What is at Stake is not the Stability of a Government but the Viability of a Nation

In this interview, investigator and former Mining and Basic Industries Minister, Victor Alvarez, argues that the government must implement an economic stabilisation plan with social welfare before it is too late.

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Economist and ex-minister Victor Alvarez (archives)
Economist and ex-minister Victor Alvarez (archives)
By Victor Alvarez
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In this interview, investigator and former Mining and Basic Industries Minister (2005-2006), Victor Alvarez, argues that the government must implement an economic stabilisation plan with social welfare before it is too late.

Alvarez currently works at the CIM (Miranda Investigation Centre). He has also served as Director of state oil company PDVSA, President of the CVG (Venezuela Guyana Corporation), President of Bancoex (Bank of Foreign Commerce), Executive Director for the Industrial Development Council and Vice-minister for Industry. 

What urgent measures are needed to escape the crisis?

The government still has a margin of maneuver to implement a program of economic stabilization with social welfare, with measures that would have a positive impact on the economy and on society. It can reconcile gasoline prices [with international rates], unify the exchange regime, reorient state imports in favor of national production, reduce military spending to prioritize investment in health and security, reprogram dollar payments for infrastructural works contracted to Brazil, China, Iran, etc., buy up external debt that is being auctioned off at a discount of more than 50%, renegotiate the external debt to alleviate payment sin 2016 and 2017, replace inefficient direct subsidies [to firms] with direct subsidies to poor households.

Some economists have criticized that the government has taken too long* in adopting measures and even if they are applied today it won’t be easy to surmount the crisis. Is the outlook so dark for Venezuela?

The economic measures– though concrete– if they are not taken soon, they won’t have the same impact; the delay obstructs them and can nullify the desired effect. It’s like a cancer that despite having been diagnosed, if it is not treated in time nor in the proper manner, the damage can be irreparable. And the ensuing economic and social crisis can provoke a crisis of governability that ends in political changes [of government].

In view of the inaction of the authorities in the face of the deep crisis we are going through, do you believe that the government is positioning itself [to take advantage of] the chaos? Does anyone benefit from a social explosion?

The government does not understand the nature of the crisis to the point of confusing inflation with speculation and for this reason it goes after the rise in prices as if it were a crime via police operations, fines, and jail time. It fails to recognize the impact of macro-economic distortions, juridical insecurity, and labor unrest on the fall in productive investment and severe scarcity that batters the population. It doesn’t understand that financing of the fiscal deficit by printing bolivars not backed by dollars stokes inflation. The opposition is betting on the government’s inaction so that the situation continues to deteriorate and they can electorally capitalize on the social discontent. The opposition already reaped lucrative rewards [from this strategy] in the December 6 elections and now it hopes to amass even greater winnings in the gubernatorial elections this year. But betting everything on a final battle is to provoke a social conflict that can end in a grave crisis of governability. What is at stake is not the stability of a government but the viability of a nation.

Why do you think that the government has not taken economic measures? What are the consequences of the delay?

The government is prisoner of limiting beliefs. It attributes the economic measures an anti-popular impact with a consequent political cost. It doesn’t understand that what is truly anti-popular is to extend a series of rigid controls and inefficient subsidies that don’t benefit at all the people whom it claims to defend, and on the contrary, are manipulated by corrupt mafias of speculators who have amassed obscene fortunes exploiting the perverse incentives created by political economic deviations and errors.

Do you consider necessary the unification of the exchange rates?

The unification of the exchange system is the only thing that can save the government from fiscal collapse. Let’s not fool ourselves: the statistics suggesting the achievement of the goals for tax collection are bloated by inflation. In 2015, GDP contraction could have been greater than 8% and many firms closed with losses and didn’t pay taxes. The ravenous inflation has brought about a process of informalization of the economy and a growing number of purchases are made without receipts in order to avoid paying sales tax. In order to put a lid over the fiscal hole, the only option left to the government is to sell dollars at higher rates.

What should the bolivar-dollar rate be and why?

Exchange rates are relations between two currencies, in this case bolivars and dollars. With the parallel dollar rate over 150 times greater than the official rate, a low exchange rate will continue being a temptation for rent-seekers who are always looking for a way to acquire cheap dollars and then sell them much higher. Unifying the exchange rates at the SIMADI** rate, though hardly 20% of the parallel rate, would generate enough bolivars for PDVSA to pay salaries and debts.

How much does it cost PDVSA to produce a barrel of oil?

Current statistics are not available but according to the last PDVSA report from 2014, the average cost of extraction is 18 dollars per barrel. With oil prices at USD$25 per barrel*** and PDVSA obligated to sell its diminished income at 6.30 or 13.50 bolivars per dollar, you’re killing the chicken who lays the golden eggs. At the rate of 6.30, for every barrel of oil of 159 liters that it sells for USD$25 dollars, PDVSA hardly gets 157.5 bolivars, less than 1 bolivar per liter of oil. And when it sells the petro-dollars at 13.50, it then obtains 337.5 bolivars, or 2.12 bolivars per liter.

At the CENOCOEX or SICAD rates [6.30 or 13.50], the bolivars accrued by PDVSA are not enough to pay the salaries of more than 140,000 workers, honor its debt to providers and contractors, make contributions to social programs, and stay up to date with its obligations to the Treasury. Therefore, PDVSA goes into debt with the Central Bank, which is obligated to print excessive amounts of un-backed bolivars in order to finance the fiscal deficit, which has become the principal factor driving inflation.

Part of the debt is up for repayment and there are some who propose refinancing the debt and there others who even say that it shouldn’t be paid. What is your opinion?

Venezuela should pay but beforehand the government must examine the books to see if it can actually pay without sacrificing the priority of jumpstarting production in order to overcome the problems of scarcity that are causing so much discontent in the population. According to OPEC figures, PDVSA extracted 2.9 million barrels of oil in 2015. In order to calculate the net income in dollars, you have to subtract the internal consumption of 750,000 barrels of oil. If Venezuela were to stop sending oil to Cuba, ALBA, and PetroCaribe and reduced shipments of oil to China to 300,000 barrels, there would be 1.85 million barrels for export. If prices rise to at least to USD$40  per barrel as estimated in the 2016 budget, income would be USD$27.1 billion. The math doesn’t square when you account for the fact that essential imports in order to avoid greater contraction of GDP are no less than USD$25 billion, while payments on the principal and interest of the external debt for 2016 is more than USD$10 billion. The government should sit down with its creditors and reaffirm its commitment to pay via a rescheduling of payments, which will be adjusted insofar as oil prices recover.

Will we have to go to the IMF [International Monetary Fund]?

Careful, what I just said does not mean that the country is inevitably on the path to default where it will die at the hands of the IMF. The government still has room to make up for the loss of oil income if it adjusts the energy cooperation treaties, reduces military spending, buys up external Venezuelan debt that is being auctioned at 50% of its face value, and reschedules the payment of the imported components of the infrastructure projects contracted out to Brazil, China, Iran, etc. If this is still not enough, then the government will have to sit down with its creditors and ratify its commitment to honor the debt, while asserting the necessity of rescheduling the next payments on the principal and interest. This appeals to the interests of both parties because in this way you avoid a cessation of payments that would slash the value of Venezuelan bonds, which would in turn be bought up by the vulture funds that are already circling over Venezuela. If the government doesn’t want to end up in the IMF, this option should be accompanied by a basic program of economic stabilization as well as the appointment of an expert, high-level negotiating team that will inspire confidence among creditors in order to flexibilize the terms of payment until the international oil market recovers.

They say that the Spanish academic Alfredo Serrano Mancilla is advising Maduro in the economic area. What is your opinion in this respect? Do you think the President’s diagnosis of the economy is correct?

The country needs true experts who understand the nature of the problem, trained and sensible professionals whose thinking is not endangered by moldy and fermented ideas taken from dusty economic pamphlets. The country needs an economic team with a shared vision and a solid unity of principles that will ensure coherent action so that everyone can push the cart in the same direction.

Should the exchange controls be eliminated?

The exchange controls were implemented for economic reasons but degenerated into an instrument of political domination. After 13 years, it’s irrefutable that they failed to deliver the desired results. They increased capital flight due to the perverse incentives that spawned the over-billing of imports, the under-billing of exports, the shell companies that defrauded the nation, and even the raspcacupos**** tempted by the sinister incentives to buy cheap dollars and later sell them for much more. The controls couldn’t even protect the international reserves and today there aren’t sufficient savings to cover essential imports and honor the external debt. If that wasn’t enough, the exchange controls didn’t serve to protect the value of the currency and the bolivar was printed with such pomposity that it’s been rendered worthless. If you want a different outcome, you have to do things differently. In the face of such disastrous results, the conditions must be prepared for first the unification of the regime of multiple exchange rates and subsequently the liberalization of the exchange rate.

The IMF has predicted an inflation rate of more than 700% for 2016 in the country. Is this possible?

According to the belated figures just released by the Central Bank, annual inflation through September reached 254%. The cases of hyperinflation studied in the world have three similar characteristics: 

  1. A recurrent and growing fiscal deficit,
  2. The deficit is financed via issuance of money not backed by foreign currency reserves,
  3. Little saving of national currency due to its accelerated loss of value.

In Venezuela, the conditions are present for a hyperinflationary process. In the last eight years, the fiscal deficit topped 10% of GDP and in 2016 it’s probable that it passes 20%. The financing of this growing deficit is done via the unbacked printing of money by the Central Bank, which causes inflation. And with interest rates that don’t keep up with inflation, people prefer to acquire goods or buy dollars on the black market in lieu of saving.

Did the Venezuelan economy become more rentier during the years of the “Bolivarian Revolution”?

The genome of a rentier economy contains pathological tendencies that the Bolivarian government was not able to foresee and avoid. Like the governments of the IV Republic, it also fell for the temptations of rentierism and ended up ruined by the curse of abundance. Socialist neo-rentierism as much as rentier capitalism has been based on the extraordinary political, economic, and social power conferred by the control of the oil rent. Socialist neo-rentierism is a model of domination that is based on the use of the rent to finance social investment and create a clientelist support network. Due to the contraction of the productive apparatus its incapacity to create new employment, Socialist neo-rentierism exacerbated the clientelist-employer role of the bureaucratic state that subdues and instrumentalizes the labor force. In this way, the domination is maintained through a system of awards and punishments to ensure the loyalty of political followers, purchase the sympathy of ambivalent groups, and punish or dissuade adversaries.

How would you describe the current state of the country’s productive apparatus? Is it salvageable?

The productive apparatus was battered by the landslide of imports purchased with cheap dollars. The injection of petro-dollars into national circulation gave rise to a demand that could not be met by the precarious local productive apparatus. And between producing and importing, the government took the easy route of importing that which had to be produced nationally with effort and perseverance. With the collapse of oil prices, the fantasy of wellbeing was thrown into crisis. Without a solid productive apparatus, it’s impossible to produce nationally what now cannot be imported. And the productive apparatus’ recovery cannot be undertaken by a government with severe budgetary restrictions. Nor can private investment in an environment of juridical insecurity and labor unrest.

Who is responsible for this collapse? What share of responsibility does the late president Hugo Chávez have for this current chaos?

In 2010, President Chávez celebrated the contraction by 5.8% of the GDP as the “funeral of capitalism”. In response to those who considered that fall as the “failure of the government”, Chávez responded by affirming that, “the economy that is collapsing in Venezuela is the capitalist economy.”  But to destroy the capitalist economy without simultaneously constructing an efficient socialist economy ended up being the perfect shortcut to sink the country in this vicious circle of scarcity, hoarding, speculation, and inflation that torments the entire population. A true revolution is a process of creative destruction: it destroys the old and inferior and supplants it with the new and superior. But the people who suffer the ravages of scarcity, speculation, and inflation have reached the conclusion that “if this calamity is socialism, I’d better stay with capitalism.” It will take a long time for the more humble sectors of the population to believe again in socialism as a path for achieving a society free of unemployment, poverty, and social exclusion. This already happened in the so-called socialist countries of the 20th Century, but the Chavista vanguard didn’t learn this lesson.

Chávez governed through means that accentuated rentierism. The belief that oil prices would continue rising led to the creation of FONDEN [National Fund for National Investment] in order to spend all of the oil revenue instead of saving part of the income in the Macroeconomic Stabilization Fund (FEM) as mandated by article 321 of the Constitution. Norway, a country which 50 years ago was one of the poorest economies of Europe, became the most egalitarian country in the world. Instead of creating funds to spend the surplus reserves stemming from the gap between the high oil prices and the price of oil factored into the budget, Norway created funds to save the money for a rainy day. It forged a national agreement and established a rule that limited to 4%– the equivalent of the expected return on the fund– the amount of money that the government could withdraw in order to cover its budget, which fundamentally draws on non-oil fiscal income.

How would you evaluate your time at the head of the Venezuelan Guyana Corporation (CVG)? What were your good and bad decisions? Why did you leave your post?

I was minister [of the CVG] from 2005 to 2006 and the results of my management can be evaluated by anyone by looking at the financial records of the basic enterprises. With the exception of Alcasa, all of them generated profits. In those two years, we launched an iron ore purification plant to sustain the new steelworks producing special stainless steel. We also initiated projects producing seamless pipes for the oil and petrochemical industry, rails for the railroad plan, metallic structures for the Housing Mission, an aluminum laminator in order to cease exporting coils and ingots without added value, a cotton gin for the textile-confection industry, a wood processor in order to take advantage of pine plantations. Also approved were projects to territorially concentrate the social missions in the Cities of Iron, Aluminum, and Diamonds, as small cities that would grow around this new generation of basic industries. Sadly, these projects were paralyzed and aborted. The basic enterprises are today kidnapped and bankrupted by bureaucratism, pseudo-unionism, and corruption that sabotaged the experiments in workers’ control. Their decline is accelerated by the electricity crisis that subjects them to severe rationing, considerably affecting production levels. To conclude, the frequent changes in administrative teams subjected the firms to the disastrous leadership of people without technical nor managerial training.

Due to a health problem that saw increasing complications, I spent a year in rehabilitation and requested to be removed from the post, and I swore that I would never again suffer the nightmare of the palace intrigues that ministers and high-level officials have to put up with.

Translated and edited by Venezuelanalysis

Translator's notes

* On March 9th, the Bolivarian government unveiled a series of changes to the currency exchange regime, reducing the previous four rates to two, one “protected” fixed rate of 10 bolivars per dollar and a floating rate. 

** The SIMADI rate was created last year as part of an effort to control the rising parallel market bolivar rate.

*** In the last two months, oil prices have steadily climbed from an average of $26.50 in January to an average of $34 so far in March.

**** Raspcupos is a term used to describe the practice of traveling abroad with government travelers’ dollars legally available to all Venezuelans and returning home to exchange them at the parallel market rate in lieu of spending the funds abroad as legally required.