Energy in Venezuela

The local press has recently published articles referring to the presentation by the National Executive to the National Energy Commission of a document which will lay out the plans to finally eliminate Venezuela’s rentist mentality. This means, basically, that increases in tariffs and prices of fuel are around the corner.

It seems clear that this document, in addition to establishing the bases for justifying new sources of income for the central government, will once again promote the thesis that the principal rentists of Venezuelan society are the common citizens, not its politicians and governors.

The identity card debacle is still fresh in our minds. This is a classic example of parasitic behavior. The Government was ready to dish out a macro-investment of US$ 500 million to solve the problems with our national identification system rather than putting just a little bit of effort into developing realistic and sane administration of the latter.

One of the main arguments used in the aforementioned document has to do with efficient use of our natural resources. The gist of the matter is that we are basically to forego the comparative advantages given us by nature in the form of abundant oil, gas and hydroelectric energy. Faced with high utility bills, companies and citizens alike must learn how to optimize and make more efficient use of these resources. The prime example of inefficient use of energy the authors of the document could come up with is that the Venezuelan aluminum and steel industry uses three time the amount of energy used in Japan.

This logic does not necessarily make sense, since Venezuela has abundant energy resources while Japan does not. The mix of production inputs such as capital, raw material and labor are usually established according to the conditions in each country. Surely most people would much rather see our comparative advantages be biased in favor of cheap energy rather than on cheap wages. It seems we don’t see eye to eye with the current or previous Governments on this.

On top of this both the aluminum and the steel industry have been managed by the State. Could it not be possible that this supposed inefficiency in the use of energy resources be related more than anything else to poor government administration?

The final blow was the publication in the press (on the same day the news of the document broke) of the invitation to prequalify for the privatization process of the power generation system of the State of Nueva Esparta. The basic terms of the invitation clearly stipulates that 100% of the shares will be sold to the highest bidder, on a strictly cash basis and without financing by the Venezuelan State.

This undoubtedly means that the power generation system will be allocated to the candidate who guarantees maximum income for the Central Government (which basically means charging higher rates to insure a return) rather than to the bidder that offers the Margariteño the best service and the lowest tariffs. Again, as far as I can see, this is just another example of the parasitic fiscal planning that has cost Venezuela immense amounts of financial resources and time. Why should Margarita pay tariffs that are higher than the in the rest of the country and might even be higher that what Venezuela will charge Brazil and Colombia for our exports of electricity? This makes no sense either.

For example, the implications of drastic increases in electricity rates for the hotel industry are horrible. A hotel needs a supply of abundant and continuous energy and there are preciously few ways to increase efficiency unless there is an unlimited amount of capital available which, for example, would allow for the importation of efficient but costly airconditioners. Today, faced with depressed room rates due to a flood of state owned supply and the lack of steady transportation due to Viasa’s exit, Margarita’s tourism industry simply does not have these resources.

Finally, as a sweetener, the Government most generously promises to limit its fiscal appetite to levels established by export values. This implies that it is it’s intention to at least not take undue advantage of the monopolistic conditions that tend to skew prices. We will live, eternally gratified with the hope that our average Venezolano will not one day pay more for each kilowatt of power than the average citizen in Tokyo.

Just how low can salaries get in Venezuela?

During a trip we recently took to a Caribbean island, I saw a local salesman selling arts and crafts supposedly typical to that island. One of his products was a t-shirt that boldly stated “Different Island - Same Sh..”. This same message could easily be applied to the economic policies implemented in our countries. These policies seem to be based on an economic Hit Parade list rather than on a profound analysis of the problems at hand. This can be good or bad.

It can be good if it forces our authorities to apply rational economic measures in order to avoid the indignity of looking out of place and time in the televised debates that have become so popular in spite of their boring economic themes. It is bad if it implies trying to adapt measures that may be rational in one country, but not in another.

Fifteen years ago, Venezuela was a country that attracted foreign investment by flaunting its sustainable economic advantages. Among these was cheap gasoline, electricity and fertilizers. Additionally, internal production was protected by a series of import duties. This compensated for the fact that the country’s oil income allowed it to maintain an exchange rate that rendered the non-oil sector uncompetitive.

Today, having applied a large part of the economic recipes that are currently en vogue, we find that the only sustainable economic advantage which remains is a rock bottom salary level. This definitely does not seem correct.

On which strange theory is the government basing its policy of raising the price of gasoline sold in the local market to international levels while at the same time paying doctors, teachers and other professionals’ salaries that are only a fraction of what they would receive elsewhere? Should the country really need to introduce certain artificial measures to maintain its economy’s competitivity levels up to par, it would be much easier to justify applying subsidies to fertilizers than to exact the sweat of our farm workers by paying miserable salaries and benefits.

Obviously, this note does not imply that we should be subsidizing inefficiency or that we should be paying salaries to those that do not show up for work. Those that do not work evidently do not deserve a salary either in New York, Tokyo or Caracas. On the other hand, those that do work deserve salaries that are reasonable in New York, Tokyo and Caracas.

When a public sector worker is competent and performs his or her duties with responsibility while receiving a fraction of the pay that would be reasonable, he or she is making a contribution to the state that is exactly equivalent to the payment of taxes. As is the custom, this tax payment will never be accounted for in our so-called fiscal paradise.

The difficult problem Venezuela is currently suffering through with regards to labor and salary structures, and which has resulted in salary levels comparable to poor countries rather than to an oil rich nation, is clearly a product of the failure to properly select and adapt an economic policy.

I attribute this failure to two basic factors. The first is that while the selection of an economic plan was aimed at strengthening the private sector, the only parts of this plan that were actually implemented were those that increased the state’s income. The magic used to achieve this was the ability to effectively disguise planning officials armed with a soviet style centralist philosophy in a neoliberal skin.

The second factor is that due to a cyclical weakness of the oil sector, the need to adjust any measures to the basic reality that we are indeed an oil country was blithely ignored. As an example of this, you may remember that some experts managed to find a comparative sustainable advantage in the cultivation of apples in Venezuela.

The reality is that in spite of the fact that our politicians have hawked a series of agendas, the country does not have a coherent model that can guide it’s development and guarantee workers, handymen and professionals a reasonable income in a globalized world. Obviously, the only way to develop such a model is by means of a unified effort by the main players in our economy, that is, the business and labor sectors. The first logical step is to avoid the traps set by the party guilty of having set them against each other in the first place.

In the absence of other subsidies and advantages in Venezuela, only salary levels remain as a means of attracting productive investment that can offer Venezuelans dignified occupation. Given the inefficiencies of the state such as bad infrastructure and the lack of physical, judicial and social security, these would most likely have to be offset by accepting salaries that wouldn’t cover the basic requirements of a Tibetan monk on a vegetarian diet.