The Devil's Excrement

—Government and AES agree on price for Electricidad de Caracas: Interesting show, the revolutionary Government pays above market price, while the capitalists say they lost money, but their investment in Venezuela was “the best one they ever made anywhere in the world”. The truth is that the Government will pay US$ 900 million plus the company will pay a dividend of some US$ 120 million before the transfer. Given that AES sold EDC’s Colombian affiliates, it’s stake in CANTV and it’s affiliate in El Salvador, they probably came out even in the end. The Government paid top dollar, expect the same in CANTV, above Slim’s price.

—Economist Pedro Palma, says that about 20% of imports are made via the parallel market, not far from our own estimate of 25%, but certainly not close to the Government’s mythical 5%.

—Agricultural Ministry says production went down 7% in 2006. Jeez, I wonder whatever happened to all that land taken over by the Government in full production. Could it possibly be that nothing has been done with it? Recall the infamous Land Bill has been in effect for six long years, but it appears to have had no effect. You can’t blame Chavez for the failure of this program, like everything else that does not work, but another Chavez, his brother Adan, was in charge of the Land Institute for two years. In the end you can blame Chavez, just a different one.

—Moody’s says PDVSA is “at risk”. I wonder why?

—Central Bank says 26.1 % of the items in the CPI are scarce, up from December. I wonder what happened to Sunday’s statements that nothing was scarce?

—One month after the new Cabinet was sworn in, we still have nothing but a vague anti-inflationary plan. The Minister of Finance said the goal is to have inflation close at 10% for the end of the year. Given that January inflation was 2% and inflation has been accelerating, this is something out of Fantasia.

—There was a still secret agreement between supermarkets and the Government and reportedly, meat will reappear at supermarkets tomorrow. there goes my diet!

—In a puzzling move, the Board of the Central Bank, increased the “optimum” level of international reserves to US$ 30 billion. This means that the autocrat Dicator will be violating the law if he asks for the transfer of US$ 8.7 billion from the international reserves to the development fund Fonden. With current level of reserves the law would only allow a transfer of less than US$ 5 billion or so. Puzzling because they are asking for a fight with this, an interesting one at that.

This post is partially borrowed from Noticiero Digital (Thanks MB!).

The tax office SENIAT has been doing a good job of improving tax collection in Venezuela. It has, for example, created the category of “special taxpayer” who have to declare in person via special tellers and their accounts can be monitored. It has also carried out a campaign for pressuring people from a moral perspective and it has trained its personnel to improve.

But I disagree with many of the tactics. In the case of the VAT, for example, most merchants pay the tax, but are still shutdown (which I think is stupid) for “formal” reasons. For example, if your receipts are not stamped “cash”, that is a violation of the formal requirements and even if have paid your taxes, your store or company can be shutdown for three days and you have to pay a fine. On top of that, this fine is so vague, and left to the tax inspector that I know firsthand companies whose fine has been equal to the earnings of the company for the full year, even if it had paid all its taxes properly!

Additionally, I have always wondered why it is that since corruption is such a huge problem, why they don’t make all civil servants above a certain level be declared “special taxpayers” also as a way of detecting funny business in their personal accounts.

But I was simply outraged, given the supposed moral high ground that the tax superintendent displays every time he speaks, asking people to denounce others, not to be accomplices and the like, but then we learn via the social security system that the tax office itself failed to pay social security taxes for its workers on nine of the twelve months of last years.

The picture below is the image of the social security system, showing how SENIAT owes, some Bs. 15 billion in those taxes. Even worse, you can not even argue a shortage of funds as these taxes are actually deducted from each employee of SENIAT.

This is another cynical double standard of the robolution, always saying something and then they are caught doing the same thing they preach others should not do. Sadly, while SENIAT is collecting lots of money, the social security system is, and has been bankrupt for years, due to the negligence of its managers (past and present), as well as the fact that many companies and institutions don’t pay their contributions. In fact, to import using CADIVI dollars, you need a certification, among many other requirements, proving you paid your social security taxes.

I guess SENIAT can bypass that, after all they are part of the cynical Government.

Veneconomy wrote this Editorial today. I was going to write about this problem, but it is very clear as spelled out by Veneconomy. This is a clear example of the arrogance of the Government. It passes laws to protect workers, which increase costs, but costs can’t be passed to prices and the solution is to import at an exchange rate for which only the Government has access. Of course, this will only be possible for as long as there is sufficient oil income. In the meantime, local industry is ruined, as it can’t compete with other countries, under prices controls, a fixed exchange rate for which the Government has ample access and 17% inflation (and growing!), which adds to costs. As Veneconomy suggests, why not talk? Why not look at costs structures and make rational decisions? Is that too much to ask or are they going to wait until there is no money or no industry? This is how you destroy a country from the top down, or from the bottom up. In the end, there is just nothing.

So What! We will import! By Veneconomy

Today, Venezuelans who went to buy their meat were surprised to find that storekeepers are no longer prepared to sell it. The reason? The government-regulated retail price is below the price at which wholesalers buy the carcass dressed. If we then add the pressure to which retail meat outlets are subject from Indecu, Seniat and other government agencies, retailers find themselves in an unsustainable position.

Meat has now joined the other basic products that have been disappearing off the shelves, among them sugar, milk, oil, pulses and coffee. This is just a tiny example of how the government’s control policies are worsening the food problem, one of the three basic problems affecting the population, the others being insecurity and lack of housing.
Faced with this situation, the government has once again come out with its habitual response: it is to import large quantities of meat to fight the “speculation,” which it alleges is being generated by the production chain.
Why, instead, hasn’t it occurred to them to calculate the true costs of cattle rearing in Venezuela?

They should do the math to see how much a cattle rancher has to lay out on raw materials, veterinary services, medicines, technology and maintaining infrastructure. In addition, they should calculation the high costs of the labor laws (e.g. Lopcymat) and of security measures (protection payments). Then there are amounts they have to spend to keep their land free of squatters and rustlers and to continue producing in the face of the legal uncertainty hanging over all the country’s landowners.

After doing those sums, the government should also bear in mind that cattle production in Venezuela is extensive (labor intensive) rather than intensive. And that now this trend has been reinforced more than ever before, because who can invest in new technologies and improvements and make capital investments if the legal system does not guarantee ownership?

Moreover, the people currently in the driving seat in Venezuela must know that, in the countries they are going to import the meat from, agriculture and cattle rearing are subsidized and protected by the government -as happens in many parts of the world-, since they are strategic industries and provide jobs. Put another way, it looks as though the Hugo Chávez administration is, once again, going to help maintain and increase employment in other countries at the expense of employment at home.

How much longer can this substitution of domestic production with imports continue? What about the food sovereignty the government makes such a fuss about?

If the country really mattered to the government, it would sit down to dialog with the producers and establish true costs and then see how it could promote investment so that Venezuelans, instead of loosing out, have new sources of employment and domestic production doesn’t shrink.

Lights Out in Caracas By Mary Anastasia O’Grady

Venezuela’s congress didn’t sing the Internationale last week when it granted President Hugo Chávez the power to rule by decree in a ceremony on Caracas’s historic Plaza Bolivar. But it did pledge unwavering allegiance to a socialist revolution that rivals the Paris Commune. It was the moment Venezuelans had been dreading for years: the official installation of the dictatorship.

Mr. Chávez had asked congress for the power to rule by decree because, he said, “it is necessary to draw up the mother of all revolutionary laws, especially in the area of economics.” Now that he can govern unchallenged, the first order of business under the new rules, he says, will be to seize control of the largest private electricity company in the country (Electricidad de Caracas), the privately held oil operations in the Orinoco Belt, and the country’s largest telephone company, known by its Spanish initials as CANTV. This is shades of Cuba 1960, and if things go according to plan, it won’t be long before Caracas could start looking like Havana.

Venezuelans have been watching their democracy slowly suffocate for seven years now. The militarized government has methodically gobbled up institutional independence; it has bribed where it couldn’t bully; it has sowed hateful class envy. Each valiant effort by democrats to hold ground and salvage civility sapped a shrinking supply of fortitude.

Thoroughly frustrated by a rigged system, opponents called for a boycott of the congressional elections in December 2005. An abstention rate of 75% to 80% confirmed widespread dislike for the president. But the few who showed up gave Mr. Chávez’s sympathizers 100% of the congressional seats. That’s how the president, “reelected” in December 2006 in a process that was neither free nor fair, managed to get the legislative branch to hand him dictatorial powers. One Venezuelan newspaper captured popular opinion last week with the headline “Heil Hugo.”

Comparisons between Mr. Chávez and Europe’s 20th-century dictatorships are natural but they overstate the Venezuelan president’s management skills. At least Mussolini made the trains run on time. Mr. Chávez, on the other hand, seems to possess a reverse Midas touch. Under his leadership the country has soaring murder rates, double-digit inflation, food shortages, oil-field depletion and a massive brain drain. Petroleum prices are coming off all-time highs but a Jan. 25 Economist Intelligence Unit briefing referred to Venezuela’s “difficult economic climate,” as well as “unattractive” labor markets and “severely distorted” financial markets. The most high-profile infrastructure news in the past seven years has been the collapse of one of the country’s busiest bridges.

The more likely fate of Venezuela under Mr. Chávez is that of Cuba, once the third-richest country in Latin America and now so poor and backward that it would take a major economic upgrade to qualify it as a banana republic. Sadly, this is where Venezuela seems to be heading.

Much has been made of the threat to seize private property in the Orinoco oil fields, and to be sure this is a serious matter. Oil companies tend to yield to tyrants and Venezuela is likely to get away with a lot, even though it badly needs private-sector technology. But the oil industry is not the only one getting pummeled. An equally alarming assault on property rights is the promised expropriation of the most reliable supplier of electricity in the country: Electricidad de Caracas (EDC), now owned by the U.S. company AES.

EDC is not only a well-run, private-sector enterprise. It is also a symbol of the entrepreneurial ambition of Venezuelans before the 1973 oil boom that changed the psyche of the nation. The company was founded by a young engineer named Ricardo Zuloaga, who read about hydroelectric transmission in a scientific journal in 1891, spent years raising capital, traveled to Europe to acquire the necessary equipment and, once back in Venezuela, transported it on mules to build the plant. EDC began supplying electricity to Caraqueños only about one year after the Niagara Falls electric plant started up in the U.S.

EDC remains Caracas’s power supplier today and is one of the few things that still work in the country. But that could soon change. The government doesn’t have a very good record of running utilities. In 2006, according to the Venezuelan daily El Universal, the state-owned electric company Cadafe, which supplies most of the rest of the county, was responsible for 70 of the 92 major power outages that affected Venezuelan electricity users. Other state-owned generation, transmission and distribution facilities were responsible for a majority of the remaining 22 failures. EDC, which both generates and distributes electricity, experienced only three major outages last year.

Things got so bad halfway through 2006 that, according to a report in the July 21 issue of the economic newsletter VenEconomia, there was a spate of protests — some violent — against the headquarters of Cadafe and its subsidiaries for the increasing frequency of power failures. VenEconomia commented on “the incomprehensible paradox” of Cadafe’s performance in a country with abundant energy sources.

The explanation is simple: There has been serious underinvestment in power generation and transmission at Cadafe during Mr. Chávez’s tenure. “From 2001 to 2005 Cadafe completed barely 24% of its investment objectives at a time when it registered millions of dollars in operational losses,” VenEconomia noted. Meanwhile, energy demand increased 9% per year nationwide since 2003, and in some areas of the country demand jumped by as much as 20% per year over the same period. Though Cadafe had been budgeted more than $2 billion in government funds, VenEconomia said, the company warned that the new thermal generation projects would take between two and three years to complete.

When AES bought EDC in a hostile takeover in 1999, investors were already bailing out of Venezuelan assets due to the shadow Mr. Chávez was casting on his country. AES thought it got a bargain. But it may turn out to have overpaid. The Venezuelan government has still not said how it will value the company, but it is doubtful that investors will receive the market price.

The real losers in this deal are likely to be the people of Caracas. They will not only have to suffer all the tribulations of a state-owned electric company; they will also be living in an environment where investors have been driven away.

The 30 minute video of popular leader Salvadora Guaraco is going around the Internet, while most like the way she so coherently blasts Chavez, I am more impressed by the historical and economical perspective she provides about what this country is and where it is coming from.

Feathers has a small introduction English here

There is a radio interview with her here.

And there is a comment on the Enabling Bill here.

Bruni has written about her here.

(There is also an interview in Tal Cual on Monday, but you need to be registered)

Over the last few years I have met many Salvadora’s (Which means saviour in Spanish) local leaders that can explain the problems better than most known opposition leaders, I am glad at least one of them has the spotlight on her, that can so fluidly explain what is going on  in Venezuela.

I have wondered whether to tell this story or not. I originally thought I would wait for the transcript of the Alo President from a weak ago to come on line, but so many plans for posts just die into the oblivion of being too busy or something more important happening.

I could have titled this post: “When Popi the clown discovered Chavez”. You see, Popi the Clown is an almost mythical figure to many Venezuelans, not too old, not too young. He was the clown that entertained generations of Venezuelans. As I said, almost mythical.

Well, on January 27th. when Chavez was giving his Sunday Alo Presidente, he was talking about how much he liked to talk and entertain and then he told us how Popi had discovered him. It went something like within the bounds of my limited memory, the order may be wrong, but the jist is the same ( I was told today he has mentioned this other times):

“I was at the Military Academy, I may have been a Captain then, one day I was told to greet Popi and organize his visit, all the female Popi’s were dancing an entertaining and then they talked to me on camera and they liked it so much that they showed it on National TV. And I became famous. All the kids on my barrio would tell me: “you are the one that goes around with Popi” and I liked that, television, the media, I became a radio announcer”

I am not kidding. He said that. But you have to wonder, where is the video? Second, what barrio is he talking about? Once he was a Captain, he had no “barrio”, he lived at the military headquarters and Barinas was not a place he visited too frequently.

Thus, Popi may have discovered Hugo Chavez, I guess it takes on to know one.

When Rafael Caldera was President, he named Marxist Economist Domingo Maza Zavala to the Board of the Venezuelan Central Bank. It was a time of crisis and Maza said many things he should have not said at the time. Maza remained on the Board of the Central Bank through the Chavez years, always making comments that showed he disagreed with the Government’s economic policy. It certainly seems weird to agree day after day, week after week, month aftetr month with this Marxist Economist, but it all has a simple explanation: No matter what his politics are, Maza knows about economics and knows that certain things are too much even in an economy like ours.

In today’s El Universal, Maza gives an interview that contains many of the things you regularly read here, except he is an economist (They call him the father of modern Venezuelan economics, whatever that hyperbole may mean) and I am neither. Some quotes:

“There is such complexity of problems, of contradictions and paradoxes in the Venezuelan economy that one has no answer or explanation, one tries to examine, of pointing out as much as possible withing this tangle. Now, someone has to put order in this entanglement”

“We still have to see endogenous development and still have to define what is XXIst. Century Socialism”

On how many Bolivars has Fonden spent: “I can’t tell (see my earlier post) we have always complained that it should present its accounts and explain how it spends its funds. Now, according to to its last estimate it still maintains almost teh totality of its funds in Dollars, some US$ 18 billion, thus it has spent little Bolivares (!!!!!!!!!!!!)

“the Government is in crux, a true bottle neck, a sort of Gordian knot”

“In Venezuela, there is the peculiarity, that it has been the Government itself, in an indirect fashion, that has sued the parallel market, when it issues dollar denominated bonds in Bolivars, or negotaites Dollar denominated Argentinean bonds”

“I have always been in favor of the state participaating in the private sector, but not in its totality”

There you have it…even the experts have no clue about what to do and how about the development fund that does not even spend!!!

A jewel for history!