Sunday, December 16, 2007

The flabby revolution 

Five years ago Venezuela was in a very bad depression on the Chavez government was fighting for its life. A reactionary and undemocratic opposition had shut down the oil industry and pretty much all other parts of the economy under their control in an effort to bludgeon Chavez's supporters into submission and force the government to resign.

The state oil company, PDVSA, alone lost $14 billion in lost sales and damaged facilities. The economy as a whole was thrown into a full blown depression with the economy contracting a staggering 17%, unemployment shooting to over 20%, foreign reserves dropping sharply, and inflation spiking.

Fortunately for Venezuela's democracy the government held on, oil production was re-started, and the economy began to grow again. In order to get the economy growing after being in such a severe depression the government was forced to take a number of emergency measures. Companies were prohibited from laying off workers, some prices were frozen, and exchange controls were implemented.

Five years on, with a booming economy, many of these "emergency" measures are still in place. The one that arguably has the biggest impact is the exchange control.

The way that the exchange control works is that Venezuelans who want dollars have to go through a government office, CADIVI, which is in charge of all foreign exchange. CADIVI then determines who gets how many dollars.

There is also a "black market" for dollars. However, the vast majority of people get their dollars through CADIVI, and not just because it is the law. The main reason people use CADIVI is they get an extremely favorable exchange rate. The reason is that the exchange rate has been frozen at 2,150 bolivares to a dollar for several years now even as inflation has been between 15% and 20% the past few years and most Venezuelan's have gotten very large salary increases. That is, dollars are very cheap for those who get them from CADIVI.

I thought it would be interesting to see how the precious dollars that the Venezuelan government has are being given out through CADIVI during 2007. This is easy to do as they publish a table on their web-site detailing how they have distributed them:

This chart has four columns: how many people have solicited CADIVI dollars, how much CADIVI allocated to them, how many then went to the Central Bank to get their money, and how much they were given by the Central Bank. The reason for this is that CADIVI just approves people's requests, it doesn't actually have money to give out, the Central Bank does that. But you will note that the Central Bank pays out just about everything approved through CADIVI so we will only look at the amount paid by the Central Bank which is listed in the final column in millions of dollars.

The very first row shows how much was paid out to importers for imports - that is $19.5 billion dollars. This amount is actually broken down by category of imports on another page found here. Taking a quick look there one can see all the billions of dollars spent on such things as importing passenger cars. But that is not what I want to focus on right now as we will find plenty of waste just in this table.

I have circled three amounts which are indicative of huge amounts of waste by the Chavez government.

The first is circled in red is "Remesas a familiares" and totaled $579 million this year. "Remesas a familiares" is just people sending money to relatives oversees. You might be familiar with this concept as millions of Latin American immigrants in the United States send money back to their families in their home countries. The Venezuelan situation is similar, only in reverse. The thing is that Venezuela is apparently so rich that more than half a billion of heavily subsidized dollars can be given to people to send to relatives abroad.

Lets think about this for a second. First, it is clear this is wealthy Venezuelans doing this. Poor Venezuelans seldom have relatives who have been able to travel abroad and even if they do they sure as heck aren't SENDING THEM MONEY. More likely this is rich people in eastern Caracas who have kids hanging out writing blogs in Europe and want to send them money so they can blog all day instead of having to work. And for some reason that only it can know the Venezuelan government subsidizes this drain of money out of Venezuela by giving these people dollars on very favorable terms.

This isn't revolutionary - this is insane.

The next row, which I have circled in blue, is for expenditures on credit cards. Note these aren't credit card expenditures in Venezuela as those would be in bolivares and not go through CADIVI at all. Rather these are credit card expenditures made abroad - either ordering something from Amazon.com or LL Bean in the U.S. or traveling to places like the U.S. and using your credit card there. And of course, if you are Venezuelan lucky enough to be able to travel abroad you WANT to use your credit card and get your money changed at the official - and very favorable - exchange rate.

And obviously a lot of them do just that - credit card expenditures in dollars total a staggering $4.3 billion so far this year!!!

Again, lets think about who this $4.3 billion in very cheap dollars is being given to. People in social classes D and E, which are Chavez's base and make up the large majority of Venezuela's population, almost never have credit cards. And they certainly don't order items from outside the country or take trips abroad where they would be spending in dollars.

Nope, these $4.3 billion dollars are being pissed away subsidizing the spending of wealthy Venezuelan's on their trips to Miami, Milan and New York.

This too isn't revolutionary - this is an insane waste of money.

Moving down to the item circled in green we see that this isn't even the full extent of the government subsidizing people traveling abroad! They handed out another $186 million in cold hard cash to people getting on airplanes to jet out of the country. And again at very favorable rates.

So right here we have well over $5 billion dollars just being wasted on giving travel and shopping subsidies to wealthy Venezuelans. And this isn't even everything on that table that is likely a wasteful subsidy of the already wealthy:

$165 million dollars were given to students abroad this year. How many people from Catia or Petare travel abroad for their education?

$530 million dollars were given to airlines. It isn't clear to me exactly what this is for - maybe they are giving out dollars to people for them to buy their tickets in dollars? In any event this is another drain of (heavily subsidized) money that goes to the maybe top 10% of Venezuelan society which can actually fly in on airplanes.

$3.2 billion was given away for "foreign investment". Now remember, this isn't money coming from outside the country and being invested in Venezuela - those people would be selling dollars rather than buying them. This is people who have money in Venezuela and taking it OUT of the country to invest elsewhere. And again, the Venezuelan government is subsidizing this by giving them the highly preferential rate of $1 dollar for every 2,150 bolivares.

$1.3 billion was given out to pay private debt overseas. This is most likely a huge racket for some wealthy Venezuelans. Think about it, if you take out a million dollar loan in New York you take the money and invest it or do whatever you want with it. "Yes, but you have to pay it back" - you say. Sure, you do. BUT, and this is a huge but, every year dollars are getting cheaper and cheaper for you as you earn a lot more bolivares but dollars still stay at 2,150 to one. So that $1 million loan gets much cheaper to pay back each year. (BTW, it should be noted this could be corruption on the part of government officials or those close to the government - the reason is that for this to really work you have to be very confident that the bolivar won't be devalued over the term of your loan and so it is those with inside information who would most likely engage in this).

So on top of the over $5 billion we saw wasted just on the first few subsidies of the rich we see there are billions more potentially being wasted subsidizing the Venezuelan elite. And again, this doesn't even count the consumption binge being fueled by cheap imports in Venezuela - that is in the $19 billion in money given for imports that I am not analyzing here.

Why is this insanity allowed to occur? Why is the Venezuelan government allowing so many billions of dollars to be given out subsidizing the middle and upper classes? That is a very good question.

It needs to be kept in mind the Venezuelan government does NOT have to do this. It could stop giving out money for those purposes at all just by telling CADIVI to stop approving dollars for those uses. Or it could devalue the bolivar making dollars more expensive and at least make it that the government isn't subsidizing these items to such an extent. Or if it doesn't want to do that (because it doesn't want to make things like imported food that lower income Venezuelans consume more expensive) it could have different exchange rates for different items - dollars to import food can be bought at 2,150 bolivares per dollar but dollars for travel abroad or for credit cards are 3,000 per dollar.

The Venezuelan government is in a very strong position with respect to this - it has a virtual monopoly on dollars coming into the country. Almost all dollars come via oil sales, all controlled by the government, or by aluminum exports, again controlled by the government. The Venezuelan government is therefore in the drivers seat and can determine how this money is used - is it used for social programs and to import capital items to help build up industry or is it used to fuel an upper class spending binge. So far it seems that it is content to spend a lot of money subsidizing the upper class spending binge.

The question is - why would a "revolutionary" government do that? How does giving so much money to the rich facilitate the creation of "socialism". And why isn't the government putting this money to better use?

Enquiring minds, particularly those sympathetic to the stated aims of this government and who want to see it succeed, want to know.


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