The Devil's Excrement

When I began this blog, my intention was to talk about the strange economic
system our country has. From subsidized gasoline prices to a belief in
“naive experimental economics” Venezuela is truly a laboratory for
silly economic experiments. Most people sometimes think that economics is a
straightforward science. Nothing further from the truth. There are so many
economic puzzles and paradoxes that whole books are devoted to their study such
as this
one by Krugman or a very recent book called
Freakonomics that looks at everyday economic issues that have no simple
answers. In fact, that is what economists do and spend their life studying.
That is why there are Economic Departments at Universities, attempting to
understand economic behavior.

All of this comes to mind, because in the last week or two I have had many
discussions with friends and colleagues who intuitively support the increased
taxes to the oil projects by the Chavez Government. Mind you, all of them are
anti-Chávez but somehow get a special sort of pleasure in thinking that Venezuela will
get more funds from these companies. The initial reactions are things like:
“:Oil prices are so high that they are making a bundle” or ”
They are selling our oil, why shouldn’t we make more money” or “None
of them are going to leave look at all of the investments they have made”

The problem is that it is very easy to think that way at a time of high oil
prices, but what if they fall? I still remember the nervousness when the oil
opening was done of not knowing whether there would or not be interest in
paying for the rights to exploit these fields. Afterwards it was a huge success,
Venezuela
collected over US$ 2 billion at these auctions. But let us also recall that some
of the fields failed to even generate a single bid. I am sure today they would command
a premium.

One should not forget that these fields are the “marginal” fields,
that is, old fields whose production is marginal and not interesting enough for
PDVSA to invest in at the time, there were other priorities. Thus, those that
bid and won those fields took a risk, a calculated risk that has worked out
quite well due to the high oil prices of today.

But by increasing the tax rate from 32.5% to 50%, the Government is introducing
a number of variables into the system which are in dissonance with the rest of
the world. First of all, the decision was taken unilaterally. Second, the
increase in taxes places some fields into the really marginal area as evidence
by the fact that Japanese company Teikoku has stated that it will not make
money with such high income taxes. 50% is comparable to some countries, but
those that charge that much have low royalties. Venezuela wants to charge a high
income tax rate and royalties of at least 16.5% and typically higher. Venezuela does
not live on a vacuum. Yes, these companies are basically printing money today,
but what if prices drop? What if in the future Venezuela wants to attract new
capital? Will it be competitive?

The same is true of the heavy oil projects ion which PDVSA is a partner. These
projects were conceived with a royalty of 1% to be increased to 16.5% the day
the revenues exceeded the original investment in the projects. Why was this
done? Very simply because the other country in the world that has large heavy
crude reserves, Canada, charges 1% up to the same point. Last fall, the
Venezuelan Government increased it unilaterally to 16.5% before those benchmarks
were reached.

The problem is that Venezuela
would need dozens of these projects to grow. Venezuela needs to grow. It will be
hard now to attract new investments, but imagine if oil prices drop. Who will
come? How will Venezuela
grow under unfavorable conditions compared to other countries?

Most of
those I have argued with are educated and anti-Chavez, after a lengthy
discussion they sort of begin to see the point, but I am not sure they are
convinced. They support the new taxes because intuition tells them it is good
to tax those that are making money. But somehow, they want to tax the golden
goose for Venezuela
that the oil investments represent, rather than taxing others, like banks, that
do live in a vacuum, make a mint and pay little taxes, under the protectionist
eyes of the Government. If we kill the golden goose, what chance will we have
of getting the population out of poverty?

I have
always wondered why Latin American Governments, including ours, always talk
about neoliberals policies that have hurt our countries, when the reality is
that what they call neoliberal is nothing more than a few attempts to improve
economic conditions via macroeconomic adjustments without really getting down
to changing the way these countries really work. But I have always wondered why
most of these Government officials simply ignore Chile, probably the most successful
country economically in the last decade.

I was
reminded of all this by Gerver Torres’
article in Sunday’s El Universal about that country. While the point of his
article was to ask if that was a socialist country, I would like to summarize
its highlights in terms of economic and social achievements.

To begin
with, Chile
has the lowest poverty levels of the region at 20%. Yes, still too high, but
the lowest in the region. Unemployment is 9% and salaries have increased in
real terms by 50% since 1990. Contrasts that with Venezuela’s numbers under Chavez
alone, poverty has increased and salaries have been reduced in real terms.

Chile has on of the highest investment rates
in the region at 23% of GDP and is the one that attracts the highest investment
per capita in the whole region.

Inflation,
that perverse tax on the poor in most of the region including Venezuela, is only 2.2% in Chile. Interest
rates are clearly low, helping the economy grow and the people imprve their
standard of living.

Chile also
has a very good social security system, which not only provides pensions for
its inhabitants, but provides a lot of the funds needed for investment in that
country, without the need for the Government to borrow internationally.

In terms
of economic freedom Chile
occupies today the 11^th. position in the world. This for a country
that had horrible numbers only thirty years ago.

What is
hard to understand is why, with an example like that, our Governments look for
failed policies and ideologies that have repeatedly been tried without any
cases of success anywhere in the world.

Meanwhile,
Chile
simply chugs along, becoming more like a developed country under the
indifferent eyes of the Government and Government officials in the region. Why?

–While the Venezuelan Government continues to say that
CITGO’s refineries in the US
are losing money, Valero Energy will become the largest US
refiner in the US
with
its purchase for US$ 6.9 billion of refiner Premcor., whose stock has
doubled in the last year. According to analysts these transactions are talking
place because refiners are “swimming in cash”. Meanwhile, the Venezuelan
Government dismisses this
report,
in which a former executive says he resigned because it was hard to
“keep track of the company’s cash flow”. Maybe its hard to swim in cash
and keep track of it at the same time.  And in another article, it
is shown how Chavez
has named his cronies to work at CITGO and they have no experience or even a clue
about the business. The problem is that rather than swimming in cash, CITGO appears
to be badly mismanaged at a time that it should be making huge profits. If oil
prices should drop, imagine what would happen! I wonder if this is why they call it “La Revolucion Bonita”. Or is
it because the children of revolutionary oil executives drive $200,000 cars?

–Japanese oil company Teikoku, said that the increase
in taxes for the marginal oil field projects would make it impossible to make a
profit from the fields it runs. The company said it would need to receive incentives
from the Venezuelan Government in order to continue the projects.

–On Chavez’s Sunday’s program Alo President, Chavez
said that among the evidence that the US
is planning an invasion of Venezuela
was the fact that a US
woman was caught photographing a military installation. Chavez also said that “several
other Americans” were caught taking pictures of oil installations. The US
Ambassador in Venezuela
said that to their knowledge no American woman has been detained in Venezuela
in recent months. He did say that a US
woman enlisted in the military lost her purse in Maracay,
where there are military installations. Her purse had a disposable camera. I
guess the invasion will be low tech.

I guess the dislike for the man extends well beyond the Venezuelan borders

Kudos to Alek Boyd of proveo and vcrisis for his interview with Roberto Giusti in today’s El Universal.
The main topic of the interview is the pecadillos of Eva Golinger, but
the real importance is how the volunteer work of a few bloggers has
managed to transcend the blogs as described by Daniel. Good job Alek!

I left science 14 years ago (Yes, three Governments ago!) because I did
not think the path that the Venezuelan Government was pushing science into made
much sense or had much future for me or for Venezuela. Things have gotten worse, much worse, as
this article by Jaime Requena, infamous for his Requena Files on the
left, tells us in this very good (and sad!) article, which appeared in
El Nacional yesterday.

Privileges
and auctoritas at IBIC by Jaime Requena

A
few days
ago in a newspaper interview, the Vice-Minister of Planning and
Development of
the Ministry of Science, architect Luis Marcano, delineated the public
policies
that will serve as reference for the scientific research and technology
projects that will be carried out in the country, specially at IVIC.
According
to his evaluation, that institution does not fulfill a social function,
thus, one has the intuition, it must be reformed. Of special concern
for the high official are the
alarming “privileges” that the researches enjoy, which, one as the
intuition, must be
eliminated. Without any details, the Vice Minister turned into a state
of
suspicion not only what many have demonstrated are important and
significant
contributions to knowledge, but also to the way and manner in which
that
knowledge is generated; what sociologists call the ethos of IVIC.

If the
ministerial admonition implies promoting the hiring of new talent and stopping
the loss of brains ; providing labs with equipment and consumption goods;
renovating the wounded and incomplete library; updating salaries at levels of misery; or
establishing a plan for the acquisition of essential goods, like vehicles or
housing using very soft loans like those the Banco Industrial gives the
military, then we welcome the pruning and let’s devote ourselves to rewrite the
Dictionary of the Royal Spanish Academy (DRAE); to endure deficiencies would come to be a synonym to enjoying prerogatives.

However,
if the admonition is directed at eliminating the fundamental characteristics of
the social contract of IVIC, which has been the search, without obstacles nor limitations,
of new knowledge that defy imagination; the free play of ideas without
discrimination for reasons of sex, age, convictions or social origin; or the
evaluation of personnel by his academic peers and on the basis of quantifiable
merits, strictly professional and intellectual, then let’s continue rewriting
the DRAE, because ethical values would be the same as privileges. We should also
then be prepared to write the obituary for science in Venezuela.

To
straighten out battered IVIC one would require a diagnosis, a plan and
leadership. The diagnose was already made through the dogmatic statements. As for
the plan of reorganization, it must be clandestine since nothing has been made
public, while the auctoritas of the
institutional leadership are open to question. Indeed, besides the legitimacy
of the Director who occupies the position-he was overwhelmingly rejected by his
colleagues during the consultation for his nomination-it is fitting to question
if he, together with his Sub Director, would be disposed to show the way to
the subordinates and immolate fertile scientific careers developed at the
institution during the last forty years.

As the
authorities of IVIC, they would be in charge of ordering the scientific
personnel under their charge, so that they stop researching on what they have
been doing and begin working on subjects chosen by the politburo, to provide
technical support to initiatives which are the object of presidential whim.
They would have to leave aside their studies about the quantum deformation of
Hamiltonian systems (sic) or the molecular structure of the head of the myosin
of the muscles of the tarantula (sic) to devote themselves to explore, elbow to
elbow with their subordinates how to prepare telita cheese for export,
primordial requirement of the Mama Carabobo Mision, the reevaluation of babandi, of
immediate necessity for the dysfunctional beneficiaries of the mission chief
General Cipriano Castro or fantasize about the new applications for malojillo
poultice, advanced party for the magic recipe book of the babalaos
(Santeria priests) of the Mision Orisha (a
faith).

Even if
the silence of the authorities of the institute about the lucubrations and
opinions of the Vice Minister indicate conformity, to set about the process of
transformation will provide them with the opportunity of showing their
commitment, giving an inescapable example. Regrettably, I fear very much that
so much party discipline and professional largesse, that could even reach
almost quasi heroic levels, will not carry to a happy ending the conversion of
what used to be the best research center south of the Rio Grande, into the
revolutionary Instituto Bolivariano de Investigaciones Cientificas.
I don’t see a future to explore the course of a science like the one the
Vice-Minister encourages: pseudo, given that it is new, parochial, because it
is endogenous, and populist, instead of social.

Apologists
for the nature of the Chavez revolution should carefully read this link
and the three accompanying ones, where Marxist activities and proselytizing are
described in detail and in plain language. In the first link Chavez’s brother
and intellectual alter ego, his brother Adan, declares himself a Marxist and
calling to reclaim Marxism in the revolution in the same way they have
reclaimed the ideas of others (Did not know Zamora had any ideas!). He also
describes his brother’s recent intellectual “evolution”. Combine that with Chavez’
militarism and you get a clear picture of what type of ideological potpourri these
guys have, which bodes badly for Venezuela. At least Adan does not
go as far as his brother in calling the family poor. He is asked if he came
from a humble background, which he answers affirmatively and then proceeds to say
how his parents are both retired schoolteachers from Barinas. Two
schoolteachers salaries in Barinas in the 70’s placed the Chavez family
squarely in the middle class of Venezuelans and not the “poor” that
Chavez always claims.

The interview
also reveals how Chavez has always lied about why he joined the military. One
of those explanations (there are a few different ones) has always been that since he came from a poor family, he
could not attend the university. But his eldest brother Adan did! I guess he
came from the poor side of the brothers.

The other
three links show how Venezuela
has become a hotbed for the spread of the type of Marxist ideas that have
proven to fail everywhere. I particularly found the existence of a talk about “Workers’
control, Venepal shows the way” to be short of hilarious. The company is being
subsidized by the Government. It is already in trouble. What a farce! An what a tragedy for Venezuela!

I don’t know why I had missed this item, but Venezuela on Sunday announced
that it was increasing the income tax rate on all operating oil
projects from a 34% to a 50% rate effective when all companies are
notified. The increase will apply only to operating projects and not to
joint ventures such as Cerro Negro, Petrozuata, Sincor and Hamaca.

This will, of course, increase income for the country. It does create
two problems which in the end affect the credibility and attractiveness
of the country: First of all, all of these projects were planned when
the tax rate was 34%, which was ratified three years ago when the new
Hydracarbons Bill was approved with the majority of this Government.
Most of these are marginal fields which are very old and yes, they make
money today at high prices, but what if they do go down. The second
problem is that it is a very high rate. This is the income tax on the
earnings fo the companies, on top of the royalties. This implies that
there will be reduced inetrest in other such agreements and these
projects may not get loans form their home companies if they were
needed when prices go down if the rate of return is not adequate.

I have been holding off on commenting on the internal
elections of Chavez’ MVR party, after all, holding elections of his party is
more democratic than anything the opposition has done in the last few months
for its supporters. And if truly democratic and fair, one has to praise Chavez
and his MVR because if there is something this country needs is a huge dose of
democracy, no matter where it comes from.

Having said that, the process has not been as free or
as democratic as desired. Other parties
in Chavez’ coalition like PPT and Podemos were only allowed to field candidates
according to a predetermined quota. Who decided on the quota? MVR authorities,
of course. This, of course, is a distortion of the process as it does not give
individuals the right to field their candidacies. We could call it manipulated democracy.

Similar complaints have been raised in many parts of
the country. Basically, MVR authorities closely controlled who could run, in
some sense limiting the extent of the democratic process. But, once again,
people did vote and participated in electing some of the candidates which is definitely
a step forward in this beleaguered country.

But the ugly face of the process did flare up yesterday,
when the celebration of the anniversary of the country’s independence, which
was organized, led and composed of Chavistas, was interrupted
by a violent protest by other Chavistas. Their basic complaint was that only
those chosen by the Mayor of the Libertador District himself, Freddy Bernal,
were allowed to be candidates in the process.

The speaker at the ceremony was none other than “mystic”
General Baduell, which meant that Caracas’
Bolivar square was full of National Guards. Despite this, the protest got to be
so strong that the General had to actually cut short his speech.

But the most surprising aspect was that the same Government
that has been so critical of the manipulation of information by the private TV
channels, the same person, now Minister of Information, who resigned from a
private TV channel in April 2002 in protest for the blackout of Chavista
protest by that channel, chose to simply hide what was happening. The ceremony was
actually being transmitted live by the official TV channel. But if you watched
it, you could not tell anything anomalous was taking place. No images of the protests
were shown, the microphones were carefully manipulated so that the sounds of
the protests could not be heard, and most images became simply close-ups of the
speakers, so that the surroundings could not be seen. Only if you watched
carefully did you notice that Baduell cut short his speech, which was confirmed
today by the press.

The explanation by Minister of Information Izarra was
typical of this carefully manipulated democracy. Said Izarra: “This was not a
news program, …we were transmitting an official act. It is the policy of the
Ministry, it was the instruction given”. Yes Andres, you can justify anything,
when you are the one guilty of manipulation. Excuses are the easiest thing to
come up with.

Thus, even the attempts to make this country look more
democratic by one hand of Chavismo appear to be quickly destroyed by the other
hand. The truth is, the protests are not covered by any of the “official” sources
today either. But we are sure Minister Izarra certainly has an explanation for
how this “news” sources were not covering the “news” yesterday either. Could it
be that the Minister instructed them not cover it? Or did the Minister have other reasons for this additional manipulation?

This is a
somewhat long article in today’s El Nacional (page A-9), since it is quite
interesting and goes right to the spirit and origin of the title of this blog
and most people don’t have access to El Nacional, I thought it was worth translating.

A true enemy by Ibsen Martinez (My subtitle: The Devil’s Excrement revisited)

What the hell
does oil have that it poisons? This is the question that many Venezuelans,
Indonesians, Nigerians Algerians, Mexicans and Iranians born in the XXth. century
have asked themselves at some point, without finding an answer.

“No, don’t
devote yourself to study OPEC” said Juan Pablo Perez Alfonzo (The Venezuelan
lawyer considered to be the “father” of the cartel of producers), to the US researcher that interviewed him one
day in the seventies. “Opec is a boring matter-he added- You should study
preferably what oil does to Venezuela; what it is doing with all of us”

The fierce
paradox of the petrostate-archetypical of the rich country, according to modern
imagination-lies in its inability to deal with the turbulences that windfalls
bring win time, and in their propensity to flog its citizens with all sorts of
misfortunes. The most painful and ironic of all of them being extreme poverty.

Judging
from the fruits of her labor, Terry Lynn Karl, fruitfully followed the advice
by the father of OPEC. In 1997, the University of California at Berkeley published her book “The paradox of plenty: Oil booms
and petro-states”. (Not available yet in Spanish). This book can be
read as a physiology of the petroleum state, understanding the latter, as a
very special case of the mining states.

In a little
cited chapter of The Wealth of Nations,
Adam Smith called attention for the first time, about the specific differences that
make mineral wealth a class of wealth in itself. What Karl has found,
throughout research carried out over a decade shows additionally, how
petro-states not only do not share the characteristics of mining states, nor
those of manufacturing or agricultural countries of the industrial or developed
world, whose products are not limited, nor are as “intensive” in capital, nor
are so dominated by external variables, as is the case with oil.

Petrostates
erected themselves, obviously, over what was there before the oil industry
appeared in those nations. In the majority of cases, the oil industry
encountered the same thing that, around 1911, was found in Venezuela, a legacy of institutional weakness
and of extreme administrative laxity. It can be said, that at the beginning of
the XXth. Century, after almost a century of cruel internal wars, when the
first advanced parties of oil exploration arrived in our country, the modern
Venezuelan state had not begun to take shape. The oil industry gave it, in
great measure, its definite shape, whether good or bad.

The way in
which the states “earns its living-Karl tells us-is decisive in its patterns of
industrialization”. But, it almost never fails, that the way in which the state
collects its resources, creates incentives as well. Sometimes these can be unimaginable,
as they impose preferences on the Governments when it comes time to
“redistribute”. And with them, perverse restrictions are created to the
available policies to fight poverty, for example, or insure education and free
health care for the population.

In the case
of petrostates, everything that would be bad on its own, gets worse because the
way in which they “earn their living” is exposed, on top of that, to a
circumstance inherent to the nature of the oil business itself: the cycles, the
alternation of booms and the dry spells.

Since 1922,
Venezuela has gone through various booms. Prof. Karl analyzes
the two most recent ones, that of 1973, that followed the oil embargo decreed
by OPEC (?) and the one that followed in 1983. Today, many Venezuelans accept
that it was corruption, rampant in those years of the “Saudi Venezuela”, which was
the overwhelming cause for Hugo Chavez’ ascent to power.

Karl
focused her analysis on the performance of Venezuela during the booms of 1973 and of
1983, to compare it with the other oil exporting countries subject to the same
pressures and temperatures that a boom in the price of oil can introduce in the
economic system of a petrostate.

Some of the
petrosates considered by Karl are members of OPEC, most of which arose from the
decolonization process that followed World War II, such as Indonesia, Nigeria or Algeria. Others are Hispano-American, born
at the beginning of the XIXth. century like Ecuador. Karl considers also the performance
of a non Arab Islamic nation, as is the case of Iran. The result? Different countries,
different social and economic structures, different cultures and the same ills.
And the same inept answers with equally paradoxical effects of indebtness and
growing poverty.

Karl
discerns two “conducts” that petrostates follow in periods of windfall. One
pertains to the jurisdiction and authority of a petrostate, that all petrostates
that go thorugh a boom tend to expand their jurisdiction, to find new areas of
“competence” where they exert their action in deficient fashion. Or where they
refuse to move aside, as long as they can neutralize economic agents.

Their
rulers fall with frequency in a manic phase and come ask their citizens to give
them special powers to allow them to surround the historical inefficiencies of
the petrostate, in order to better confront the happy contingency of a boom.
Thanks to the windfall, we can now do everything; as a consequence, everything
must be done. Thus, there appears, without order or coordination, new competences,
new jurisdictions, new agencies.

Inside
those petrostates, those competences, jurisdictions and agencies fight bloody
battles for the control of the huge resources, battles which weaken even more
the institutional fabric and favor the concentration of powers, the legal
vacuum and last, but not least, corruption.

The announcement
of the reactivation of the economy by President Chavez immediately after his
victory in the recall referendum last August 15^th, contemplated the
creation of a new state airline, and of various new ministries in charge of “social
programs”, one of which changed names and Minister in less than 48 hours. Car
sales have grown in surprising fashion, so have the sale of private airplanes
and the real state registry contains transactions for amounts unheard of in quite
a long time.

As to
poverty, between 2000 and 2003, without strident populism, nor a belligerent nationalism,
Chile reduced poverty in 1.8% to reach 18.8% (since 1990 it has gone down 50%),
while Venezuela is the country in Latin America where poverty is growing the
fastest and according to the Catholic University Andres Bello, there are today
two million more people in poverty than when Chavez was elected President. In Venezuela, social policies limit themselves
to spending money with a clientist propagandistic criteria and huge
assistential inefficiency. All of this at the same time that PDVSA, the country’s
state company announced revenues of US$ 30 billion in 2004 alone.

Many
foresee in the current increase of conspicuous consumption in Venezuela, the birth of a new caste of millionaire
contractors associated with public expenditure and reminiscent of the Saudi Venezuela
that followed the boom in prices in 1973. Is the so called “bolibourgeois”. The
“diplomacy of crude” inaugurated by Venezuela in the English speaking Caribbean region during the times of all-powerful
Carlos Andres Perez is experiencing a resurgence. Lately, the demential
largesse of the Venezuelan Government is directed towards the Southern Cone and
it has taken it to buy Argentinean debt or finance a sub regional TV channel.

The other
conduct that a petrostate undergoing an oil boom displays, is to appeal to
international credit to avoid the conflicts that collecting taxes at a time of
a windfall entails. These bond issues of the country are backed by oil revenues
and are justified as operation with little risk “because we have oil for quite
a while”. It happened in Venezuela in past booms and is happening again.

The book by
Prof. Karl ends with a comparative study between the performance of those countries
mentioned and that of a relatively poor European country, but one which is
institutionally mature, and that has been able to confront the discovery of a
sudden oil richness, without being catastrophically affected by it, like we Indonesians,
Nigerians, Algerians and Venezuelans have: Norway.

The above
seems relevant when one thinks that despite the political cataclysm that
overcame Venezuela in 1998, and despite the official rhetoric,
the populist petrostate, monstrously inept and monstrously corrupt that Chávez fought
only to inherit it, is still alive.

The
Venezuelan petrostate, unscathed in the middle of the boom we are undergoing –
the most sustained one of the last fifty years- with its sequel of wastefulness,
of subsidized ineptitude and of corruption is, perhaps more than yanqui imperialism,
the true threat and the true enemy of the Bolivarian “revolution”.