June 14, 2008

A big pile o' nothin'

Katy says: - The past week saw a heavily-promoted presidential address that was supposed to contain the details of a stimulous package to attack slowing growth and soaring inflation.

All radio and TV stations carried the sad spectacle, with the nation's top businessmen sitting in the audience, laughing and occasionally clapping, as Hugo Chávez gave them his usual combination of scorn and goodies. Yet lost in the shuffle were the announcements themselves, which, to paraphrase Rick Blaine, didn't amount to a hill beans in this crazy country of ours.

There is a growing consensus that the problems in the Venezuelan economy stem from a lack of investment. Because neither the private nor the public sector invest enough, the supply of goods and services in the economy is not growing at the same pace as demand, which mainly comes from soaring oil prices.

The measures announced were supposed to stimulate investment. However, the government revealed that it does not really understand the reasons why the private sector invests in the first place.

Investment usually depends on the comparison of two things. Roughly, if the projected return from an investment exceeds your internal discount rate - for example, the return you would get from an alternative investment with similar risk - then you invest. Usually, you put the projected return on the left-hand side and the discount rate on the right-hand side, and compare the two.

The first important announcement was the elimination of the Financial Transactions Tax, a 1.5% levy on all financial transactions. On the surface, this tax was progressive, in that big businesses and the wealthy carried the biggest burden. It follows that its elimination amounts to a tax cut for Venezuela's middle and upper classes, and a boon to the country's banking system.

Normally, tax cuts would help investment. Lowering taxes helps raise the left-hand side of the equation (the return on the investment), so in theory some investments that would not have taken place before all of the sudden might seem attractive.

Yet this tax is not what is keeping the left-hand side of the equation low. The tax may be gone, but the expected return is still low because of the enormous costs and risks an investor faces in our country. Security risks, the threat of expropriation and the risk of not getting currency to import raw material are huge, and risks cost businesses money.

The second measure was a promise to speed up the approval of dollars at the controlled rate for machinery and equipment. On the suface, this measure too would seem to help investment. Yet the measure was announced as a temporary thing, subject to the whims of Chávez himself. Furthermore, there is no point in speeding up the flow of cheap dollars for machinery when there is no assurance you will get cheap dollars to buy raw material for your production process or to bring your dividends back to your country.

Ultimately, the exchange control remains intact, as does the risk of not getting your dollars in the future. You may now face less paperwork, but you are still at the mercy of Chávez and his boli-klepto-bureaucrats.

The last measure was a promise to shell out $1 billion in funds for investment projects. In theory this would help the left-hand side of the equation by lowering the cost of financing investment projects.

Again, on paper this would seem like a good move. But we all know what will happen: the well-connected will get their "projects" approved while good investment projects are left by the wayside, and the money will end up in the Cayman Islands with little to show for it. Even if the $1 billion were truly invested, this would only be a fraction of what Venezuela needs to invest each year in order to keep its economy running.

The irony of Wednesday is that Chávez feels he has to reach out to the very oligarchs he denounces on a daily basis, and yet he does so in an ineffective way. Time will probably show he got nothing in return yesterday.

Say what you will, but Fidel Castro would have never begged businessmen to invest. And if he was ever forced to, he certainly would have come up with a better plan than this. In proposing these half-baked measures, Chávez didn't sell his socialist soul. He gave it away for free.

Great Moments in Implausible Deniability

Quico says: So National Assembly deputy Pedro Ortega thinks (and I use the word "think" loosely here) that responsibility for the Intelligence Decree-Law fiasco belongs not, as you might think, to the guy with the sole constitutional and legal authority to promulgate a Decree-Law, but rather on the faceless, authorityless, unelected, constitutionally non-existent Miraflores flunkies who drafted the thing.

It's a curious new juridical precept that, I think, brings a whole new level of lexical accuracy to a now familiar charge:

irresponsible |ˌiriˈspänsəbəl|


1. (of a person, attitude, or action)
not showing a proper sense of being accountable or to blame for something : [with infinitive ] it's irresponsible to just drive on after causing an accident.


2. an irresponsible person : there will always be irresponsibles who take a risk.
3. Hugo Chávez

I tell you, the fun never ends with this one...

June 13, 2008

The Making of the New Elite

Quico says: What does it take to 'make it big' in this society? What do the most ambitious people here feel they need to do to 'make it to the top'? How do you join the upper echelons of money, status and privilege?

Answer those questions and you'll understand much about what makes any society tick. Where the quest for success pushes the most driven people to act in ways that benefit everyone, society flourishes. Where the ambitious find they need to act destructively to "make it big", society flounders.

In an aristocratic order, the main thing you need to do to "make it big" is to choose the right set of parents. In a well-regulated capitalist order, your "ticket to the top" is success in business. In a petrostate, the ambitious are drawn to state power like moths to an open flame.

This, at any rate, was what was going to my mind as I watched Banesco's Juan Carlos Escotet (pictured above), Oswaldo Cisneros, Polar's Lorenzo Mendoza and Televen's Omar Camero palling it up with Hugo Chávez during Wednesday's extraordinary New Economic Plan Aló Presidente thingy.

The reason for their presence there wasn't much of a mystery. During his speech, Chávez pledged $1 billion over two years for "downstream development" in petrochemicals and other industrial sectors. He assured that the terms would be "soft" - a nudge-nudge-wink-wink way of guaranteeing that projects will not be subjected to rigorous viability studies, will face only "soft budget constraints" and are likely to continue to be supported long after it's become clear that they are hopeless money holes.

(La Gran Venezuela, anyone?)

If you know of any businessman who would decline a deal on those turns, send me his name: I want to put his name forward for beatification. In the real world, nobody's going to pass up a manguangua of such monumental proportions.

The problem goes well beyond the free cash. The reality that the petrostate creates is that businessmen can't "make it big" - or even make it at all - unless they become cronies. If you're in business in Venezuela, you need to be able to pick up a phone and get a sympathetic minister or vice-minister on the other end when the consumer protection agency comes knocking at your door, or when the tax guys come to do an audit, or when you apply for exchange-controlled dollars, or for building permits, or when you need capital, or a regulatory green light for any of a thousand of micro-level decisions the petrostate insists on regulating. In Venezuela, a businessman without government contacts is an orphan - helpless, weakly, and at the mercy of the government-connected competitors all around him.

What interests me is the way that last paragraph applies with equal strength to business-government relations in the Chávez era, the Punto Fijo era, the Perez Jiménez era, the Trienio, and the Andean caudillos era. For the last 94 years, ever since Zumaque I started spewing out all that black gunk all those years ago, that basic outline really hasn't changed.

What we're seeing today boils down to a rehash of a very old dynamic of mutual accommodation that has defined the Petrostate all along. The basic bargain (political support - or, at least, political quiescence - in return for the chance to make a ton of money) really hasn't changed at all.

What's most remarkable about this setup is the way new petrostate governing elites of every ideological stripe end up finding an accomodation with parts of the previous commercial elite, no matter how sordid its past.

Nothing new there: the Capriles and Bloque de Armas media conglomerates may have played a key part in sustaining the Perez Jiménez regime, but that didn't stop the new AD-Copei governing class from pacting with them once they took power, going as far as to get their respective patriarchs elected to congress in the 1960s and 70s. And now the pattern is replicated, bit by bit, in the Cisneros's stunning conversion from fascist conspirators to government pals within the last six years.

Of course, not all private groups are willing to pact, but they hardly represent a systemic problem: the state has any number of ways to ensure they wither into insignificance (c.f., 1BC). And certainly, new top level cronies arise exploiting their early access to the new state elite (c.f., Wilmer Ruperti.)

The new elite is an amalgam of new cronies and newly chastised old cronies, tempered through the exemplary the exclusion of the recalcitrant. Little by little, the competitive edge that access to state largesse affords ensures that cronies grow ever richer, all the while fully realizing that their wealth is entirely dependent on maintaining their good standing with the governing elite.

Over time, this process leads to the formation not just of a new, politically pliant economic elite, but also of a politically dependent middle-class. In some of the most provocative economic research I've seen on Venezuela in the Chávez era, a team led by Francisco Rodríguez has documented the way not just firms but also regular individuals' economic prospects are systematically enhanced if they support the Chávez government and depressed if they oppose it.

The underlying message here is that the petrostate makes its own elite. Within just one decade of chavismo, we've already seen the way the regime's stability is bolstered by the fact that those who have something to lose, those who have property, or influence or money or status at stake, have become, de facto, a conservative force in society, a constituency with a vested interest in keeping chavismo in power because its own privileges stem from and depend on chavismo's continuation in power.

Nihil novi sub sole.

June 11, 2008

Charm offensive, cash in hand

Quico says: Time was when he'd look genuinely upset that he'd lost his cool and raised his hand against you. He'd show up all sheepish like, flowers in hand, asking for your forgiveness. And he'd seem so, so nice at those times that, well, you couldn't help but forgive him.

Yes, you knew his faults, but you also knew how sweet he could be, and even as he was hitting you, you were sure that, deep down inside, he loved you.

In the early years, these little charm offensives used to come along every few months...as time goes by, you see them less and less. It's been ages since the guy wrote you a proper love letter. Almost two years, actually. The act's worn thin. He knows it, you know it.

These days, schmaltz won't cut it any more. Oh no. We're all too cynical for that.

If he wants to get back into your graces, he better put up some cold hard cash up front.

Is that really what your romance has come to? So sad...

A white rose by any other name

Katy says: - Venezuela's "Moral Power" asked today for two Supreme Court Justices to be impeached and fired from the Court. The move comes as a surprise since the Court has long been a chavista stronghold, but it serves to remind us of the extremes to which chavismo is willing to go in order to quash dissent.

The first case involves Justice Carlos Oberto, the husband of chavista congresswoman (and Native Venezuelan representative) Noelí Pocaterra. Justice Oberto apparently intervened in the long-standing inheritance feud between two branches of the powerful Capriles family (publishers of the popular pro-chavista tabloid Ultimas Noticias), and this did not please chavismo's upper-echelons. One can only assume that this is retribution.

The other case involves the ridiculously named Justice Blanca Rosa Mármol de León - literally, White Rose Lion's Marble. Justice Mármol was one of the few remaining voices of dissent in the Chavista Supreme Court, a role she seemed to reluctantly play but which nevertheless earned her a marginal spot on the Court. The alleged fault has to do with something she did four years ago - when, in a sham trial against opposition NGO Súmate, Justice Mármol decided to reserve the case to herself and her part of the Court.

Lest you think this move by Justice Mármol had any effect on the trial, her decision was quickly overturned by the Constitutional Hall of the Supreme Court, and the red wheels of "justice" continued their march unencumbered. So it is somewhat curious that a marginal opposition voice in a very loyal Court is now being impeached for something she did four years ago, a move she was entitled to make and that had little to no legal effect.

Probably Justice Mármol's recent branding of the new Intelligence Law as "unconstitutional", "horrendous" and "repressive" had something to do with this latest move. Probably the fact that the current Prosecutor General, and a member of the "Moral Power", Luisa Ortega, was also the prosecutor in the Súmate case, which must mean she carries a grudge against Justice Mármol. Which of these factors came into play is anyone's guess.

My first instinct is to feel sympathy for Justice Mármol. And yet ... what was she doing in the Supreme Court anyway? Everyone knows that place lost any semblance of being a functional institution a long time ago. Still, I guess it was a good thing she remained in the Court for a while and was able to shed light on some of the travesties of justice it was responsible for.

Justice Mármol seems like a nice, respectable lady, but she seemed curiously out of place in that wolves' den that is the Supreme Court. With mobsters as colleagues, she must have anticipated she would end up sleeping with the fishes. The last shred of dissent in the court is now gone, and while this has no real effect, its symbolic meaning is not lost.

June 10, 2008

What Primero Justicia Wants, Part I: Oil and energy

Katy says: This is the first of a series of wonkish posts on the specific proposals of Venezuela's opposition political parties.

We start off with Caracas Chronicles' exclusive excerpt of Primero Justicia's platform. These proposals were approved last October in an Ideological Congress, but the final version has not yet been made public.

These posts are translated summaries of the original document. The original version is available from me, via email.

Full disclosure, for those of you who don't know: I'm a member of Primero Justicia and I helped edit the platform document. However, my goal in writing these posts is not to advocate this or any party. Rather, it is a way of adding something to an ongoing debate regarding opposition political parties.

The diagnosis.-

Any analysis of Venezuela's problems, any solution put forward, should probably begin with oil. Oil is not only the source of our wealth, it is also one of the reasons the country is so ... Venezuelan. Oil has shaped our culture, our cities, our government and our way of life in ways ordinary Venezuelans do not yet fully grasp.

The current model is just a rehash of the one that reached its nadir in the 1970s. It sees oil as the source of needed rents and not much more. People at the top use oil as a tool to advance their personal interests, and matters of the State boil down to a struggle for oil rents.

Primero Justicia's proposal seeks to change the way society relates to oil wealth by limiting the State's discretion in the distribution of oil rents. The main basis of their philosophy is that as oil belongs more and more to the State, it belongs to Venezuelans less and less.

Their platform recognizes that Venezuelans, ever since Gómez, have been living under a collective illusion that oil resources are "public" when, in fact, they have always been "state-owned." The two are quite different. Since their main proposals (and, in fact, the party's name) deal with justice, they view increased involvement by the public in the oil industry as a matter of justice, of exercising a Constitutional right.

The platform regrets that the country is not taking advantage of all its oil-producing potential. It laments our decreased production capacity, where the lack of investment in our industry means we lose markets to our competitors. It expresses outrage at the continued involvement of politicians in making technical decisions within PDVSA, and the blurring of the line between the State's regulatory and productive functions.

This translates into the oil industry's transformation from a source of wealth for the country into a tool in a complicated political game. The constant giveaways to friendly foreign countries means the industry is used as a diplomatic sledgehammer instead of a source of wealth for Venezuelans.

Due to Chávez's new legal framework, public and private investment have dried up. The industry is now smaller, less safe, more damaging to the environment and, in general, in much worse shape than it should be.

The proposals.-

Primero Justicia's proposals for the oil industry can be summed up in a single sentence: making oil a source of prosperity for current and future generations.

The key proposal is the separation of the State's regulatory and productive functions. Under this vision, the State would set volumes of production according to different criteria (OPEC quotas, market realities, etc.), while PDVSA would simply be one of the State's companies in charge of implementing these measures, a company that generates rents in the most efficient way possible in order to maximize the value of the company for the shareholders - which would now include all Venezuelans. They believe the people making the political decisions should not be the ones carrying them out.

In order for this to work, they want to create a separate regulatory office. This would be a technical, semi-autonomous body in charge of making sure that the State's decisions regarding oil are carried out by PDVSA and all other oil companies in the country in the most efficient way possible. By separating the policy-making, regulatory and productive functions of the State, the party believes the incentives in the industry will be brought into line with what most benefits Venezuelans and help us make significant progress in preventing the further encroachment of corruption.

In order to change the way Venezuelans relate to the State, Primero Justicia proposes that part of the State's oil income go directly to individual health funds, retirement funds and workers' compensation funds (it is not clear in what proportion, nor what strings would be attached). The idea is that by limiting the State's role as an "intermediary" between the goose that lays the golden eggs and the goose's rightful owners, the perverse incentives that breed corruption will diminish. The party proposes using the oil development funds of Alaska and Norway as blueprints for these individualized accounts.

As part of this reorganization scheme, Primero Justicia also proposes that Venezuelans be given shares of PDVSA and all other state-owned oil companies. This, by the way, does not mean the State would relinquish its role as majority shareholder, but it would imply that citizens not only have a direct stake in the company's financial well-being, but that oil companies would be required to meet national and international rules regarding transparency and accountability. TO my knowledge, it is the first political party of significance in Venezuela advocating such a scheme.

In order to carry out these proposals, the party advocates changing existing legislation thoroughly, although it also highlights the importance of consensus wherever feasible. Flexible business models should be allowed, under the strict supervision of the State, in order to take advantage of the market's changing conditions.

The party believe that laws should increasingly allow private companies - both foreign and domestic - to participate in the business. They propose changing articles 9 and 22 of the country's Organic Hydrocarbons Law. They favor flexible royalties to be used for the development of less profitable areas of the oil business.

The party comes out in favor of a significant increase in production, a proposal that should not be controversial given how PDVSA's own expansion plans promise a significant expansion as well. It is also firmly against giving oil to our neighbors in conditions more favorable than the market suggests.

The party adopts a somewhat skeptical stance regarding OPEC, which is seen as both a tool for development as well as a potential harm to our sovereignty. While they advocate staying in the cartel because it serves Venezuela's interests, they believe we should adopt a more aggressive position within the cartel. They believe our policy toward OPEC should reflect the need to develop our industry, increase our capacity and open new markets for Venezuela's oil, considering our country's unique geographical position and the average quality of Venezuelan oil.

They also favor fair prices that compensate the necessary investment in the industry but also preserve our oil's value in the medium- and long-run. In other words, PJ is concerned that when prices are too high they hurt us in the long run, because they damage the economies of the people buying our oil and increase the incentive to develop alternative sources of energy.

Other proposals include strengthening PDVSA's research and development capacity, investing in technology and increasing research associations between the industry and universities. They favor policies that help create a significant private oil sector in Venezuela, by favoring domestic contract firms and creating oil-based clusters where knowledge and technology can flow more freely.

Moreover, they favor policies for the development of the natural gas and electricity industries. These involve recognizing the need for investment and the opening up of these sectors to private capital.

Finally, PJ emphatically favors changing the way our internal energy markets work. In other words, they don't believe Venezuelans should get cheap gas regardless of their income level. They believe that the current system is regressive, because it subsidizes the consumption of energy by rich Venezuelans. The solution they propose is the elimination of subsidies to rich Venezuelans and a gradual shift to a system of progressive, sustainable and explicit subsidies to poor Venezuelans.

June 9, 2008

Quadruple U-Turn. With two backflips. And a watermelon on top.

Quico says:
It's a measure of the lunacy that saturates Venezuelan public life that a totally vanilla headline like "Leader urges hostages' unconditional release" is seen as man-bites-dog stuff: "a surprising turnaround" that generates a ton of coverage and calls for heaps of commentary. But that's exactly where we find ourselves now that Hugo Chávez has dropped his softly-softly approach to FARC and called for the guerrillas to release all their "prisoners" in exchange for nothing and then disband.

[Brief tangent on (some highly charged) terminology. While most sane commentators have always described the people FARC holds as "hostages" ("secuestrados"), the Venezuelan government and FARC have gone far out of their way always to refer to them as "retained" ("retenidos") - just one of many symbolically important ways Chávez has been careful to align himself rhetorically with FARC. Yesterday, though, he described them as "prisoners" ("prisioneros") - staking out a kind of lexical middle-ground that, nonetheless, serves very visibly to distance his government from FARC rhetoric.]

What's it all mean? As usual, it's ambiguous, but I see three possibilities.

1-Chávez is cutting his losses. Realizing FARC is a-losing the war, b-a P.R. albatross around his neck and c-not listening to him anyway, Chávez decided to throw them under the proverbial bus, severing rhetorical ties and delinking himself from whatever abuses may follow.

2-This whole thing was agreed with new FARC leader Alfonso Cano ahead of time. It's just possible that FARC has just about had it with getting its ass kicked by the Colombian government and had been planning a move like this anyway, once Marulanda was out of the way. Having Chávez publicly call on them to release all hostages and demobilize could save face on both sides: FARC could argue that, without Venezuelan patronage, the "struggle" is not sustainable while Chávez could then take credit for demobilizing them.

3-The whole thing is a massive exercise in Goebbelsian doublespeak, and Venezuela's new policy will be to clandestinely arm, fund and aid FARC while Chávez publicly condemns them. The capture, just a few days ago, of a Venezuelan National Guard officer on a gun-running mission to Colombia suggests Chávez has decided to have his cake and eat it too.

If we see mass hostage releases in the coming weeks, we'll know it was 2-. If we don't, we can assume it was 1-. And if we notice Chávez bitching louder and louder while FARC gets stronger and stronger, it was probably 3-.