Thursday, January 18, 2007

In Venezuela, the rich get the biggest subsidies

On occasion we start sensing that newspapers in Venezuela practice some form of self censorship. For example certain crucial news is reported in the back pages on not important days. This might be bad enough already, but there is neither follow up nor any echo from other papers or opinion makers. Something like a hot potato that must be acknowledged but none wants to deal with. One example was the publication on December 31 by El Nacional of an item where it was calculated that the government of revolutionary and social Venezuela actually saves the Venezuelan driver the fantastic number of 6 million of Bolivares (VBS)a year (2700 USD) by keeping the price of gas at a low 0.045 USD (not even a nickel!) a liter (or at not even 3 cents on the street dollar value). In other words a premium gallon of gas in Venezuela costs barely 15 cents of dollar and even less in Euros. And this measure benefits obscenely the rich.

Before I get into the details let me summarize the story in the graph below. This drawing is derived from the data presented by El Nacional (original in Spanish here). I just normalized it in percentage to make it clearer to understand (readers know how often I complain at how poorly data is presented in Venezuelan newspapers). It is important to note that the “gasoline subsidy” is not easy to calculate: 1) the government for reasons explained later has no interest in people knowing the truth, 2) the subsidy is as much the money paid by the government as it is what it fails to rake in taxes and revenue (1) and 3) even though Venezuela used to export gasoline (it has stopped recently) the price of that exported gas is not necessarily the one that would be set in the Venezuelan market. This being said, if we standardize the estimated gasoline subsidy as a 100% budget item we can proceed to compare these numbers to other budget items. For example, we can thus observe that the biggest ticket item in the Venezuelan budget, education, that is, all the bolivarian schools, mision Robinson and what not flagship social program, well, that budget is ONLY 70% of the "gasoline subsidy budget". In other words, if the Venezuelan driver paid its gas at production cost based on international oil prices, Chavez would dispose at least of enough money to DOUBLE the education budget (and let's imagine what that would do to the health budget!!!).

Historical perspective: gasoline as God's gift to Venezuelans

The problem is that under the ill called 4th Republic people got used to the idea that God gave oil to Venezuela so we could all drive big cars with cheap gas (I throw the first stone to AD without any contemplation). In fact, the official decomposition date of Venezuelan political system can be set on February 1989 when Caracas rioted because freshly reelected Carlos Andres Perez decided to increase gas price. He never recovered from that and today Chavez refuses to consider any gasoline increase because, well, he knows his power rests in large part on cheap gas, perhaps more than on any Mision or other social program (1). Even people who stand no chance to ever owning a car will tell you "I do not care if the state is paying to keep gas cheap, which is something they will not steal from us".

This entitlement to gas much, much cheaper than drinking water is definitely the worst populist legacy that Venezuela has had to suffer. Chavez will bankrupt the country before he dares to explain to us that gas should be paid at least at cost at the gas station. Governments have let this become an emotional issue in Venezuela and Chavez as the archetypal emotional leader will not dare face it down (at least not until he can control any insurrection, or takes cars away from people, whichever comes first).

The measure of the subsidy

Perhaps the numbers shown in the graph above might seem to you a little outlandish. But here in Yaracuy I have made my own personal calculation that hint that these numbers might be too close to reality for comfort. Even at my humble observer level I can see the folly of the whole scheme.

I fill up my tank once a week for 5000 VBS average. Let’s say that the subsidy for me is 5000 per tank-fill, that I should be paying 10 000 (which I could afford very easily). Now, let’s look at my coworkers that must take a bus to work because they cannot afford a car. They take public transportation, which is minibuses that, say, fill up their tank daily. If the price of gas were to double they would have to pay an extra 5000 VBS per day and charge it to a higher ticket price. If they make 10 trips a day and carry an average of 15 folks per trip (well below the reality even in small San Felipe) they will need to divide that extra 5000 by 150 passengers. Thus the ticket should increase by 34 VBS (5000 / 150). Each one of my coworkers makes two trips a day, 5 trips a day, plus two on week ends to go shopping. Thus their transportation budget would go up by 408 BSV (34*2*6).

In other words the government gives me EVERY WEEK 5000 BSV and it gives my less fortunate coworkers 408 BSV (and probably much less if the number of passengers carried by the “buseta” is higher). That is right, the subsidy I receive is at least ten times MORE than what the lower income folks who take the “buseta” receive. Does this make sense in the glorious socialist Bolivarian revolution? How can Chavez justify never dealing with such a spectacular injustice?

In fact, it is actually even worse. When I buy a car, be it a utility vehicle as this blogger owns since 2000 for work, or the flashy Audi that Jorge Rodriguez busted a few months ago, we would both get a hefty subsidy to replace it today since cars or car parts to be assembled here are imported with preferential dollars at 2150 VBS instead of the free rate in the street which ahs been above 3000 VSB for a year (above 4000 since Chavez opened his big CANTV mouth two weeks ago). That is, the more than 100 million that Rodriguez paid his now trashed Audi was subsidized by a third (30 million VSB, roughly 13 000 USD) courtesy of the currency control set up by Chavez. Rodriguez is now Vice President. You can make your own predictions.

The perversity of the subsidy

It is easy to guess why such subsidy has created a dependency in the Venezuelan population. Now it is OK for folks to pay more for drinking water than for gasoline. Now it is OK for the private sector to be the biggest beneficiary of that gasoline subsidy (think at the thousand of trucks owned by the Polar group and each receiving millions a year in cheap gas bonus!). The perversion and distortion of the price system in Venezuela is now so obvious, so deleterious that we do not know exactly what things really cost.

But it also works on moral and ethical grounds. For example why would you dare to complain about the lousy states of the roads or the insecurity on them when the government already gives you nearly free gasoline? How can you increase tolls on highways (they have been the same for now 5 years even though we have had an average inflation of 15%) if you do not increase gas price? Without gas taxes and toll booth how can you keep up roads, cops, security, towing, etc… The indirect costs for the private sector are actually considerable: expensive maintenance of truck fleets, insecurity of trucks fleets as highway robbery is more and more common.

And what about unrestrained importation of vehicles and soaring sales which have lead to chronic congestion of Caracas streets? People seem willing to accept the lack of efficient public transportation or wasting hours daily of one’s life in a traffic jam because, well, we have a new car, we can let it run as much as we can while we have the AC blasting and the radio on. We do not pay financially for the hours spent in traffic, only physically, and in materialistic Venezuela this seems to be what matters, that we do not pay financially.

Perhaps the worse consequence for this blogger is that ridiculous low gasoline prices affect the welfare of all of us. Intuitively I am sure that as long as gas price are so low, wages will remain low. Why? A basic tenet of economic performance is the price of energy. It used to be wood and human labor in the past. Today it is oil and nuclear plants. But it is the energy that moves the economy and the lowest cost source of energy is the one that will shape the general structure of a given economy. In Venezuela we do not pay for energy (electricity is also ridiculously cheap). Why would Venezuela pay its workers their human energy cost when they can have access to almost free gasoline? Venezuelan workers will have to settle for a 25 cent subsidy a week for their public transport for a long time, instead of receiving a real wage that would allow them to afford a 2 USD transport ticket as in most developed countries. You want to earn a lot, to have purchasing power? Start by paying for mechanical energy the real price, then your human energy will be worth something and you will be able to charge for it.

What should be done?

Some specialists are quite blunt: gas should go up to at least 300 VBS a liter. That is, three times the actual value (but not the export cost of about 1000!). And this only to make sure PDVSA sorts of covers its costs of oil extraction to make the gas and ship it to gas stations. Considering that I supposedly get 6 million VBS a year in subsidy, even if I start paying 15 000 a week for gas instead of 5000 I would still be getting 5.5 million subsidy!!!!! But the state might get enough already to double the housing budget and have less people nailing themselves on trees to attract the attention of bureaucrats in the vain hope that this will get them subsidized housing.

Personally I am willing to pay 1000 a liter, tomorrow, if Chavez finally comes to his senses and uses his political capital to start digging himself out of the hole he made. For once I would not mind if he were to say “We have to stop financing those rich escualidos!”. “We have to think about the environment!” “We must have drivers pay for the roads and the public transportation!”.

But we all know that Chavez would never do anything that could tarnish his image among the silly masses ready to believe any crap that comes from him. As long as I can afford a car I will be able to afford to drive it to the next corner if I feel like it, and may the hot house gases accumulate, courtesy of Chavez while Green Peace and assorted ecologists look at him in stupid stupor for what he preaches, never scanning for what he does. Anyway, I should not worry, soon the communist measures that Chavez is taking will make sure that only the apparatchicks of the regime will be the ones able to afford cars. Talk about elite creation...

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1) The basis of the calculation is that the average price of gas in Venezuela is 80 VBS but the government could sell it at 965 VBS (more than 10 times!!!!). So even rounding up or down the government starts by failing to rake 90% of the price of gas it manufactures through PDVSA. Enough revenue that could be used for countless social programs, even if you were to argue that higher gas would lead to lower consumption. That argument would be void from the start as it would allow again the government to have gas for sale again, as it is reported that gasoline exports to the US have dropped dramatically.

2) Chavez is on record in 1999 announcing that "under my government gasoline prices will not increase". I could not find in newspapers archives the exact quote that I clearly remember from these days as I already knew it was a huge mistake, but at least I found some articles from El Universal who show that Ali Rodriguez was planning to increase gas by 15% in 1999 and was overruled by Chavez. I also found interestingly a forgotten article where Bush and Chavez had lunch together in 1999, when Bush was still Texas Governor. Ironic, no?

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