Oil Wars

Back in the days when I actually believed Chavez when he talked about new projects and plans I would have gotten all worked up and excited over this:



We are told the Chinese will help set up factories in Venezuela to build appliances such as refrigerators, ovens, and washing machines. Additionally, they will set up a research and design center for Venezuela to increase its technical capacity and be able to design its own appliances in the future. If what is said in the video is true, within little more than a year Venezuela will be producing more than a million appliances annually.

Let me first say, IF this is true and is really carried out this is very good news. This is EXACTLY the sort of thing that Venezuela should be doing... on a massive scale.

Further, the choice of appliances is excellent and one I have always favored. The reason is that while many countries start out making very simple things like textiles, toys, and other very simple products Venezuela probably can't do that because its wage rates are already too high (due to oil) to ever allow those industries to be feasible.

On the other hand, big industries such as autos and ships require huge investments and lots of technology in a addition to a very highly trained work force - hence it is hard to start off your industrialization process with those sophisticated industries.

Things like appliances strike a happy medium - they are high enough value added that they can support and justify the higher wages of a country like Venezuela yet not so sophisticated that they are beyond the technical capacity of the country. They are not the ONLY thing Venezuela should be building - Venezuela needs to start LOTS of industries - but they are certainly a key industry that Venezuela is absolutely right to target and invest heavily in. In short order all appliances sold in Venezuela should be MADE in Venezuela and exports should be actively promoted.

So this all sounds awesome, right??? Yeah, it does. But sadly the reality of the last several years has taught me not just to take this news with a grain of salt, but with the whole salt shaker. Here are some key reasons why:

First off, this project should have been started, at a minimum three years ago. Why, for gods sake, have they waited until now?!?!?!? What prevented them from doing this years ago?

If they had begun it earlier they could have these factories fully up and running and possibly even be almost self-sufficient with these important products. Yet because they have done NOTHING on this up to this point they are now having to import 300,000 appliances from China (not even counting all their regular imports of this over the past years)!?!? Those are appliances that should already have been made in Venezuela.

Once again, this is very late in coming and Venezuela has wasted huge amounts of time and money - two very precious things it can ill afford to waste.

Then there is an even bigger reason for skepticism. That is, although many industrial projects get announced very few actually get built, particularly of the larger ones, or turn out to be much reduced shells of what we were told the would be.

Examples?

The Venezuelan-Iranian car company housed in a tiny warehouse in Maracay - how many cars is it assembling? Who knows, we almost never hear of it any more.

The Venezuelan-Iranian tractor factory was supposed to be producing multiple tractor lines by now and have mainly Venezuelan made components. Again, its seems to have fallen off the earth as we almost never hear of it or how much it is producing.

We've been hearing about what is supposed to be the largest car parts factory in South America for years now. Yet when we last looked into it it turned out almost no progress had been made in building it. And since then, not a word.

The Venezuelan-Chinese cell phone factory? They were supposed to make hundreds of thousands of them, yet apparently only made less than a third of the projected number. Sadly, that probably makes it a success relative to other projects.

The seamless pipe plant and petrochemical plants are presumably (hopefully) progressing - but very slowly.

As you can see just from the few examples presented above Chavez has a long and sad history of announcing things with much fanfare which then never come to pass - or only as a shadow of what they were supposed to be.

It would be great to believe this announced factory will be different. But would it be realistic?
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As is well known, Venezuela has an official fixed exchange rate between the its Bolivar currency and the U.S. dollar. It is also well known to be an overvalued currency and while the government gives it to sectors of the economy that it wants to prioritize not everyone gets dollars at the official exchange rate. Hence, there has been a parallel market where currency is exchanged at free market prices (technically it is bonds that were traded, not currency, but it winds up being exactly the same).

So, for example, stores that were needing to import basic food items or medicines could get dollars at the most favorable exchange rate of 2.6 bolivares per dollar.

People importing less essential items, maybe clothes, would use the less favorable rate of 4.3 bolivares per dollar.

Finally, there were people who were importing things that were not a priority of the governments at all such Ipods or Whisky and they would have to get their own dollars. They would go to the parallel market and pay upwards of 8 bolivares for a dollar.

This blog has long been critical of the government giving out way to may "cheap" dollars via an overvalued exchange rate. However, at least they did tell SOME people wanting some totally frivolous things to bug off and get their own dollars.

Well, it looks like someone got pissed that their whisky was getting expensive or the Ipods whey wanted to give their daughter for her 15th birthday were costing too much because it was determined that the parallel market rate was too high.

Chavez has complained that the parallel market was selling dollars at too high a rate, has threatened and forced to shut down blogs that listed prices, and even raided brokerage firms. The central bank will now make arrangements to give people who formerly used the parallel market directly, at presumably a more favorable rate - may 5 or 6 bolivares per dollar.

Lets back up and think about this for a minute. The government, which controls virtually all the dollars coming into the country due to its controlling the State oil company, has long given "cheap" dollars to many sectors it considered important, and even some rather frivolous ones.

However, there were certain sectors that even the government thought were two frivolous to subsidize with cheap dollars - people importing Ipods, whisky, or simply wanting dollars to take them out of the country - ie capital flight. In fact, as it turns out, of the $29 billion dollars sold on the parallel market last year 70%, yes 70%, were simply people wanting dollars to take them out of the country - ie CAPITAL FLIGHT. Less than 30% went to actually importing anything.

Yet the government considers it important to keep the parallel rate low!?!?!? Why??? Why would any sane government want to subsidize capital flight????

Of course, they shouldn't. And the more expensive dollars were for people wanting to take them out of the country they better - they should have been happy if people wanting to buy dollars to deposit them in a bank in Miami had to pay 20 bolivares for them.

But not this government. The people running it are so confused and so equate a favorable exchange rate for Bolivares with being a sign of success and power that they always want the fewest bolivares to be able to buy dollars. That is probably a big reason why they have always insanely had an fixed and overvalued exchange rate and why they now are in the completely absurd position of giving dollars more cheaply to rich Venezuelans taking money out of the country.

So here we go, billions more dollars to be pissed away on the rich while the country itself stagnates and can't even make its own washing machine!!!
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