Pure water and Dostoyevski

I recently had to travel to Washington on business. On the flight from Miami I was handed a small picnic-like bag that contained the modern substitute for the traditional on-board meal. I suppose this is aimed at cost reduction. For obvious reasons, which by the way are widely shared, I was never much of a fanatic of this service, so the modernization of the same is neither here nor there for me. I did find, however, that negotiating an extra bottle of wine out of a picnic bag is far more difficult that doing so out of a stewardess.

What inspired some of the following comments was the bag’s content. The bag included a bottle of pure, natural water and a “globalized” menu made up of a Manhattan deli-sandwich, Dijon mustard and Tortilla Chips.

The water is contained in a clear plastic bottle, good but costly. Its label told me that the water originated, and is bottled, in France, vintage ’98 and can be consumed safely until July 27, year 2000. (What should one do in August of year 2000?) It also included a bar code, which evidently makes logistics easier, considering the fact that the product must be transported long distances from its source to the ultimate consumer.

On the backside of the bottle, another label gave me valuable information as to its “Nutritional Content” broken down into units per serving, which in this case is exactly equal to the content of the bottle, which is 11 fl. oz. or 330 ml. The information is as follows: Calories = 0; Total Fat Content = 0 gm. = 0% of the Daily Value (DV); Sodium = 0 mgs. = 0%; Carbohydrates = 0 gm. = 0% of the Daily Value (DV); and Proteins = 0 gm. = 0% of the Daily Value (DV). All was, as one should expect from water although, curiously, no info at all was provided in respect to its purity.

While I drank the water, I read a special supplement of The Economist magazine which addressed the issue of international commerce and developed the fundamental thesis that the world should continue, come hell or high water, to develop free and open market programs. I am a sincere and avid defender of free and open market principles and if the possible benefits are analyzed in the traditional terms of "bicycles and wheat" I have absolutely no problem.

However, if this means that in Venezuela, in order to reap the benefits derived from free trade, we have to create the conditions that allow for the sale of non nutritional French water, instead of the equally non nutritional Venezuela water, something which borders on fanatism, then, perhaps, The Economist and I must be referring to a free trade or an aperture of a different sort.

As we landed in Washington, I concluded that any business or economic development policy, that leads to substitute the cost of a stewardess for the cost of a particularly expensive bottle of water, is really not adequate for Venezuela. Actually it isn’t adequate for anyone.

My arrival in Washington coincided with the annual meeting of the International Monetary Fund (IMF). This year the meeting was particularly high profile as a consequence of the global economic crisis that is already affecting many countries around the world and threatens to continue to expand.

In terms of human suffering and sacrifices, we have already begun to understand the horrible implications of this crisis. From Japan, the press relates the terrible drama of a collective suicide of three businessmen, all husbands and fathers, due to bankruptcy as a result of recession. In Venezuela, our citizens are already paying their dues as a result of the fall in oil prices. 

In Washington, I observed on a daily basis, almost to the point of nausea, the pressures applied on an otherwise apparently successful President, as a result of sins caused by possible excess in libido. Being from another country I would not want to judge their reactions but I do believe that this debate centers on the American society’s need to see to it that responsibilities are assumed (accountability is the appropriate buzz word).

Much of the discussion during the IMF meetings centered on what is called the “moral hazard”. The argument maintains that by helping stricken countries we are actually simply helping speculators to avoid massive losses and keeping them from suffering the punishment they deserve. As a result, they will surely be tempted to incur in the same errors over and over again.

All in all, the economic crisis, Clinton and the moral hazard created in Washington a real Dostojevskian scenario, reinforced by the fact that one of the TV stations, in what I considered an extraordinary sense of timing, was announcing the upcoming airing of "Crime and Punishment".

Against this background I noticed, somewhat surprised, that the faces at this year’s meeting of the IMF, were the same as those present at previous meetings, as if nothing had occurred. Could it be that Venezuela and to complement its export of beauty queens, has managed to come up with a new non-traditional export called “impunity”?

Regulations as enemies of bank missions

Note: Now 25 years later, when hearing about efforts to regulate cryptocurrencies, something which will clearly dilute the “caveat emptor”, the “buyers beware” principle, again I find reasons to refer to this article.

In Venezuela, much has been discussed about the solvency of the financial intermediation entities, mainly banking. In virtue of the great attention paid to the subject of banking regulation throughout the world and our recent banking crisis being quite recent, this should not surprise us.

In the debate I think, it is important to remember, that the functions of the financial sector are not limited, simply, to return the money received from its depositors, since, if so, the traditional mattress could be sufficient to fulfill this mission.

Apart from providing other opportunities, which serve to stimulate national savings, as well as fulfilling the task of facilitating monetary flows, there are two other functions, of great social importance, that banks must comply with. The first is to be a very active agent in the process of generating wealth and the second, to collaborate in the function of democratizing capital, that is, allowing access to capital to those people who, lacking resources, have initiatives and will to work.

Supposedly, with the commitment and ability to fulfill these last two functions, the creation and distribution of wealth, both the application and the approval of a banking license were justified. How far is it from being true today! Next, I present some reflections on the subject.

In 1975 John Kenneth Galbraith, in his book entitled "Money, his origin and destiny", advanced the thesis that one of the fundamental reasons, for the past century was achieved, the economic development of the West and the Southwest of the States United, it was the existence of an aggressive and unregulated bank, which frequently broke down, causing great losses to individual depositors, but which, because of an agile and flexible credit policy, left a trail of development.

As for the democratization of capital, it is clear that the new banking regulation, now more than ever, obliges the bank to lend to the one who has and refuse as a credit client, the one who does not. The days when a banker, on the simple basis of a character trial, could approve a loan, without having to incur the cost of creating reserves, which presumes in advance the non-payment, went down in history."

Of course, with the foregoing, I do not refer to the immense amounts consumer loans. Today, we can question the wisdom of the regulator, noting the ease with which a consumer gets a loan and compare it with how difficult it can be to acquire a loan for productive purposes.

The saddest part of the regulatory chapter is that it never really immunizes us against risk. Even in portfolio based on probabilistic expectations and compensations by means of high interest rates we know that, one way or another, risk remain… and in many cases even trying to regulate, runs the risk of giving the impression that by means of strict regulations risks have disappeared. Sometimes it's in good faith... sometimes it's only faith. When for example the SEC (Venezuela) arrogantly presumes of performing a significant mission, we know it is pure baloney.

Frequently, in matters of financial regulations, the most honest, logical and efficient is simply to alert about the risks and allow the market, by assigning prices for these, to develop its own paths.

I do not propose, not for a moment, that the State abandons completely the regulatory functions, much the contrary, what I propose is that it assumes it correctly. History is full of examples of where the State, by meddling to avoid damages, caused infinite larger damages. In the case of banking regulations developed to be applied in developed countries, I am not sure we are doing our country a favor adopting them with so much fervor.

But what are we to do? Regulations are fashionable and there are many bureaucrats in the world trying to find their little golden niche. I just read an article about a county in Maryland, USA, where, in order to be able to work as an astrologer and provider of horoscopes, you need to be registered and obtain a license in order to “read the hand palms. The cost of such license is 150 dollars.”

PS. And indeed the Basel Committee's risk weighted capital requirements has caused infinite damages.

PS. The page with the details of Maryland certified astrologers has disappeared, it might have been an early case of fake news :-( Now the certification is issued by AFA Certified Astrologers - American Federation of Astrologers

Economía Hoy

http://subprimeregulations.blogspot.com/1998/10/la-regulacion-como-enemigo-de-la-mision.html

The bad habit of external public debt

I am amongst those who believe that one of the most important reforms we can bequeath to future generations of Venezuelans would be that of forcing the country to begin a gradual but real amortization of its external public debt. When the latter reaches zero, we should then constitutionally prohibit new indebtedness.

I consider this perfectly justifiable due to a) the dreadful experience we have had in the past with our public debt; b) the fact that even the slightest improvement in the country’s economic climate incites the international financial sector to press more loans into our hands; and c) the fact that it must be very difficult for our leaders to resist the temptation of reaching out for those new resources.

The arguments are simple and unsophisticated. As such, they are of little help in the battle against the thesis, universally accepted, that foreign debt is absolutely necessary in order to maximize the development of a nation. This thesis is even considered applicable in countries like Venezuela, which receive resources from sources other than debt that amply surpass its capacity to digest them efficiently.

I obviously believe in access by the private sector to the international capital markets. If there were no public external debt, the market conditions in Venezuela would be very different from those we have today. Today’s conditions could be summarized as being 3% over a country risk factor of 20%. It is difficult to take on debt in Bolívares at 70% interest even when there is the “hope” that inflation or devaluation will erode the real cost of the debt. It is virtually impossible to contemplate debt in Dollars at 23% interest when taking into account that inflation in the United States is somewhere around 2% per annum and the world threatens to hit us with recession.

Today, every politician agrees with the thesis that we should shrink the size of the public sector and reduce the number of public employees. The majority of them are in favor of the “bit-by-bit” method, arguing that these layoffs should be implemented only when the private sector creates the offsetting job opportunities. The classic case of the chicken or the egg!

The private sector will only be able to be the motor of development when the mortgage of the external private debt that indirectly taxes its activities is removed. We cannot expect the help of banks and the international financial entities with this task. For decades, we have heard their calls for the reduction of the public sector while, with the same breath, they request the Republic’s guarantees in order to lend resources to the private sector.

One of the main worries the common Venezuelan citizen harbors is that solutions to the mismanagement of our current public debt, such as the partial sale of PDVSA or Citgo, will only contribute to the continuation of the orgy of bad administration of the State. I am sure that if we managed to implement a credible constitutional prohibition that will assure the population that our national debt crisis will not be repeated, it would be possible to reach a consensus.

The key word, of course, is “credible”. If we have learned anything from our past experience with modern democracies, it is that they have an immense capacity of altering their course in order to satisfy short term aims. Today we may applaud the prohibition mentioned above. Tomorrow they would probably look for our applause to lift the same prohibition.

A proposal such as this one, evidently has many natural enemies. On top of our leaders that like to win votes by using easy money, we also find the bankers that wish to place their resources, easily, with high yields and with “safety”.

When we say “safety” we mean that in our unreal world, a banker that lends funds to a private sector company that then goes broke due to the government’s erroneous policies, puts his job at risk while the banker that only lends to the government, thereby abetting those very same policies, normally does so without risking his personal hide.

There are other enemies, not necessarily natural ones. These maintain that is in unpatriotic to limit the State’s attributions. These enemies can be recognized by the ease with which they maintain in the same breath that the actual debt is bad but that future debt is good. We remind these people that to govern while recognizing human failings and thereby avoiding further damage cannot possibly be unpatriotic.

To continue to believe egoistically that the next government, or the one after that, will not repeat the same errors is surely treason. If there is one nation in the world that can attest to this fact, it is Venezuela. The immense resources from the country’s oil production has not contributed much to the country. Certainly, the debt it has contracted has not contributed at all.

About bad trust and good distrust

About bad trust and good distrust 

Once again, the international financial classification agencies are speaking out about Venezuela and everyone is trembling. Its results constitute for many foreigners and, unfortunately, also for some Venezuelans, a primary source of information about the country. The debate on concepts, such as trust and international capital mobility, begins again. I take this opportunity to present again some evidence, reflections and conclusions in this regard.

Evidence 1: There is no doubt that the vast majority of actors in the short-term speculative capital market respond, to all types of events, like a stampeding herd of buffaloes, entering or leaving a country. The above causes high volatility in these funds, which are correctly called swallow capitals.

Reflection 1: As in so many other fields, in finance, the rule also governs that errors committed by many of the participants and therefore shared, are forgiven, while those, committed alone, are punished. As a result of this, the professionals who manage these funds and who wish to save their own professional prestige will be prone to go with the flow, that is, their actions will obey more to fashionable financial criteria and not to what may be indicated. your own experience or instinct.

Conclusion 1: According to the above, it is perfectly irrelevant that professionals are “geniuses”, since other reasons guide their actions.

Evidence 2: The global debt crisis of 1982 caught many bankers with their pants down, indecently exposing huge amounts of bad loans. More recently, we can name the obvious errors contained in the reports on Asia 18 months ago.

Reflection 2: I remember my astonishment at the reverence with which, in 1983, the “qualified” opinions of those same bankers, who had so recently demonstrated the limitations of their genius, were heard. The same thing happens today. Could it be that the human need to seek order in the world drives us to attribute magical knowledge to a group, which they brazenly exploit?

Conclusion 2: The truth is that the world is very naive when it places a good part of its economic destiny in the hands of people with “such a good resume” but such a “bad track record.”

Evidence 3: The volumes of swallow capital present in the market are gigantic, when compared with the economic magnitudes of many countries, which is why they can cause great havoc.

Reflection 3: Given the magnitude and volatility of these funds, it is expected that the main damage will occur at the entrance and exit doors, where it would be logical to anticipate a certain crowding.

Conclusion 3: Knowing the existence of quite successful methods (Chile), to manage, in a somewhat more orderly manner, the entry and exit of these funds to the country, the fact that nothing similar has been developed in Venezuela, It is another evidence of the government's apathy that punishes us.

Evidence 4: Economic decisions made by long-term investors, both foreign and domestic, take time to execute. For example, the decision to open a factory or to build a hotel or to plant a forest is not made overnight. On the contrary, swallow capitals react in seconds, via purchase and sale orders and electronic transfers. Its economic impact is, therefore, much more immediate and explosive.

Reflection 4: I believe that the most important economic signals for a country emanate from long-term actors, such as the hotelier from Cumaná, the rice farmer from Calabozo and the industrialist from Guacara. However, the urgency and immediacy represented by the pressures of the swallow capitals probably means that the latter manage to attract too much of the attention of the economic authorities.

Conclusion 4: As long as the economy (and politics) obeys, to a greater degree, the young man with gelled hair and suspenders who rules the short term, ignoring long-term signals, the path to economic disaster will remain clear of obstacles

Evidence 5: Venezuela has received an extraordinary amount of resources over the last 25 years, in the short and long term, and they have been of no use. Venezuela, in recent years, has received important long-term funds and they have not been of much use either.

Reflection 5: If we do not know how to manage the resources granted in the long term, what are we doing trying to attract short-term resources?

Conclusion 5: As long as a viable economic development model and a government system that inspires confidence have not been established, the country should not be interested in swallow capital at all, even if it has an efficient gatekeeper to regulate the entry and exit.

Evidence 6: “Credit rating” agencies, despite being used by many diverse actors, such as banking and insurance regulatory entities, with long-term interests, in reality, work mainly for bankers and investors who wish to take liquid positions at short term.

Reflection 6: For someone interested in the long term, for example, a young citizen, the opinions of a “credit rating” agency can be quite irrelevant. Also, know that not every expression of distrust produces bad results.

Consolation 1: Venezuela, in recent years, has not been subject to an invasion of swallow capital as large as it could have been. Imagine the chaos that would occur if some $20 billion of hot money had entered the country and today they were anxiously seeking its way out. The interest rates needed to contain such a herd would have to exceed four digits.

Consolation 2: Do you remember the story of the anguished debtor who finds sleep when with “I can't pay you” he transfers his insomnia to the banker? In our case, something similar happens. When the Venezuelan score goes down, personally, I sleep better, safe in the knowledge that they will not be giving so many resources, on behalf of myself, my daughters and future descendants, to governments that insist on wasting them.

Conclusion 6: The day our governments (during non-electoral times) pay more attention to the opinion of their humble subjects, instead of the opinion of the glamorous international agencies, that day we will have a greater chance of getting out of this situation of ours , which I can only classify and, forgive my English, as a “standard moody and poor”.

https://unsustainabledebtsustainability.blogspot.com/1998/10/about-bad-trust-and-good-distrust.html

https://radicaldelmedio.blogspot.com/1998/10/sobre-confianza-mala-y-desconfianza.html

Orimulsion vs. tower of terror

This week's television reported on a small incident in one of the Florida amusement park attractions (Tower of Terror) whose causes are being investigated. Some users apparently suffered minor injuries, however, we doubt that this will reduce the public attracted to this type of recreation.

Imagine the existence in Venezuela of some amusement park owners who, upset by the competition from Florida and with the aim of forming a support movement, recruit and seduce a group of mothers who all suffer from pathological anxiety. Imagine this aggressive and vociferous Opinion Group demanding that the authorities of the Federal District prohibit children from traveling to Florida parks.

The absurdity and smallness of the accident, the Florida protests, the children's protests, everything would make it impossible to think that the Prohibition Decree would be approved.

However, if we are allowed to assume that: a.- there are other parks as good as those in Florida, "Mommy, we can go to Disney in France!", b.- that the administrators of the Florida parks do not care. It matters a lot, "with fewer visitors we work more comfortably"; and c.- the support of the citizens of Florida is neither requested nor received, then suddenly the possibilities of the Decree do not seem so remote.

"Guys, even though I have family in Florida and it could cause harm to them, since no one cares about this, let's pass Prohibition, at least this way we can get these screaming crazy people off our backs."

In a somewhat similar way, the state of Florida banned the use of Orimulsion. The Orimulsión that has so much meaning for Venezuela. For a Venezuela that today needs any help it can receive. But, for a Venezuela where this, apparently he doesn't give a damn. For a Venezuela where we drink orange juice from Florida and read that simultaneously “currency transfers to Florida grew 400%.

This week a trade mission from Florida visits us in Caracas. Its purpose is to sell us products and investment opportunities. Neither a candidate or member of the government, nor a business or union organization, nor a director, executive or employee of PDVSA, nor a parliamentarian, nor a university student, no one, probably no one will use the occasion to at least indicate that we are harmed and upset. for the decision on Orimulsion.

We should all be ashamed. If in Venezuela we had to choose a popular saying that was known and applied by all our people, it would probably be "he who doesn't cry doesn't suck." Apparently we don't use it outside our borders.

For a long time I have maintained that one of the main problems that Venezuela has in correctly adapting fashionable economic policies, such as trade liberalization, is that the vast majority of our economic leaders, in the public and private sectors, are very recent converts. . Since originally they held other points of view and today they are terrified that someone will recognize them in their new clothes, they maintain and apply their dogmas with the fervor that we can occasionally detect in a nouveau riche, eager for recognition from the "establishment." or in a believer recently subjected to an inspiring call.

The truth is that globalization and trade openness do not diminish in any way the need to group around the concept of nation to meditate and negotiate the economic strategies convenient for the country. Quite the opposite. Before with closed borders, with tariffs and general import bans, this did not matter much. Today, with open borders, we really need intelligence, will and cunning to prevent the “world from eating us alive.”

I am not and have never been a protectionist. However, my pulse or intellectual conscience would not tremble if when negotiating on behalf of Venezuela I had to resort a little more to hypocrisy. To that hypocrisy that all countries apply with mastery but that Venezuela apparently considers in bad taste.

What would be difficult or almost impossible for me would be to negotiate on behalf of our country without being able, in a concrete way and as support, to refer to a will, a clamor and a true national demand. In other words without the support of a good and exportable collective cry. Let's globalize the plantain!

Talking about amusement parks reminded me of a full page I saw in a newspaper less than a week ago. It described a country that, unlike the red deficit suffered by Venezuela, was illuminated by a “blue; color of the surplus.” A country with resources to generate microenterprises (granted through “more expeditious channels than those of Corpoindustria”), a country with resources to take care of the environment, develop hospitals. A beautiful country where “it seeks to promote a new relationship with society” establishing in a splendid way

From Economía Hoy

Translated by Google

Hit in the head by the SENECA sale

On Tuesday, September 14th, the power system of the State of Nueva Esparta, SENECA, was finally privatized. The Venezuelan Investment Fund (FIV) and Cadafe, both representing the Nation in this case, had established a base price for the sale of US$ 35 million. The price finally paid by the winning bidder was US$ 90 million, awarding the sellers a premium of US$ 55 million.

There is no doubt that this is a great achievement and it would be very selfish not to congratulate those involved in this transaction for a job well done. Evidently, this privatization bodes well for the supply of electricity for the State and in this sense its population can celebrate the happening.

I have, however, postulated time after time the thesis that the privatization of a public service company should be aimed at improving the service while minimizing the cost of the same for its users, and not at maximizing the central government’s income. It is in this sense, then, that I express the following reservations with regards to this particular transaction. I am not criticizing the privatization SENECA per se, but am raising the flag with regards to the ‘morning after’.

Evidently, should the SENECA have been sold for US$1, the tariffs for electricity required in order to amortize the investment would have been much lower.

Today’s financial community has awarded Republic of Venezuela long term debt a tax and project risk free return of over 20% per annum. In this sense, it would not be exaggerated to say that SENECA’s buyers will expect a return of at least 20% on their own investment.

This implies that Margarita will have to come up with US$ 18 million (i.e. 20% of US$ 90 million) every year and that this flow must come from the tariffs paid by the end users of the service. In tourism terms, this is like paying for a small brand new five star hotel every year. 

To this amount, we must also add the outlays represented by salaries, new investment, purchase of electricity and taxes.

It could very well be that this annual toll of US$ 18 million for the right to liberate itself from Cadafe’s management is actually a great deal for Margarita. However, since Cadafe and the FIV obtained US$ 90 million for the privatized entity while projecting tariffs on a base price of US$ 35 million, there is room for the following questions:

First: Who, if anyone, went overboard when promising potential investors what future tariff levels were to be paid by Margarita’s population? Who calculated these tariffs? Did they make a mistake? If so, was it made on purpose or was it simply incompetence? It is obvious that if the tariffs offered in the bid documents had been lower, the investors would not have put a premium of US$ 55 million on the table.

It bothers me to no end to be treated as a moron by public officials. When they maintain that they obtained this premium simply due to the excellence of their management of the transaction, I feel they are sticking their tongues out at all of us. Why then didn’t they establish a base price of US$ 25 million? The premium would then have been US$ 65 million instead of US$ 55 million. Why didn’t they offer an even higher tariff structure and obtain, say, US$ 120 million instead of US$ 90 million?

We obviously understand the laughter and back slapping by State officials. We can almost hear them say “Marvelous. We have gotten rid of the responsibility of the supply of power to the island. 

On top of this, we have received a front-end tax payment of US$ 90 million on top of all the other taxes we will be able to charge in the future! Nobody was the wiser for it! What a deal! Let’s do the next one!”

Second: If Cadafe and FIV say they would have been happy with the base price of US$ 35 million, why then, will the take the US$ 55 million premium away from the island? We must remember that the entire US$ 90 million, and specially the premium of US$ 55 million, will be ultimately footed by Margarita’s population.

Immediately after the sale, one official celebrated the event by saying he felt like Sammy Sosa of the baseball Chicago Cubs when he hit home run No. 61. As a user of the electrical system in Margarita, I felt more like I had been hit in the head by the very same baseball.

I suggest we analyze the possibility that the US$ 55 million premium by retained by the island. This would at least assuage some of the pain caused to my head by the falling baseball. Some direct benefit for the island could then be gleaned from the affair, for example, another pipeline for potable water. Evidently, if the entire US$ 90 million were left on the island, so much the better.

In summary, there is no doubt that as Venezuelan’s we should all be applauding the success of the privatization of SENE in the face of tough times. However, as an assimilated Margariteño, I find it difficult to celebrate since its cost, a mortgage of US$ 90 million, has been placed directly on the island’s shoulders.

Su ombudsman electrico

What is it we really need in Venezuela?

We are being confronted on a daily basis with an endless litany of proposals, some fanatical and others just irrelevant and misguided compliance with a perceived social obligation. Both types are bad and make it harder for us to focus on how to really solve our problems.

The fanatics, who all share the wish of looking good on CNN's "Crossfire", cover the extreme sides of the advisory rainbow. 

On one side we find those who want us to foster nationalism and patriotism through isolation in true Robinson Crusoe style while casting old Fidel as young Friday. 

On the other are those who hype the benefits of economic opening and globalization to such a degree that we begin to feel that the only ones with the real right to be called Venezuelans are our compatriots in Miami.

Some twenty years ago, I used to vehemently oppose excessive use of protectionism, considering then that this was causing us to slowly degenerate into an inefficient and lazy nation. Additionally, having studied in Sweden and therefore carrying the social democratic values of that society on my back, I found the pockets of political patronage and power this protectionism created very disagreeable.

Today, however, I consider that in many ways Venezuela has opened itself up to the world excessively. In our effort to be part of every economic fad the world developed, we have actually become poorer and run the risk of slowly being wiped out as a nation. 

In spite of this switch, I am convinced that I have not changed my way of analyzing economic problems one bit since at all times my only goal has been to search for what is best for the nation, at a given moment and under a specific set of circumstances. 

I honestly think that a majority of my colleagues, all advisors and consultants, some formally assigned to this role, and others, volunteers, self-empowered and nosey, have been, albeit not on purpose, basing their recommendations more on how they fit a specific model of thought than on what the country really needs to get ahead. This is tragic.

The second category of proposals are those generated by all the individuals and organizations who seem to live by the motto “if we don’t have a Web Page on the Internet we don’t exist” or in this case, "if we are not able to develop a ‘do-it-in-20-easy-steps’ proposal on how to save Venezuela we have not fulfilled our social duty".

Most of the proposals that fall under this category, some more relevant than others, are basically harmless. 

Even I recently published a humble proposal about what I would do if I were to become President (obviously in an allegorical sense) which had to be published in two articles in order to satisfy its boundless degree of ambition.

Other organizations, given their importance in the development of public opinion due to their ample presence in the national scene and in the media, simply do not have the right to treat the process of the generation of proposals lightly. Among these entities we can mention Fedecámaras.

I know there is a wealth of material on the politics of oil and it could very well be that the last Fedecámaras General Assembly generated some others I do not know of. 

However, what you can find in the document known as the Assembly’s Central Document, all 36 pages of which can be downloaded off the Internet, and that is certified as Copyright© Fedecámaras, seems to me to be a relatively poor proposal. The document includes a list or mix of 63 vital proposals. Obviously, he who has 63 vital issues on his mind, really has none.

In addition the Fedecamaras document does not grasp the realities. It barely touches the issue of how to reactivate the internal economy and it ignores the need to improve the distribution of wealth while urging increased use of the General Sales Tax rather than the Income Tax. 

The issue of reducing government spending is treated with kid’s gloves; trivial matters such as privatization of jails and the approval of the Code of Ethics of Public Servants are addressed; the creation of the Macroeconomic Stabilization Fund is belatedly discussed; and even further confusion is created when the reform of the Judicial Sector is mentioned by saying that “Maybe it would be convenient to hand over all responsibility to the Supreme Court of Justice”.

In a moment such as this, when there is hunger and unemployment in Venezuela, when the economic crisis becomes worse every day and when the world is full of uncertainties, an organization such as Fedecámaras must either present a well developed and thought out proposal or simply keep quiet. The duty of those members of the private sector that feel they are or should be represented by Fedecámaras is to express their opinions.

Of oil, income and the Constituent Assembly

Absolutely incredible, there is no anthropologist who can understand it. In a country so given to celebrations of holidays, national, religious, pagan and others, there is not one, not even a parish festival, whose purpose is to celebrate what from every point of view is something of the most important for Venezuela, its oil.

A few months ago, the IESA Debates magazine published a brief essay of mine and in which, in order to provoke a debate, I suggested the possibility that the entire national custom of presenting oil as something bad and unpleasant, going so far as to describe it as "excrement of the devil" to something that in any other civilization would be considered a gift from God, is derived from an intelligent compromise to prevent the national country from being more severe when demanding accountability.

As long as oil revenues are "dirty" and have not gone through our pockets (as they say so as not to corrupt us), there will be little importance that we give to the function of supervising the performance produced by those who have graciously offered to manage them on our behalf.

If at Sunday Mass, the oil income was worthy of a few simple thanks. If in primary school children were taught the need to thank God by correctly assuming responsibility for this income. If souvenirs alluding to oil were sold at the airport. If when traveling to Florida we proudly displayed t-shirts selling the benefits of Orimulsion. If from time to time and together with some virtuous maiden we sacrificed some Minister of Energy and Mines to try to ensure a season of good prices for oil. If all of the above were true, then as they say: "another rooster would crow!"

The most important thing to develop a solution to a problem is to clearly identify the resources available. In Venezuela it seems that this does not apply. Here colleagues, social planners, notables and other well-intentioned opinion leaders insist on proclaiming that the optimal development model for Venezuela must try to ignore oil revenues. Something like assuming that we leave the oil buried and then pray a hundred "ceteris paribus" to compensate for continuing to exploit it.

The oil income is still there and the opening efforts are aimed at increasing it. In view of this, I expressed in my article the thesis that perhaps the model that Venezuela should adopt is that of rentierism. Of course, not that of easy-going and lazy rentism but that of responsible rentism, which requires the formation of a solid character that responsibly assumes the management of wealth for the benefit of future generations.

If one were the owner of a company where the manager is useless, fails and continually squanders resources, the simplest rentier model would indicate that before ensuring a true reorganization of the company, the owner should not contribute new capital or allow the manager to continue putting the company into debt.

Consider the lack that we have of the simple previous wisdom in order to better be able to face the current demands of the IMF experts and the politicians eager for resources and who prescribe to the country, based on strange models that I believe are more sadomasochistic than of a cutting nature. macroeconomic, that the disastrous administrative experience of the State should be ignored and continue giving more and more resources to the treasury.

There is much talk today about a Constituent Assembly. I am not an expert but I am sure that somewhere in that Constituent Assembly there is a need to include matters related to how Civil Society can monitor, supervise and influence the management of its oil industry.

When the previous Constitution was drafted, the country, although it enjoyed income derived from oil, was not in charge of managing the industry. Today, when witnessing programs of all kinds by PDVSA and related companies, when contemplating how PDVSA is called to collaborate in government management and when simply measuring its economic significance, it is clear that there is a significant power, whose performance and form of expression can that is not properly regulated.

Nor sufficiently regulated to ensure that the Government of the day does not squeeze PDVSA for the necessary resources it needs to ensure its own development and survival. Nor sufficiently regulated to ensure that a technocracy does not take root in it and implements its own agenda behind the country's back. Nor regulated enough to ensure that the Government and the Petrocracy do not collude against the rest of the country.

When discussing the separation of powers, for example that of the judiciary, let us not forget the need to also separate the monetary powers, PDVSA the generator of resources and the FISCO the spender of these. A truly independent NATIONAL OIL BOARD

From Economía Hoy

Translated by Google

 

A code for our ‘public servants’

I have in my hands a copy of the Official Gazette of the 15th of July 1998. Published in this gazette and entitled “Instructivo No. 1”, we can find the Code of Conduct for Public Servants. I have this document because someone threw it into my lap a few days ago and asked me what I thought of it. I have been at a loss for words since then. Maybe I am at a loss for words because this is one of those circumstances in which keeping quiet is exactly what is called for when having noble sentiments or simply a good code of conduct.

On Father’s Day, when my daughters come up with presents of gigantic multicolored key rings with looks on their faces that say “use it or you don’t love me”, I don’t merely hide my reservations but even am able to produce evidence of infinite enthusiasm. 

When a friend who has recently discovered his hidden talent for painting shows me his first works, I also hide my reservations with words such as “how interesting”, albeit distorted just a wee bit by a mild cough. 

When a person I don’t know commits the type of faux pas that most of us commit at one time or another, I also hide my reservations with total silence. If such a silence simply aggravates the embarrassment of that person I even, educated as I am, tend to create some diversion to ease the pain.

No way am I going to hold my tongue on this one! This “Code of Conduct” was signed, based on a 40-year-old Constitution, by an outgoing President and 23 Ministers, professionals, neighbors and of age. I don’t see why I have to hide my reservations.

I am not saying that it is wrong to require that a Public Servant be “honest, fair, polite, loyal, disciplined, efficient, responsible, punctual, transparent and clean and that he have a calling to serve”. 

As standards, these are so logical that they should be required even to simply aspire to a post as Public Servant.

I am also not saying it is wrong to try to define each and every one of these traits, even though I think the place and time to do this is during primary school.

What I am saying, however, is that it is a bit disquieting to see the publication of a ‘manual’ like this one in a formal vehicle such as the Official Gazette. Specially when the fact that we are going through a moment of such emotional import as is the transition to a new millenium while facing one of Venezuela’s worst crises, both structural and temporary, should merit a ‘real’ effort to push the country towards a new path or model of development.

It is disquieting because it reflects the traditional attitude of our governments that think that all our ills are a result of human frailties and cultural faults that can simply be rectified by decree.

Disquieting because it reflects the degree of shamelessness that our governments have achieved. They have thrown the first stone and preach of truth, trying thereby to tell us that those in the driver’s seat have been, are, and always will be, over and above the flagrant violations of each and every article in the new code.

It must be due to all of this that it is so difficult to remain silently discreet. For example, should the government simply have offered its excuses for the difficult market conditions in which the Brady Bond swap was executed and the recent dollar issue of 20 year bonds at 14% was floated instead of sandbagging us by selling both as great achievements, the adverse reactions would have been minimized. Luckily, this will not happen again. Paragraph (a) of Article 26 of the Norms states that “Every person is entitled to know the truth. The Public Servant must not omit or falsify .........”.

All publications in the Official Gazette are subject to occasional typographical errors. Unfortunately this must be the case in Article 17:1 in which we read: “Those persons who have occupied public office must not use information obtained during this time against the interests of the Republic for at least one year”. The statute of limitations of the prohibition to use anything at all as a tool to attack the best interests of the Nation should definitely not prescribe!

The Code frequently repeats that its contents must be made public (could this actually acquire the status of Mao’s Little Red Book?); calls for the creation of a National Board of Public Ethics; and allows Public Offices to issue complementary norms as long as these are kept “within the framework of the spirit of the Code”. We evidently have not heard the last word.

As an incentive, the Code specifies in one of its articles that the Public Servants must comply with the former in order to be eligible for “condecorations awarded on the Day of the Public Servant”. Unfortunately, the Code does not include one article, one paragraph, one letter, nor one comma with regards to what would happen should a public official not comply with the letter of the decree. This evidently renders the entire effort less credible and efficient.

However, all is not lost. This Code, published in a leather hardcover and placed in the drawers of the night tables of local hotels, could indeed become a precious souvenir for foreign tourists. Additionally, Paragraph (c) of Article 19 states that the “Public should be treated with the formal “Usted” and familiarities should be avoided ....”. 

Could we finally be close to getting rid of the familiar “mi amor” and “mi vida”?

 

How can we all keep quiet?

Last week Venezuela issued 20-year bonds for a total of U.S.$500 million at an interest rate of close to 14 percent per annum. This implies service outlays of U.S.$70 million. The United States would pay only 6 percent for a similar issue. This means Venezuela must annually pay U.S.$40 million more than the United States. In spite of this, government officials qualify the issue as successful. Who are we kidding?

Although I am sure these Venezuelan officials were formally authorized to contract this debt, I am certain that they were not authorized morally.

I say this based on the certainty that capable, responsible and patriotic administrators would not have rested in their efforts to develop a healthier alternative for the country. An alternative different than simply paying more, so much more, in fact, that people queued up to purchase these instruments.

I also maintain that there should be limits to the cost at which the country is allowed to subscribe new debt. There should be a limit to the cost at which we, as a failed generation, have the right to saddle future generations with. I consider we have reached that limit. What’s is our government’s limit? Is it 25 percent, 100 percent, or is there no limit at all?

What other alternatives do we have? If there were a real political will to fight for the future of our country, the alternatives are infinite. Cut costs, use reserves, achieve the consensus necessary in order to use the vast real guarantees the country possesses in order to contract debt at lower interest rates, or simply contract debt at shorter maturities. Any which way, anything other than what was actually done.

For example, if the interest rate for Venezuela’s debt drops within one year to the levels Mexico’s debt is currently traded at (9.8 percent), then, considering that there would be 19 years left to maturity and that the paper carries a fixed 14 percent interest rate, the country would have to pay U.S.$675 million to retire this particular debt issue. In other words, in one year the country would have incurred losses of U.S.175 million.

Someone could object and say that the situation could become worse and the 14 percent could actually become a bargain. I don’t believe however, that any government has the right to impose its pessimism for future decades. Should the country now actually implement some of the alternatives being discussed today, such as the partial sale of PDVSA in order to cancel existing debt, the rates the country could command would fall to the same levels as those of the United States.

In this case, the losses incurred with our most recent issue would be stratospheric (hypothetically, if this were to occur within one year from now, the losses would reach U.S.$450 million).

Some may argue that the political conditions that would allow the development of an alternative that was not of least resistance do not exist. I can’t accept this since it is the responsibility of leadership to create these political conditions or, if it fails, to resign. The governability of a country must mean more than simply being able to avoid a coup d’état. The damage caused is not limited to the fact that we must now pay higher interest rates for the U.S.$500 million.

The fact that we forced the issue upon a market with low receptivity by simply raising the interest rate, means that this will be used to measure future opportunities in Venezuela.

It is enough to note that this increase in interest rates will be reflected immediately in an increase in financing costs for the private sector and in a reduction in the income we could receive from future privatizations.

The interest rates fixed for Venezuela are approximately 3 percent higher than those applicable to Mexico and Argentina today. This means a difference of U.S.$15 million per annum.

Our official spokesman explained that the international markets unfortunately perceive a higher credit risk in Venezuela since the latter is an oil producing country. I am truly amazed by the sharpness and realism of this analysis.

As if they were rubbing salt into the wound, the announcement of the bond issue was published simultaneously with an ample, and probably costly, campaign launched by Fogade in which they exhort failed Banco La Guaira’s debtors to “comply with the payment of their obligations.”

This exhortation comes a full four years after the day this institution was intervened by the government. The tranquility with which the government went about the collection of these debts doesn’t seem compatible with the urgency reflected by the high interest rate accepted in the latest bond issue.

I have three beautiful, intelligent and talented daughters. Thank God they have had opportunity to visit various parts of the world and enjoy them immensely. Their good knowledge of languages and computers, as well as their open-minded thinking about the new realities make them ideally suited for a globalized world. 

My eldest daughter recently told me that, in spite of all this experience, the place she likes the most and in which she wants to live is Venezuela. How can I keep quiet?

Of bolivars and time-sharing

The oft-mentioned Law for the Safeguarding of Public Patrimony (Ley de Salvaguarda del Patrimonio Público) imposes controls over the sale or liquidation of public assets. 

It is interesting to note that this law is completely and utterly ignored when it comes to the sale, day after day, hour after hour, of what should be classified as the country’s main public assets, i.e. its reserve of dollars.

At this point in time, I doubt there is one economist that, upon having analyzed the evolution of relative prices and the forecasts for the country’s income levels (basically oil), doesn’t consider that the Bolívar is overvalued to the tune of at least 20%. That means the Dollar should be worth at least Bs. 670.

Why, then, don’t we devalue? I don’t know the proper answer for this question, but if you asked me to speculate, I would probably infer that it was due to factors such as ignorance or stubbornness. 

I still remember back in 1982, when I called for a modest devaluation of the Bolivar so as to correctly reflect circumstances that resemble the ones we have present today. The absurd argument against this devaluation I received from professionals of fame and reputation was that this was impossible since we were due to celebrate the bicentennial of our Liberator Simon Bolivar in 1983, and that a devaluation was tantamount to denigrating the latter.

These references to the dishonor of Bolivar’s memory, were totally confusing for someone like myself. I was educated under the influence of a system of competitive economies for whom the real heroes were those authorities that managed to devalue the currencies of their countries just a tad more that their neighbors, furthering economic development even if this came at the expense of others. I consider it is patriotic to generate opportunities of internal employment by way of increasing exports and minimizing imports. 

It is possible that we still have public servants that equate a downwards readjustment of the exchange rate with national weakness and an upwards readjustment with strength. If these people have invested a high amount of ego in this argument, God save us if they find that they could theoretically return to the days of Bs. 4.30/US$ by increasing bank reserve requirements and increasing interest rates.

One of the more ridiculous arguments arising from this debate is that the government is not promoting a fiscally motivated devaluation thereby showing that there is great seriousness in the managing of the country’s finances. Devaluations are the consequence of irresponsible fiscal management, not the cause of it.

The only truly fiscally motivated devaluation that occurs is when, due to a lack of confidence in the future of the country, the market decides to pay an exaggerated premium for foreign currency. We could call this a tax on nervousness. 

When we analyze recent Venezuelan history, there is no doubt that our governments have been very efficient in their collection of this tax. “The budget doesn’t balance. Let’s spook the markets and get more Bolivars for every Dollar”.

The least we should expect out of a government in its dying days is that they don’t leave a wide gap in the valuation of our currency based exclusively on artifices such as disproportionately high interest rates or the simple burning of international reserves.

The next government’s job, whoever it is, will be sufficiently complicated without having to tackle this type of problem.

The use of mini-devaluations fixed within a band is a reasonable policy when one is trying to manage market expectations on inflation and devaluation into the future. The use of the band system and mini-devaluations to hide facts that already exist (inflation and falling oil prices) is an insult to our country and our intelligence.

If, in the face of all of its mistakes, the Government really wishes to make an act of penitence, I suggest they go about seriously and effectively reducing the unproductive public payroll. I say seriously and effectively since our governors have in the past demonstrated their dexterity in applying the techniques used by the sales persons hawking time-sharing units.

These sales persons normally increase the sales price by US$ 15,000 in order to then generously award potential purchasers a discount of US$ 12,000. The same goes for our politicians, who first increase the public payroll in order to then propose a reduction.

By the way, it is being said that, although the government has not been able to reduce the payroll, it has at least designed the restructuring plans that will allow the next government to achieve this goal “with ease”. 

I believe that, as far as shamelessness is concerned, our politicians are head and shoulders above sellers of time-sharing units.

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.