Oil Wars

Recently I pointed out how why I believe Venezuela would do better to eliminate price controls on most (all?) products and replace them with subsidies targeted to the poor. This would give incentives for producers to produce more, would reduce the contraband problem, and would target government subsidies to only those who really need it instead of giving it to everyone.

One objection that was raised is that being able to properly identify those who should qualify for the benefit and then making sure only they get it may require administrative capacities that Venezuela simply doesn't have.

Indeed, that is a very important point. If a proposed solution simply isn't doable then it isn't really a solution after all. So the issue of whether or not Venezuela could properly administer subsidies targeted to the poor is something we should look at.

At the present time the main issue revolves around food (in fact just yesterday the state oil company PDVSA started handing out packets of food to anyone who bothered to stand on a line to get it) so I would like to take that as the concrete example to examine. The question then becomes how can the government determine who should get subsidized food and then make sure that those people, and only those people, actually get the food rather than it being stolen or diverted.


I think the most difficult part is actually determining who should be eligible for the discounted food. Yet even that is not impossible and while the government may not be able to make a perfect list of who should get it it can at least exclude a lot of people who should very obviously NOT be getting it.

For example, a very large portion of the Venezuelan workforce works for the government and of course the government knows exactly how much each of those millions of people earns. Therefor it could easily set some earnings threshold above which those people would not be eligible for the discounted food.

Similarly people with large incomes in Venezuela must file tax returns with the government. The government knows their earnings and could easily exclude those above the earnings threshold.

Further the government also already has a food subsidy program called "cesta ticket" which provides meal coupons for those in certain jobs. Again, given that some of these people are already getting subsidized food the government could decide who among them should not be eligible for other food subsidies.

Just using this already existing information the government could do a lot to exclude the people who least need any subsidies. So while the list of who would be eligible for the subsidy would not be perfect it would be pretty good and it would at least exclude millions of people who should NOT be getting government subsidies.

Next comes the task of making sure that only those determined to be eligible get the food and that the subsidized food isn't somehow stolen along the way. This actually turns out to be the easier part for a rather curious reason.

Remember all those very expensive fingerprint reading machines the government bought to use with elections and that wound up being so contraversial?




Well, they are stored in warehouses somewhere in Venezuela collecting dust 99% of the time. Yet they could actually be very useful in making sure the subsidized food only goes to the intended recipients. Here is how.

Everyone who would be part of the subsidized food program would get a card and have their fingerprint read. A huge central database would be created and it would include their fingerprint scans.

Lets say for the sake of the example the food packets are distributed once a month through the Mercal stores. The fingerprint machines would be in the Mercal stores and would be connected to the central database (just like they used to be during elections). A person comes into Mercal to get their monthly allotment of food, their fingerprint is scanned and eligibility verified by the computer and they are given their food.

People who aren't eligible won't be able to get the food because their won't be in the database and you can't fake fingerprints. Further, people won't be able to get more than they should by going to various Mercals because the central computer would know they already got their allotment and deny it to them at other locations.

Finally, this system would help prevent theft by the people actually distributing the food. To see why take an example - each month a store might be given 1,000 packets of food. For every packet distributed there would have to be a legitimate fingerprint scan recorded by the central computer. If there were 800 legit scans that month then the store would have to have 200 packets left over and if it didn't then you would automatically know something was wrong. So this would actually allow for a very robust accounting of how the food is distributed and make theft if not impossible at least very difficult.

The only remaining way food could be diverted is if individual people could wind up selling their subsidized allotment rather than consuming it to get money. But even if that happens (and it would to some extent) the government doesn't really have to care that much - it already carried out its mission of making sure they had ACCESS to subsidized food - that they later wasted it is not something the government can be responsible for.

Now this may all sound like a big and costly undertaking. In point of fact I don't think it would be that costly because Venezuela already has pretty all the necessary equipment. It has the fingerprint machines sitting around doing nothing. It has the computers sitting around doing nothing. In point of fact, all the government employees responsible for running very much the same system during the election are probably sitting around doing nothing most of the year. So its not unthinkable you could even have them oversee this (or at the very least train others to do it). And of course Mercal employees could just as easily be trained to run the scanning equipment as the drafted poll workers are.

So in looking at this we can see that Venezuela could almost certainly implement a pretty good food distribution system aimed at those who really need it and can very conveniently use EXISTING systems and capabilities to do it.

Of course, I am sure readers will find some possible flaws. Others I am sure will find ways to better refine this idea. Still others may come up with entirely different ideas that would be even better.

The real point here isn't about what should be done with the finger print reading machines. It is that the powers that be in Venezuela need to start spending more time finding solutions to problems and less time denying that the problems exist or looking for excuses as to why they can't be fixed. I don't think the Venezuelan government so much lacks for resources and capabilities as it lacks for the will and determination to fix problems.
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Flanker:Anybody that knows any RATIONAL member of the opposition has heard this line before regarding economic growth: "We all went through this before, in the 70's blah blah blah." Indeed during the late 70's Venezuela expirienced a modest boom in real economic growth and gargantuan in terms of nominal growth, the latter led people to naively believe that development status was assured, but the real numbers were creepy, and anybody that should have been paying attention did not.



Notice how this graph behaves exactly proportional to this one



Evidently the graph would be similar to what happens nowadays, nominal growth is growing at a 30 percent clip, and if this were the only data we could use to compare, the critics would have a point. (that up to this day growth is entirely similar to the 1970's) But here is where their theory falls flat.



It is not a joke, the year inflated adjusted oil prices were at their highest peak EVER (1980) and our country was in a STRONG RECESSION!!! Not to mention that the weakness was already there in 78-79 with pathetically anemic growth.

The boom that never really was. Barring 4-5 good years of 6% growth the rest was an illusion propped up by viewing things in a capitalistic way. Instead of looking at production we viewed revenues and consumption.

Source: UN statistics division

Now ow will probably chip in and claim that pegging the dollar was the fault of the recession in the middle of an oil boom, and while indeed partially correct the currency was pegged to the dollar for over a decade (unchanged), leading to overvaluation, since there are no PPP data that goes back as far I will post data starting in 1980.

1980-2008(predicted)


Source: IMF

We can assume that the currency was 20-30% overvalued during the whole 70's, and evidently it was something that could have contributed to the unsustainability of the peg. but still, it was devalued, and during the whole 80's and 90's it was so devalued that it would make Argentina blush, but there was no recovery, growth was sporadic and barely kept up with population growth. Suffice to say it was no South Korea.

I do believe that the currency should be kept as undervalued as possible, but everything is part of a whole, having a currency policy that is neither weak or strong will not spell doom or success, the only thing guaranteed is an economic bust if the price of oil collapses, but wake me up if we enter into a recession with this index actually increasing into the stratosphere, only then will this be the 70's all over again.
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The Chavez administration just announced that it will be raising prices on something.

No it isn't gasoline.

Nor is it dollars.

Even less is it road tolls which in fact just got eliminated.

As we have heard time and time again prices can't be raised on those things because (gasp) it might somehow spur inflation, or make it difficult for people to travel abroad, or cause riots, or whatever.

So instead of raising prices on any of those things the government raised prices on, get this, milk.

First a little background. Milk, along with a slew of other produts, has been subject to price controls going all the way back to the oil strike of 02/03. The prices have been revised at times but they have always been controlled by the government and held artificially low.

This has had three predictable effects. First, by keeping the price low the government has made the products more affordable and boosted consumption. This is a positive effect and probably what the government wanted.

The second effect is that with enforced lower prices profits were reduced and possibly eliminated (ie producers would be LOSING money) so that no-one had an incentive to invest in producing milk or even to keep producing at current levels. Hence supply from domestic producers would stay pretty much the same or even drop.

The third effect is the result of the first two - with consumption up (good) and production not up (bad) you got the famous "shortages" with milk often not appearing on store shelves.

With prices frozen and costs for producers still going up over time the supply of milk was bound to get worse and hence the mismatch between supply and demand (ie shortages) would also worsen.

Hence, the governments response of raising the price of milk.

This was a very bad policy choice for several reasons.

First, it isn't likely to solve the problem of reduced supply. The reason is that all they did was raise the price - but prices are still controlled so they are now frozen at a higher level. Who is to say this new level is enough to give an incentive to produce milk? Futher, given that the new price is frozen even if it is currently adequate it likely won't be so for long and 6 months or a year from now producers will be incurring the same losses they were last week.

Yes, prices could be adjusted again in the future. But who knows if and when that will be done. And not knowing that and facing the possibility of future losses it is unlikely any farmers will invest in increasing milk production.

So this price increase is unlikely to do much to alleviate the problem the government wants it to alleviate.

A better course of action would have been to eliminate the price controls all together. But this leads us to the second defficiency in Chavez's action.

While raising the price of milk he did nothing help low income Venezuelans deal with the price increase. In other words, the idea behind the price controls to begin with was to make milk more affordable to low income people. That is good - the poor did need to eat better, and still do. But now with this increase they are going to be able to buy a lot less milk than they were able to afford last week. They will simply be priced out of being able to consume milk (while there will now be more milk on store shelves for affluent Venezuelans to buy!!).

So once again, we see this government now favoring the interests of the well to do over the interests of the poor. Some "revolutionary" government!! With revolutionaries like this who needs reactionaries!

In point of fact, the best solution would have been to eliminate the price controls altogther to boost production (and this blogger must admit he has been guilty of defending the controls for too long) but then announce new food subsidies for low income people so they could still maintain their consumption of food at high levels. That is, the government still should be taking action to help the poor get food it is just that it should switch the mechanism for doing that from price controls to a "food stamp" type program.

Low income Venezuelans could be given ration coupons entitling them to get heavily discounted food. Or the food could be sold very inexpensively through Mercal. But regardless of the exact mechanism the government should do something to guarentee access of low income Venezuelans to basic necessities like milk and not just let them be priced out of consuming it as famously happens in places like Mexico.

Now of course some will likely ask where is the government going to get the money from for yet another subsidy. Good question. But it really isn't all that difficult to answer.

A few weeks ago I pointed out that the government was losing tens of billions of dollars by giving away gasoline for free. If it raised the price of gasoline it could easily raise billions more in revenue which could then be used to pay for food subsidies (how ironic that this government apparently views gasoline as a more basic necessity than even milk and is completely unwilling to raise its price!!!!).

Or they could quit giving away cheap dollars for affluent people to take vacations abroad and buy luxury goods. With the savings they could make sure the poor had enough to eat.

Or lastly, they could put the tolls back on the roads and raise them to a reasonable level so that they would actually pay for road maintanence and maybe even mass transit construction. That in turn would free up money from the central government's budget that could be used for this subsidy.

So in point of fact the government COULD take actions that would help alleviate shortages, increase production AND ensure that the poor got the basic necessities that they need.

But to do that the Chavez government has to quit carrying out policies that direct so much of the current economic boom towards the upper classes. Unfortunatley this just announced new policy shows little change in that regard.

It is hard to tell if this is done through design or ignorance of basic economics. But either way, they are screwing up the economy and screwing their political base at the same time. So all this is not only bad economics, it is bad politics too.
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Just the other day after noting that a Wall Street Journal investigative article on the drug trade and money laundering didn't once mention Venezuela I noted that U.S. government officials were "concacting reports telling us just how in the middle of all this Venezuela really is".

And, as if on cue, it would appear they were:

BOGOTA (Reuters) - The United States accused Venezuelan President Hugo Chavez on Saturday of allowing his country to become a haven for international cocaine trafficking by neglecting to tackle the problem.

Venezuela has long been a transit route for cocaine manufactured in neighboring Colombia, the world's No. 1 producer of the illegal white powder, that ends up in the United States and Europe.

But U.S. officials say Venezuela's role in the cocaine trade has expanded to make it a major drug shipment route.

"At a point where neglect becomes complicity, it is an active policy not to engage and deal with this problem," John Walters, director of the U.S. Office of National Drug Control Policy, told Reuters in Bogota.

"I think it is about time to face up to the fact that President Chavez is becoming a major facilitator of the transit of cocaine to Europe and other parts of this hemisphere."

Walters estimated annual cocaine shipments through Venezuela were now more than 200 metric tons. Colombia produces at least 600 tons a year, most of which goes to U.S. and European markets.

Of course, one could ask where he got those numbers from. Who knows? They probably just made them up.

Regardless, that isn't what was really interesting in the article. What I found fascinating/perplexing was this:

"He is making Venezuela into a haven, he is making a haven that is being used to victimize not only this hemisphere but Europe and Africa," Walters said.

Victimize?!?!? Who is being victimized?!?!?!? Does this person look like a victim to you?



The unwillingness of gringos to accept responsibility for their own problems is amazing. Pretty soon we will probably be hearing how the housing bubble was the fault of the Asian countries who were giving the U.S. too much cheap capital!
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