September 16, 2009

Elite Permutations

Quico says: Fly into Venezuela and you come face-to-face with the single most important element reshaping Venezuelan society literally as soon as you've entered the country.

I'm not talking about the giant posters of Chávez you see in Maiquetía's baggage claim area. I'm talking about the the thing that happens the moment you leave customs, cross that symbolic portal into the country as such: you find yourself face-to-face with some hustler saying "bolivars? change dollars...good rate..."

In a way, it's a uniquely honest introduction. That guy at the airport is the tip of a massive socio-economic iceberg. Because currency arbitrage is much more than just one aspect of the chavista model of political economy: it's its heart and soul.

The distortions introduced by Venezuela's permuta-dependent, de-facto dual currency exchange system are remaking Venezuelan society from the ground up. Until you've grasped its dynamics, you've grasped nothing of the way the chavista stranglehold on Venezuelan society actually operates.

And yet even as I'm writing it I realize that that phrase - "permuta-dependent, de-facto dual currency exchange system" - is obtuse enough, impenetrably technical enough to send most sane people's interest's waning.

And that, in a way, is why it works: in the permuta system, we have a virtuoso feat of misdirection. While we all focus on what the government is doing with the one hand, it's off remaking society with the other.

Because, make no mistake about it: just beneath the surface, just beyond the heavily propagandized mountains of socialist paja, the government really is upending Venezuelan society. It's just that the reinvention is happening by stealth, through a mechanism too obscure for most observers to quite grasp, let alone pay any attention to.

When you get past the economist's mumbo-jumbo, the permuta system is the vehicle for a 21st century montonera, a mechanism for replacing one elite with another.

The dual-rate exchange market is, at its nub, an instrument of financial alchemy, a way of turning $1 into $3 instantaneously, with no risk, but only so long as you have the right connections.

Administrative permission from Cadivi is your golden ticket to this incalculable manguangua. Needless to say, if you can create $3 out of $1, you can create $9 out of $3, and $27 out of $9. Which amounts to saying that, in Venezuela, the amount of the nation's oil rents you can appropriate, risk free, is entirely dependent on your connections.

The dual exchange system's genius lays in the way it makes participation in the go-go world of risk-free bolibourgeois oil rent appropriation entirely dependent on your political loyalty. With control over a key part of the arbitrage mechanism, the government keeps a tight rein on who is able to participate in the windfall and who is not.

In this way, the Permuta System allows the real agenda of chavismo to be achieved: not the hopeful bla-bla-bla about the abolition of the class structure, but rather the recycling of elites. It's a process as old as Venezuelan nationhood, repeated a dozen times in the 19th century and another four times since Juan Vicente Gómez's death three-quarters of a century ago.

Any number of otherwise incomprehensible puzzles start to make sense when you understand the Permuta System's absolute centrality to Venezuela's political economy these days. Everything from the fact that a batido de guanábana costs $4.50 in an arepera if you put it on a foreign credit card but just $1.50 if you buy it like a sane person, to the fact that Wilmer Ruperti sails around in a vintage yacht that once belonged to Henry Ford.

International Capital's softly-softly approach to the Chávez regime only makes sense when you realize that any number of multinational firms have literally billions of dollars in profits whose value depends entirely on Cadivi's willingness to honor their official dollar requests.

Witness this Wall Street Journal article on Telefónica of Spain's perilous position with regard to its profits from Movistar's Venezuelan operation: whether Telefónica walks away with over $2 billion in profits from its Venezuelan operations since 2006, or with a third of that depends entirely on a single administrative decision in the hands of a handful of bureaucrats and advisors close to president Chávez. Can we really believe that the Spanish government's benevolent line towards the Venezuelan regime is uninfluenced by that?

And the supposedly "technical" policy debate inside the government on what to do with the exchange rate can be reinterpreted as a fight over who will end up appropriating the nearly limitless arbitrage opportunities arising from dual exchange rates: whether it will be Nelson Merentes' cronies inside BCV (who, unsurprisingly, are pushing for the Bank to adopt a daily auction of dollars that would leave their hands right next to the till), Alí Rodríguez's at Finance (who want rather a "tax" on foreign exchange transactions whose proceeds would end up - you guessed it - in the Finance Ministry's hands) or Rafael Ramírez's syndicate at PDVSA, which wants to keep the current system because the status quo leaves massive sums of cash flowing from PDVSA directly to the Permuta market, allowing them to appropriate part of the arbitrage margin.

Which faction succeeds is of mostly academic interest to outsiders, because each is locked in a bitter battle with the others over control of a natural resource rent stream whose existence is entirely independent of their efforts to control it. What we have, in other words, is a near-dictionary definition of rent-seeking (rentismo): an economic system where the prevailing incentive structure drives people to focus their efforts on activities that create no value for society as a whole.

The faction that exploits the rent-seeking opportunities around them most effectively will, inevitably, become the country's new economic elite. Venezuela will inevitably become the property of people well-connected enough to persuade Cadivi to trade them $20,000 for Bs.43,000, and then manage to use those $20,000 to buy a car in the US, ship it back here, and sell it for Bs.70,000. Or to those who manage to do the same with medicines, or clothes, or toothpaste, or any other product. The country is being turfed out to the Arbitrageurs.

The skills needed to ride this particular gravy train - politicking, bureaucratic empire-building, scheming and intriguing - are skills that do precisely nothing to advance the welfare of Venezuelan society as a whole. This is the system Chávez has reinvented. This is the receptacle into which all that drool pouring out of Oliver Stone's slack jaw must eventually be collected. This is the revolution, people. The rest is bread and circus.