Saturday, December 22, 2007

Getting back to basics 

In the preceding posts I have pointed out some of the wasteful subsidies, primarily benefiting the wealthier segments of Venezuelan society, that the Venezuelan government can no longer afford and needs to start looking for ways to limit.

One of the main objections to some of my proposed reforms is that they may make sense economically but are not viable politically. That is, they would prompt a strong reaction not only among the traditional opponents of Chavez but also possibly among his political base of the poor and working class.

This is certainly an important consideration. After all Venezuela is a full blown democracy with full freedom of expression and a strident oppositional media. Unlike South Korea and China where public opinion was not a concern because opposition was/is simply repressed the Venezuelan government does have to concern itself with public opinion and poll numbers.

For that reason Venezuela's policy making decisions are more complex - not only must the policies be right economically, they must also be "right" politically. Failure in either respect is untenable in the medium to long term either because they will in the first case fail economically or cause the government to be voted out of office in the second case.

In making my recommendations for new policies I did try to take into account the politics of these subsidies. In point of fact, what made these subsidies obvious targets for cuts in my mind was the fact that they overwhelmingly favor the more well of segments of the Venezuelan population that have been strong opponents of Chavez pretty much all along. I therefore viewed the elimination of these subsidies as both economically important and politically viable, if not advantageous.

Still, many readers seem to not be convinced of that. Part of the reason is I believe is that with all the talk of economic boom and a consumption binge it is easy for people to forget how most Venezuelans live.

To help refresh peoples memories I would like to revisit some slides giving the socio-economic breakdown of Venezuelan society, how much the different groups earn, what they tend to consume, and how large they are. These slides were first published a couple of years ago so they are obviously a little dated given the recent boom, but not by much and the portrait of Venezuelan society and peoples standard of living is still largely accurate. Also, after we finish reviewing each slide we will see precisely how these groupings have changed.

The first slide shows those at the top of the heap in Venezuela - social classes A, B and the top part of C:

This high income group comprises about 1 million people and they have relatively high incomes, good living conditions, the ability to save money and and also have high levels of education. Looking at what they own they not only have the things virtually all Venezuelans seem to have like televisions and cell phones but they also have luxury items like micro-wave ovens (81%), computers (72%), DVDs (45%), and automobiles (74%). Further, a sizable number of them (38%) have credit cards.

So one can see that they very heavily consume items that in Venezuela are almost entirely imported. Further, as the slide indicates they travel outside of Venezuela, a luxury enjoyed by very few Venezuelans. These facts will be significant when we revisit the specific subsidies the government is giving.

Next we move down the social scale to the middle/lower middle class (known as C- in Venezuela):

This group is significantly larger, consisting of 15% of the population or 4 million people at the time. While its income is less than half of the previous group it still has a lot of expensive imported consumer items - 60% have cars, 65% have microwaves, 49% DVDs, 51% computers, and a still sizable 27% have credit cards. While no reference is made to it, probably some of these people can occasionally take trips abroad.

Clearly this group is going to be favored by the same sort of policies that favored by the top income group, just to a lesser degree.

Next we move out of the middle class and down to the working class or social class D:

This group made up 23% percent of the Venezuelan population or 6 million people (we will see shortly how those numbers have changed). This group is not only much bigger than the previous ones but it is also much less affluent. Rather than living in decent, if not very nice, housing as the previous groups do these people tend to live in run down private homes or public housing. Further, while they still generally have TVs and cell phone, only a minority of them own other imported consumer goods - 44% have microwaves, 27% DVDs, 24% have computers, and only 36% have their own cars. And only a very small minority have credit cards.

Further, although it isn't explicitly stated it is safe to assume people in this social class do not travel abroad at all. Not only could they never afford it, they would never be given a visa to entry any developed countries like the United States, Canada or the European Union.

Next we come to the final group - the poor and working poor, social class E:

This has for a long time been the socio-economic class of most Venezuelans encompassing 58% of the population and more than 15 million people.

These are people who are doing little more than getting by and who populate the huge hillside slums of Caracas and the other very numerous poor areas throughout Venezuela. They may get enough to eat and have clothes on their back (though significant portion don't even have those things) but they have very little in the way of consumer goods: only 18% have microwaves, 11% DVDs, 8% have computers, and only 18% have their own cars. A mere three percent have credit cards. And, of course, these people are not hopping on airplanes and traveling overseas.

Although we will go into greater detail shortly we can see here a fairly clear dividing line - the first two groups ABC, and C- are very big consumers of imported items and account for just about all travel abroad. Further, they are the only groups where the majority of people own private automobiles. The latter two groups, D and E, which together represent the vast majority of the population, consume far fewer imported items, don't travel abroad and generally don't have cars.

It is therefore clear that the first group makes heavy use of dollars via imports and travel and also makes heavy use of free gasoline via the cars they own so I will call them heavy consumers. The second group consumes far fewer imported items and hence is much less dependent on access to dollars. Further, they use relatively little of Venezuela's free gasoline as they generally don't own automobiles. I will therefore call them light consumers.

There are two more slides that we should look at before drawing any conclusions.

The first shows how the size of these socio-economic groups has changed recently:

Note that the heavy consumers, groups ABC+ and C-, didn't change much between 2004 and 2007. In 2004 they totaled 19% of the population and this year they increased to 20.7%. Clearly, these heavy consumers are still a small minority, barely more than a fifth of the total population.

Next note that the total number of light consumers, groups D and E, also didn't change much. In 2004 they totaled 81% and currently they constitute 79.3% of the population. The main change was within this grouping where a significant number of people who had been poor or working poor were able to move up to the working class.

Still the dividing line between heavy consumers and light consumers is pretty clear and unchanged - about 20% are heavy consumers and 80% are light consumers.

Finally lets look at their political tendencies:

This polling information from Datanalisis shows that the greatest level of support for the government is among classes D and E (the red circles) while the greatest opposition to the government is among the high income A and B groups (the blue circle).

If that data was maybe a little muddled by controversial constitutional reform proposal it can be seen much more clearly at the bottom where the data from before last years presidential election was given. There we clearly see that only a very small portion of the heavy consumers (A,B and C classes) support Chavez whereas large majority of the light consumers support Chavez.

In summary, heavy consumers are clearly anti-Chavez and constitute the oppositions political base while light consumers heavily favor Chavez and are his political base. Therefore, anything that were to adversely effect the light consumers would probably be political suicide for Chavez while policies that adversely effect heavy consumers would cause him little political harm.

With this in mind lets review some of the proposals from my last two posts.

In the first post it was pointed out half a billion dollars were being sent overseas to family members, another half a billion was spent on airlines, and a whopping $4.2 billion was spent for dollar transactions on credit cards. I stated that it would be wise for the government to either eliminate or curtail these expenditures. From an economic point of view it would make a lot of sense as it could save the country billions of dollars that could be better spent other items or simply saved.

But would restricting these expenses be politically viable? Well the dollars spent on airlines and sent overseas to relatives would clearly only effect the heavy consumers - they are the only ones who travel abroad. Further, restricting the use of credit cards for dollar purchases would only effect the upper classes also. Remember, 38% of classes A,B and C- and 27% of class C- have credit cards while only 9% of social class D have them and a minuscule 3% of social class E have them.

From this is should be very clear, that reducing the dollars allowed for overseas travel and dollar purchases with credit cards should NOT present a political problem for Chavez as those measure will almost exclusively impact those who don't support him in the first place.

So from a economic AND political viewpoint it would seem a no-brainer to go ahead with these measures.

In the following post I proposed raising the price of gasoline for private automobiles as a way of saving the Venezuelan government billions of more dollars. Also recall, I proposed continuing the same discounted prices for fuel used by buses and trucks so that this would only impact those with their own cars.

Looking at the data above it is clear this would impact the heavy consumers much more than the light consumers, but the divide isn't as clear as it was with overseas travel and credit cards.

Note that automobile ownership rates for heavy consumers are 74% for classes ABC- and 60% for class C-. Clearly raising gasoline prices will hit heavy consumers hard and they are likely to protest against it. But given that very few of them support Chavez in the first place,  6% of the former and 23% of  the latter, that shouldn't impact Chavez's political fortunes.

By way of contrast, only a minority of light consumers have cars, 36% of social class D and 18% of class E.  Most people in this group don't have cars.

Still, in contrast to the previous case where almost no light consumers travel abroad or have credit cards, in this case a significant number of them do have cars.  That means that some of them WOULD be hard hit by a gasoline price increase and there would be at least some political repercussions for Chavez in carrying out this measure.

However, the losses through via making gasoline essentially free are huge (at least $20 billion!!) and even recovering a portion of those losses is simply too big a bonus for the country for it NOT to be done.

All this said, the cost saving measures that have been proposed clearly are politically viable as they would primarily impact those opposing Chavez and leave his political base untouched. However, the impact is uneven with a gasoline price hike being more politically costly to Chavez than the other measures.

That suggests one possible course of action. The government could first restrict the dollars for travel abroad and credit card purchases. By doing so they could save at least $2.5 billion dollars and possibly as much as $5 billion. These funds could then be dedicated to measures which would show immediate benefits to the population.

For example, this year little more than $2 billion was spent on food imports. If the money saved from restricting travel and credit cards were dedicated exclusively to food purchases the government could easily double or even triple the amount of food it brings in and sells through Mercal. Doing this would help solve a very immediate problem effecting people and buy it much political good will.

Then 6 months to a year after doing that the government could implement the more painful measure of raising gasoline prices. By then the government should have earned enough good will through its previous measure to withstand any political fallout from this reform. These savings, which as we saw could be up to $6 billion dollars annually, could then be dedicated to public works and industrialization projects which would also show benefits to the public over the longer term.

Of course, this is only one possible way of doing things and the government could choose other options and timing. But the central point is clear - these necessary economic reforms ARE politically viable and could even boost Chavez's political standing if done properly. Political timidity and fear should NOT be used as an excuse not to pursue these type of necessary reforms.

Lets also be clear about one further point. The Venezuelan government is NOT facing any kind of immediate economic crisis. The economy has been growing very rapidly in recent years, peoples standard of living has been increasing, and most people are happy with the state of the economy. This is likely to continue for at least the next year or two.

However, and this is a huge however, it is just as clear that there are problems which are getting worse and will continue to get worse over time - an overvalued currency, stagnant non-oil exports, a unproductive and unsustainable consumption binge, etc. It is probable that these problems will become a crisis over the longer term if not addressed soon. This means the Venezuelan government has two options:

A) deal with the problems now while they are still relatively small, the solutions won't be too politically costly, and their are no major elections for a number of years


B) ignore the problems, face a significant economic crisis in a few years if oil prices decline or even level off, and face this crisis right when Chavez faces the possibility of being recalled or the National Assembly is up for re-election.

Which do you think is better, not only from an economic point of view but also from a political perspective?

If you were Chavez, which option would you choose?


Monday, December 17, 2007

The flabby revolution - II 

In the previous post we looked at how the government is wastefully giving huge subsidies to the wealthy through its exchange control entity CADIVI. That waste is conservatively estimated at between $5 and $10 billion dollars. No small amount given that the total oil profits for the government last year came to around $50 billion.

Today we will look at another way the government is wasting money - and this time it will be even easier to quantify exactly how much money the government is wasting.

It is widely known that in Venezuela gasoline is sold for next to nothing. No its not exactly free, but darn close to it. Most Venezuelans can completely fill up the tank on their car for about $1. This makes gasoline not only extremely cheap by foreign standards but it makes it very cheap by Venezuelan standards too and people make no effort to economize on it.

A clear example of this is that in Venezuela one can easily take taxi's between cities. For a price that is significantly higher than a bus ticket, but still not all that high, you can share a cab with 3 or 4 other people and be driven between cities that are hundreds of miles apart - say Merida to Maracaibo. To my knowledge this practice exists virtually no where else - the reason being it would be to expensive taking into account how much the gasoline costs and whatever the wear and tear is on the car.

But in Venezuela where gasoline is essentially free the cab driver can charge whatever he thinks is a fair price for his time (and the little wear and tear on the car) and that is it - the gasoline involved is so inexpensive it simply isn't a factor. So in Venezuela there are a large number of taxis traveling between cities and it is a common form of transport for people who don't want to bother with a bus. Such are the effects of (almost) free gasoline.

Filling up the tank in Barquisimeto, Venezuela

For less than one dollar!

Currently Venezuela produces about 3.2 million barrels of oil per day. Of this the best estimate is that about 700,000 thousand barrels are consumed internally. When it was last detailed in a financial statement it was about 550,000 but since then huge numbers of cars have been sold, 450,000 being sold this year alone. So while 700,000 barrels of oil per day is an estimate it is probably a conservative estimate of Venezuela's internal consumption.

Now, here comes the key concept - opportunity cost. Opportunity cost is where you give up income that you could otherwise have. For example, if you are a consultant who earns a thousand dollars a week and you decide to take a week off then we say the opportunity cost of your week off was one thousand dollars because you didn't earn that money. It could be said you "lost" one thousand dollars or that the vacation "cost" you a thousand even though you didn't actually pay out any money - simply not getting money you COULD be earning is the same spending it or giving it away.

This concept comes into play when Venezuela sells oil internally. The oil sold domestically generates virtually no income for the government whereas if that barrel of oil were exported rather than consumed it would fetch full market price (currently $80 per barrel). This may not sound like a big deal but when we start going over the numbers it will be very clear that the revenues being lost by the Venezuelan government to give out free gasoline are simply enormous.

Just to calculate what it is right now we can note that Venezuelan oil is selling for over $80 per barrel. If there are 700,000 barrels consumed domestically rather than exported this comes to $56 million per day in lost revenue.

Just looking at that on a daily basis is bad enough but multiply it by 365 to get the annual cost and you get over $20 BILLION dollars that it is costing it is costing the Venezuelan government to give its citizens free gasoline!!!! (quick question - who do you think owns the VAST majority of cars in Venezuela and therefore benefits the most from free gasoline - the higher income social sectors A,B, and C or the lower income sectors D and E ? )

Now remember, this isn't $20 billion dollars that the government is having to pay out to anyone. So it seems painless. But it isn't because they are losing $20 billion dollars per year that they COULD get if they exported it rather than having Venezuelans use it for free.

This is an enormous loss of revenue for the government. Obviously if the government had another twenty billion dollars at its disposal it could do a lot more for its social programs, build more public works, pay down debt, and maybe invest in some new industries.

But before going on I want to step back and clarify one more concept that could be confusing to people. People should not read this and think "Oh my god, the Venezuelan government has been losing $20 billion dollars every year for the past 8 years" - it hasn't.

The reason why is that the amount of this "opportunity cost" depends on the price of oil. I did the calculation at $80 per barrel which is the current price and is very high. But oil hasn't been nearly that high for most of the past 8 years and the lower the price is the less are the opportunity cost losses.

For example, in 1998 before Chavez came to office Venezuelan oil sold for $8 per barrel. Assuming domestic consumption had been 700,000 barrels (it wasn't, but just to keep things simple I will leave that number alone) the lost revenue per year would only have been $2 billion, or one tenth as much just as the price of oil was only one tenth as high as it is now.

And that is a key concept - the higher the price of oil goes (which is otherwise good for the Venezuelan government) the greater the lost revenue from domestic consumption. So while Chavez did a great thing by rallying OPEC and helping boost prices he at the same time made it a much bigger loss for Venezuela to keep giving away free gasoline to its own public.

Of course, as anyone who knows Venezuelan history is aware the price of gasoline in Venezuela can be an explosive issue. A price hike in the late 1980s is what precipitated - via public transport price increases - the deadly Caracazo riots.

So care has to be taken when addressing this issue. Clearly huge amounts of money are being lost on this subsidy of Venezuelans who are affluent enough to own cars (by and large NOT Chavez supporters) but if possible efforts need to be made to ensure public transport fares are not effected.

There are probably a number of creative ways this could be done. The price of gasoline (which private cars use) could be increased while diesel (which buses and trucks use) would be left unchanged. Or ration coupons could be given to bus companies allowing them to get their gasoline at the cheaper old price while all private motorists have to pay the higher new price. There are probably other ways this could be accomplished too and the government should simply choose what it thinks will work the best. But increased bus and trucking fares and the specter of another Caracazo should NOT be used as an excuse to maintain the highly wasteful current policy - the government has plenty of ways to mitigate the effect of any of these changes on lower income Venezuelans.

Now, for the government to reduce this "opportunity cost" revenue that it is losing does it need to increase prices to full market rates that people pay in other countries?

The answer is no. They could make it that Venezuelan gasoline would still be fairly inexpensive by world standards, they just can't have it be almost free as it is now.

Here is why. If prices are increased by even fairly moderate amounts it would still be inexpensive by world standards but it would be expensive enough by Venezuelan standards that Venezuelan motorists would be more careful about how much they use - it would no longer be a trivial expense.

In fact, that is the whole idea here - not that people would stop using their cars and consuming gasoline altogether but that it will cost enough they will economize in what use. If gasoline cost say 50 or 75 cents per gallon (still very cheap by international standards) it would be expensive enough to most Venezuelan car owners that they would cut back on their gasoline use. Maybe people would take the bus to the beach sometimes instead of driving. Or take mass transit to work rather than sit in hours long traffic jams burning no longer free gasoline.

Hence the Venezuelan government doesn't even have to have a specific number in mind for how much it should the price of gasoline. Rather, it can decide how much it wants to reduce consumption and then increase prices until consumption is in fact reduced by that amount.

Just to see what this might look like lets go over some numbers. Lets say they decide they want to reduce domestic consumption by 200,000 barrels per day. This seems realistic - that is a reduction in consumption of less than a third and could be done probably with some lifestyle adjustments (carpooling, taking public transportation, etc.).

If the Venezuelan government exported that 200,000 barrels of oil per day it at today's prices of $80 per barrel it would get an additional $16 million in revenue per day. Again that may not seem like much but annualize it and the Venezuelan government could get an extra $5.8 billion dollars per year!!!! That is a staggering amount of money which could surely be put to good use by the government rather than burned up by the cars of upper class Venezuelans.

And even if the price of oil goes down somewhat - to $60 per barrel for example, it still comes to $4.6 billion dollars per year. This is not chump change for even for a government which may seem at the moment to be flush with cash.

So there you have it, by administering some pain, mainly to better off Venezuelans who would never consider voting for Chavez anyways, he could get large amounts of revenue that could be put to good use benefiting the country. Lets keep in mind that while the government is losing all this money by subsidizing rich peoples cars it still has 10% of the population living in extreme poverty!

Chavez himself knows this as earlier in the year he briefly mentioned the possibility of raising prices. But then the issue was dropped, with no mention of why, and hasn't been brought up since.

This matter needs to be revisited immediately. The government simply can't afford to keep handing out $20 billion of free gasoline - at least some portion of that has to be recovered for the government by reducing domestic consumption. And again, the ideas outlined here are only some ideas that I have - there are many other possible ways of doing this. For example, they could just flat out ration gasoline, everyone gets only a certain amount each month, and once you use that up you start hitch-hiking or riding the bus. I have no doubt that Chavez and his advisers with some study of this issue and deliberation could quickly come up with a good plan.

Yet so far they don't. How much longer can this be allowed to go on? And why is so much money being wasted on the affluent when the poor and Venezuela as a whole have so many unmet needs?

The "revolutionary" government of Venezuela really needs to review its priorities, make some changes, and lose the flab it really can't afford to have.


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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