An example of how the not so lean but still mean Bureaucracy Autocracy machine works.

First expert technocrats concoct and impose bank capital requirements implying their bureaucrat colleagues, those with no skin in the game, know better what to do with credit than e.g., small businesses.

“Assets for which bank capital requirements were nonexistent; sovereign credits. A ‘leverage ratio’ discouraged holdings of low-return government securities” Paul Volcker

Then politicians "complain" banks are not lending sufficient to small businesses.

And so, bureaucrats with access to lots of credit, further subsidized by central banks QEs and the preaching of MMT, design their own lending programs to small businesses, implying they know much better how to lend to small businesses than bank loan officers. This generates new jobs for loads of new bureaucracy associates, while adding loads of costs to be paid by tax payers or inflation.

Just an example of how Bureaucracy Autocracies empower themselves to grow and grow and grow

Of course, no matter those preaching MMT promise easy money ever after, that is unsustainable. The members of the fallen Bureaucracy Autocracies will also suffer. 

Citizens in countries suffering the curse of centralized oil revenues, they don’t live in a nation but only in somebody else’s business. Opposition politicians in such nations, more than changing that, usually only aspire to be the new owners of the business.

The same can be said of all countries suffering the easy public credit curse. Citizens there live in the business of their respective Bureaucracy Autocracy. Most of their respective opposition politicians, sometimes all, also aspire to be the new owners of that business.

Bureaucracy Autocracies were empowered by stealth.

A Bureaucracy Autocracy has been constructed with stealth

Sir, below I quote from Didi Kuo’s review of Moisés Naím’s “The Revenge of Power”, “How the world has been ‘made safe for autocracy’” Washington Post, April 24.

“Today’s autocrats are savvy, with new stratagems fit for a world upended by technological change. They exploit, and sow, distrust in experts, authorities, the media. They manufacture truth, invent enemies and use legal pretexts to consolidate power.”

The regulators in the Basel Committee for Banking Supervision, launched Basel I in 1988. In order to “save” our banks from that “enemy” of excessive risk-taking, these “savvy” experts concocted risk weighted bank capital/equity requirements; and for which they decreed weights of 0% the government and 100% citizens.

That translated effectively into banks being able to leverage much more their capital/equity with  e.g., Treasuries, than with loans to citizens. That has made it much easier for banks to obtain desired risk-adjusted returns on equity with Treasuries, than with any private sector assets. That de facto implies that bureaucrats know better what to do with credit for which repayment they’re not personally responsible for, than e.g., small businesses and entrepreneurs

You don’t need to take my word on it. Paul A. Volcker, in his 2018 autobiography “Keeping at it” which he penned together with Christine Harper, valiantly confessed: “Assets for which bank capital requirements were nonexistent, were what had most political support: sovereign credits. A simple ‘leverage ratio’ discouraged holdings of low-return government securities”

Add to that central banks’ QEs, which primarily includes the purchase of government debt, and the empowernment of a non-transparent Bureaucracy Autocracy becomes evident. 

If that is not a prime example of “what Naím terms stealthocracy: a way of maintaining the architecture of liberal democracy while gutting accountability” what is?

Sir, as a Venezuelan just like Naím I too heard Hugo Chavez with concern and dislike. But, just like Venezuela’s centralized oil revenue curse has allowed truly bad autocrats to remain entrenched even when the walls are tumbling down, what I now most fear, is that world wide easy-government-money curse. 

Let me also remind you Washington Post, that none of the excessive bank exposures that resulted in major crises, or bubbles that have burst, have ever been built up with assets perceived as risky, always with what was perceived as safe.

I could go on and on, but let me end with two questions:

The Founding Fathers of the Land of the Free and the Home of the Brave, what would they have opined about the Federal Reserve decreeing risk weights of 0% the Federal Government and 100% We the People?

Where would America be today, if its immigrants centuries ago, had been met by this type of risk averse regulations?

PS. My first ever Op-Ed, in the Daily Journal of Caracas, was on the theme of bank regulations. 

PS. An example of how the Bureaucracy Autocracies work.

PS. I have recently enlisted #AI ChatGPT - OpenAI to help me fight the Bureaucracy Autocracy. "What would you opine of risk weighted bank capital requirements with risk weights assigned for political reasons?"

Here's a letter the Washington Post published August 2023. It refers to Paul Volcker’s valiant courageous and honorable confession on what happened 1988. Thanks @PostOpinions for not ignoring it.

Having fallen so low, Venezuela should take that golden opportunity to try reach the stars.

Moisés Naím and Francisco Toro describe well the utter current horrors of Venezuela in “Venezuela’s suicide: Lessons from a failed state” Foreign Affairs, December 2018.  But they conclude in that: 

“Even if opposition forces—or a U.S.-led armed attack—somehow managed to replace Maduro with an entirely new government, the agenda would be daunting. 

A successor regime would need to reduce the enormous role the military plays in all areas of the public sector. It would have to start from scratch in restoring basic services in health care, education, and law enforcement. 

It would have to rebuild the oil industry and stimulate growth in other economic sectors. It would need to get rid of the drug dealers, prison racketeers, predatory miners, wealthy criminal financiers, and extortionists who have latched on to every part of the state. 

And it would have to make all these changes in the context of a toxic, anarchic political environment and a grave economic crisis.”

That mission impossible sounding reads like placing all responsibility on the government to fix it all by going back and repeat, this time differently, all that got Venezuela to where it is today.

That to me is unacceptable. After all the blood, sweat and tears Venezuela has had to spill during the last decades, it really deserves a brand new future.

Here are eight tweets that imbed my action plan and dreams for my country.

"So Venezuelans can eat, quickly, PDVSA must be handed over in payment in full to all Venezuela’s creditors quickly, so they put that junk to work quickly, so they can recover some money quickly, and so as to pay us citizens, not the government, royalties quickly"

“Let then the government tax those oil revenues received by the citizens (like with 10%), so that those in government are clear about who they work for, and let what the citizens have left, then flow through the market and help oil the economy of Venezuela.”

“The result will be a different and better Venezuela, freed from those oil revenue distributing profiteers that have always found ways to keep more for themselves or their crony friends. No longer will Venezuelans have to live in somebody else’s business”

“New government debt should be contracted only to help pay for investments needed by its core infrastructure; Guri’s hydroelectric dams and central transmission lines. Privatizations should be designed to provide good and low priced services to the public ” 

“Expropriated properties should be returned to original owners, and all efforts made to recover what has been stolen the last 20 years, including by paying a bounty on any money recovered.”

“The government employees should be reduced to a fraction of their current number. With their individual share of oil revenues, and not having to go to work, most of them would anyhow be better off than today”

“The government’s initially ultra low revenues should be used almost exclusively for law enforcement (not military spending). Make Venezuela’s streets safe again, and Venezuela’s citizens, including returning migrants, will take care of the rest”.

“The best way to eradicate forever that economic human rights violation of giving away gasoline domestically, would be to have all citizens to participate in the revenues generated by the sale in Venezuela of gasoline at international prices”

These tweets are not just based on current realities. In 1974, as a 24 years old recently graduated MBA, I was appointed to be the first diversification manager in the Venezuelan Investment Fund that was being created to manage the oil revenues from the oil boom of those days. I resigned after only two weeks, the same day my desk arrived, already convinced by outside pressures exerted, that oil revenues redistribution profiteers would never allow the Fund to have the independence needed.

Three decades later, as an Executive Director of the World Bank 2002-04, a chair that Moisés Naím had also occupied before me, during and after the Iraq war I tried to push for an oil revenue sharing scheme as best I could. No luck, the crony statism interest of concentrating these revenues in the hands governments, were they could be more easily exploited, proved much too strong for me. 

Now Venezuela has a golden opportunity to free itself from the most malignant part of its oil curse, the excessive concentration of power in its government. I pray it is able to keep away any neo-redistribution profiteers. Let us make sure that having fallen this low we Venezuelans will aim for the stars… that way we will, as the Chinese saying goes, at least reach higher than if aiming at something seemingly more reachable.

“Venezuela would need to get rid of [all] who have latched on to every part of the state.”  What better way than assuring there is much less to latch on?

Here are some of the articles I've written and that relate to my desires about Venezuela’s future.

https://www.carnegiecouncil.org/publications/archive/policy_innovations/commentary/000083

https://perkurowski.blogspot.com/2012/03/my-tax-paradise.html

https://perkurowski.blogspot.com/2017/06/a-simple-but-complex-question-from.html

http://unsustainabledebtsustainability.blogspot.com/2006/05/debt-sustainability-analysis-sdl.html
https://theoilcurse.blogspot.com/2015/07/cidhdenunciasoas.html

http://theoilcurse.blogspot.com/2016/05/the-last-thing-venezuela-needs-is-to.html

Curses and blessings quite often come hand in hand

I will keep here my reflections on the subject in Kenneth Rogoff’s book “The Curse of Cash”. (For full disclosure I have yet not found the time to read it in its entirety)

In my comments I will often also refer to Professor Rogoff’s blog.

Kenneth Rogoff writes: “But for all the advantages of cash, we have to recognize that the current system is badly off kilter. A lot of central banks and finance ministries know it, as do justice departments and tax authorities.”

I fully agree, 100%, but do “We the People know it? There are reasonable and unreasonable doubts out there. And I am not 100% sure among which of those mine could best qualify.

Should not abolishing larger anonymous practical ways of storing wealth have to be subject to something like a referendum? I have no idea?

Yes cash might cause some local tax evasion, but does anyone really believe that big tax evaders keep their fortunes in cash like some seem to say? I just know that the word “cash” is open to all types of confusions (that are sometimes exploited)

Cash in hand, if devalued, looses its value equally for all. Non-cash can be devalued discriminatorily. Do we want our grandchildren to be subject to such great Big Brother power? As a Venezuelan, not me for sure!

Cash, as can oil, can indeed be a curse. But does that mean that we in Venezuela should stop extracting oil? I don’t think so.

And how would the elimination of for instance $100 bills, that might represent about one trillion dollars take place? I have no clue.

Would it not just dramatically increase the value of other assets? Not much, it seems like peanuts when compared to what is done with Quantitative Easing.

Do I want cash to assist drug trafficking? Of course not, don’t be silly.

Rogoff writes: “but most world holdings of dollars are in the underground economy (crime and tax evasion). I am not sure. First of all because I do not agree that all underground economy must be either illegal or bad. Then because I think criminals have many alternatives of how moving cash into something else. Moreover, much cash might make even many hardened criminals nervous.

Today I was censored in my homeland Venezuela

Since January 2000 I had been a pro-bono columnist at El Universal. It was recently sold to a group supposedly very friendly and cozy with the Nicolás Maduro government.

Today, July 29, 2014, two days before the centennial of the discovery of oil in Venezuela, something which has enriched governments so much so as to make a true democracy impossible, I was informed there was no room for me in the paper anymore.

Am I sad? Of course! It is truly hard to be censored in one´s own country, especially when one has so much one wants to say, especially when so much needs to be said.

Thank God there are now such things a blogs otherwise I might have had to start putting up a print-shop in the basement or practicing graffiti.

The title of the article I was to publish July 31? “100 years of submission”... in it I was as always wanting for the oil revenues to be shared out directly to the citizens... so that we do not have to live any longer in somebody else's business.

Think of how you would feel if your government was receiving and disposing of over 97% of all the exports of your country. That is my Venezuela. That is the country where the price of milk, if you can find it, is 278 times the price of gas (petrol) and that is not viewed as something immoral.

That is an oil curse as big as oil curses can come!

PS. But, on the other hand can you think of "Daddy why are you not censored?" Indeed it is not easy to live in a low profile dictatorship! 

One question, and one opinion, on the Scottish independence referendum of September 18, 2014

Question: How many Scots under 16 years of age will not have a chance to vote on what will affect them the most? Why not give all thirteen and more that right and allow those over 50 to vote only if they do so in representation of a child or a grandchild under thirteen? That could really make this vote on the declaration of independence a real game changer.

Opinion: The draft of June 2014 of the Scottish Independence Bill states that “In Scotland, the people have the sovereign right to self-determination”. Great, but unfortunately, it would not seem that “self-determination” will include each Scottish citizen managing his share of natural resources his country has been endowed with, like oil.

And friends, speaking as an oil-cursed Venezuelan, who has had to live in somebody else’s business, until he could not endure that anymore and had to leave his country, you might think more about this issue.

If not, I assure you that this independence of yours could turn out to be a real Pyrrhic one, when all of you Scots will become dependent on the clan that manages those natural resource revenues for you.

Please don’t let that happen!

Me, in favor of and against... free market think tanks

I believe profoundly in that our world is driven forward by the risk-takers operating in a free market. And as typical risk-adverse citizen it behooves me to fight for that to be happening.

And that is why even though I admire profoundly many free-market think tanks, their silence on two issues extremely important for me, drives me nut.

1st. I hate it that when free-market supporters imply that if only there was a free market supporter in charge of the government, he would be able to overcome the problems that the concentration of power in governments cause… like that of 98% of all my nation’s, Venezuela, exports going into the government coffers. That is intellectually dishonest of them!

2nd. I hate it when free-market supporters ignore the distortions in the allocation of credit to the real economy that risk-based capital requirements for banks produce, and have it in their minds, that someone should stop their banks from taking risks, so that their money is safe. That is also intellectually dishonest of them!

The Hugo Chavez Revolution cheated the poor

And before “Chavistas” stop reading this let me point out that the title does not imply that Hugo Chavez, as a person, deceived the poor, all the time, since for sure he himself was also much deceived by some of his most dedicated followers.

So let me explain the Great Deception.

If there is one thing that the Chavez Revolution holds, is that it foremost works for the poor of Venezuela... and it congratulates itself with reports where the Gini coefficient evidences that inequality has declined in Venezuela. Well ... that is completely false unless you want to argue that this was achieved by impoverishing many of those who had something more.

(PS. In fact some Bolivarian Revolution revolutionaries have confessed their need of keeping the poor poor)

But the Gini coefficient in itself contains falsehoods. As an example, its calculations, for “methodological" reasons, does not include the income of those who became rich via corruption and deviation of funds, like the “boli-bourgeois” (the new rich) and the “briefcase companies” (a name for those who have abused the foreign exchange controls)

And I can argue the Great Deception even stronger.

Imagine that the government had not directly given dollars to other countries or purchased services at inflated prices (Cuban doctors and nurses)

Imagine that the government had not given away the gasoline in Venezuela ($ 6 cents per gallon, € 1.5 cents per liter) and had sold it at its international price.

Imagine that it has not sold cheapo-dollars to those traveling abroad

Imagine that it has not sold cheapo-dollars for imports, those who benefit criminal importers, for instanbce those who over-invoice, or good faith importers, by providing very generous distribution margins ... and which all ultimately delivers only a tiny portion of benefits to the population which, precisely because it is poor, consumes less imports.

And imagine instead that all these resources just HAD BEEN distributed equally in cash among all Venezuelans.

In such a case, I assure you that the Gini coefficient would have shown a vastly larger, more real and more sustainable reduction of inequalities in Venezuela.

So you the poor of Venezuela and you the middle class in the process of being part of the poor in Venezuela, demand your share of the net oil revenues, in cash, in dollars.

And please, I beg you, stop being so naïve as to believe the story that some experts, no matter where they come from, no matter how beautiful they speak to you, know better than what you know what to do with an amount that can represent 150-250 dollars monthly for each one of you 

PS . Reading about some new government efforts to further indebt our country, I beg our students: “You, who would be the surest payers of this debt, declare that debts, incurred only to postpone much needed corrections are "odious", and that therefore you have not the slightest intention of sacrificing yourself by paying these.

PS . Some thoughts during Christiane Amanpour’s interview of Nicolas Maduro:

How can one ask other countries for respect when one disrespects one’s own countrymen?

How can one ask for a multi-polar world while requiring a single-polar country?

How can a government which manages 98% of all the exports of the country, declare itself so innocent of its problems?

How can you say to sleep like a baby and wake up with such large bags under the eyes?

Do you think that Hugo Chavez would sleep happy as Maduro says he does, when so much unhappiness abounds?

Some countries have governments that washes brains, Venezuela has one which is brainwashed

Translated from El Universal

Hugo Chavez and the poor of Venezuela

Now upon his death, we often hear news-media reporting in reference to Hugo Chavez, that he helped to pull a lot of Venezuelans out of poverty. That is simply not true. 

Hugo Chavez did indeed help many poor to live better in poverty, good for him, but that is far different than pulling poor out of poverty. To do so exceeded by far Hugo Chavez’s capabilities, and that of his collaborators. 

Those Venezuelans who did manage to pull themselves out of poverty, did that entirely on their own, or with the help of oil revenues and corruption and very little else.

Four Years and Counting in Iraq: Regarding "Lessons of War"

Regarding "Lessons of War"

The Post should be commended for not describing the extremely difficult way forward in simplistic terms. Having said that, the editorial should have given more attention to the role of oil, not because of its obvious energy significance but because it is an obstacle to good governance in Iraq.

The editorial said, "We may have underestimated the impoverishment brought about by misrule and sanctions and the brutalization born of totalitarian cruelty." But the sentence should have continued: ". . . that thrives especially well in countries cursed by large amounts of oil revenue flowing to a central government, eliminating any chance for a sustainable democracy."

Coming from Venezuela, where oil revenue is centralized, I know that loyalties to country, tribe and sect are all irrelevant compared with the unnatural loyalty that can be purchased by those in control of a checkbook fattened by oil. If the United States wants to achieve anything going forward, it had better find a way to distribute Iraq's oil revenue directly to the Iraqi people.

Per Kurowski

Bethesda

Published in Washington Post

PS. Here my minimum minimorum suggestion on when exiting Iraq

The curse

  The curse

Lately, articles that analyze the supposed curse that weighs on countries rich in oil resources have been published like rice. At first glance it would seem that there is a certain basis of support for these theories of obscurantism, however, for proper reading, it is important to clarify one or another detail.

First of all, and judging by the immense number of existing offers to free ourselves from this cursed burden, it is obvious that we are not talking about a common curse. There are even those who generously offer to assume their risks, even paying us for the right to such sacrifice.

A suggested exorcism is to leave OPEC to sell oil at its marginal extraction cost, thus guaranteeing that we avoid earning the dirty rent for oil. Another way is to privatize it, against a tasty and tempting initial payment, to cancel the current public debt... and get into debt again? As you can see, both methods have a strange similarity with selling the sofa.

Finally, considering that the European treasury earns about 100 dollars net per barrel, while those who sacrifice the resource only get 25 dollars, gross, it is not very obvious who is the cursed one.

The indisputable thing is that oil revenues have not been used well, but as you can understand, this has less to do with the abundance of resources and more to do with the damn system used to distribute them. Currently, the entire oil revenue enters the government's coffers alone and effortlessly, thus unbalancing the democratic system, since we all know that the happy holder of a full oil checkbook has little incentive to pay attention to the citizen.

How do we get out of this? To begin with and due to the obvious and incurable lack of talents of our rulers, we must apply the parable of the talents in reverse and bypass them, delegating a greater part of the administration of oil revenues directly to the citizens.

However, since we civil society members are not very different from our politicians, like-minded, like-minded, perhaps we should, just in case, pay the oil dividends with educational tickets.

Chances of it? Few, due to that true curse, the one that leads our leaders to believe that everything bad in the past is miraculously cured with their arrival in power (with the checkbook) and, us, to believe them.

Translated by Google

https://petropolitan.blogspot.com/2003/11/la-maldicion.html

https://theoilcurse.blogspot.com/2003/11/the-curse.html

No, thanks

 No, thanks

The following paragraph is extracted verbatim from the UK Energy Report 1999, published by the Department of Trade and Industry of England.

“The retail price of products is largely determined by taxes, especially for fuel. The attached figures ... illustrate the increasing proportion of the price of gasoline attributable to taxes. The incidence of taxes, ...explains around 85 percent of the final price of unleaded gasoline..." Prices are expected to continue growing, given the commitment of the English Government to increase taxes on petroleum by an average of 6 % annual, above inflation.

The report's figures indicate that the price of petrol before tax fell from 15 to 10 pence per liter between 1980 and 1999, a decrease of 33%. However, for the same period in England, the consumer price went from 26 to 68 pence per liter, increasing 162%. The explanation for this phenomenon is found in the various taxes on gasoline, which rose from 11 pence in 1980 to 58 pence per liter in 1999, an increase of 427%.

Taxes, applied in a discriminatory manner to oil, which favor coal, for example, affect both the volume and the sales price of our main export product and therefore directly harm our country. All of Europe applies taxes of the same order and the other consuming economies, except the United States, are evolving in the same direction.

It was only a few months ago that the magnitude of these taxes was understood and the consequences, at least in Europe, were serious protests by consumers. It will be necessary to observe whether in 2001, countries like England and Germany, even when stripped, continue with their pre-programmed increases.

The relative silence of Venezuela and other oil-producing countries, the truly aggrieved ones, is surprising. Sometimes I wonder if such passivity has its origin in the fact that in this globalized world, everyone is still dying for the possibility that one day The Queen will invite them to have tea in her palace.

In November 2000, the president of the European Energy Foundation of the European Union, with great cynicism, announced that in the dialogue between oil consumers and producers, everything could be discussed, except taxes, since these did not significantly affect consumption.

In December 2000, the European Union announced a donation of 55 million euros for the reconstruction of Vargas, to be disbursed over two years.

In a world that preaches free trade, oil taxes are hypocrisy. I, being a Venezuelan of European descent, may react in particular, but I am convinced that we have to place our protest in its correct dimension. In this sense, and even if I had never rejected the help offered by the United States during the tragedy in Vargas, today I would not hesitate to respond to Europe: No thanks, we do not want your donation, that amount is equivalent to what Venezuela would obtain each week if You, on the basis of false environmentalism and real fiscal voracity, do not apply taxes that discriminate against oil. We will not help calm their institutional conscience by accepting some insolent barter with begging mirrors.

(Translated by Google from an Op-Ed published in Venezuela February 1, 2001)

The Oil Curse

Let's talk about official advertising (and exchange rate anorexia)

Let's talk about official advertising (and about an exchange rate anorexia)

If the constituents of the time when the Constitutions, which currently inspire those of the Western world, were drafted, had had a notion of the importance of publicity and understood its irresistible temptation for a politician, they would surely have established all kinds of limitations to the same.

Advertising is for a politician, like drugs for a drug addict, he cannot live without it. In normal times, under a fully current Constitution the Nation is administered by politicians. Hence, it would be impossible, like asking for pears from an elm tree, to ask those same politicians to generate effective self-regulation in advertising matters.

In a Constituent Assembly, since there is a greater possibility of a certain apolitical representation, it would be the almost unique opportunity to introduce the limitations on politicians that civil society believes are necessary.

What limitations can be proposed? Before answering, it would be helpful to illustrate what you want to avoid. The following are just a few examples, although, of course, readers will surely have their own list.

The fact that to “inaugurate” a small "green" space of 12 m2 with some nuances, awnings, chairs, sound equipment, gifts and other promotional material are hired, shows an absolute disrespect for the citizen.

Surely many have observed, when passing through some highway, crews of workers who are actually doing a good job of cleaning and maintaining the road, who, unfortunately, are forced to carry, like a cross, a sign that weighs more than than his work team and that only fulfills a promotional function.

We see throughout the country so many posters that announce, with the name and surname of the official on duty, the fulfillment or supposed fulfillment of duty, of the President, Minister, Governor and Mayor. All these advertisements, surely expensive, only serve to remind us why we are not politicians. Out of simple politeness, we would be embarrassed.

To avoid abuses such as those expressed above, I would love to include in our Constitution, within a chapter entitled "Limitations for officials in the use of advertising", the following articles:

1. Advertising expenditure related to the execution and start-up of any civil work is prohibited, exceeding 1% of the cost of said work.

2. Any public servant is prohibited from using, in relation to any official activity, any adjective intended to give a favorable connotation to the way in which said activity has been carried out.

3. In any activity that can be classified as promotion, advertising or information, and regardless of the origin of the funds for payment, whether public or private, the use of one's own name, photo, or any other element that, directly, can personally identify a public official or a political organization.

To the extent that in our next Constitution we manage to introduce some type of limitation on the shameless self-promotion of the politicians in power, to that same extent we will be able to say that we have achieved a new Constitution, with real possibilities of producing results. Only in this way can we have, at least the hope, that the politicians of the future will have to dedicate themselves to achieving real fruits of their management, instead of spending resources and time trying to sell us imaginary fruits. Does that seem little to you? This alone would almost justify the Constituent Assembly!

Another different matter. [An exchange rate anorexia that can plague a centralized oil-revenues cursed nation] 

A respectful question to Mr. President. Just for my historical archive.

The rate of the bolivar against the dollar should be at 900, but it is at 600. As a result, a hotel, when converting the 40 dollars it obtains from a tourist, receives, instead of Bs. 36,000, only 24,000 and goes bankrupt. If you try to obtain the Bs. 36,000 you must charge 60 dollars, then the tourists go to another destination and you go bankrupt. The disaster affects everyone. Today we read about a small gypsum plant that had to close because it is cheaper to import gypsum from Spain. 

Even postgraduate degrees (the paid ones, not the free ones) are cheaper abroad. It is true that a devaluation, by itself, does not remedy anything, but I believe there is more than enough evidence that anorexia would change if it kills

I have no doubt that if I were responsible for the country's economic policy and had to face uncertainty regarding exchange rates, if I sinned, I would always, always prefer to do so in favor of the national producer and not the foreign one. Since, upon reviewing my files and finding that the first date, on which I got on my knees begging for a greater rate of devaluation, was in July of '98 and since then, I have cried out for it, "so many hundred" times, I know , that they didn't pay attention to me.

Mr. President: Who was it? Who was it that convinced you to continue with Dr. Kevorkian's exchange rate policy? Was it Casas? Was it Natera? Was it the International Monetary Fund? Was it a military man? Was it Kelly? Was it Alfaro? Was it Emeterio? Who was? Don't you remember? - With respect, I recommend you remember - Many others are going to ask you... and very soon.

Translated by Google from an OpEd published June 15, 1999

Learning to appreciate

It is absolutely incredible. There is no anthropologist who understands it. Ours is a nation that dedicates serious effort to the art of national, religious, pagan and other such festivities. However, there is absolutely no mention of any holiday, not even a minor municipal one somewhere out in the wilds of Venezuela, to celebrate what undoubtedly must be the most important single object for the nation, its reserves of black gold.

The magazine Debates IESA recently published an article in which, precisely to create food for thought and debate, I tackle the subject of oil. I forward the possibility that our usual habit of labeling oil as something bad and disagreeable, to the point of actually calling what in most other nations would be considered to be God’s gift, the devil’s excrement, is simply part of an intelligent plot to cover up mistakes and avoid a severe audit of accounts.

While oil income continues to be considered “dirty” and has not been channeled through our pockets as ordinary citizens in order to avoid soiling or corrupting us, we will not give any importance to the efficiency with which the administrators to which we have delegated the task of handling these resources actually go about it. It would be another story, however, if this oil income would be considered squeaky clean and be the object of devout attention every Sunday at mass.

I ask you to reflect on the value of an educational program that would instill in even the poorest child the need to a) thank God for the Bs. 200,000 of oil income that would correspond to every single Venezuelan citizen (and which all of us have subrogated to the government in 1997), and b) to assume direct responsibility for its clean and correct administration.

Tongue in cheek aside, I am an economist and have a Master’s Degree in Business Administration. During my career if have learned, and taught, the basic precept that the most important step required in order to develop a solution to a problem is the clear identification of the resources you have on hand. Here, the opposite seems true. Colleagues, social planning gurus, VIPs and other such well-intentioned people seem to insist on preaching a model based on the theory that Venezuela should try to ignore its oil income. Something like supposing we decide that we should really be leaving the oil underground and immediately thereafter begin praying one hundred “ceteris paribus” to compensate for the fact that we continue pumping it anyhow.

Our oil income continues to exist, and all the efforts being undertaken under the umbrella of the oil sector opening seem to be aimed an increasing the same. In light of this reality, I propose in my article the thesis that maybe the best model for Venezuela is exactly a rentier one.

Many people would label this as heresy, but I steadfastly maintain that in my opinion, a rentier model has nothing to do with having a laid-back attitude or being a vagabond. On the contrary. A rentier model obligates us not only to save, but also to develop solid characters in order to assume the responsible management of our wealth to the benefit of future generations.

For example, experts from multilateral agencies and, of course, politicians thirsting for more resources to spend, seem to be basing their advice on models which are closer to being sado-masochistic than macro-economic. They advise us to completely ignore the horrifying experience we have been subjected to by our State administrators and to continue, in the name of fiscal deficit reduction, to pump more and more resources into our leaky fiscal system.

In stark contrast to this, we can well imagine the simple wisdom of the rentier model often used in the private sector and which motivates the owner of a company to cut off his capital contributions and avoid future indebtedness at all cost should his manager prove to be a useless failure after having misused the company’s resources.

I think, therefore, that an honest and simple application of a rentier model would allow us to identify with more clarity the true comparative advantages upon which to base Venezuela’s real development and which would in turn generate employment commensurate with our reality as an oil producing country.

Maybe then we could escape the mortal trap we have fallen into as a country by assuming that in order to initiate development we must substitute the traditional mix of incentives such as low prices for energy, communications and fertilizers with a salary structure almost comparative to a banana republic.

Certainly, it is not ethical to be poor rentiers and to throw out our income in order to work with the sweat of our brows. It would be ethical and logical to simply become excellent rentiers.

The Petroleum Ombudsman revisited

Almost one year ago, I published an articled titled “The Petroleum Ombudsman”. In this article I raised the need to institutionalize the figure of a qualified entity that could satisfy the requirements of the Venezuelan citizens of objective and independent information and analysis related to the country’s oil industry.

At that time, my observations were initially driven by a desire to know what effects on the industry the vast restructuring of PDVSA’s organization would have. In my opinion, there was a risk of centralization of the company.

Today, upon reviewing the myriad of questions PDVSA’s actions have raised in the Venezuelan society over the past year, I am even more convinced that the matter of the ombudsman for the petroluem sector must pass from being a mere suggestion to being an outright and urgent requirement. Let us see some examples:

The Oil Opening was justified by a lack of availability of resources to continue PDVSA’s investment plans. All of the funds raised by the opening, however, went directly into the Nation’s fiscal coffers. Who can explain that?

Without the slightest remorse, the National Executive requested that PDVSA withhold or delay payment of its obligations to local suppliers in an effort to further fight inflationary pressures, thereby becoming just another poor payer. Could this have been the beginning of an interesting swap aimed at sending Mr. Guisti to the Central Bank in return for Dr. Casas?

We are continually bombarded by adds in the press, selling courses and seminars to be dictated by an educational affiliate denominated PDVSA Cied. One single session, from 8 AM to 5 PM costs Bs. 300,000, an evident divorce from the economic realities of the country. When was PDVSA authorized by the country to expand its scope of activities in this manner?

Everyone has been made aware of the dangers of lead in gasoline. The solution for this seems to be of lesser importance than the revamping of an immense amount of service stations which, in addition to dispensing gasoline, are also to sell snacks. Who establishes investment priorities?

If any market is to be considered a captive client for PDVSA, it should be the Venezuelan one. I find it difficult to visualize a supertanker from the gulf trying to pass gasoline through our port authorities with the aim of selling me the concept “Put a camel in your tank”. If this is so, and if PDVSA truly is short of resources, on what basis can they announce a plan to invest US$ 800 million over the next nine years in order to improve their service station network. Why aren’t these resources invested in countries who’s markets we should be conquering?

And while we are talking of PDV, how much did the changes in image and the marketing of a new logo and trademark cost us?

And speaking of logos and trademarks, I haven’t seen any of the large oil companies now coming into Venezuela to participate in the local markets make these changes in order to compete in our environment. In a world of global markets, global coherence would seem to be important. We are all aware of the PDVSA’s important participation in the US markets through its holdings in the CITGO network. Why, then, don’t we support this trademark and market it in Venezuela as well?

By raising these questions, I don’t wish to give the impression that I argue in favor of the Petroleum Ombudsman only to supervise PDVSA. It is also important to note that this office could also launch a vigorous defense of the industry’s interests at times when fiscal pressures are brought to bear by the National Executive. These pressures could ultimately lead to further indebtedness and/or endanger our goose of the golden eggs in many other ways.

If anyone still harbors doubts as to the need for the office of this ombudsman, it should be enough to reflect on the confusion and ado created by the question as to whether PDVSA has or has not legally complied with is fiscal obligations.

PDVSA is a State owned company, headed by Directors and Management designated by the State. We should therefore be able to expect a certain confidence an adherence by the same with the norms handed down by the State. If this were not so, it would seem to indicate a much more serious problem, one that cannot be solved merely by establishing a special SENIAT office within PDVSA.

Should we abandon OPEC?

Alternative 1: Continue in OPEC, produce little oil and sell it at reasonably high prices. Alternative 2: Abandon OPEC, expand production capacity and sell oil at relatively low prices, while conquering new markets in the process.

Venezuela’s future oil policy should lie somewhere on the axis formed by these extremes. We, as citizens, should supposedly form our own opinion as to where this ideal point should lie.

Over the last 20 years, I have consistently questioned the logic of a policy under which the members of a cartel have turned a blind eye to the diminishing strength of the latter, almost as if on purpose. This is the case of OPEC, which has, year after year, lost market share. In this sense, the only plausible response to the proposal of going out and aggressively conquering new markets should be “let’s go for it”.

Unfortunately, it is not quite like that. Even though I support this proposal on technical terms, I can’t quite seem to drum up enthusiasm. Neither because of the possibility of revindicating myself with an egoistic but savory “I told you so”, nor because of the possible inherent promise of the plan itself. The cause of my indifference is none other than my conviction that such a decision is in itself of little importance for the future of the country.

It does not suffice to follow a coherent oil sector policy. What really matters to the country is its final result. A decision that is technically wrong but produces satisfactory results is clearly better than the opposite. As far as the future of my country is concerned, I am not interested in applying the medical phrase that certifies that “the operation was a success, but the patient unfortunately has died”. 

In its initial phases, OPEC generated large volumes of resources for Venezuela; more than sufficient to set the country on the road to development. This did not occur and there is no reason to believe that the country will manage to reap the non-perishable fruits of this development even if the next oil policy is successful.

Even though I realize that it is not popular today, and feeling a bit like a prehistoric hippie predicating “Love is all we need”, I will risk whispering the statement “oil is a valuable natural, non-renewable resource”.

Since oil is indeed valuable and because it is not renewable, prices have once upon a time been pushed up to nearly $ 40 per barrel and projected prices should probably be around $300 today. Since oil is valuable and non-renewable, it was also said that before liquidating it at low prices it would be better to leave it in the ground (for the benefit of our grandchildren).

If we were not all, myself included, simple egoists itching to get our hands on resources that would allow us to once again live an easy and happy life, we should really be leaving the oil in the ground today, thereby insuring the future of our country and our children. Not until the price is right (the current market price of US$ 12 may indeed be the right price), but until we can find prudent, reasonable and responsible destinies for the income our oil sales generate.

When oil prices skyrocketed in the 1970’s, the country went the route of mega-projects; duties to protect against imports, subsidies and all of the other ingredients which eventually proved to be wrong. At least, however, these were the result of a plan and a vision. Today, there isn’t one coherent statement, not even an incoherent one, with respect to a development model applicable to Venezuela.

These comments are not aimed at paralyzing the oil industry’s current plans. On the contrary. We have read in this week’s press about the need to isolate the country’s fiscal accounts from the ups and downs of oil prices. In my humble and probably validated opinion, we should probably be doing just the opposite in order to give our industry an even chance to fight for its markets. We should be isolating our oil industry from our fiscal appetite.

The previous strategy of reducing production and selling at lower prices represents, in addition to minimizing investment requirements, the milking of our cash cow, PDVSA. Today’s strategy implies that we must cover increasing needs for investment in the face of falling prices with drastic reductions in fiscal spending. We still have a long way to go before we can be convinced that the political will to reduce spending is really out there. To begin with, the US$ 2 billion the country reaped from the oil opening, which should have been earmarked for PDVSA’s own investments and expansion, have already been spent. As usual, there is nothing left!

Guaranteed - 100% artificial

Several years ago, on a bottle which contained a liquid of dubious quality, I saw a promotional phrase displayed with obvious pride which spelled out “Guaranteed 100% Artificial”. I remember having thought of this slogan, which converted a negative argument into a positive one by a total and shameless acceptance of the it’s failings, as a marketing masterpiece.

However, that was many years ago. Since then, our politicians have provided several examples of the application of this marketing strategy, proving that they have taken its development to new heights. This week, I got the impression that I am being taken for a ride again.

Obviously, something must be done about Venezuela’s foreign debt. The point is, why do we have make such a jolly occasion out of a relatively sad affair, something like joining a funeral procession in New Orleans.

There has been much ado about the development of a new strategy for the management of this debt. Among the incredible advantages we have achieved, through the efforts of our financial magicians, the following have been readily bandied about:

“Above all, the country would manage to establish a yield curve similar to those in other countries which would allow for future issues of debt instruments....”. Splendid! Imagine, we would now have our very own yield curve! Just what the doctor ordered for Venezuela at this moment! There is no doubt in my mind that this would pave the way for new, and possibly indiscriminate, indebtedness.

“In addition, Venezuela would attain savings due to the elimination of the requirement for collateral as is the case for the Brady bonds already issued...”. Part of the external debt was guaranteed by low yielding bonds which in one way or another reduced the country’s net indebtedness. Once these collateral bonds are released, the government is free to use the funds for other “productive” expenses. This means that our national debt will be increased, bringing our net indebtedness up to the level of our gross indebtedness.

The new bond issue, which if successful could top US$ 1 billion, would carry an estimated spread over the US Treasury Bill rate of “only” 3.5%. The former is today approximately 6.5%, which bring the total annual rate to about 10%. This should technically be marvelous for a country “which has in the past had to issue Brady Bonds which carried interest rates with spreads of up to 6.5% over the US Treasury Bill rates”. I’m not about to discuss the cost to the Nation of previous issues. 

May those responsible for these transactions defend themselves. One thing is a 6.5% spread (if this is indeed the case, which I doubt) established for instruments with relatively short maturities. Another, totally different, is tying into a 3.5% spread over a whopping 30-year period. 

The favorite tool used to calculate the “savings” for the Nation is based on analysis of the present value of money, i.e. the value of a dollar today versus the value of a dollar tomorrow. Beware, these are the very same tools that were used to argue Venezuela into the current debt crisis in the first place.

A simple initial calculation would indicate that Venezuela would undertake interest payments over a 30 year period of US$ 1.085 billion in excess of what the United States would pay for a similar US$ 1 billion issue. If we were to extend this calculation to include the cost of accumulated interest at the full 10% per annum, the value of this interest payment differential would explode to US$ 6.368 billion. 

Politicians used to blame international bankers for our high levels of debt. One President even stated that he had been mislead by them. Today international banks are the men in the white hats. On the other hand, bank analysts consider Venezuela worthless one day and worth billions for 30 years the next. Seems like nobody can make up his mind.

We have been told that another advantage of this new financial strategy is that the country’s debt profile will be changed. The new 30-year bond issue will give future budgets some “breathing room”. This means the pressure to reduce government spending and streamline its bureaucracy will have been effectively trashed. I can almost hear the following dialogue in the back rooms of several ministries: “Well boys, enough of the critiques of our sons who lament not being able to go to Disney World or to a University abroad like we did because we have misspent our oil income and, on top of it all, have increased the country’s indebtedness. Let’s change the signals! We’ll postpone the payment of our external debt and lay it square on the backs of our grandchildren. You know what they say, “if it’s the same we are not cheating” (“lo que es igual no es trampa”).

Finally, I wish to make my own contribution, however small and humble, to the science of successful marketing of dubious results. The next time there is a general strike in Venezuela, I suggest the headlines should read: “Bravo! This strike is a healthy indication of social and economic development in Venezuela”. We all know that only well-developed countries such as France, England and the United States can afford a nation-wide strike.

It just must get smaller

Last week, the Finance Ministerndeclared that “there will be no modification to the sales tax simply to comply with the requests of the business community”. Immediately thereafter, he stated that “when tax evasion is reduced ... we could think of reducing the percentage of the sales tax”. There is no doubt that the official sector has become expert at applying the “divide and conquer” formula.

The desire to reduce sales tax levels is completely normal and common, typical of tax payers world-wide. The reduction of sales tax levels doesn’t only benefit the business community. On the contrary, given the progressive nature of this tax, the salaried workers are normally the ones who benefit most from this reduction. In this context, to divide Venezuelans into businessmen on one side and workers on the other seems out of place.

Another such “division” is between income earners that actually pay their taxes and those that don’t. This would imply that the payment of taxes in Venezuela is simply the result of individual social responsibility and not as in other countries, the result of the existence of an efficient tax collection entity which is perceived as severe but just.

Normally, a State would not even have the right to apply new taxes in the face of such a deplorably poor and inefficient collection process. If it does, instead of complying with its duty as promoter of justice, it is merely promoting just the opposite. Evidently, there is a dose of truth as far as its final implication is concerned, when the Minister declares that there is a possibility that our taxes will be reduced if and when our neighbor pays his. This, however, does not imply that we must become the collector of our neighbor’s taxes. This function is still exclusively in the hands of the States.

This discussion, however, is totally irrelevant in Venezuela. Since the State enjoys unrestricted use of “our” oil income which, by the way, is obtained through the use of a fiscal collection system that is so efficient that we don’t even notice it, it should not collect one more cent. The Venezuelan State is so immense for a country with a population of 20 million, that it is difficult for even the shrewdest of politicians to hide it.

These declarations, which point toward the probable lack of fiscal pressure in Venezuela, were written in the midst of the negotiation and signing of the centralized public administration labor contract framework which will benefit seven hundred and fifty (750,000) workers. For those who worry about the State’s capacity to efficiently manage such a large public sector, an olive branch is offered; the labor contract upholds advancement by merit and awards benefits for individual achievement and for fulfillment of duties as a public servant.

In reality, these comments are simply variations of old and well-known themes. Subjecting this article’s readers to another version of the Venezuelan tragedy is not meant to be an expression of refined sadism, but the unfortunate result of the identification of new threats that block the development of solid public opinion that would demand, for the benefit of all, a real reduction in the size of the Venezuelan State.

One of these threats comes from international multilateral entities. After much insistence on the necessity of reducing the role of the State in favor of the private sector, the message has now been increasingly oriented towards the need to improve the efficiency of the state. That is to say, there seems to be no need to reduce the size of the State. What it should be, is more efficient. This position, which is obviously logical when applied to the efficiency of a State which has already been reduced in size, will unfortunately simply be an excuse for our pro-bureaucracy politicians to maintain, or even increase, the size of our public sector.

The second threat is endogenous, much more subtle and therefore much more dangerous. The theory that the problems facing the administration of the public sector in Venezuela are based not on its size but on the will, capacity and affection for the country of its leaders has resurfaced as an issue around one particular pre-candidacy for the next presidential elections. This is evidently based in turn on this official’s excellent and admirable administrative achievements at a local level. We are again beginning to feel the first consequences when debates about the qualities of the pre-candidates bring up discussion about the merits of having solid political party administration experience versus the merits of political independence based on administrative capacity and personal integrity.

For someone convinced of the fact that even Bill Gates, reborn as Simón Bolívar (in other words, Mandrake The Magician) could not efficiently manage a country in which the State is as omnipresent as it is in Venezuela in the long run, these new theories are undoubtedly distressing.

Personally, and as a prerequisite to give my unconditional support, I will have to continue my search for a candidate with a less developed ego who recognizes that the future of our beloved country depends more on the dismantling of official bureaucracy than on its great will and capacity for work.

Per Kurowski

 

 

The petroleum ombudsman

Ten years ago during an interview with a local reporter, I expressed my worries about the long term future of organizations such as Petroleos de Venezuela. While satisfying a real need for freedom of action and informative confidentiality, we have unfortunately also set the organization on a path towards degeneration of its operative capacity, no matter how efficient it may have been at the starting point. 

During this interview I even stated that the day could conceivably come when it could theoretically be more attractive to have politicians sit on PDVSA’s board than suffer the effects of an encysted meritocracy, unaware of the country’s realities. 

Venezuela’s challenge at that moment was to find a way to avoid this. It still is.

During the last few weeks we have received information pertaining to our oil industry which seems a bit strange and contradictory. Some “experts” harp on the fact that the internal cost of producing gasoline exceeds by far its price in the national market while others maintain just the opposite. 

The industry has announced a reorganization plan which would result in annual savings of US$ 2 billion. The other side of the coin of such sweet savings would seem to be the bitter possibility that the industry has been throwing these resources out the window all these years.

What does all this news really mean? Are we in bad shape but doing better, or are we in good shape but doing worse? This is very difficult to answer. 

As Venezuelans, shareholders and indirect beneficiaries of the petroleum industry we should have access to qualified sources of information. This information should be somewhat more objective than that we receive today from sources dedicated to different agendas, may they be government, opposition or industry insiders.

In this sense, I believe it may be interesting to promote the appointment of a Petroleum Ombudsman who, beginning with the limited role of providing truthful information, could eventually develop into a real defender of the Nation’s interests. The Ombudsman, a word of Swedish origin that identifies a spokesman and representative of the interests of society, is a figure that is used in many countries and performs many different functions in areas that are of relatively lesser importance than what the oil industry is to Venezuelans.

In addition to his role of truthful informer, the Petroleum Ombudsman can assist in the evaluation of the consequences of a great variety of aspects that affect the industry. One interesting case would be the implications of a request by Venezuela’s Central Bank to expand the oil industry’s role by asking it to delay payments to suppliers of goods and services in order to reduce excess liquidity in the local market and, as a result, fight inflationary pressures.

Another matter on which the solid, objective opinion of an Ombudsman would be more than welcome is the oil opening. Our happiness would be more complete when we are asked to celebrate the oil opening, could we only rest assured that the reasons for this aperture are not related to excessive fiscal pressure imposed on the industry which has limited its investment possibilities and even forced it to contract debt.

The existence of an Petroleum Ombudsman that is respected by the country would guarantee the collaboration of the nation’s citizens when it is justified. I am sure that among all Venezuelans of good faith that love this country, there isn’t one that would outright wish to contribute towards a deficit for the oil operators by purchasing gasoline at prices below production costs. On the other hand, among these same Venezuelans, very few would be prepared to pay a higher price in order to contribute to a Central Government that squanders its resources.

During the interview I mentioned at the beginning of this article, I maintained that should PDVSA be politicized, citizens would at least be in the position every five years of being able to pass judgment as shareholders of its management’s achievements. This was interpreted by the reporter as a recommendation to politicize PDVSA. This, as you can imagine, caused much embarrassment, and I was very relieved that the article was published on Saturday and during a period of vacations when few people read the press anyway. Today, talk about politicizing PDVSA does not continue to be a crime when we are seeing the latter become a political player; what is the same is not cheating (lo que es igual no es trampa).

Much more on this in The Oil Curse and in Petropolitan