The Devil's Excrement

(Este post en español aquí)

You have to give it to Chavismo, despite ten years of screwing up, they still talk like they just got to power and announce plan after plan that will make something better, but somehow it never seems like it does. Even with the oil windfall of the last few years, the Venezuelan economy has more distortions that it ever did in the past fifty years, there are few economic indicators that anyone can point out to even suggesting there has been an improvement and Venezuela’s industrial production is almost dysfunctional. But for Chavez and his Ministerial buddies, the beat goes on, let’s see what we can announce this week they seem to think, because nobody will remember it a year from now, we don’t have a Teflon President, we have a Teflon Government.

And they proceed to act accordingly, announcement after announcement, which attacks one problem without taking into consideration what or whther it causes an impact somewhere else. Take this picture as an example:

Chavez signs an agreement with Argentina to buy a billion dollars of Argentinean junk. You can imagine how Cristina is laughing all the way to the bank. Venezuela wants to buy anything that used to be imported from Colombia, so offer them trinkets from the list and at any price. Maybe even a relative of Cristina can make a buck or two in the process.

Because there is nothing worse in international trade to have not alternative, to say I buy from you because I like you, and I dislike the other guy or whatever. In the end it is going to cost me more if I have a single supplier or I urgently need to replace another source. Venezuelans will pay it with higher prices and inflation, as if we needed some more.

And then we have that economic genius Eduardo Saman, nobody knows what type of tree they found him under, but he dared to say today that it is cheaper to bring things from Argentina by ship than from Colombia by truck. Where do these guys invent such “Bosta de Toro”? Has Saman ever been to one of the ports here like La Guaira or Puerto Cabello?

Imagine the process in Colombia, you make enough widgets to fill a truck, load them on and then get the truck rolling. Six hours to the border, poor driver has to wait twelve hours for customs to let him through (some bribes along the way) and then you are almost home free, A couple of National Guard posts on the way and in eight more hours you may be at the Valencia plant ready to have the widgets distributed and sold.

Imagine now the same widgets made in Argentina. (The best widgets in the world!) First of all, salaries are higher there, but we will ignore it. Then let’s load the truck to take the widgets to the ship. Damn! There is no ship to Venezuela till Saturday. Driver waits two days, the union does not want to load the stuff on a weekedn, ship does not leave till Monday.

Ship stops on the way in Recife for a couple of days and finally gets to Puerto Cabello a week later. And the nightmare begins. The new Bolipuertos Cuba-Venezuela company has not hired back all the estivadores. The National Guardsman go on board, a few bribes and the stuff proceeds to the deposit where it gets checked again by the tax office and the National Guard. After having the truck on hold for two days at the port, finally the stuff gets loaded (at a cost). A few hours later, the truck, after a some two to three weeks from departure gets to the distribution center and we can sell the stuff. Cheaper? In your dreams, Saman! Too many unpredictable steps, too much time, too many times loading and unloading and Argentineans are not more competitive (or honest!) than Colombians. Particularly, because Colombians have picked their spots of where to compete and they know their business and have fewer unions to deal with.

But recall that this is a Government fighting daily with shortages from coffee to sanitary napkins to milk. So you are going from right in time inventory management to whenever it is possible and at a higher cost. Recipe for disaster, if you ask me.

But there is another angle that I have not heard Saman or his illussionary buddies mention: Over half the junk that come from Colombia, its produced by multinationals. Multinationals that left Venezuela over the last ten years, figuring out that it would be cheaper and easier to produce in Colombia and export to Venezuela than to invest in a very unfriendly environment, under regulations and price controls. You move to Colombia and if the Government regulates the price of an antibiotic, you simply don’t export it anymore. Nothing Chavez and his gnomes can do about that. And it began with pharmaceuticals, continued in paper products and ended up with toothpaste and cleaning products. And the point is that none of these companies are going to allow its Argentinean subsidiary or affiliate to ship a single item to Venezuela.

And the same goes for the infamous Argentinean cars that will be imported now. 10,000 of them Saman told us. Well, the worldwide car business works the same. A major corporation makes or gives out licenses to make cars somewhere else. But when you are allowed to make or sell Fiats in Zambia and Mozambique, you can only sell or make cars for Zambia and Mozanbique. Nothing can go to Kenya! As simple as that! So, bring a brand that does not exist in Venezuela, a sure guarantee for no spare parts and spotty service.

And today Saman had an brighter idea: No more imports of pharmaceuticals to promote local production! I guess except computer chips, it is hard to think of another area where you can decide that on day and not be faced with a nightmare two months from now than pharmaceuticals. An industry that has not invested in the last ten years, that has actually desinvested is not about to change their minds just because some ignorant Minister wants it. And taking over Pfizer’s plant will not allow you to produce Viagra next week! Because Silnedafil Citrate is not produced anywhere but at Pfizer’s main plant in Connecticut. And even some of the most “pedestrian” pharmaceuticals sold in Venezuela have components not made in Venezuela and if anything, Chavez and his Combo Bolivariano have promoted exactly the opposite for ten years and now they want to turn on a dime overnight! Sure!

And there was also Rafael Ramirez saying today that we don’t need Colombia’s natural gas either, because “we could easily switch”. Well, why didn’t we switch before you may wonder? Can we really switch Maracaibo’s natural gas supply that easily? Or find gas to inject into the Western wells to keep up production. Somehow it seems hard to believe.

But no tale from the imagination of the robolution would be complete without the participation of Chavez himself who said today that he was ready to remove the “disequilibriums’ and “distortions” created in the foreign currency markets during the last two years (The latter is in Bloomberg, but no link yet on the public system). Let’s see, over the last two years, Chavez has had three Ministers of Finance, Rodrigo Cabezas, President of PSUV in Zulia, Rafael Isea, currently Governor of Aragua and for the last 14 months…drum roll…Ali Rodriguez, who happens to be the current Minister of Finance.

Thus, the distortions and disequilibria were created by the same geniuses that continue to run the country and the economy. But Chavez makes it sound like this was done by the oligarchs of the IVth. Republic, his enemies, rather than the ignorant fellows that he handpicked to create the distortions and disequilibria. But somehow, because Chavez met with them (at last!) some night up to the wee hours of the night, things will turn out to be different this time around.

Because Chavez refuses to remove the biggest distortion, that of the overvalued “official” currency which has half the country looking to arbitrage the Government every single day, whether by buying bonds at a special cheap rate to the rich, or get cars at subsidized prices or everyone’s dream, import any widget, whether from Argentina or Colombia at Bs. 2.15 and sell it as if you had bought them at Bs. 7 per US$.

But come announcement time, we are likely to hear the same old and tried formulas of intervening the swap market, maybe a second swap rate (double arbitrage!) and nothing more. So that, we can spend another 10-15 billion dollars experimenting with Chavez’ or Merentes’ theories and hopefully, just hopefully, oil prices will bounce back in time. And if they don’t, Chavez will announce a year from now, that he is ready to stop the speculation with the Bs. 15 per $ swap rate and he had to import coffee in order to be able to stay awake and hear the proposals from his economic Cabinet which by then will be presided by Jesse Chacon  and the current Minister of Culture, or something like that.

But the true distortion, is that the money supply (M2) in Venezuela is nearing US$ 100 billion at the official rate and international reserves stand at US$ 30 billion. This gives you an “implicit” exchange rate of 3.33  (M2/reserves)times the official exchange rate or Bs. 7.15 per US$, not too far where the “distorted” swap exchange rate currently is. Thus, spending resources in fighting what does not exist, in the best Sancho Panza style, will not help Chavez and his Teflon Government at all and will in the end create bigger and deeper distortions, until it all unravels.

And even then, it will never be “their” fault.

They will have a new plan to fight their newly created distortions. All said with a straight face.

This entry was posted on August 11, 2009 at 9:53 pm and is filed under Venezuela.