November 26, 2005

Another hole in CNE's Swiss Cheese-style Credibility

For months, Sumate has been saying that the combination of the finger-print scanning machines CNE has decided to use and electronic voting machines would allow CNE to deduce who had voted for whom, by matching up the sequenced records from the two machines.

Just to be sure we're all on the same page, I'll illustrate precisely what this is about. Say, at a given voting table, Juana Catalina is the first person in line. She gets her finger-print scanned first, which identifies her as indeed being Juana Catalina. Pepe Barrigón is in line right behind her, so he gets his finger-print scanned second. At the end of the day, the finger-print scanner machine's record shows:

1-Juana Catalina
2-Pepe Barrigón
etc. etc.

Juana then goes on to vote. She chooses MVR. Pepe Barrigón goes in second, he chooses Primero Justicia. The voting machine record shows:

2-Primero Justicia
etc. etc.

If CNE gets to look at both sequenced records, how hard would it be to figure out who voted for whom? Not very. Sumate has said again and again that this system does away with the constitutional principle of secret voting. In light of the dark history of political discrimination behind the Tascon List, the opposition has been alarmed about this.

For months now, CNE chairman Jorge Rodriguez has openly mocked the allegedly artificial "opinion current" Sumate has created over the secrecy of the vote, saying it was simply not true and just an attempt to discredit CNE.

Except, two days ago, when CNE carried out a voting simulation in front of International and Venezuelan elections monitors, Opposition technicians who were given access to all records were able to tell each person who participated in the simulation which party they had chosen. The machines do store sequenced records, it is possible to infer who voted for whom by looking at them, and the Opposition proved it.

The funniest thing about this whole affair - if funny is the right word here - is that when the whole scheme was laid bare for all to see, CNE and Smartmatic technicians declared themselves shocked, shocked! that the system they had spent years designing, developing, and implementing could do such a thing! Heavens, we never knew!

...sigh...all I can do about it is add another CNE Illegality du Jour...

CNE Illegality du Jour

From the Constitution of the Bolivarian Republic of Venezuela

Artículo 63. El sufragio es un derecho. Se ejercerá mediante votaciones libres, universales, directas y secretas...

Article 63. Suffrage is a right. It shall be exercised through free, universal, direct and secret voting...

November 24, 2005

The Secret Life of Foreign Reserve Dollars

From the comments forum:

Is it really correct to say they haven't saved? They have $30 billion in foriegn reserves. A few years ago it was only $12 billoin.
Marc | 11.24.05 - 1:17 pm | #


This is a common misconception. But foreign reserves are not government savings. Ni es lo mismo ni es igual.

It gets a bit abstract, but I think the easiest way to grasp this is to follow the path of a dollar from a foreign consumer's pocket into the Venezuelan economy.

When you buy gas at a Citgo station, you give PDVSA a dollar. PDVSA has to pass your dollar on to the Venezuelan government. But the Venezuelan government doesn't spend dollars, it spends bolivars. It has no use for your dollar until it's been turned into bolivars.

So what happens? PDVSA takes your dollar to the Venezuelan Central Bank and exchanges it for 2150 bolivars. PDVSA gives the 2150 bolivars to the government, and the government spends them.

What happens to your dollar? The Central Bank puts it in the Foreign Reserves account so that holders of bolivars who want to buy that dollar in the future can do so. This, actually, is the economic sense of having dollars in foreign reserves - they're the asset that backs the value of the bolivars in circulation.

The point here is that the dollars in the Central Bank's Foreign Reserve account represent bolivars the government has already spent.

That's why you can't think of them as government savings.

FIEM dollars are something else altogether. The point of FIEM was to keep some dollars obtained when oil prices are high from becoming bolivars until the price of oil drops again.

In high-oil years, the Central Bank was supposed to set aside part of the dollars PDVSA earned. Instead of issuing bolivars against those dollars right away, the Central Bank was supposed save them in a special fund designated FIEM. Only when oil prices dropped was the Central Bank supposed to issue bolivars against those dollars so the government could spend them.

At that point, the dollars would be moved from the FIEM account to the Foreign Reserves account.

Incidentally, this framework also explains why traditional economists were aghast at Chavez's call to spend "excess foreign reserves." Though details were murky for a long time, the government seemed to be asking the Central Bank to hand your dollar back to PDVSA so PDVSA could turn right around and buy bolivars from the Central Bank with your dollar again.

In effect, Chavez was asking the Central Bank to issue bolivars against the same dollar twice.

When you think it through, you realize that, if you do that, the total number of dollars in Central Bank Reserves stays the same, but the total number of bolivars in circulation grows.

Economist after economist had a conniption trying to explain that this was just a fancy way of asking the Central Bank to print new bolivars that weren't backed by anything to finance a government spending binge.

As every economist knows, this is how hyperinflations start.

Because once you start down that path, there is nothing to stop the government, six months down the line, from saying "well golly gee, look at those foreign reserves, they're still mighty high! We want to spend them again! Come on, Central Bank, cough up some more bolivars!..." Once you've set that precedent, that's a game you can keep playing again and again and again...

The last I heard of this absurd little spat is that the Central Bank and the government reached a compromise on "excess reserve" spending. The government agreed to use existing Foreign Reserves only for dollar-denominated purchases (to import food, for instance, or to fund Chavez's various foreign allies), and not to issue new bolivars against old dollars.

This is a fudge, since under normal circumstances foreign reserve dollars aren't free: the government has to buy those dollars from Central Bank using the bolivars it has. The compromise is the mirror image of the situation described above - by spending "excess reserves" this way, the number of bolivars in circulation stays the same, while the number of dollars in foreign reserves will drop. You're still fiddling with the ratio of bolivars-in-circulation-to-dollars-in-foreign-reserves in a pretty dubious way. But it's probably less damaging than flooding the domestic economy with lots of new bolivars created out of thin air.

The Tragically Forgotten FIEM

People don't like to hear it. It's technical, impersonal, dull. It doesn't serve up an identifiable bad guy you can blame. But economists who've looked at the question seriously agree: the reason the Venezuelan economy has done so badly since the 70s has everything to do with the instability of the world oil market.

With our exports massively concentrated in oil, swings in world oil prices wreak havoc with the economy. Worse still, a governing class that chronically overspent when prices were high only to find itself hanging from the brush when prices fell magnified the destabilizing effect of the cycle.

I remember listening enthralled to my Tio Pepe (that's Jose Toro Hardy to you) tell me this story when I was just 15 years old. (OK, I was a weird teenager - you'd probably already guessed as much.) Back then, Tio Pepe had a dream. "If only we could put in place some sort of mechanism to even out oil revenues between high-oil years and low-oil years, we could smooth out the swings and turn oil revenues from a liability to an asset for the country."

In 1998, Tio Pepe, along with Luis Giusti, persuaded the Caldera administration to put the dream into practice. They called it the Investment Fund for Macroeconomic Stabilization - FIEM, after its Spanish acronym.

The rule was disarmingly simple: first, compute the average price of the Venezuelan oil export basket over the last five years. When current prices are above that five year moving average, save the difference. When prices are below the average, make up the shortfall from your savings.

For example, if the average selling price of Venezuelan oil over the last five years is $20/barrel but the price today is $25/barrel, you can spend $20 but you have to save the other $5 in FIEM. And if the average is $20 but the price today is only $17, you're allowed to spend $3 from your FIEM savings.

That way, when oil prices head south public spending doesn't have to contract so brutally. And when oil prices go up, you don't go on a destructive "Gran Venezuela" style spending binge.

FIEM might have become the most significant piece of economic legislation in Venezuela since Medina Angarita's Hydrocarbons Law...except, of course, Chavez won the election later that year. By late 1999, the government was already fiddling with FIEM, making the save and spend rules much more complicated. By 2000, the government was violating the new rules they themselves had set. In 2002 we had the FIEM scandalet, when Chavez publicly admitted to misappropriating $1.4 billion earmarked for FIEM and, predictably, faced no consequences.

By now, hardly anyone talks about FIEM anymore...which is a crying shame, because oil prices are sky-high again, and the government is spending it all as fast as it comes in...again.

With the Venezuelan export basket hovering at an astronomical $35-$50/barrel throughout this year, FIEM has hardly budged. Right now, the balance in FIEM is at $728 million - basically unchanged from the last couple of years. Once again, we're not saving when times are good...which guarantees yet another brutal series of cuts in public spending when (not "if") oil prices drop. Actually, given Chavez's spooky radicalism, foreign creditors may be especially tight-fisted with Venezuela when oil prices drop - which could make the retrenchment particularly harsh.

But nobody talks about this anymore. It's sad, really...

November 23, 2005

CNE Illegality du Jour

From the Framework Law on Suffrage and Political Participation:

Articulo 172 - Una vez finalizado el proceso de escrutinio, se elaborará un acta que expresará los resultados del mismo, según los formatos y especificaciones que determine el Consejo Nacional Electoral. El acta registrará el número de votos válidos para cada candidato y partido participante y el de los votos nulos de la elección correspondiente, igualmente deberán indicarse el número de boletas depositadas y de votantes en cada elección...

Article 172 - Once the vote tallying process is finalized, an official report will be produced to express the results, according to the format and specification determined by the National Electoral Council. The official report shall register the number of valid votes for each participating candidate and party, and the number of null votes in the election, as well as indicating the number of ballots deposited and the number of voters in each election...

(emphasis added)

Creatively destroying the Traditional Opposition

Here's a train of thought I've been mulling since I started studying Innovation Economics (sometimes called Neoschumpeterian Economics.)

The basic insight in this field is that innovations disrupt markets. When a superior technology hits the market, firms selling older technologies either adapt or die. When the DVD comes onto the market, firms manufacturing VHS tapes either invest in machinery and know-how to produce DVDs, or decline until they're out of business.

Schumpeter called this process "creative destruction" - because the old VHS industry is destroyed in the process. Neoschumpeterians see creative destruction as the basic mechanism that underpins economic progress.

I think we can interpret Venezuelan politics - and more specifically Venezuelan political communications - by analogy. Chavez's rhetoric is the DVD here, AD/Copei style rhetoric is the VHS.

Chavez's political communications include a series of innovations that disrupted the political market. He spoke to normal people, in language that normal people can understand, about topics that normal people care about, in a style that normal people identify with. In 1998, this was a total novelty in Venezuela.

Since then, the Opposition has been trying to compete with Chavez using an outdated, no-longer appropriate rhetorical technology. For the last seven years, the Opposition has kept talking to the elite, in language only the elite can understand, about topics only the elite cares about, in a style that only the elite identifies with.

Seven years on, the Traditional Opposition is still cranking out VHS tapes and wondering why people refuse to buy them.

One way to think about December 4th is as the date when Venezuela's producers of political VHS tapes finally go out of business. They might have adapted and survived, but they didn't, so they won't.

Is this a bad thing? I don't think so. Eventually, we'll need a New Opposition that understands the new conditions in the political market. An Opposition that unabashedly copies the innovative features of Chavez's rhetoric, that uses language normal people can understand, touches on topics normal people care about, and does it in a style they can identify with.

Actually, given the Traditional Opposition's manifest inability to adapt, I'd say they're just getting in the way at this point. On December 4th, they'll be creatively destroyed...and then, maybe, our side will realize that nobody wants political VHS tapes any more, and somebody will start cranking out anti-Chavez DVDs.

Regular readers know exactly who I have in mind here...

November 22, 2005

CNE Illegality du Jour

From the Constitution of the Bolivarian Republic of Venezuela:

Artículo 186. La Asamblea Nacional estará integrada por diputados y diputadas elegidos o elegidas en cada entidad federal por votación universal, directa, personalizada y secreta con representación proporcional...

Article 186. The National Assembly shall be composed of deputies elected in each federal entity through universal, direct, personalized and secret voting with proportional representation...

(emphasis added)

The sounds of repression

If you understand Spanish, don't miss this one (MP3 format - large file.)

Rocío San Miguel, a professor of Human Rights Law, legal advisor to the National Council on Borders and longstanding civil servant, was fired from her public sector job in retaliation for signing the Recall Referendum petition last year. She called her boss, Council Executive Secretary Feijoo Colomine, to ask for redress. She also taped the call - and put it on the internet this week.

The result makes for enthralling, stomach turning, compulsive listening...

One bit of news shines through clearly: it was Vicepresident José Vicente Rangel who ordered the firing of civil servants who signed against Chavez.

CNE Illegality du Jour

From the Framework Law on Suffrage and Political Participation (LOSPP):

Artículo 120 - Con sesenta (60) días de anticipación por lo menos a la realización de una elección, el Consejo Nacional Electoral deberá publicar el Registro Electoral vigente para dicho proceso, sujeto únicamente a las modificaciones que pudieran surgir de recursos interpuestos con posterioridad al cierre del Registro, colocándolo para su consulta en todos los Centros de Actualización y sedes de la Oficina del Registro Electoral.

Article 120 - No later than sixty (60) days before holding an election, the National Electoral Council shall publish the Electoral Registry in force for that process, subject only to the changes that may arise from legal challenges (recursos) brought after the Registry has been closed, and place it for consultation in all Updating Centers and seats of the Office of the Electoral Registry.

November 21, 2005

ABN Photographer Soon to Lose Job

What the hell is wrong with Agencia Bolivariana de Noticias these days?! Normally, if Chavez calls a march and nobody shows up, you expect them to run pictures like this:

See? Taken from a low angle, nicely set up to make the march look bigger than it really was. This is normal: any self-respecting autocratic regime has a propaganda arm designed to crank out images like this.

But then, how did this other picture make it onto their coverage of Saturday's Chavez-the-Mariachi rally?

I mean, c'mon! They didn't even crop it off on top and on bottom to make it look like it went farther on either side!

Don't these ABN types learn anything in those Prensa Latina seminars they send them to in Havana? Frankly, I'm outraged! We send them oil, and they can't even train our journalists to disinform us properly! Shoddy, shoddy propagandizing, I say...

That picture, along with this next one, strike me as totally amazing.

Jesus! Is this really as many people as they can drum up to march along with Chavez? Not so long ago, this is about how many chavistas would turn up outside Miraflores on any given day just to hand in a papelito asking for a personal favor! What the hell happened?

[Thanks to Daniel for the image tip.]