Archive for January 8th, 2011

Dumb economic subsidies and arbitrages in Venezuela

January 8, 2011

(I am going to unify them)

Economic theory always talks about the efficient allocation of scarce resources, the acceptance that Governments have to optimize wealth, distribute it as uniformly as possible in order to maximize the well being and happiness of citizens. Clearly, none of Chavez’ “economic” advisers either understands this, nor has explained it to Hugo. The revolution continues to run on a path of destruction, where the State believes that it can do it all, in the process, it is destroying value, reducing those same resources that are scarce and simply trying to redistribute them around. In the end, if your could distribute it all evenly, Venezuela would turn out to be a Nation of poor people. Yes, the extremes have to be eliminated, but the way about doing it have all been wrong in the last twelve years.The subsidies and distortions in the end turn out to be more costly than actually reaches the poor. In fact, the money that it costs to sustain the gasoline subsidy alone could be used to give half the Venezuelan population over the “average” of the GDP/Capita of the country. Not that I am arguing that should be done.

But Chavez’ Government could care less about optimizing or improving resources. When a cement plant is nationalized just to be able to say that the Government owns it, the price of the plant, say US$ 1 billion is spent on buying an existing plant with x jobs, rather than creating a new plant that generates jobs. Even worse, the plant is run more inefficiently, there is less economic value and we are all poorer.

But there are worse subsidies and distortions than the dumb nationalizations. Minister of Planning and Finance Giordani has actually been arguing in the last few days that people were taking advantage of the dual exchange rate of Bs. 2.6 and Bs. 4.3 to the dollar offered by the Givernment.


It took him seven years to learn that?

I could have told him that would happen on day one. It is the story of dual exchange rates in the world and Venezuela.

But what really gets to me is that Giordani  has suggested that even Government imports were being sold as if they were purchased at the higher rate of Bs. 4.3 per US$. So, someone within the Government was making a lot of money out of that arbitrage, because someone had to pocket that difference. The worst part is, nobody is being accused, charged or being fingered. But n the end the truly, really worst part is that those that implemented these idiotic, corrupt, distorted and dumb system, are still running the show.

There is simply no accountability.

And there were many other arbitrages that were absurd and they still exist. It had become fashionable for middle and upper middle class people to send their kids to study abroad. They were given a basic stipend and tuition at Bs. 2.6 per US$ to go study abroad. Hey, with the parallel rate at three times that, how could you go wrong? I am not against education, but I would prefer a program to give scholarships to the best and the brightest at Bs. 0 to go abroad that to fund the well to do at Bs. 2.6.Because most of them could afford it anyway.

And why should I be able to buy US$ 400 of Internet goods at Bs. 4.3 per US$? I was planning to forego the pain of submitting the forms this year to get that amount, but the Government changed policy and I got an email two days ago telling me I had to do nothing, that my card was renewed automatically and I could go ahead and spent my money. This makes no sense at Bs. 4.3, its absurd, its unfair to the poor.

It is the furthest thing from optimizing the allocation of scarce resources. It is the opposite, it is giving money to the rich to buy widgets and gadgets from Amazon, even if they don’t accept my Venezuelan credit card for kindle books.

And I don’t even ask for the travel money, or my US$ 5,000 a year from SITME at US$ 5.3, something some people spend all the time planning and preparing for.

But these things are likely to be tiny in the scale of food imports from the Government and the private sector. Who knows what is authorized at Bs. 2.6, now Bs. 4.3. For that matter who knows what is being imported at Bs. 4.3 and sold at an equivalent exchange rate of Bs. 10 per US$.

But Giordani hails his own decisions, refuses to recognize he imposed this crazy and goofy system and in fact, he is continuing it. At Bs. 4.3 per US$ you still get a subsidy for your kid to study abroad, for your Internet dollars, for food purchased at Bs. 4.3 and sold as if it was purchased at Bs. x higher and likely for breast prosthesis used to enhance the attractiveness of Venezuelan upper and middle class women.

Giordani must be proud of that.