A necessary change of optics

The fact that the Venezuelan currency was named the Bolívar and the misguided sense of that a devaluation of the same would be disrespectful to the memory of our Liberator, supported the refusal to devalue the currency during 1982 even in the face of economic reality. As a consequence, the devaluation in February 1983 was much more drastic than necessary and hastened the country’s dive over the precipice of economic chaos. We still have not managed to stop this dive.

Our sense of direction was lost basically due to inflation. Today, the private sector must follow strict accounting rules which call for re-expression of accounts. The Income Tax Law has also introduced the concept of adjustment for inflation as well as the application of tax units (unidades tributarias). In spite of this, we note a curious lack of activity aimed at requesting that the public sector establish more links with reality.

When we analyze the problems inherent in the Venezuelan economy, either we are blind, or we don’t want to see, or someone simply doesn’t want us to see. I will detail some of our economic variables in United States Dollar terms in order to allow our readers to form their own criteria as to which alternative applies. We have expressed dollar terms in real 1982 values.

1) In December 1982 the total of all deposits in the Venezuelan financial system (normally known as M2) were the equivalent of US$ 31.3 billion. In July 1997, this figure had dropped to US$ 7.8 billion, that is to say, only 25% of the 1982 total. Even if we consider possible changes in the multiplier, this indicates and incredible drop in the real economic activity in the country.

Not a day goes by without some “expert” in economics expressing preoccupation about excess liquidity. This attitude could be compared to when a physician begins to worry about left-overs when the patient is in a serious state of inanition. The real problem that has traumatized the country is not the excess liquidity (food) but the lack of economic growth (appetite).

2) In 1982, Venezuela’s international reserves had reached US$ 10 billion and were equivalent to 32% of M2 as described above. In July 1997, these reserves totaled US$ 10.1 billion (in 1982 terms) and represented 130% of M2.

It is important to note that in 1982, the country did not have sufficient dollars to satisfy the demand should all deposit holders in the nation wish to purchase dollars. As it were, the Bolívar had to be devalued in 1983. In July 1997, the situation was just the opposite; all the deposit holders in the country put together do not have enough Bolívares to purchase the dollars held by the Central Bank.

If we apply a broad analytical brush to the before mentioned figures and note that the international reserves belong to the state while M2 belongs mostly to the private sector, it is evident that the latter has become much poorer in comparison to the former. When we see that in spite of these results there is still support for maintaining and even increasing tributary pressures, the reigning economic philosophy seems to have a lot in common with a Gulag-style Soviet purge.

3. In December 1982, the Venezuelan financial system had a credit portfolio totaling US$ 16 billion while in July 1997 this amount had shrunk to US$ 4 billion, again, in 1982 terms.

We have frequently heard and read that an increase in credit activity could put the country’s banking system in jeopardy. Since lending is the essence of banking by definition, and when we take into account the low volume of credit activity mentioned above, it can only mean the opposite. If lending doesn’t increase, banking slowly dies.

If we wish to recuperate an economic orientation that makes sense for the country, it is imperative that we begin to express public finance figures in terms of real figures. By this I don’t imply that we should use the US dollar as denomination to express our national accounts. I do propose, however, that we find an element that reflects reality so that we at least liberate Bolívar from having his name associated with creative or even fraudulent accounting.

A Big Foot watches over Sabas Nieves

Sabas Nieves is one of the most popular trails up the Avila. Over the last few years, it has also been the target of frequent controversy, mainly related to how to take make correct use of it without causing undue grief to the area’s residents.

I am a frequent visitor to Sabas Nieves; during certain periods, I have become almost an addict. Having now made evident the origin of the probable subjective nature of my comments, I’ll refrain from excusing myself.

The atmosphere between neighbors and mountain climbers has boiled over frequently. It has recently come to the point where the neighbors were close to putting up barriers to limit access to the area. On top of this, having taken to heart the application of theoretical models which call for the imposing of tariffs by the state for all types of public services and rights of access, they almost started collecting toll charges.

A solid protest by users of the trails, based basically on the menacing reality of numbers (i.e. votes), handed neighbors an initial defeat. Licking their wounds, they had to retreat to their lairs and try to hatch new strategies.

Having done so, they have now renewed their attack. This time around, they have developed a plan whereby they offer the mountain climbers the alternative of parking their vehicles under the Plaza Francia (still Altamira to some of us old-timers) and be transported in modern, comfortable buses up to the base of the mountain, enjoying ecological videos and expected to sing merry praises about the advantages of such a generous solution. But, lo and behold, the initial cost of this solution is estimated to be in the order of Bs. 20 million!!

The mountaineers, on the other hand, having discovered that there are resources at hand for a “solution”, a currently analyzing the possibility of requesting the expropriation of the property of some of the neighbors in order to expand parking facilities around the entrance to Sabas Nieves.

Evidently, among the users of the trails, there are all kinds of poorly educated, disrespectful people that create all types of grief for the neighbors. However, there are shameless creatures present in all types of associations, in the best of families and even among the neighbors of Sabas Nieves.

The solution to this type of problem should normally be developed in an environment of better education and with the creation of social pressure that, through a system of punishment and stimulus, generate corrective measures. The type of solution that the Venezuelan society is bandying around in the case of Sabas Nieves, i.e., throwing money at anything that moves, must be rejected totally and absolutely it we are to have any chance of nudging the country towards a better future.

On the mountain, there are signs indicating that it is forbidden to travel the paths without a shirt and other appropriate items of dress on. As far as the shirt is concerned, this regulation seems evident since it reduces the possibility of getting sweat rubbed on you by some gasping co-mountaineer. It is also esthetically more appeasing in many cases.

Many mountaineering colleagues ignore these prohibitions and do not wear shirts. In a misguided show of solidarity, the majority of us don’t protest vehemently enough. I am sure that if Venezuelans in general begin exacting better behavior of our brethren, we would find immediate solutions to a great many of our ills. Among those, the ones festering at Sabas Nieves.

Mountaineers and Friends, it behooves us to avoid that other colleagues park badly and bother the neighbors Sabas Nieves. Maybe, then, the neighbors of Sabas Nieves can in turn keep some few exaggerated and overly sensitized neighbors from promoting extreme solutions. Maybe then, copeyanos, masistas and other such creatures will avoid and censure acts of corruption by adecos, copeyanos, masistas and other such creatures.

In the meantime, please save yourselves the buses. When I go up the Avila through Sabas Nieves early in the morning, I do so a bit for the physical exercise and mostly for the spiritual tranquility if offers that in turn helps me struggle through the daily hassles of a large city. Under no circumstances am I going to undergo the torture of an ecological bus with a suicidal driver careening from Altamira to Sabas Nieves, return trip!

Roping in the herd

We have frequently seen examples of how economies that permit total liberty for foreign investment flows, especially those that are in essence short-term investments, often must confront more difficulties than those that impose certain restrictions.

As so many things in life do, problems often have their roots in exaggeration. It is possible that on the one hand confidence and the magnitudes of the resulting flows become so great that they can actually hide problems or diminish the pressure brought to bear on local authorities to take corrective measures. On the other hand, absolute mass panic may set in, creating the medium for the type of accidents normally attributed to such a response (for example, the Mexican debacle and resulting “Tequila Effect”).

Since it is very difficult in most cases to identify a special event such as war, earthquakes, or the sudden death of an important leader as the trigger for a change in sentiment, and as we supposedly live in a world of virtual and perfect information, what could be the possible origin of the overly exaggerated reactions of fund managers?

Above all, I suspect that the financial roller-coaster rides we are subjected to have their origins in the traditional search for the type of security usually found in herds. This instinct predominates in most decision making. I refer specifically to the attitude “it doesn’t matter if things go well or not, as long as I’m in good company.”

As an example, I can go back to the period just after Venezuela abandoned exchange stability (February 1983). I watched with surprise as the treasurers of large multinational companies blithely signed contracts that insured future exchange rates at such incredible costs that they seemed outright irrational. The premium paid easily surpassed the possible exchange losses that would be caused by reasonably predictable devaluations.

When I tried to get to the bottom of this madness (frequently assisted in my investigation by offering a shot of whisky), I invariably would receive the following explanation: “We actually have two accounting registries. In the first we register the exchange earnings or losses per se. In the second we register the cost of the insurance premiums to cover exchange risks. Our head office has become so sensitive to exchange risk that it doesn’t combine both accounts to analyze the total net results. On the contrary, even if I save the company a fortune by not contracting this coverage, but incur in so much as one cent in exchange losses, I would be handed my pink slip in a flash.”

What, then, does this observation aim at? Simply that even when an individual or company is perfectly amicable, capable and basically worthy of an invitation to invest in our country, if his inclination as manager of funds is to follow the herd in stampede, the nation can simply not afford to allow him and his company to enter.

In this sense, we must ask why our monetary authorities have not managed to develop a coherent set of regulations to limit the inflow of international investment when this is obviously intended to be for irrationally short periods of time, in grossly large amounts, or both, instead of wasting time and money exchanging bonds and restructuring debt that matures in 20 years.

Countries like Chile, which have earned the confidence of international markets, limit the inflow of short-term investments. This limitation has definitely not resulted in damage. On the contrary, it has helped increase the confidence of exactly those foreign investors whom the country actually wishes to attract. They are not those that come on a 30-day visa, but rather those that come to invest for the long term.

It is important to remember that when a foreign investor risks his funds in a country in the long run, installing factories, developing projects, creating employment, and in general acquiring a real presence in the country, his interest in the future of the country becomes much more sincere and similar to that of the nation’s own population. Much more so than the interest of some fund manager sitting in New York or London.

When we speak of gaining the confidence of foreign investors, we must learn to discriminate among them.

PS. As you would want to know if those courting your daughters have serious intentions.

Published in Daily Journal, Caracas, December 4, 1997 and in "Voice and Noise" 2006.