My tweets on protectionism

I am against protectionism... but... and

All trade deficits are not created equal
If a nation has a trade deficit resulting from importing too much of tomorrow’s goods and exporting too little of yesterday’s, that deficit is worse than if importing too much of yesterday’s goods and exporting too little of tomorrow’s

All capital surpluses are not created equal
If foreigners invest too little in your nations’ current existing assets, and too much in your tomorrows’, that capital surplus is not as good as if they invest much in your current existing assets, and less in your assets of tomorrow.

Are not nations who retaliate against the imposition of tariffs by imposing their own tariffs just as protectionist as those who started imposing tariffs?

There is no time for games

John Kenneth Galbraith wrote about the evolution of economic nomenclature in the context of describing the efforts of economists and politicians to soften over the impact of economic disasters. He describes how, throughout the period between 1907 until the Nixon years, the word ‘panic’ evolved into crisis, depression, recession, sideways movement and rolling readjustment. At the end of this period, the panic of 1893 would have been called a simple “growth correction”.

In Venezuela we have perfected the habit of exaggeration, and I therefore think we have never linguistically sub-estimated our economic crises. Our problem is that we have never managed to act in accordance with the gravity of our problems. We are eight months away from the swearing in of a new government, but the majority of the proposals put before us seem to be related more with actually making it there rather than with finding ways of facing the emergency situation we are in today.

In today’s economic context, we have a basic problem. The country blithely jumped onto the global wave of commercial aperture without having identified a strategy beforehand that would guarantee an acceptable level of employment. We trusted too much in the sheer power of market forces while totally ignoring the fact that sometimes these forces can work only if there is a total destruction of the existing economic structure in the country. Nobody was willing or prepared to accept such destruction, nor did anyone have much reason to accept one of such magnitude.

Unemployment grew hand in hand with the opening of the economy to global markets that implied prices at international levels, for example, for fertilizers. Instead of allowing the market in all its cruelty (supposedly temporarily), to indicate the way forward, politicians, either because their hands trembled or simply because they wished to take advantage of the added resources, let the public sector employment grow as never before.

We are at the crossroads of a new century (indeed, millennium). We know that the marginal economic value of our public expenditure is zero, zilch, zippo. We also know that we should, without much contemplation, sack almost 500,000 public employees, since these, also without contemplation, are the most probable cause of the poverty of another 5 million. What we do not know is how to go about it, especially in an electoral year.

The result is that we continue to be captives of the illusion that this massive reduction can be made only when the private sector (who’s taxes and interest rates we want increased) has supplied us with jobs to offset it. My God! We certainly seemed to have made up our mind on this particular chicken and egg situation.

The current state of the oil sector makes this structural problem even worse. If it was difficult to maintain the system with oil at US$ 15 per barrel, it must be impossible at US$ 11. The drop in oil prices, however, now gives us the excuse to review our current policies. If I were to sit down with a panel of experts and was allowed the traditional 30 seconds that is allowed an expert to solve problems, I would say:

Our priority is to generate real employment in Venezuela. If we don’t, we will never recapture the confidence of the Venezuelans, and without the latter the confidence of the international community is a moot point and may even be damaging. 

The lowering of interest rates is essential in order to kick-start this policy. In this sense, we must devalue the Bolivar now, accepting that it has already been devalued about 20% and 30%, a fact that has been hidden behind high interest rates. We should also study the possibility of changing banking regulations to allow for a system of financing based on indexed units that would allow real repayment terms for those who wish to invest in long term projects.

In order to insure that the above has real significance and does not worsen the situation even more, we must among other things: immediately reduce public payroll by 500,000 people; reactivate the construction sector; impose (without being bashful) protectionist import duties of 15-20% on all imports (except those from Colombia [Edited out: the only trading partner were we bilaterally seem to be promoting jobs and who we should invite to join us in the increase of tariffs]; and finally, reduce or even eliminate the value added tax. The reduction of the value-added tax, even though it flies in the face of fiscal balance, is a sacrifice the politicians must go through in order to make their promise of the reduction of the public sector in favor of the private one credible.

People may say that this is a Messianic proposal. In many ways they may be right. I think, however, that this alternative is based on sounder fundamentals than, say, those of the desperate Messianism which argues for the sale of PDVSA in order to balance the accounts.

The day a constitutional prohibition on new debt is put into place and the government has been limited and complies with its duties, I will be at ease with the plan to sell PDVSA in order to service our debt. In the meantime, the only patriotic thing to do is to avoid fanning the fires of waste, such as we did with the resources obtained from the oil opening.

The demands of university professors simply serve to make a point for drastic action. The professors brazenly maintain that they are 40,000 strong in 17 public universities. This translates into 2,350 per institution and they are asking for the equivalent of US$ 115,000 per head in compensation.

This is not a time for fun and games. Towards the end of June I read a statement issued by a representative of the World Bank who contemplates the possibility of a real depression in Asia. This is the first time I’ve read something like that, and knowing how discreet these officials usually are, it is frightening.

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.