venezuelas economic structure …….., its emphasis in on policy reform not on political reform which dysfunction many consider to be the root source of all our evils ……, but of course , we have to go at this one step at a time , and this 7 point proposal is really very useful …….!!

  3. I wouldn’t disagree with any of your 7 points.
    The Economic factors to reach prosperity are at this point well understood.

    However, the problem is mostly Political.
    In the current system of western democracies the focus is almost exclusive in full representation at the expense of everything else and that is a big problem (it almost always descend into a tyranny of the masses).
    The unintended outcome is that elected officials are forced to limit their policies to the very short term in a populist downward spiral thinking on the next term elections. There are plenty of experienced and competent individuals but if no charisma, they can’t get elected. This is so fucked up. In fact, this is how Venezuela ended up with the Maduro/Padrino dictatorship or a reality TV star is crowned King.
    It won’t be until we change the electoral systems that we can get more qualified politicians in power.

    These are the 3 most significant measures that need o be taken in a post-chavista Venezuela.

    1) Election Reform
    No more populism or charisma over competence.

    2) Extreme Transparency
    Best anti corruption tool there is.

    3) Dollarization
    Fastest and easiest road to economic stability.

    • 1. Under election reform, it would be helpful to include a limit to how many years a legislator can sit, (8 years / 2 terms, or 12 years / 3 terms for example, but not “a lifetime” as we’ve seen too often) as well as limiting a pension amount equivalent to however well the non-government types can expect from those 8-12 years… Limiting pension amounts from a single source (the gov’t) would also limit the number of different gov’t jobs one is appointed or elected to as well, as a means of being rid of those that serve 4 years on a school board, 6 years on a utilities review board, 8 years on a public hospital board, 8 years in a state legislature, and then with those 26 years of pensionable time in “gov’t service” they decide to leap to the federal level for a decade or two more, all the while never having actually done anything but shuffle paper around a desk, throwing straw into the engine of the economy.

      2. “Sunlight is the best disinfectant”

      3. Dollarisation would nicely take care of those multiple exchange rates. The stores would be barren for awhile before this ship is righted, just as they are now.

  4. A few ideas to munch on the subject :

    We need to create Public Bodies made of recognized experts of umblemished personal and professional pedigree which operate outside the Customary Political Spectrum , which members are not beholden on any particular political party for their appointment and which judgement can be relied upon to be totally objective and professional . They can then render opinions on the policy proposals of govt and any congressional group such that where these are flawed people will know if those proposing them deserve the public trust …

    All policy decisions must be formated so that they are specific enough to be able to be judged by such bodies on their economic or practical merits…..giving specific information as to the results which they are expected to produce , these policy decisions should be subject to later scrutiny as to their actual results to determine if they deserve abrogation or correction ……!!

    Any political group must accompany any candidate list to the highest offices of the land with a plan of what they specifically intend doing and what results they expect to obtain , the plan should list the specific policies which they intend to implement and how they are to be funded and implemented from existing resources ……..voters should not just vote for people (making polls a personality contest) but on the issues which their proposed plans raise ……,

    Where serious enough errors of policy design or implementation are determined to exist as per the expert body;s opinion the officials proposing such policy to be subject to a recall vote and/or destitution depending on the gravity of the results following upon the implementation of such policies , The expert bodys opinions to be substantiated in detail so they can be in turn scrutinized by other experts….within or without the country.

    Where a politically appointed representative or authority proposes and supports policies which are later found to have led to undesirable consequences of import , he/she can be brought to trial regarding his/her record of failures and be either banned from aspiring to any future office or be forced to obtain a mayority vote of at least 50% of the TOTAL vote to be re elected….!!

    Any one member of the above non political public bodies must show total independence of judgement in their decisions , such that they are subject to instant removal if in the opinion of a mayority of their colleagues in such bodies they make any public gestures which identify them as simpathysing with any one political party .

  5. Sensible financial, macro/micro economic/financial propositions……but “the seven pillars on which a new, stable, prosperous economy would be built” would crumble on a sniff, crippled by Venezuela’s 2 main obstacles to prosperity. Galactic Corruption and Massive Under-education.

    I would have listed at least 9 pillars, with controlling corruption and focusing on education as the first 2. You cannot have prosperity just by addressing the economy and finance sectors. You have to address crime, political issues and legislation of all sectors, true separation of powers, improve jails and the correctional system, weed-out the military, control drug trafficking, clean Sebin, Guardia, CNE, TSJ, etc, etc.

    So there are at least a dozen “Pillars” to be built and maintain, not just 7 economy/finance ones.

    The closest we see on this post to addressing Corruption is “accountability”.. Yet , under-the-table deals, i.e. mega-guisos, everywhere, at all levels, is what kills Venezuela. Corruption is the root of all evil. The 7 “pillars” would crumble, if they can even start to be built, unless you control theft, crime, and start sending the biggest crooks to Jail, as they as ‘trying’ to do in Brazil. You have to clean PDVSA, Jail the Derwicks and clean Corpoelec, clean the mining industry, wipe out the TSJ and CNE and replace them with people who steal less. Regain some semblance of separation of powers, clean the corrupt narco- military, clean the Sebin and the Guardia.. Clean the Jail system.. All rotten by what? You guessed it: enormous corruption and embezzlement. Tigre, tigre y mas tigre. Segundas, izquierdazos, mordidas,.. everywhere.

    Now to build these “7 pillars” and maintain them, you also need professionals, educated people with skills, not just big policies and dreams. You have to maintain the pillars, and the Financial, Economic machines working properly. You need good bankers, engineers, oil experts, good accountants, etc.. Well, almost 2 millions of those, including most of those reading these blogs, left Venezuela, and most of us will never return. Especially with crime rates as they are, and after we built solid lives on countries that work, with proven, tested “pillars”. So after this massive brain-drain (which continues as we speak), there’s not much left in Venezuela to build and then maintain such pillars. And to properly educate a new generation, and then train them professionally on the job after that.. it takes more than an entire Generation,.. if they do not also flee the country as soon as they can, after graduation..

    Theory is one thing, practice quite another. And I didn’t even mention that our heavy oil is very cheap, and was already given away to the Chinese for decades to come, we have zero credit or credibility, and we don’t know how to produce anything else, which also would take decades to learn, teach and start producing some exports and reducing imports. But with such gigantic corruption and lack of educated professionals, them 7 pillars are mostly a nice dream. Without many more pillars and a solid foundation, the building wouldn’t stand a chance.

  6. The authors look like Nero while Rome was burning.

    Accumulate a big pile of cash to smooth the oil volatility? That’s what attracted the Chavista-Kleptocrat-Marxists to Vz in the first place.

    The Venezuelan people voted against the “seven pillars” every chance they got (and always will).

  7. Do any of the 7 points lead to a more diversified economy either in terms of decreased dependence on oil or an enhanced private sector. Couldn’t a future government employ all 7 points and still not diversify your economy?

    on oil

  8. The question to ask is …if these 7 points had actually guided the policies and decisions of our govt these last 16 years , would we be in the mess we are at now or would we be in a much better situation ?? I think we know the answer to that …..but still…its true that after 15 years of atrocious misgovernment and corruption much more is needed to restore Venezuela to a situation where it can launch itself as a proyect for the building of the better country we all desire…… !!

    The seven points are basic sine qua non preconditions for us to be able to develop the other conditions on which the future of Venezuela can be founded , they are not enough but they are necessary …!!

  9. Here is my list, after following this mess for some time and watching other countries in LA go through similar crisis for decades:

    1. Recognize Venezuela has a problem. Admit that Venezuela is a failed State. Get rid of the current government, but also assume that all future governments will also have corruption problems that will not go away any time soon. So, restructure the government based on the assumption that corruption is a problem, and plan for it. Things like term limits would be a good start, but obviously Venezuela needs a new and bigger constitutional reform. It has to stop people like Maduro from getting power in the first place, and keeping it if they do for very long.

    2. Float the currency. Just rip the band-aid off. The currency is worthless now, so it only has up to go. There is nothing on the shelves, so it really can not get much worse on that front either. Don’t dolarize the economy, but let the dollar or any other currency be an alternate, freely exchangeable currency on the street. It will eventually help stabilize the domestic currency, and help create confidence in it.

    3. Default on the debt. Just get it over with. Later, after stabilizing the economy, revisit settling with the bond holders so Venezuela can enter the international debt market again.

    4. Liquidate the government oil company and all it’s assets at a public international auction. Sell the oil rights to international producers with real track records. Hold an open, public, transparent international auction. Then impose a simple tax going forward on all oil exports. This will provide a quick shot in the arm of cash, provide for long-term revenue stream for the government, and get the oil back in to competent private hands that can run it. It will bring confidence back to the currency and the rest of the economy.

    5. Impose a simple sales tax, and then get the government out of the way of everything else. No more free anything. The country is broke. Stop messing with the private market. If there is a job for a new government, it is simply getting basic security under control so the economy can function. Get the courts working again.

    6. Finally, get the international community in to start help fixing the mess the IMF, UN, international aid agencies, and so on. The resources and experts are out there to fix failed states. Once they are in, confidence in the rest of the economy will bring in international investors.

    7. Once all the above is done, long-term rebuilding of the country can start. At some point, Venezuela might even be able to afford some sane social benefits and services.

    My guess, would be is that these 7 points would lead to the craziest economic recovery ever. Perhaps even bigger than the fall of the USSR. It will be painful, it will be messy, but, it will be something.

  10. This seems taken from a Kenney School or World Bank economics Manual. Very theoretical cooky cutter policy recommendations for any given developing country. Points are well crafted and well intended, but given the current mega crisis, Venezuela and its public sector need shock therapy to avoid becoming Mozambique. How to respond to:

    1) triple digit inflation
    2) pervasive corruption
    3) non functioning economic institutions
    4) Multi layered currency regime
    5) Current account fluctuations
    6) Scarcity of basic goods
    7) deep recession
    8) unproductive industry

    Again great intentions and theoretical model, for the long run of this country, however Today how we respond to the deep deep economic crisis given our available tools?

  11. Maybe offtopic but there is news that Paul Ryans tax ammenments package for the US would impose a VAT tax on imports ( they are talking of 20%) …..and disallow treatment of imports as cost deductible . Has someone thought of the implications for Citgo (which imports most of its crude input from Venezuela) ?? The incentive would be to favour domestic production over imported production and would savage companies like Citgo that rely so heavily on Venezuelan imported crude !!.

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