Conducted by Gregory Wilpert on June, 2003
GW: After having read numerous articles on the Venezuelan economy, I realized that the problem of the “Dutch Disease” appears to be a very important issue for the Venezuelan economy. When one looks at the government’s Development Plan for 2001-2007, one of the most important goals is to diversify the economy and to activate domestic industrial production. What I do not understand is how one can do this without addressing the problem of Venezuela’s “Dutch Disease,” which makes it extremely difficult for domestic production and competitiveness because products are too expensive to sell outside of the country and it is cheaper to import most products. Recently, for example, Chavez has said, that PDVSA should produce its own pipes. But if it is cheaper to import the pipes, how can one get around this? Do you have any ideas how to deal with this problem, assuming that there is a “Dutch Disease” in Venezuela? Perhaps you have a different interpretation of this problem?
FPM: I can only speak to you about the program while I was minister because things might have changed now. With reference to the “Dutch Disease,” the impact of the lack of competitiveness accentuated itself during the years 2000 to 2001 because we overvalued our currency with respect to Colombia’s during this period, by about 60%, with relation to Brazil by about 120%. This came as a result of pegging the Bolivar to the Dollar. There were exchange rate bands, but actually it was a “crawling peg”. So this overvalued the currency and this was a strategic error. This changed, in particular with the devaluation of February of 2002. This devaluation came about because there was no alternative. Capital flight was very great and the Central Bank had no way to contain the currency flows. So there was a period of a substantial devaluation, in which there was a policy of a free floating currency. I came to the government in April and proposed to the Central Bank a system of exchange rate bands, but really as a band. I proposed a movable average of 45 days, around which the currency could float up to 7.5%, up or down. So within this band the currency could float freely. If it touches the top or bottom of the band, then the Central Bank would intervene. I predicted at the time that the Bolivar would drop again to 1,400 to the Dollar, because it had overshot its mark during the devaluation. Everyone was against me at that time; even within the government they did not believe my prediction. But I was absolutely certain, based on our calculations of the overvaluation and the correct equilibrium of the currency and the overshooting that had taken place. Unfortunately, we then had the oil coup attempt of December 2002 and things got out of hand again.
Our policy to counter the “Dutch Disease” was based on two things. First, to have policy of stable exchange rates, which would stabilize the currency. But of course, that alone does not eliminate the “Dutch Disease”. Still, it establishes a climate of exchange stability with an appropriate level of currency reserve, at about $11 billion, and with a better FIEM, which was a disaster earlier. However, an important element for combating the “Dutch Disease” was the investment in infrastructure and the provision of credit, for growth from below. The government should invest, so that it is easy for businesses to produce. Investment in basic productive infrastructure is needed, such as in roads, education, health, the work force, etc. Also, this was a strategy based in an alliance with national producers, not with commercial traders or with transnational companies, but in particular with small and medium sized producers, and especially with cooperatives. So, the aim was “growth from below” not “from above”. “Trickle-up” economics, not “trickle down.” A strong support for national producers, particularly for small and medium producers and for cooperatives, with good credits, land, education, health, so that they would at least temporarily live in a kind of oasis, protected by the government and the government would finance this with oil revenues. Oil would be cheap so as to generate the conditions for national production. This would give national producers competitiveness in the face of imports, since there would be a kind of subsidy. This doctrine was based in a model of regional economic integration, with the neighboring countries, such as Brazil, Colombia, etc. Also, we would close ourselves off a bit from the rest of the world, while opening ourselves to the region, so that we would only compete with businesses that are technologically similar and not that advantaged, such as transnational companies are. Of course, this would also allow us an oasis on the regional level. There would be a national protection to solve the historical disadvantages we have, including in the region. But within the region there would be an appropriate competition, in accordance with the comparative advantages in the region. This is a doctrine of providing incentives to national production which would resolve the “Dutch Disease.” Of course, this would require a strong fiscal income, so that the state could make the necessary investments.
In Venezuela, the income tax revenues are extremely low because people do not pay their taxes. We have a new income tax law which means that many more will have to pay taxes, which have in the past managed to evade it. Only about 1.5% of the richest pay income taxes. While in the U.S., 80% of the richest pay income tax. It is completely ridiculous. We had told the president the plan, but unfortunately it was not implemented. In any case, the non-oil fiscal revenues went down as a percentage of the Gross National Product, during the first three years of the Chavez government. This is an incredible thing, which goes against leftist ideals. The efficiency of tax collection went down and instead of fixing the laws, the problem was simply ignored. The person who used to be in charge of the SENIAT did not have a clue. Fortunately, there is a new manager now, who is quite good. Of course, what is needed is fiscal revenue because currently non-oil fiscal revenue is around 10%, while in the rest of Latin America it is 23%. In the U.S., the neo-liberal ideal, it is 33% of GNP. Let’s do it as the U.S. does, let’s collect 33% of the GNP. Here people are more right-wing than in Somalia, where there is no government. We need non-oil revenues in order to finance education, health care, social security, the provision of credit, dignified homes for workers. This also would be a subsidy for the private sector. Growth from below would kick-start production because it is within the context of a global economy, which stabilizes (?) the macro-economy.
The great debacle of the world economy was Richard Nixon because when the Bretton Woods agreement was broken, the world economy fell apart, because the currency equilibrium fell apart. As a result, capital flight became common and instead of investing here, they invested in the U.S. They no longer financed investments here. Of course, we had a large oil income and so we imported products. The economy was relatively small and so we could import most products. If you have macroeconomic stability, particularly currency stability, you break capital flight. As a result, you’d have internal savings and investment. This is another component of stability, of the availability of money for investment and economic growth. All of this presents a picture in which there is money for investment, support by the government for national producers, and one would be able to return to a model like we used to have, in the 70’s, of conditions for national production to develop, at least eliminating the external volatility. You eliminate external volatility and support national production, but not by subsidizing large producers, but by helping the poor, the small and the medium producers, the cooperatives, for a new type of economy, for a social economy. Of course, the rich would benefit too, but instead of trickling down to the poor, as it was with the Reagan doctrine, trickles would go towards the rich. They would benefit because there would be more demand for their products. This doctrine would permit the recuperation of the economy. If you generate macroeconomic stability, in such conditions would naturally rebound. We need to return to conditions we had earlier. I had estimated that with such policies we could have reached 7% growth per year for ten consecutive years. Nothing magical about this, but merely facts. Unfortunately, we could not do this because there is such a lack of coordination within the economic cabinet.
We have various elements of this plan in place, such as the revision of the FIEM, which is ready, the new income tax law, and the new Tobin tax, which would strengthen the exchange rate bands, protecting them from political shocks, not just from economic shocks. What we had before merely protected us from economic shocks, but the Tobin tax would also cover the political. The law is ready to be approved by the national assembly. And the other parts of this plan are the agreements that are currently being realized with small and medium producers and with cooperatives, in different sectors. With respect to the international, we are pushing for regional Latin American economic integration, in the face of the FTAA, towards the ALBA. All this together would eliminate the “Dutch Disease,” while supporting a transition towards a non-oil economy.
GW: I know that before you left the Planning and Development Ministry, you had some comments about the exchange rate controls. Could you explain what you think of these controls now and if one should or how one could get out of such controls.
FPM: I was one of those who believed that one should provide leadership with respect to people’s expectations. Unfortunately, the opposition here decided to provide leadership towards bad expectations. They presented us with a self-fulfilling prophecy, which works in the economy. Someone once won a Nobel Prize in economics, focusing on the role of expectations for the economy. I know this doctrine very well. Before the introduction of the currency control, I tried to lead the expectations, but was not given much attention, so the opposite occurred and we entered into a panic, which was then followed by the currency control. In the face of this reality, I proposed to the president the Tobin Tax and the economic cabinet and the president agreed, so we designed the law for it. I was of the opinion that once there were the appropriate conditions, one should abandon the currency control and go over to the Tobin tax. The currency controls should not be maintained for much longer. Already the foreign currency reserves have recuperated. The problem that produced the controls was the low level of reserves, the oil strike, and the political problems. But the Tobin tax is something very robust in the face of any economic shock. It establishes a tax that is too high for fleeing capital.
GW: Why wasn’t a Tobin tax introduced a long time ago? Perhaps Venezuela could have spared itself much of its current economic problems.
FPM: Yes, well, in order to introduce a Tobin Tax you need a period of currency control first. What I said was that now that we already have the currency control, we should take advantage of it. Because if you introduce it before any control, capital will flee before the tax takes effect. It would start an avalanche. In order to avoid the avalanche, you introduce a currency control and then the Tobin Tax, since it has to be approved by the National Assembly. If you did it without the currency control, while the tax is being discussed in the National Assembly, capital would try to leave before the law was passed.
My opinion is that the currency controls should end as soon as possible and lead to the introduction of the Tobin Tax. The oil industry has recovered, the political conditions are more or less stable now, and the tax makes the currency more robust in the face of political shocks. The exchange rate bands would stabilize, just as they would have back in September.
GW: The tax would not only prevent capital flight, but also provide an additional source of income to the government.
FPM: Yes. But it would completely stop capital flight.
GW: What do you think are the greatest problems for the Venezuelan economy right now?
FPM: Unfortunately, there is a lack of clarity in the current economic program of the government. This is something that we had tried to avoid. Not having a clear policy is a problem for the economy. One has to have a project. Since expectations are an essential element in an economy, this has a negative effect upon the economy. The recuperation might have been stronger if we had remained in office. Investors are now a bit doubtful as to what will happen, waiting to see. If there were a clear program, they would be investing. The other problem is the lack of definition with regard to the currency control. Some are saying that it will last a while longer. I always tried to say that it will last only as long as absolutely necessary. This was one of the factors that led to my dismissal. Giordani believes that the control should last forever. Another problem is that the regional accords are not concretized. We also proposed a regional monetary union, a single currency for Latin America and the Caribbean.
GW: You believe that this is an idea that people are still pushing for or is it just something that you proposed, but is not being pursued any more?
FPM: There are regional leaders that are still seriously considering this idea. This would be a fantastic solution. I tried to push this on a regional level, but the president did not support me much on this issue. In any case, this is another issue. In the Colombian ministry of the economy there are people who believe in the idea very strongly. In Brazil and in Argentina too. With these three countries, among the largest of Latin America—Chile will not want to, but that does not matter—…
GW: In the past three years the Chavez government has been transferring its foreign debt in favor of domestic debt. Could you explain why this has been done and if you think this was a good idea or not?
FPM: This was not so good. The government says it was, but really, no. What happened is that there was a credit crunch on an international level. So we faced problems in applying for credit internationally. As a result, since we have managed our fiscal income so badly, we had to go into debit. We have a structural problem in our deficit, which we have to finance in some way, recently internally, but at onerous interest rates. The solution to this problem was to raise taxes, not to go into debt. This was a consequence of our poor policy to let the expenditures to soar.
GW: I know that you support the social economy, but other economists, perhaps mainstream economists, tend to say that the social economy is good, but it cannot change much. It is always a small part of the economy. What do you think of that criticism?
FPM: The way I conceive of it, the social economy would not be only a small part, but the most important part. First, in terms of the number of businesses that would be under the social economy. Why? Because cooperatives are the businesses of the future. The internal organization of cooperatives provides more incentives for making a business more efficient. The traditional, vertically organized business, whose owners are outside of the business or who are the managers generate contradictions between the employees and the owners. There are shortcomings, for example, in the dissymmetry of information which generates a lot of conflict and inefficiency, such as job shirking. In contrast, if you have workers who have as a common good the success of the business, they have incentives not to shirk on the job and such things. For example, if there is something dirty and no one cleans it, I feel motivated to do so because I know that if the business does badly, I will do badly. If you pay employees in accordance with the success of the business, they will want to make sure that the business is successful. And if the economy does poorly, they will be more willing to lower their income. There are some interesting papers that demonstrate that such conditions generate solidarity between the workers. Cooperatives are the businesses of the future?
We had planned provide a tremendous impulse to the cooperatives, in the form of credit and in start-up aid because cooperatives cannot be started from one day to the next. This is like a virtuous circle, where the ownership structure generates solidarity, and the solidarity generates stability within the business. If they do not have the training, it is possible that individualists can break the internal organization of the business. I don’t see the social economy as something marginal, but as something principal. In any case, this would be accompanied by a policy of long-term economic development, based in free technology, which is why I tried to push free software. Free software and free technology are a part of the social economy. The whole movement for free software, in the world, is a solidaristic movement. This does not come from private enterprise, nor from the government, but from people who organize themselves to produce a public good, which is technology. This should be generalized to other technologies, which are not software, but knowledge as such. For example, how to make cars, how to make hardware, and how to design buildings. All this could be free knowledge, so that people would have access to this technology for free and that they complement each other with it – this is an atomic bomb, in the sense of the impulse which it could provide to the economy. This would be a social economy, a solidaristic economy because public goods are not taken good care of by the market or by the state. This is a great opportunity for all of technology, for producing medicines, for health, for education. With just one professor you can teach a million people. The literacy program of the Cubans, for example… With a little bit of effort you can create a fantastic result, to have a great social impact. A solidaristic economy implies a solidaristic government because if people are solidaristic they will elect a solidaristic government.
I have a paper about this, looking at the degree of solidarity in an economy and its relationship to political choice. For example, if you have a solidaristic government, which concerns itself primarily with those who are worst off, you have a Rawlsian economy. If we are at the other extreme, the government concerns itself primarily with those who are best off. This implies redistributive policies. An altruistic economy concerns itself with those who are poorly off and makes transfers towards those people. In other words, the social economy also implies a political orientation of the government of transfers from the rich or those who have to those who don’t. Also, it implies the formation of altruistic preferences. Preferences can be formed towards altruism and when people vote they will tend to vote for a government that is leftist, that is oriented towards altruism. As a result, you move towards a virtuous circle, where the government follows leftist altruistic policies and the people will people will continue to vote for leftist governments because they are educated to be more altruistic. These transfers are not just transfers of presents, where one receives presents and the other does no work. Rather, the idea is that this person receives transfers only as long as they are doing badly. However, as soon as they are doing well, they engage in transfers towards others. This is not the naïve idea that the person is eternally like that. Rather, that the person is doing badly only in some circumstances, which in some cases could be permanent, such as in the case of disabled persons. These transfers also imply that the person who is disabled has their conditions changed, so that the playing field is leveled.
This is the idea of the fourth way, in which there is a market because the market is that which relates cooperatives to each other. There would be a state, but a solidaristic one which engages in transfers to benefit those who are doing poorly. And there is a solidaristic regime among the people, in the area of businesses, the family, communities, and among friends, as well as in the area of the production of public goods, such as with the Internet, free software, and free technology. This is the doctrine of the fourth way. State, market, and solidarity, which permeates businesses and cooperatives, permeating the state, creating one that is more solidaristic and horizontally organized, less bureaucratic, more agile, etc., permeating the market because it regulates the areas of the market that do not work well under market control, such as a World Central Bank or the problem of big monopolies, regulating these. Also, it would control areas where property is not well defined, such as at sea or on outer space. So property would be well defined and administered in accordance with the criteria of efficiency, so as to resolve problems of the community. These are problems that exist when property rights are not well defined. Also, other shortcomings of the market, such as the asymmetry of information, so that it is equal for everyone and a public good, which could be produced solidaristically. The problem of corruption would be resolved because a moral, ethical regime would exist, in which I do not steal because that would harm others. Because I hold others in esteem, I do not steal. What this means is that altruism resolves the problems of corruption and of the asymmetry of information. Not because those who do not steal are making a sacrifice, but because in the long term, under stable relationships, it is not worth it to steal because I don’t gain that much. If you establish a situation in which no one steals, all sides benefit more from not stealing.
GW: The big question is how can one advance altruism in a society. You are suggesting that the state can do this?
FPM: I am suggesting that the state can promote solidarity when it promotes cooperatives and when it promotes equality of opportunity. Also, if there are various equilibriums, the state can lead towards good equilibriums. However, not just the state has to promote solidarity. Also, the principal ingredient can be the people themselves. If you give power to the people, the people will support this type of program. The solidarity is there. One does not have to educate people to it. The problem is that people rarely have the opportunity to manifest it. They are oppressed by an ideological, mediatic, and alienating regime. If people could really express themselves, if you give them power, solidarity will emerge spontaneously.
GW: So this is basically the idea that you have about the fourth way?
FPM: Yes, the fourth way is basically that. The third is a combination of state and market. The fourth way is the combination of state, market, and solidarity. Solidarity influences that state because it is chosen by those who are solidaristic. This is a different state than one that is chose by egoists. The state and the market are not neutral, which try to correct each other’s shortcomings. There is a political element. Solidarity is an essential element in a society, especially for the future of society. The fourth way implies first a dynamic, then a status quo, then a transition, and then an ideal regime. The ideal regime is one in which there is neither state nor market. The allocation of resources would operate spontaneously. And such spontaneous allocation occurs when there is a certain level of solidarity. This occurs when there is no contradiction between egoists. There is harmony between altruists, when a person wants for the other exactly what he wants for himself. Also vice versa, when the second person wants for the first exactly what the first wants for himself. For example, in a family, you have a certain amount of resources and you make plans for how to distribute them. When is there a conflict? Let’s assume you have $1,000. Conflict will ensue when the other wants $700 for themselves and you want for the other $300. There is a certain amount of harmony in that you don’t want zero for the other, but there is a difference of $400 in what you want for the other and what the other wants for themselves, which is the zone of conflict. On the other hand, if you wanted for yourself $300 and for the other $700, just as the other wants, then there would be harmony. So there are different types of harmony.
Conducted by Gregory Wilpert on June, 2003