The Devil's Excrement

Part Four of this article, here are parts One, Two and Three.

Fourth Problem: The Phantom of the New Man

The response of the regime to these obvious matters is to denounce that they are made form the neoliberal capitalistic mind frame and that socialist education will bring us a New Man, capable of working with solidarity for the collective, independently of what he will get in the distribution of the products. “To each according to his capacity, to each according to his needs”, according to what was said by Marx, the bearded one.

There are a number of problems here. The first one is that the New Man will not appear at the same time laborious and with solidarity, nor with the socialist education nor with any other one. Human adult existence takes place in the mist of some tensions, which can be lived as destructive or as creative ones. The tension between individuality and the community is one of them. Education can help a young person alleviate some of those tensions in a constructive manner, but it can’t resolve them for him. That is the task of the moral life of each person. The State cannot substitute people in it, without weakening society in its own nucleus: the person as a moral subject that makes projects for himself and for the world. If it is tried, the result will not be solidarity, but social paralysis.

This has been confirmed by historical experience. Socialism has been governing countries and building the New Man, from the monopoly of education, to propaganda, to the media and repression. Raymond Barre noted in the 70’s that the 3% of the cultivated land in the Soviet Union dedicated to family plots, produced as much as the 97% of the collective exploitation of the koljoses and sovjoses. Once the soviet regime disappeared, what turned out to be behind it was not the New Man, but the vodka mafia. In China the “Great leap Forward” killed with hunger some 30 million “New Men”, appropriately framed inside the popular communes. By way of contrast, the current economic take off, began in the mid seventies with the reform that allowed the return of private ownership of the land. Today three quarters of the Chinese GDP is generated by the private sector. Close to us, Cuba offers another interesting example: almost fifty years guided by the New Man himself and they have not even managed to provide their own country with toilet paper.

To build a socioeconomic model on the basis of anthropological fictions happens to be extraordinarily costly in time, money, blood and dignity. The most reasonable path is to assume people as they are on average, without presuming that political power can provoke extraordinary changes either culturally or morally in a short period of time. From that point, society can organize itself in such a way that altogether people will inhibit negative trends and reinforce the positive ones.

The XXth. Century demonstrated clearly how you do this: you have to distribute power as much as it is functional in both the State and Society, in such a way that the tone of political life will be provided by civilized negotiation, mutual control and the respect for the agreed rule of law. And one has to establish mixed economies in which about 60% of the gross product takes place within free markets, open and competitive of private goods and around 40% will take place through a democratic Government with strong political, judicial and media control, for the production of public goods, the conservation of common resources and a certain equality of opportunity.

The details have to be adapted to each country, but this general formula has been proven with success in the European, American, Latin and Asiatic contexts composed of normal people, with the usual motivations and moral qualities. In Venezuela we are going to do exactly the opposite-concentrate power and blind the precarious markets that do exist-which is obvious can not succeed with the normal Venezuelan,- but requires an extremely novel one, that acts by motivations which are precisely the opposite to those that move so many ordinary people to vote for Chavez.

The whole talk about the New Man denotes that this project has economic failure built into it; we will see Chavez time and time again fighting with this ghost, protesting that his own people do not act in the way that is needed for XXIst. Century Socialism, requiring a Venezuelan which does not exist for the State that he wants, instead of asking how to adjust the State that Venezuelans have, to make both of them functional. At the end, he will conclude, like Adolph, that we did not understand him and we did not deserve him.

My second post is about Rodrigo Cabezas. When he was named Minister of Finance I certainly was in agreement that he was a much better choice than Mathematician Nelson Merentes, at least Cabezas is an economist, even if he invented the strange concept of excess  international reserves which will come one day to haunt the Government and I certainly hope Cabezas is the Minister when it happens.

But the more I hear Cabezas speak, the more I get concerned about the future direction of the Venezuelan economy under his helm. About the only think I like of what he has done is stop that vicious circle of corruption involving the discretionary sale of Argentinean bonds and structured notes to local banks, as a way of intervening the parallel market.

Unfortunately he has done little else. For the first month in office he did essentially nothing. For the second, very little. Then they issued the Bono del Sur 2, which he hailed as a smashing success, for which Quico gave him the Chutzpa of the young year award. (Still time to beat this!)

And now comes monetary reform also known as monetary reconversion, under which the new currency will be known as the “Bolivar Fuerte” or the strong Bolivar.
 
Unfortunately, other than taking three digits off the currency, almost nothing has been done in terms of trying to help the Bolivar be strong. This has generated lots of criticism and today Cabezas blasted the critics. Let’s see what he had as ammunition:

—“Those that predict a devaluation are lying. The new monetary exchange will generate equilibrium when it is established at Bs. 2.15 (per US$), thus there would be no devaluation because there will not be a need for it. We will not give in to the pressure of economic groups that cartelize the foreign exchange market”

Wow! Where do I begin. If taking three digits off the currency “generates equilibrium”, why not take four, five or six? The more digits you take off, the more equilibrium it should generate. Or not? Am I missing something in his explanation?

As to the strength, the equilibrium and devaluation. If the currency is so strong, why did he sell his smashing success bonds at an implicit rate of Bs. 2800, a full 30.2% higher than the “official”, “equilibrium” rate. And why are these cretin, cartelized, economic groups willing to buy dollars at Bs. 4,000 to the dollar in the parallel market, a full 86% above the official exchange rate? Do they really expect to make money if Cabezas devalue let’s say to bs. 2,800 to mimic the Chutzpah bond?

By the way, did you notice the paralell rate did nothing when the bonds were sold? Shouldn’t this be telling them something? Apparently not.

As for the “need” for a devaluation, has Cabezas added up the Government’s income this year and compared it to the budget? Let’s see, last year there was a fiscal deficit of about US$ 1 billion in a budget of US$ 53 billion. The new budget started at US$ 60 billion. They need US$ 7 billion. Oil is about 10% lower so far in 2007. They need another US$ 3 billion, we are up to US$ 10 billion. Uups, they cut the Value Added Tax, for some US$ 6.5 billion more, we are down US$ 16.5 billion. We need to adjust salaries by at least inflation add another US$ 4-5 billion, for a grand total of some US$ 20 billion plus or minus 2 billion. Scary, no? And this does not take into account the income tax reduction decreed by the Supreme Court if it gets applied this year.

Let’s move on.

—The Minister explained that there are two modes that force a devaluation: Capital Flight or a lack of foreign currency. “None of that is happening, thus it is a stupidity to say there will be a devaluation”

Well, I left the word stupidity in bold, so that when the devaluation occurs I will be able to remind you who is the stupid person here.

Somehow Cabezas forgot a third mode: Spending too much. Last year imports were US$ 31 billion, this year shoudl go higher at the current pace. It is not whether your income is sufficient, it is a matter of the balance between income and spending.

—“We have to get used to living without inflation”

We would love to!

—“Those that say this is a cosmetic change in the streets are wrong…there is a systematic policy for reducing inflation: An increase in production, a flow of imports, controlled liquidity and a macro policy to lower inflation to a single digit”

Here he sounds like he was in Sweden. Inflation in two months is already close to 4%, 12 month inflation is at 20% and has been moving higher.

As for systematic, the term implies a system, many steps, many measures. As far as I know, of all the steps taken, only one really helps in curtailing inflation, that of having PDVSA hand over the foreign currency to the Treasury. Unfortunately, like the VAT cut, the effect will only be temporary as when “equilibrium” is reached, to use the Minister’s words, it ceases to have an effect. And the the 1.5 billion removed in liquidity by the Bono del Sur, is equal to the increase in liquidity in the last six weeks. So the systematics appear to be an empty set, in new math terminology.

As for the rest of the sentence, some parts are missing: Production has been decreasing in the face of cheaper imports and liquidity has been out of control…

See why I am worried?

Every day, I read local newspapers with eagerness. Reading the paper has become an adventure into the unknown, I no longer read it to see what’s new, but is more like reading it to find out what is nutty, dumb, stupid or shocking, even if by now very little seems to be shocking Venezuelans accustomed to a daily barrage of ever increasing crazy, strange or weird ideas and announcements.

Artículo 316. El sistema tributario procurará la justa
distribución de las cargas públicas según la capacidad económica del o la
contribuyente, atendiendo al principio de progresividad, así como la protección de la
economía nacional y la elevación del nivel de vida de la población, y se sustentará
para ello en un sistema eficiente para la recaudación de los tributos.

In the end, that is precisely what is at stake. Stay tuned…

This is today’s headline from Caracas’ newspaper 2001: 620 soldies will guard Chavez in Argentina

Not to mention the three special military planes used to fly them there or the 2,000 buses rented by PDVSA to move people to the stadium where Chavez’ speech will take place or the $12 person that is being offered to each person to go.

Quite a change for the humble man elected in 1999 who started a campaign against the luxury trappings of power and said things like:

“I don’t want the imperial paraphernalia of power” or

“I will eliminate bodyguards and credit cards without limit”

“It is enough with a small apartment for me, my wife and my daughter and a man outside in case someone thinks of throwing a stone”

“he gets stressed by the President traveling in a caravan of luxury cars, while bare feet kids populate Caracas”

He also criticized the pomp and ceremony of the Venezuelan presidency, superior to even that of the Spanish royalty.

Well, eight years later, the pomp, the expenses and guards have only increased. Chavez travels in his brand new US$ 80 million Airbus, mobilizes 600 soldiers to his paranoia, the PDVSA jets are back and the credit cards and “special travle” dollars are the rule of the day for Government officials.

And the misery and the kids are still in the streets, even more than before.

That is the revolution.

I find this come to New York campaign by Mayor Bloomberg a little bit tasteless. The one on Singapore is horrible, the Suriname one yukk and I take offense at the Venezuela one, after all I am sure that Bush’s popularity is low everywhere and any Middle East country beats us at Bush bashing and hating even if we do have the world’s top leader at that. And how about truth in advertising? Is she Venezuelan? I don’t know her! (If she happens to read this and you are Venezuelan, please drop me a note. Hey! We could even meet)

Thanks AB for the tip!

This is Part III, part I here and part II here

Third Problem: Businesses without businessmen, markets without merchants

If the spine of XXIst. Century Socialism is going to be a whole bunch of large state companies, around which and also around the Ministries, City Councils, misiones, etc. it is expected that all sorts of “social “enterprises” will flourish around them as its suppliers, contractors an subcontractors. There isn’t a single privileged model but you try one and if one fails you try another one. Cooperatives, mixed companies state/workers, various small businesses, communes, “social production enterprises”, have been implemented in larger or smaller degree and scale, with spectacular failures in some cases and basically without any successes that can be replicated which are worthy of mention. Clear widows of all of the types of socialism worthy of a mention arrive daily in Venezuela, with new ideas under their arms, attempting to capture the attention of the Comandante to try out their social experiment, with the meat and the money of the Venezuelan people. Of course, some private companies will be left, special those that “were not signers of the recall” perhaps modified by law to introduce a political commissar next to the Director or Manager or a soviet of workers, peasants and soldiers, specially soldiers, in the Board of Directors. Who knows?

The new forms of businesses in XXIst Century Socialism share three main characteristics: i) They depend financially on the State or a bank forced by the State; ii) they depend on contracts from the state or state companies for their survival; and iii) businessmen in the capitalistic sense of the word are not desired, that is, a person with initiative and capacity for risk that coordinates production elements and promotes as his the success of the company in the market, because he will benefit from it. It is preferred to have some sort of assembly management of the production units, which anyone with a minimum of experience knows turns out to be more complicated that ordinary company management. Of course, if the assembly management fails, as we fear, the bureaucratic management directly by civil servants, the same as in Cuba, probably with the same splendid results, can always substitute for it.

On the other hand, one has to mention in terms of the production model, that the workers that already have a job have not welcomed any of these possibilities with great enthusiasm. With some justification, the workers see more profit in the fact that their rights and job stability will be respected (Caldera’s Law) if they are directly employed by the State, than if they belong to a cooperative that contracts with the State, a city or a State company. That is why they ask if a company is nationalized, that it be nationalized completely (They don’t even want shares). It is a different matter for the unemployed, who probably prefer some backing for their job from the state that none at all and are more willing to participate in this business experiments. Given that in Venezuela there are serious problems to maintain work discipline in conventional businesses, the difficulties could be even larger in these new unit with more complex mechanisms for decision and sanctions, populated with workers who are not accustomed to formal jobs.

These companies, hyper dependent on the State, without a true business vocation behind them, will very unlikely reach competitiveness to stand on their own in open markets. In reality, the competition in which they will participate will be of the political type going after contracts with state entities of various types, something very similar to the old “living off the income capitalism“. Such contracts will be handed out as usual, because of family connections, political connections or for “sharing” economically with the civil servant that hands out the contract. Lacking these contracts, the companies will go bankrupt after using up the initial loan or the contribution from the Ministry, as it has already happened with some cooperatives and some mixed companies. More than simply dissolving themselves, if they have nothing better to do, those involved will argue they have become a social problem and will ask for their fundamental socialist right of having the Government support them.

XXIst. Socialism does not exhaust itself in chaining itself to the State. There is also room to new economic units, which are not part of the State, or are only partially owned by the State, which could then produce directly for the markets. It will be mainly an internal market protected by the Government, because without a business outlook in complete control of the company, there is no way to reach international competiteviness, which others are achieving in Latin America.

In the same manner as the image of a businessmen, markets are also disliked by XXIst. Century Socialism. This can be witnessed by foreign exchange controls, price controls, inspired possibly in Lusinchi (President from 1984-1989), which have already begun to yield their crops of shortages and severe problems for producers. However, controls only make markets more difficult; even more ambitious is the idea of replacing it with barter on the basis of chips, which will be valid only in certain places and times, thus moving it back to an experience-that of the coinage made out of leather for each village-that the West abandoned a thousand years ago, when roads were opened at the end of the Dark Ages and metals began circulating again. As any first year economics students learns, markets are much more efficient the more open, competitive and fluid they become. That is why Europe joins its economies in a large market and its coin becomes the Euro. XXIst. Century Socialism promises the opposite: to fragment markets and to take coinage to the local level.

Blocking entrepreneurial action, segmenting markets in local units for the interchange of plantains for espadrilles, forming pseudo social companies to which you will assign contracts on the basis of politics and the other microeconomic initiatives of XXIst. Century Socialism will have consequences. On the one hand, it will reduce the power and freedom of action of all the non state economic agents, including the poor ones, thus, they will give more control of society to the Government, in such a way that nobody will be able to survive without its approval. On the other hand, it will increase even more the inefficiency of the production-distribution system, which will be uncovered when oil income to finance massive imports to maintain consumption and keep happy the social grassroots of the regime, as long as it can. Then, repression will arrive.

This is part II, part I is here (Previous Post)

Second Problem: Nationalizing with a dysfunctional state

Chavez did not damage the Venezuelan State, but he reached power precisely because the State was damaged. From being an instrument of society to modernize it, our State turned into the principal obstacle for that modernization: a large machine, costly, inefficient, not only clumsy, but also a stumbling bloc for social initiatives, each time more of a failure in its basic responsibilities of guaranteeing security, education, health and infrastructure.

The Venezuelan State of the XXth. Century itself as a distributor/investor of oil income with the aim of modernizing the country. The State failed not so much because of the bad design of the successive modernization projects, but because of the existence of an underlying distribution criteria, always the same, but always different from what the modernizing project proposed. This criterion continues to be: income is distributed according to the connection of those that receive have with the one that gives it away. That connection can be personal, a business one or political, and with frequency all of them at the same time. Our Venezuelan state is capable of turning any modernizing plan into a feast of oil income distributed according to networks of private links.

Chavismo seems to be conscious of this. That is why it does not use, but instead duplicates the State in the diverse plans and misiones, borrowing the organizational capabilities of the Armed Forces and the Cuban State. It so happens, that despite this practical recognition of the inefficiency of the Venezuelan State, the economic design of “XXIst. Century Socialism” has as its axis the re-nationalization of the spines of the economy, that is, communications, energy, mining and hydrocarbons, perhaps later, foodstuffs, transportation, construction, tourism, banking, education…declaring them “strategic”, “of National Security”, or the like.

This can only surprise us. A Government that does not know what to do with the basic social functions of the Venezuelan State and sublets them to the military and the Cubans, pretends to assume with the same dysfunctional state, large scale economic operations that the private sector is executing reasonably well, with more or less benefit to its shareholders, but without any cost to the public sector.

What will come after the nationalization, in the short term of a few years, we do know, because we have lived it before. It is sufficient to rewind the movie to the period of Dr. Lusinchi, who “was also like you”. (Reference to his campaign slogan) The nationalized industries will start departing from the logic of business, which is what sustains them on their two feet. Managers, workers, clients, contractors and suppliers will all understand that the company has changed its nature; it is not there to produce a benefit for the shareholder, but to distribute oil income among those that are connected to it. Each one will try to extract its piece of the pie: the managers fattening up their accounts abroad, will cultivate political clientele: the clients will look for frozen “social” tariffs, the workers will pressure for union protection for their jobs and will place their relatives in the company; the suppliers will sell with scandalous overcharges and the contractors will ally themselves with whomever it is necessary inside to get the business. Investment and productivity will decay. Private relations, whether they are family, economic or political, will soon predominate over more or less rational rules that the Owner-State will try to impose.

Government owned companies and decentralized entities were decisive in the bankruptcy of the IVth. Republic, precisely because since they were part of a State in charge of distributing wealth, they were incapable of conceiving themselves as long term businesses. It is astonishing to replicate an economic model that failed precipitously in better institutional conditions and professional capabilities that this regime can possibly obtain. Given its peculiar political structure, Chavismo can only obtain professional capabilities to manage those companies at outrageous prices (whether it is the middle class which it hates or hates him, or from Cuba, if they have it and if the Government wants to continue making the State more foreign). And it can only respond to the income expectations of its social base with respect to the nationalized industries, destroying their business model and turning it into a source of benefit for the owners (and of taxes for the State) in sinkholes for the oil which is already wasted through the numerous internal and external channels, without leaving any capitalization for the country.

Once in while I read an article that I like a lot because it is clear and to the point and says a lot of what I am thinking of have thought, but synthesizes things in a very nice way. Such is the case of the following article by Raul Gonzalez Fabre published in SIC magazine (A Jesuit publication) recently, entitled “Venezuelan Style Socialism: Five little problems”. It is long, so that I will translate it in the same five parts or “problems” that the article focuses on: 1) Living off the income Socialism, 2) Nationalizing with a dysfunctional state, 3) Businesses without Businessmen, Markets without merchants, 4) The phantom of the New Man and 5) Government by witticism.

Lately, I have not been writing much for two reasons, I have had a terrible cold for over ten days that has taken a lot of energy out of me, but additionally, things like more mismanagement of the economy or the unity party only having one party seem to be almost irrelevant in the scheme of things. So, while I get my energy back, enjoy this lucid article:

Venezuelan Style Socialism: Five little problems by Raul Gonzalez Fabre

Hugo Chavez was reelected in December 2006 with more than 60% of the votes. During his campaign and afterwards, he assured us that voting for him was backing an XXIst. Century Socialism of unknown boundaries. At the same time, the nucleus of his campaign consisted in an expansion of public spending which gave way to a phenomenal populist piñata, with money and imports running with an abundance that made us remember the first period of his archrival Carlos Andres Perez.

First problem: Living off the income Socialism

There is however a problem: not even Commander Chavez can deceive himself with respect to the fact that receiving income form the state in exchange for votes, on the one hand and producing at the maximum of your own capacity without the spirit of profit for the benefit of the collective, on the other, are opposing movements of the human soul. If you recruit supporters and voters via the first procedure, it is going to be truly difficult to make them function under the second directive.

In fact, Adam Smith already noted the attitude of the indepently wealthy class, accustomed to receive without work or care, is contrary both to the entrepreneurial initiative based on your own interest of the capitalist class, as well as to the effort to survive and social ascent of salaried workers. Nobody will get involved with the complications and risks of investments, or in the sweat associated with productive employment, if you can solve your economic problem with income from the land, the State or whatever.

That is why Asdrubal Baptista (a local economist) has insisted that in the great economic project of the Venezuelan XXth. Century, consisting in using oil income to realize the first accumulation of a modern capitalist system was internally contradictory. He was absolutely right. Businessmen under the regime of oil income (protection, contracts, incentives, overpricing, preferential dollars, loans without return…) already have a profit made for them: They don’t need nor wish to leave to compete in uncertain markets with Colombians with knives between their teeth, or Chinese that work sixteen-hour days. The income that was going to feed our endogenous capitalism also froze it after the initial push. When the hour of truth came and income was seriously diminished, there was no competitive private sector, capable of going to open markets without the aid of the State in order to leverage their development.

Living off the income paralyzed capitalism, with which it shared the search for its own interest as the fundamental motivation. Now Venezuelan style socialism pretends to convert the beneficiary of the income that he cultivates with gifts, campaigns and missions, into a socialist capable not only of efficiently producing but do it following the interests of the community at least as much as his own interest. Where living off the income capitalism was impossible because it was internally contradictory, living off the income socialism will fail for even more reasons. There can no be socialism in Venezuela but another gargantuan distribution of wealth through a scheme that is even less productive and capable of creating economic modernity than that of living off the income capitalism.

So it turns out that Hillary and I do have one thing in common, she blasted Chavez out of the water today:

“If we said, ‘Turn off that light because we don’t want to send any
more money to Chavez in Venezuela,’ that would make a difference.”

“The former first lady assailed the Venezuelan president for fomenting “anti-Americanism across Latin America””

I guess they ran a poll on what issue would favor her, and Dear Hugo came out at the top. Bloggers must be getting the message out. (Thanks M.)

Now waiting for Obama to join the fray…I guess Hugo will not have it easy if the Democrats win either…

Being so Bolivarian, Hugo Chavez was truly irked (He has mentioned it three times in public already) by this banner hung around many places in Caracas by Ciudadania Activa with a quote from Simon Bolivar in reference to Chavez’ intention of changing the Constitution to allow his indefinite reelection:

“Nothing is more dangerous than to allow the same citizen to stay in power a long time. The people get used to obeying  him and he gets used to telling them what to do which originates tyranny and  usurpation”