March 21, 2009

The Package that Dare Not Speak Its Name

Quico says: Chávez's message today, in a nutshell, was that he plans to raise Value Added Tax and cut overall central government spending from BsF.197 billion in 2008 to BsF.156 billion this year. So his bright idea is to fight the looming recession with a tax hike and a 21% cut in public spending. But remember, inflation is running at 30% so, in real terms, that's more like a 39% budget cut, year-on-year.

And this bit of Hooverian economics is dressed up in socialist rhetoric and trumpeted as a masterstroke of counter-cyclical fiscal mangement. Ooooooookay....

Never fear, we're told: everyday hard working Venezuelans will hardly notice the difference because the entirety of the cut will come from capping high-ranking public servants' salaries and cutting the fat from the budget: official advertising, cocktail parties (agazajos), official cars, office redecorations, that sort of thing.

...ummmm, even if you take this claim at its own, insane, face value, doesn't that amount to a roundabout way of admitting that 39% of last year's budget was wasted on exorbitant salaries, needless ad campaigns, extravagant hors d'oeuvres, fancy cars and Thainesque office makeovers?!?

There is no such thing as a pain-free retrenchment on this scale. It's clear to me that the real cuts won't be announced. They'll just be made.

Chávez's Idea of Austerity

Quico says: Is a 20% hike in the minimum wage!

March 20, 2009

Parallel exchange market freaks out on fears Chávez is about to move on banks

Quico says: A reliably AAA, gold-plated source chips in with a theory that's just crazy enough to be plausible. Apparently, on VTV yesterday, Chávez launched into a lunatic rant about the evils of the "encaje legal" - the commercial banks' legal reserve requirements, which they're bound by law to hold at the Central Bank.

The Fat Man in the Palace railed against the iniquity of "bankers" earning interest for simply parking their money in the Central bank without mentioning the fact that they are obligated to do so by law. Tantalizingly, he pointed out that there's "a huge wad of cash there, more than the entire government budget."

In fact, there's $22.5 billion, according to our source, and Chávez being Chávez, he can't understand why he can't go out and spend it. After all, the Central Bank is his bank!

The rest of the rant was enough to give any Venezuelan saver nightmares:
I have the banking report right here, what they have, bank by bank, the reserve requirements in the Central Bank, monetary liquidity, all that...a total X-ray of the resources of the private national banking system
Reserve requirements everywhere act as a source of financial support for the banking system, a backstop against a bank run. Chávez's hint that the revolution might be making a grab for those funds is a sure-fire way to set off a crisis of confidence in the financial system, which may be part of the reason the parallel exchange market is freaking the hell out today, even more than it had been in recent days.

(I could tell you exactly how much, but then I'd go to jail.)

The possibility of the government seizing the banks' reserve requirements fits in with the perverse logic of the Revolution. A traditional adjustment package - even a severe one - wouldn't come close to filling the truly massive hole in the public sector finances this year. Devaluing to Bs.3.50/$, quadrupling the price of gas and hiking VAT from 9% to 12%, for instance, would have a massive impact on people's pocketbooks, but might cover less than half the fiscal shortfall the government can expect if oil prices don't rise sharply this year. But the banks' reserves requirements would handily cover the shortfall, and then some.

In effect, a grab like this works just like printing money, since bank's reserve requirements don't actually circulate, they just sit in a BCV account. If they're taken over and spent, they would enter the money supply, end up as deposits in a bank and end up in the BCV, right where they started. In the process, the government multiplies the money in circulation, and more money supply means more inflation.

Aside from the inflation hit, the additional "minor" drawback is that the move would set off an immediate set of bank runs. Knowing that your deposit insurance is being spent by the government and, worse, that the government is printing money like this immediately makes you want to take your money out and convert it into dollars.

This would make some kind of broad-based intervention unavoidable in the banking sector which, as far as chavismo is concerned, is a feature, not a bug. It's a golden opportunity to nationalize not this bank, or that, but the entire sector.

But nationalization alone won't prevent people from wanting to withdraw their money, which may be an invitation for further restrictions on the banking sector. What's the Barinas term for "corralito"?

Granted, this is all just a case of Rumint - kremlinologically-based speculation and very possibly a red herring. The government could simply be floating these stories to manipulate the parallel exchange market, which is increasingly PDVSA's preferred venue for turning petrodollars into bolívars.

Still, Chávez's decision-making process has been getting weirder and weirder. Apparently, Banco de Venezuela's people found out that their on-and-off nationalization was on again from the TV yesterday! So it no longer seems safe to dismiss any idea, crazy though it might seem.

Which explains why Caracas' financial people are incredibly jittery in anticipation of tomorrow's announcement. And if its centerpiece does turn out to be a Reserve Requirement grab ... remember where you read it first ... or second, if in fact Jose Guerra was talking about it this morning.

But then, if it doesn't, kindly forget this whole post!

Paging Leopoldo Carnevali

Quico says: So Chávez's announcement that, tomorrow, he will unveil a series of "economic measures" (socialistese for "paquete", apparently) sent me scrambling back to this thread from last October, when Juan Cristobal encouraged y'all to place your bets on the exact date of the looming devaluation.

Almost everybody placed the devaluation way too early (with most predictions clumping around late December or January) but sporadic commenter Leopoldo Carnevali placed his bet on March 20th. Mr. Carnevali, please come forth to claim your prize.

March 19, 2009

Pondering whether to cut that anchor loose

Juan Cristobal says: - Today, Venezuela's Prosecutor General indicted former presidential candidate Manuel Rosales on corruption charges, and asked for him to be tried in prison. This is no surprise, as Chavez has been threatening to put Rosales in jail for months now.

What can we make of this?

The first reaction is to point out the unfairness of it all. A completely partial prosecutor's office indicts a political leader and a popular, recently-elected mayor of Venezuela's second-largest city, in front of a judicial system that has zero independence - if we were to leave it at that, the post would write itself.

And yet - what can we make of the stories of Rosales' many business ventures? What can we make of the anecdotes of the friends of Rosales's kids getting university scholarships through the state government? Why have opposition people in Maracaibo been talking about Rosales's farms for years now? Does he really own a real-estate company in Florida?

Because all of this has been circulating in Maracaibo - among opposition circles, mind you - for years.

On the one hand, Rosales may well be the victim of political lynching. There is rich hypocrisy in this government of kleptocrats, of the Cabellos and DiMartinos and Adan Chavezes of the world, indicting Rosales.

But on the other hand, must we show automatic solidarity toward a politician who may very well have his hands dirty? Should the opposition movement be distracted from the important tasks ahead and mobilize in order to "save Rosales"?

I, for one, am not in the opposition to support corrupt politicians.

Sad, we may never learn the truth because there is no chance Rosales will get a fair trial. But I can't be bothered enough by this to make it my cause, specially when he may very well be guilty.

The case against Rosales is a clear provocation, and while we should not be forced to accept the political persecution of the opposition, we can't simply assume he's innocent, not when he has this much baggage.

For years, Rosales has seemed like a half-glass-full politician, talented enough to deliver a key constituency (Zulia), but icky enough to render him intragable to the broad center that we need to conquer.

At times, he and his right-hand man, Omar Barboza, a man with deep ties to Jaime Lusinchi of all people, have felt like an anchor, weighing the opposition down.

So now - do we support him? Or should we cut that anchor loose? 'Cause I honestly don't know.

Collapse of Constitutional Government Chronicles, Part 17,348

The 1999 Venezuelan Constitution, Article 13, says:
Venezuelan geographic space is a Peace Zone. Foreign military bases, or installations that in some way have military purposes, shall not be established by any foreign power or coalition of powers.
Reuter's says:
Venezuelan President Hugo Chavez on Sunday said he would allow Russian planes to use one of his nation's islands on long-range flights, boosting ties between two countries at odds with Washington.
There is, to be sure, a bit more wiggle-room to this one than to the Ports thing, as they'll presumably claim that the military bases the Russians will use will technically be Venezuelan, not Russian. Still, the intent of article 13 is unmistakable, and its subversion by Chávez's decision evident.

March 18, 2009

The constitution as subversive pamphlet

Quico says: As Chávez orders the military to take over all the nation's ports, I have to ask myself, where is the wiggle room in this?

Artículo 164. Es de la competencia exclusiva de los estados la conservación (10) administración y aprovechamiento de carreteras y autopistas nacionales, así como de puertos y aeropuertos de uso comercial, en coordinación con el Ejecutivo Nacional.

Article 164. State governments have exclusive jurisdiction over (10) the administration and enjoyment of national roads and highways, as well as commercial ports and airports, in coordination with the National Executive.

It's important to note that in Venezuelan jurisprudence, "Competencia Exclusiva" is a term-of-art, a term with a specific, well defined, widely understood legal meaning: if entity A has Competencia Exclusiva over area B, only A gets to make decisions about B.

It changes nothing. It adds nothing to the debate. It gets drearily repetitive. And yet it feels like it needs to be said:

The collapse of constitutional government in Venezuela is now complete.

March 17, 2009

Chávez: "As soon as I take power, I'm a'gonna shake things up around here!"

Quico says: Sunday's Aló, Presidente brought one of those classic Chávez moments that leave me somewhere between utterly dumbfounded and grimly awe-struck at the sheer, galactic scale of El Comandante's cojones.

Discussing the coming economic adjustment measures, Chávez railed against Venezuela's gasoline subsidies on social justice grounds.

"We practically give away gasoline!" he said in a tone of high moral indignation, "the people who use lots of gas in those luxury cars - it's not fair that the rich pay almost nothing for gas!"

Why he's telling us this now, why gas subsidies are any less fair today than they were last year, or the year before that, why he's doggedly hung on to this unjust policy, through thick and thin, for over a decade...these are questions no sane chavista asks.

Episodes like this leave me reeling, confused by feelings that mix deep disgust with something bordering on admiration for the man. Ten years on, he still manages to put himself across as, in effect, leader of the opposition: a redemptive figure riding in to right wrongs he had no part in making. It really is remarkable. When he skewers his own policies, he uses the same tone of noble purpose he normally reserves to slamming his enemies, and does it all in a performance so seamless, so natural that as you're watching, you can't help but get swept up in it, losing sight for a second of the absurdity of it all.

How does he do that?!

March 16, 2009

Talk is cheap

Quico says: Probably the most debilitating aspect of Venezuela's political crisis is the conviction that there is no serious alternative to chavismo.

As the government careens from one insane policy to the next, on the other side we find an utterly unconvincing opposition political elite. Stumbling from one haplessly misconceived photo op to the next, the Ramos-Borges-Barboza-Rosales axis can't seem to get any traction can't seem to put across a coherent program and can't seem to convince even its natural base of support that they can lead a credible challenge to chavismo.

In fairness, the oppo party leaders are well aware of it.

Their reaction? To talk. To say all the right things and do very little. Because make no mistake, when Julio Borges says "we must build a solid unity, a movement that transitions from opposition to alternative, and commits itself to representing a jump to the future, not the past," or when Ramos Allup says that "it's not right that [the main party leaders] sit inside four walls to discuss and solve problems because the image that sends out is that of a closed group," they are absolutely right.

But it doesn't matter. Right as the words might be, the signal is all wrong. And it's wrong for a simple reason: talk is cheap.

That's more than just an aphorism. Believe it or not, there's a cottage industry within the economics profession dedicated to teasing out its implications. Beginning with this classic 1973 paper by Michael Spence, economists have been busy working out the farthest implications of "costless signalling" (a.k.a. cheap talk) in strategic interactions.

It all gets incredibly abstract very quickly, but the basic intuition is simple enough.

Imagine you go to a used-car lot. The salesman comes out all smiles and wide lapels and polyester pants, quickly points you to a grubby old 1984 Chevy Impala and launches into his sales pitch. "She's a beaut!" he enthuses, "only 20,000 miles, and just one owner: a little old lady who only used it to drive to the store. It's in mint condition! can't do better than a good ole chevy!"

You know in your gut that you should disregard a sales pitch like that. What signalling theory does is provide a theoretical framework to explain precisely why you should disregard it.

The short answer is information asymmetry. The salesman knows more about the car than you do, but his underlying interest - selling the car - is different from your underlying interest - buying a good car. It costs him nothing to make extravagant claims about the Impala. Even if the car's a crumbling hunk of junk, he has every reason to try to convey the impression that it's a great car because after the car is out the door, he won't see you again - what does he care if it breaks down at the first traffic light?

But you're not stupid. You realize that the signal he's sending is information-poor. So you disregard it.

If you want an information-rich signal about the car's quality, you'll ask about the warranty. Warranties are costly. If the car breaks down, it's the salesman who's out of pocket. Talk is cheap; warranties aren't. That's why warranties reveal more about a car's quality than sales pitches.

In general, people have no problem grasping that costly signals carry much more information than costless ones. Proposing to your sweetheart with a two-carat diamond sends her a much stronger signal about your commitment than proposing with a cheap knock-off. Showing up to a job interview with a bachelor's degree carries a lot more information about your willingness to buckle down and work than any number of promises about how you "learn fast" and "are very dedicated". Graduating college has a cost - in terms of time, money and effort - that making promises just doesn't have. And Victor Kiam's famous sales pitch for Remington electric razors - "I liked the shaver so much, I bought the company" - was effective because the signal it conveyed was costly. Kiam had shelled out cold hard cash for Remington. His talk was anything but cheap.

This is a lesson Venezuela's opposition party leaders seem unable to learn. It's been years since they've given us a costly signal, since they've shown themselves willing to make real sacrifices in order to help get rid of Chávez. It's no wonder that so many of the opposition's radical supporters increasingly assume people like Borges, Rosales and Petkoff are on Chávez's payroll.

These days, those of us who stand against Chávez are coming to the morale-sapping conviction that our party leaders are about as trustworthy as used car salesmen. We intuit that their interests - staying at the head of their parties - diverge from our interests - replacing Chávez with something better. We sense they have strong incentives to lie to us. And under those conditions, we're not minded to believe them, even when they're telling the truth!

Our opposition leaders may in fact be telling the truth, just like in our example it could be that the salesman is telling the truth and the Chevy really is a great car. But the structure of the interaction makes it impossible for you to take his word for it. Without a warranty, you'd be a fool to believe him.

I think we anti-chavistas should ask for a warranty from our party leaders, too. If opposition party leaders want us to take them seriously, they need to understand that costless signaling just won't cut it anymore. Nobody's going to take them seriously until they start sending out costly signals about their commitment to the cause.

In recent weeks, this blog has called for the resignation of the main "inamovible" party leaders: Barboza, Ramos Allup, and Borges. In politics, resignation is the quintessential costly signal. There's no real tradition in Venezuela of asking for, or expecting, the resignation of failed political leaders: a fact that, in itself, speaks volumes about our political culture, about its structural inability to do accountability.

My preferred option - merging the opposition chiripero into a single Political Party with true national reach - would be even costlier than a spate of resignations. It would reduce the number of coveted Party Leader posts by 75%. But just imagine the signal it would send, the Seriousness of Purpose it would convey, if the Big Four oppo parties stopped fooling around and merged!

Less dramatic but still costly signals could also start to change anti-chavistas' perceptions of our party leaders' commitment in the fight against chavismo. They could completely distance themselves from the 2002 coup (costly in terms of social awkwardness) or just tell us the unvarnished truth about how many voting tables actually had opposition witnesses in the last two elections (costly in embarrassment). They could make a concerted effort to move party organizers out of the middle class enclaves in the big cities and get them to organize the countryside and small cities where we always get creamed at election time.

Such moves would not be as immediately effective as costlier, more dramatic signals, but they would at least prove that not everything that comes out of oppo party leaders' mouths is weightless paja. They would send out a credible signal that the opposition parties are serious, something too many of their "natural followers" don't accept right now.

Venezuela is in a lot of trouble right now. It is lead by a psychotropic-al leader, its economy on the verge of an epic collapse, and generally we're very far up a creek with no paddle in sight. In times like these, the country desperately needs a credible sign that the opposition...gets it. An information-rich signal that they've turned a corner, que se enseriaron, chico, that they're serious about the fight against chavismo.

But talk is cheap. For that signal to be credible, it has to be costly.