July 10, 2007

Gone fishing

Quico says: Katy and I are both out of town for the rest of the week. See y'all Monday.

July 9, 2007


Katy says: It's a beautiful Saturday in Caracas, and I'm standing on the shoulder of the Cota Mil, because the cab I was riding in just broke down. I begin to panic, sure I'm about to get kidnapped, expecting my driver's accomplices to jump up from the hill at any moment. I think about hailing another cab, but there's no way to do that in the middle of the highway, and there's nowhere to walk to.

Lucky for me, the guy had a fairly simple breakdown, and we were on our way again soon.

My trip to Venezuela was marred by things breaking down. It happened all the time. At one point, I had no running water, no phone and no Internet access. My cel phone worked intermittently, and the power at the offices where I spent part of my time went down twice in a week.

The Aeropostal plane that was supposed to fly me to Maracaibo stalled and died when we taxied off the gate - lucky for me this didn't happen in mid-air. I had to wait for four hours until I was booked on Aserca, the wait made all the more pleasant by the fact that Caracas' airport had no running water, due to "recurrent shortages in Vargas state", as the lady in the airport's speaker system reminded us every ten minutes or so. Funny, I thought, the lush, blooming trees that adorn the Vargas side of the Avila don't seem to have a problem finding water.


Life for the Venezuelan exile can be tough sometimes. Former Foreign Minister Miguel Angel Burelli once famously chastised the Venezuelan exile community in New York for not living in their country, saying they were going to die like Pedro Estrada, "looking for an arepera in every corner of Paris."

As obnoxious as it may sound, Burelli was part right: all the Venezuelans I know who live abroad (me included) have an unshakable and somewhat unhealthy nostalgia for the homeland. One of the reasons for this is that we tend to forget how these obnoxious little breakdowns, mostly caused by market failures, are part of the daily routine back home.

Take traffic. As much as people had warned me, it was still pretty shocking to find that Caracas traffic is two, three or four times worse than ten years ago. There are no new roads, and demand for cars has soared. Granted, a few train lines have popped up, but at least in the Eastern sections of the city, they don't make much of a difference. A simple trip from point A to point B six kilometers away usually takes more than an hour, any time, all the time.

The solution should be obvious - make it expensive for people to drive. You can do this either by taxing cars on the road more heavily (congestion taxes like those implemented in many of the world's cities, or even fuel taxes) or, to be more democratic, by keeping cars off the road during certain moments of the week. You can then use the proceeds to finance public transportation.

Another solution is opening up the building and maintenance of roads to the private sector. Santiago de Chile, for example, has recently been transformed by hundreds of kilometers of highways, all built by the private sector. Trouble is, for this "market" to work, you need to have clear property rights - the builder of a highway must be certain that she won't be "expropriated" or "nationalized" once she opens up her highway, something that is virtually impossible to ensure in today's Venezuela.

The inability of the government to find a solution to this particular market failure results in a much lower quality of life for ordinary caraqueños. The faces of the people caught in traffic reflect a lack of sleep and a general uneasiness that lowers people's productivity at work, diminishes their ability to be effective parents and, in general, makes them really unhappy.


The health-care industry, the most recent target of the government's attacks on all things private, also reflects a bucket-load of market failures.

While I was in Caracas, my mother had surgery at La Floresta Clinic, a somewhat upscale private health-care center in the Altamira sector of town. Given the prices we were quoted, I was expecting a modern facility with specialized care.

Instead, I found a small clinic last remodeled some twenty years ago. The hallways were noisy and crowded, the waiting rooms were uncomfortable, and the complete unavailability of a parking space was legendary.

When my mother's surgery was finished, we were told there were no rooms and were placed in a 25 square-foot cubicle in the top floor, separated from other surgical patients by three walls and a curtain. At least in a common room you would have a bit more elbow room, I thought. This was claustrophobic.

Luckily, the anesthesiologist was the son of an old fried from Maracaibo, and he pulled some strings and got my mother a private room, which was a bit larger and had a private bath. It was more comfortable, but still not up to the standards I felt we deserved after what we were paying for.

It turns out all private hospitals are the same in Venezuela. The government's infusion of cash, combined with their threats to nationalize everything has produced a curious mix: a large increase in demand that fails to generate its own supply. Middle-class folk now have more access to private health-care than they did, say, four years ago, but nobody invests in improving, expanding or modernizing facilities. It's government-induced gridlock, and it will only get worse if private health-care is eliminated as the government is announcing.

The same could be said of the airline industry. Venezuelan airlines are in dire straits because the government has a) increased cash in people's hands; b) prevented airlines from raising prices, the natural consequence to an increase in demand; c) inhibited the creation of more supply with their constant threats to private property, so that airlines do not invest; and d) competed unfairly with private airlines by starting their own state-owned, subsidized airline. The end result? Gridlock in the nation's airports and shabby service.

Education is another victim of these insane policies. Private schools find themselves in the curious situation of being in really bad financial shape while, at the same time, they have fewer spaces available than ever. The government's war on private schools (forbidding them from raising their fees to match inflation) is putting most of them at a high risk of having to close.

As usual with market failures, the middlemen always get their booty. For example, the hoops you have to go through to buy a car are memorable. My brother told me how he went to buy a car and was told there was a six-month waiting list, and that to get on the list they needed the information of the bank where they got their loans from. My brother informed the salesman that he wasn't working with any bank, that he had the money for the car in cash. The salesman told him that cash sales were not even eligible for the waiting list and that he could not help him.

It turns out that this particular market failure means car salesmen have hooked up with loan officers of the banks of their choice, so that in order to get a car from that particular salesman you need to go through his bank of choice, and the salesman gets a share of the bank's commission from the loan. Buying a car, as most everything in Venezuela, has become an exercise in "Who do you know and can they help me out?" Having the money to buy something makes no difference.


The country is in the midst of a consumption binge, and when the Marxist Revolution finally takes hold, people will not take it sitting down - or will they? While I wondered how people put up with all these inefficiencies, I found myself simply shrugging them off as the only way to maintain sanity and not have a fit every two hours or so when the next market failure hit me.

After fixing the malfunction, I talked to my cab driver about why he had such an old cab. He told me it was in great shape and he had just bought this car a few months ago, that he couldn't go through the paperwork of getting a loan to buy a new car, and that in any case, his cab was much newer than most of the other cabs circulating in Caracas' streets. I agreed.

So instead of getting angry at the guy for providing shabby service that could have endangered my life, I took a deep breath, shrugged off the experience, and gave him his customary tip. This is a lot of what life in Venezuela is like, and there's not much I can do about it in a ten-day visit.

July 8, 2007

The politics of fiscal retrenchment

Quico says: So, Finance Minister Rodrigo Cabezas finally figured out that if you prime the pump long enough, the thing just breaks. In a rare outbreak of economic common sense, he announced that the government plans to fight inflation by slowing public spending and mopping up $2.8 billion worth of liquidity. Even then, he knows he won't be able to bring inflation in at its 12% target, but hopes for 14%.

All that talk of fiscal discipline sounded possitively Friedmanesque. It was weird.

But the questions won't take long to crop up. What's going to happen on the next Aló, Presidente when Chávez has a marvelous new idea, turns to his money guy and says, "Rodrigo, be sure to set aside $450 million for this one"? Can we seriously picture him shooting back, "I'd like to, presidente, but remember, fiscal discipline!" ? And even if he did, could he also control PDVSA's autonomous spending? How about Fonden's? When Carlos Lanz calls Chávez and tells him ALCASA needs an emergency cash injection to continue operations, is Chávez going to let that veritable worker's paradise collapse just because Cabezas wants to shave half a point off the inflation number?

There are two interlocking problems here: the longstanding impossibility for any minister to make a credible commitment on Chávez's behalf, and the increasing fragmentation of the institutional mechanisms for exercising fiscal policy, which now include at least three parallel state budgets - PDVSA's, Fonden's and the normal budget - with no meaningful oversight over any of them.

Of course, it could be that Cabezas' announcement is driven more by income shortfalls than by a newfound commitment to fiscal discipline. Oil prices may not have fallen much, but oil production continues to tick down, and the operational problems in PDVSA have only grown over the last few years. So the revenue stream may be flattening out, but the expectation of continually improving standards of living financed by continually increasing state spending certainly hasn't.

Fiscal retrenchment is good policy but bad politics here: Chávez's performance legitimacy now rests on the state's ability to continually improve people's standards of living. His ideological legitimacy does as well, since he's emphasized so much that the private sector can't make everyone better off. So if the state can't deliver on people's economic aspirations, Chávez will face mounting social unrest: not, this time, from the opposition, but from his one-time supporters, whose expectations he won't be able to meet.

So far, under Chávez, poor people's incomes have risen faster than inflation, all on the back of extraordinarily fast growing oil revenues. But Cabezas' announcement is an implicit acknowledgement that that era is coming to an end. Public spending has now reached the point where it feeds directly into price rises rather than into increased aggregate demand. Cabezas, at least, seems to grasp that even if oil revenue did continue to rise, there would be little point in continuing to feed inflation by jacking up spending (but does Chávez?)

The exhaustion of the keynesian phase of chavista economic management will profoundly transform the politics of the Chávez era. Because there is a long, established tradition of social protest in Venezuela: and unrest always intensifies when the state runs short of the funds it needs to bankroll the needs of society. It's a cycle we've seen played out many times before.

How is Chávez going to deal with it? Is he going to call the protesters CIA stooges and throw them in jail? Or is he going to lecture them on the true socialist's stoic contempt for consumption - that lefty equivalent of the old right-wing paeans about the moral virtue of austerity?

And what will a fiscal retrenchment mean for people's perceptions of the new Hummered Elite? Things could get really tricky for chavismo on this score. Venezuelans' attitudes towards corruption have always tracked the oil cycle. People didn't much begrudge the AD elite's graft in the 70s because there was more than enough bread to go around back then, but they ressented corruption acutely in the 90s, when the lifestyles of the well-connected contrasted so starkly with their own.

For similar reasons, Chávez hasn't really paid a political price for his cronies' corruption on the up-side of the current oil cycle, but that luck is not likely to stay with him on the down-side. The revolution seems to be condenscing a process of popular disenchantment that took AD 30 years to accomplish in just a decade: a three-fold increase in efficiency!

Marcos the Apure Fisherman knows all about this sort of thing. As we enter the new era of chavista fiscal retrenchment, let us make, 2, 3, many Marcos the Fishermen!