Venezuela and Colombia today

Two weeks ago I attended a conference identified as Venezuela and Colombia in the new millennium. This event was sponsored by the Pensamiento y Acción Foundation, the Rómulo Betancourt Foundation and the IESA. It was also supported by the Andean Development Corporation (CAF) and the Banco Mercantil.

The event was excellent, having managed to impose a strictly academic ambiance in spite of an extremely delicate subject. There was absolute respect for different and contradicting ideas and sentiment. Since the event allowed for moments of reflection and thought, I would like to share a personal concern.

Over the last few years, trade between the two countries has grown dramatically in nominal terms. As a result of this, it seems that the idea that an irreversible process of integration led by markets, business and consumers now exists has become popular. On top of this, this process seems to be occurring behind the political sector’s back.

This idea is somewhat dangerous. Specially when you consider that a substantial part of the trade we have observed over the last few years is based on false premises and on factors that are not sustainable in the long run. Among these we can observe the following:

The explosion in the volumes exchanged between the two countries originated during the early eighties at a time when Venezuela was entering into its “impoverishment” phase. Before this, with the exception of certain strictly unilateral commercial activity of basically local and borderline character, Venezuela negotiated at its will, need or extravagance with the most sophisticated commercial centers in the world. Colombia had virtually no chance to participate in the Venezuelan market.

At the same time, Venezuela’s oil income caused the country to sustain an extraordinarily strong currency which made it virtually impossible to achieve levels of competitivity that would have allowed the country’s business community to make inroads into the Colombian market. Evidently, there was no incentive to export when the country was required to maintain a policy of high tariffs and import quotas in order to protect local markets.

In recent years, the introduction of artificial economic measures helped to feed this mirage of increased trade. Among these measures, one of the more important ones was the appearance of currency exchange subsidies offered Venezuelan industry in order to facilitated imports of raw material and even finished goods. This obviously generated an “export of subsidies” both in the formal as well as in the informal markets. It is also important to note that in the face of barriers such as exchange controls of various types, commerce naturally gravitated towards countries that belonged to the ALADI compensation agreement, including of course, Colombia. This also artificially stimulated Venezuelan imports from these countries.

I also harbor a suspicion that commercial flows, even when expressed in hard currency and apparently favorable to Venezuela, hide problems that should be looked at more closely. Among these problems, looked at (perhaps subjectively) from the Venezuelan perspective, we can find the following: Is the generation of jobs produced by this trade equitable? Is Venezuela exporting commodities to Colombia for which the country has always had available markets? Is Colombia being favored by this exchange, gaining access to an export market for products that are really not competitive elsewhere?

I am certainly not criticizing the increase of trade between Venezuela and Colombia. I am totally for it. However, I am convinced that the commercial trade between Colombia and Venezuela by itself does not constitute a sufficiently strong foundation to support the integration. Most specially when, as all Venezuelans desire, the country manages to emerge from its current impoverished state and as a consequence totally alters its management of trade flows.

We should definitely not paralyze this integration, but we must promote new and solid foundations that can support it. For example, it is of utmost importance for any beneficial integration between the two countries to reach agreements on the management of hydrological basins and catchment areas which will guarantee the supply of potable water to future Colombo Venezuelan generations.

Recadi rises from the dead

In a country in which the Government proudly announces in 1997 the completion of a highway on which work was initiated back in 1973, the belated results of administrative and legal initiatives should not be surprising. Nevertheless, we have indeed been surprised once again upon hearing rumors about the summons being issued, applications for reimbursement being submitted, fines being imposed, appeals being declared null and void and other such fine aromatic herbs. The clincher is that all of these are related to Recadi. Yes, ladies and gentlemen, Recadi - not OTAC - Recadi!

I remind my younger readers, who could be under the false impression that the follies of exchange control systems originated exclusively during this Government’s tenure, that in the early eighties a system of controls was implemented as an answer to new exchange rate realities during which the devaluation of the Bolívar was discovered. This system was known by the initials Recadi.

The Recadi system sent the wrong economic signals, stimulated unnecessary imports and allowed for blatant corruption though the misuse of the exchange benefits it offered. It was the most costly economic experiment in Venezuelan history. All of the accumulated losses racked up during the recent financial crisis don’t even come close to the cost incurred during the Recadi years. Only the fact that the Recadi debacle was spread out over several years diluted its effect and made it less visible as a disaster than the bank crisis.

Even though there was some opposition, the Recadi system so totally enveloped the national economy that it resulted in the creation of a kind of society of accomplices or accessories which then made it extremely difficult to correct as well as to punish the abuses that were committed under the system’s umbrella. We can still remember the comments relative to the infamous Chinaman of Recadi, the only person who, as an exception that validates the law, underwent judicial punishment.

Recadi, as does all official bureaucratic process, implied the elaboration and use of an incredible amount of documentation. This put to task the internal administrative capabilities of industry and commerce in Venezuela not used to working with government entities at certain levels. Local banks were brought into the game by the government, and against their best judgment were forced to dedicate several years and immense resources to documentation and issuing of bonds to cover incomprehensible obligations.

When Recadi finally disappeared, there was general relief all around. As a natural reaction, all parties actually involved in this involuntary process immediately began filing, stashing, hiding and losing all types of documents which could possibly remind them of their participation in this horrid chapter in economic history. New actors also surfaced to help purge filing cabinets of this damning material. New upcoming generations which never had to live through Recadi (50% of the country’s population), foreign investors and bankers. All, however, have something in common. When they see a file labeled “Recadi”, they rifle through it, define it as the product of a historic comedy and then send it to the trash bin with the efficiency, energy and arrogance of a newcomer.

Once this happened, however, official entities of all types and colors began spewing forth their edicts; the Central Bank of Venezuela, the Ministry of Finance, the banks and the different Administrative Courts.

“The Court XXX, in relation to the recourse ........... declares null and void the administrative appeal submitted by YYY against the decision issued by the External Private Debt Registration Commission in its resolution of February 1985”

“We are pleased to notify you that the Central Bank of Venezuela has requested the reimbursement of US$ XXX in advance payments for the following imports due to the fact that the corresponding documentation required to justify said advance payments was apparently not submitted on time.”

The questions that still remain to be answered are several. What strange power can manage to reactivate, almost fantasmagorically, files that up to now have been classified as “dead”? Is this the new Venezuela in which justice arrives late but does finally arrive? Could this merely be an example of “I’ll get you sooner or later”? Or could this simply be the result of the privatization of official business?

At least some conclusions seem clear: Save even your toll receipt! Watch out, OTAC is coming, maybe not this century, but certainly the next!

Daily Journal, Caracas, November, 1998

Restructuring PDVSA - some doubts

The efficiency of the oil sector in Venezuela could be of more relative importance to the common citizen than is the efficiency of the government itself. Considering the brouhaha that the search for constitutional or electoral reform would cause, it is surprising how easily the reorganization of PDVSA went down.

When faced with all the country’s problems, most of its citizens, at least those that cannot even contemplate emigration, have placed all their hopes on the imminent development of a buoyant oil sector once production has been increased to six million barrels per day. In order to avoid the onset of profound depression, it is probable that most Venezuelans don’t question or even contemplate the possibility that all is not as it should be in the oil patch.

I am one of those that await only good things from our oil industry. However, since “the eye of the owner fattens the cattle”, all Venezuelans have the clear responsibility of keeping watch, issuing opinions and generally do all that is within reach to avoid that due to lack of effective control the industry dives into a tailspin. Without this control, and should the internal meritocracy (however meritorious it may be) be allowed to simply act as it pleases, it seems evident that an organization as rich as PDVSA, dedicated to an activity generous enough to permit the sale of a product with a production cost of about US$ 5 at US$ 20, will eventually degenerate.

In this sense, it behooves us to express our reservations about the amply publicized restructuring of the oil industry. As far as we understand, the plan is based on the substitution of the current organization, represented by Lagoven, Maraven and Corpoven, all of which functioned integrally as operators, with specialized companies designed to cover specific functions, among them exploration and production, manufacture and commercialization and services.

It could be that I have been overly innocent, but I was always under the impression that by splitting the Venezuelan oil industry into three operating companies, we had the keys to some control over it. This division allowed for certain competition, guaranteed a basis for comparison and finally, created different specialized professional teams which in one way or another kept an eye on each other.

I was, however, never so innocent as to figure that this control was perfect. Evidently this three-way split created much duplication of costs. The solution, however, seemed to be satisfactory when compared to alternatives such as the politicization of the industry or the awarding of total independence (upon which we would have had to light candles to our favorite Saint).

The new Plan has been justified with the following arguments: a) estimated savings that have quickly grown from US$ 1 billion to US$ 2 billion annually; b) the need to elevate the country’s participation in the international market; and c) as a simple response to organizational tendencies and pressures relative to the industry itself.

These arguments don’t completely convince me. Evidently, some savings are always possible. However, if savings such as those mentioned above are possible without adversely affecting the company’s operations, it would imply the recognition of such an incredible inefficiency that the first administrative act we should request is the immediate removal of the entire Board of Directors of PDVSA.

The second argument, i.e. the need to elevate the country’s participation in the global market, has more to do with abandoning the agreements established by OPEC than with a plan for reorganization. Finally, we should not be comparing the organization of a state owned company like PDVSA with private oil companies that operate in a world of shareholders, stock markets and other elements that exercise control over management.

Until I hear arguments to my satisfaction that address the issue of the control that our society has a right to, the Plan simply smacks of a proposal to centralize, both functions as well as power. In this sense, I believe the Plan could simply accelerate the degeneration which I feel the industry is doomed to. Additionally, why are we so set on decentralizing the country’s government, infrastructure, etc. if centralization by function is so beneficial?