Wednesday, February 18, 2015

Why we are flat broke and in an nonviable system

To say that we are flat broke requires no explanation. All the indicators, from inflation to black market currency, from crash in importations to crash in oil prices, are all well known, vox populi if you wish. Equally well known the daunting corruption of the last decade and the wasted money in buying foreign sympathies.

Thus there is no point to waste my and your time in rehashing the reasons why we are out of cash. Only the brain washed chavista would dare to argue that. But there is a lesser known fact, or rather less studied fact which is the societal changes in the last decade and a half which makes it more difficult for Venezuela to recover, even if a new creative and honest management were to be swept into office. I have made a graph to try to drive my point in.

During these past 15 years populism has been busy at crating a "client/dependent" society while making sure the private entrepreneurial sector was reduced so that political challenges would be limited, if anything by lack of funding from those with independent income.  In the drawing below the proportions between the social groups are of course not realistic. The way I drew boxes and circles is to be seen on their relative variation over time, not on specific value. The top row "represents" a gross division of society circa 1998. The lower row is what I think it looks like today, with a new social group added, "the exiled".
Right click to enlarge in a different window

DETAILS

1) Let's start from the left. In the "ancien regime" there was already a class of people in the lower strata of the population that was dependent on the largess of the people in charge. But indeed this was somewhat limited and explains in large part the arrival of Chavez, as most had a sense of entitlement. Unfortunately, and deliberately, this has not changed except that now the "client" subgroup is proportionally much larger than it used to be, courtesy of the "Misiones". But all in all, the more so this year with currency collapse, the poor and lower classes are larger than ever in our history. Do the math at an exchange rate of 170 to the USD on the minimum wage and wonder at what can these people can afford today compared to 1998....

We should not be surprised, this is how ALL populisms end. It is just a matter of time. The only escape here is the dotted line that links "clients" with "bureaucrats". Chavismo always needs to recruit people to organize distribution to clients. These agents can be recruited, where else, on the lower classes strata where they can easily be detected. Their promotion to bureaucrat reinforces their allegiance to the regime. (note: the light red arrow reflects the early recruiting of chavismo cadres from the lower classes, and their joining the middle class through adhesion to the army or employment in the bureaucracy; but today the recruitment is mainly out of the Misiones beneficiaries, well screened, well indoctrinated).

2) In the middle, in green, we have had the evolution of the middle class of Venezuela, loosely defined as someone that may not be able to buy a flat but can at least rent something somewhere in a not too bad neighborhood. This group has shrunk, part going directly to the lower classes, such as school teachers, one of the big shame of the regime.

Inside the middle class the portion representing store clerks, trained workers, etc, has gone down as the economy weakened yearly. Today it is not a wild guess to state that the middle class is dominated by the bloated bureaucracy and the army.

It is not idle to note that an increasing large portion of the bureaucracy is formed from ex-military or even active ones.

3) The rich on the right is perhaps the more "mutated" group.

The "owners" have been quite reduced. By owners I mean anyone from a shop owner to a major capitalist. Let's call them entrepreneurs.  With the constant chavismo attack on the more independent minded sector of the society the reduction has been two fold, from those who gave up and retired to those who chose to leave the country. We can note that some did play the chavista game and accepted to partake into the regime's corruption thus joining the new rich class of "bolibourgeois".

Another group inside the rich are the professionals, doctors, lawyers, etc. People that in other country would not be ranked as "rich" but in Venezuela are because, let's face it, in 1998 they could afford a flat. Now many cannot anymore and as such this is perhaps the group that has suffered proportionally the greatest emigration. Let's remind the reader that since Chavez was elected up to 1.5 million Venezuelans may have emigrated.

The rest of the rich, a relative term in Venezuela, composed of retirees, higher management, sales representatives, etc. has equally suffered and has equally left the country with as much capital as they could take away with them. Note: 1) the rich oval is of course overly large as compared to the green or red, this for clarity in the diagram. 2) I should have put an arrow to illustrate the descent of many in the "rich" toward middle class but did not put it for two reasons, one being clarity in the diagram and the main one because I suspect that emigration has taken a much larger toll on the rich than descent to middle class.

Where the major difference comes is the apparition of a nouveau riche group (and sometimes old money that join into the party) the "bolibourgeois", boliburgues in Spanish. These are those who have greatly benefited from currency arbitration, juicy government contracts or simply frontmanship positions, if you forgive my coining of words. Initially this group was connected with bureaucrats favorable early to Chavez. Let's not forget that the regime's cadre and ministers come ALL from bureaucracy ranks, some colleges and the military. I cannot think of a business person, or even a true economist that has participated in the government since 2006 at least. Notes: there is a certain mutual feeding between these bolibourgeois and the bloated bureaucracy and military (dotted line) as all hope for a turn at the cash register. Also there is floating permanence between exile and Venezuela for this group. They enjoy their millions overseas but still need to maintain a presence in Venezuela to make more cash and also try to erase documentation on their misdeed. The Derwick case is a great example of this.

What is wrong with all of that?

Well, look at the shaded boxes, those of "unproductive" people though some are necessary and productive in their own ways (soldiers, police, some bureaucrats). The point here is that the people in the shaded ovals are those who cost directly to the state, be it paychecks, be it populist programs, be it genuine welfare. These groups have increased a lot in the past 15 years whereas the groups that provide, in theory, the taxes for their support has shrunk.

What is worse, let's not be afraid of stating it, is that the class that is more necessary for the recovery of the country, the professionals and entrepreneurs, has been not only economically damaged, but a large chunk has been lost to emigration. Few of these exiled will consider returning to Venezuela,

Thus, EVEN IF tomorrow we get a new more efficient government, the large dependent population will have to be served while the means to restart the economy will be limited in personnel and capital. It is of course not politically correct to point this out, and certainly people like Capriles know that they cannot gain votes discussing this aspect of the situation. Indeed, discussing it becomes is a direct suggestion that the dependent class must be pared down, a sure election loser (cf. Greece).

Thus not only we are flat broke but the system is nonviable and will need, unfortunately, massive overall at a potentially great social cost. And we are in the worst possible situation when at the same time we have a "dependent" class frightened by the future and a business class that is scared to even breathe and thus unable to raise to the challenge.

14 comments:

  1. Eduardo10:26 AM

    Sad to say this, but salaries will shrink, in one or other way, to adjust to the Venezuela's product. It will happen through inflation or reduction of subsidies.

    On the long rang, it depends on the economic policy. As things go, itæ's Cuba for everybody excepting big bosses in the PSUV.

    Starting a serious economic policy, it means that professionals and entrepreneurs will see ther incomes become higher, within a reasonable time. Unproductive or poor educated people will suffer the most.

    In the last scenary, it isn't avoidable a bit of populism, to keep people eating. And the subsidies will nett to be reduced gradually, or some other kind of support must be developed.

    If you simply apply the economic adjust, you will see the same populitst people taking power after 2-3 years.

    It's an irony that left-wing populistndestroy the economy, and afterwards they blame the reasonable people of all the suffering. It has happened in all the countries.

    Hope the best, but prepare for the worst.


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  2. Charly10:58 AM

    Remarkable diagram. As for the military, I do not know if its size has increased substantially during "these cursed times" as Jean Cocteau used to call the occupation, but it looks more and more like an inverted pyramid with apparently 35 troops per general versus 1,200 in the USA. Last time I have seen this is in "L'oreille cassée".

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    Replies
    1. Thank you, thank you.

      And thank you extra for Tintin reference.

      Delete
  3. Anonymous1:03 PM

    Or the easier clear explanation: oil + ignorant people = theft-corruption.

    Is this the highest level of THEFT, ever, in Vzla? of course.

    Worldwide? That's what I'd like to know, how we compare in history..

    ReplyDelete
    Replies
    1. Anonymous2:51 PM

      Some history to help you compare -

      http://en.wikipedia.org/wiki/East_India_Company

      Limey

      Delete
  4. Anonymous1:16 PM

    Comparison with Cuba is becoming popular, so here goes my contribution to the debate. If there is a free election in Cuba today, the Castros will probably win, for the reasons you discuss above. The "metropolitan" Cubans are one single giant dependent group that will not dare vote for an end to clientelism for fear of not being able to buy food ever again, however scarce. The "exiled" Cubans are now an aging group that will not return even in their wheelchairs. This works for the Castros, except that they too are getting old and will be meeting their creator pretty soon. But fret not: their offspring will take over after the funerals.

    What has this to do with Venezuela? Well, people talk about the Cuban model that is being copied. This model guarantees that the great majority of the population becomes dependent on the state for their livelihood, however miserable. Give the Chavistas a couple more years and they will never have to fear losing an election or facing a revolt. The Venezuelan exiles? As you wrote, most will never return. A stable Chavista regime can last practically forever, like the Cuban. Those at the top will make sure it happens.

    Good night.

    Tony.

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    Replies
    1. Charles Lemos12:37 AM

      There are big differences between Cuba and Venezuela. One, Cuba can feed itself and has a fairly advanced pharmaceutical sector, one of the best in Latin America. Venezuela cannot feed itself importing 70 percent of its food and over 90 percent of its essential medicines. They are currently recycling pacemakers from those who die. That sort of situation is unthinkable in Cuba. Cuba is also fairly well managed economy. Its debt to foreign reserves is 39 percent. Venezuela's debt to foreign reserves is well over 200 percent (Greece was bailed at 178 percent). Cuba also doesn't have a multi-tiered currency exchange system. Yes there is a black market but Venezuela's exchange system enables a corruption that is second to very few in the world. The countries more corrupt than Venezuela are few: Iraq, Afghanistan, Zimbabwe, DR Congo, Equatorial Guinea, Eritrea, South Sudan, Somalia.

      But the biggest difference is really one in values. Cuba's elite really do believe in socialism and in making life better for the Cuban people. The foreign investment climate is also far better improving vastly since the fall of the Soviet Union. European, Canadian, Korean and Latin American companies have made significant investment on the island and are able to repatriate profits. The investment climate in Venezuela is at this moment the worst in the world. Apart from China, which is really buying up Venezuelan natural resources more than actually investing, few businessmen today would invest in Venezuela. Venezuela's airline connections, for example, are extremely few these days. Many airlines (Air Canada, Alitalia, Air France) have simply stopped flying to Caracas or reduced their flights dramatically. American used to have 40 flights per week to various destinations in Venezuela. Now it has one flight a day. Avianca, the Colombian airline, used to have three flights a day from Bogotá to Caracas. Now it's just three a week. Why? Well Venezuela owes the airlines over $4 billion USD in fares that were sold in Venezuela using bank cards issued by Venezuela banks. The exchange rate system plus price controls on just about everything has led to a situation where say a bakery can't get flour to bake bread and even if it did it would lose money unless the bakery received a preferential rate.

      Cuba has none of these problems. Cuba is very restrictive in terms of political rights for sure but the majority of the Cuban people do recognize the gains of the Cuban Revolution and know that there are imperfections. But in the end the Cuban state works reasonably well. After the fall of the Soviet Union left Cuba in dire financial straits, Cuba had very hard decade. The other country dramatically affected was North Korea. In North Korea, we don't even know how many died in the famine but we estimate in the hundreds of thousands. No one died in Cuba. The average Cuban lost about ten pounds in the 1990s but the Cuban state allowed small private farming initiatives and roof-top farming for urban residents. Cuba survived what is called Peak Oil. The state is also efficient in delivering basic services. Chávez may have believed he could implement the Cuban system in Venezuela. It's hard to say but for most of the members of the PSUV and the Venezuelan military, socialism is something you pay lip service to while lining your pockets. Castro would have shot anyone who blindly robbed the Cuban state. In Venezuela, it's par for the course.

      Delete
    2. Anonymous1:24 PM

      In my opinion, your view of Cuba mixes a few facts with tons of Cuban propaganda artifacts. I have been in Cuba twice. Cuba was broken, and it would still be broken if it wasn't for the Venezuelan oil. If democratic elections take place there, for the Castros it would simply means 'game-over'.

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    3. The biggest difference between Cuba and Venezuela that will not allow a Cuban outcome is oil. The wealthy and powerful could have cared less about Cuba. They were happy to see Venezuela become disfunctional as made oil wealth from fracking very profitable. The only question is who's hands does the oil fields in Venezuela end up in as to the future gov't. USA Europe massive oil companies or the likes of China?

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    4. Anonymous1:13 AM

      I live in Miami and travel to Cuba. I also meet newly arrived Cubans regularly and interact frequently with Cubans who travel to Cuba. Is is getting better in Cuba. The answer is NO.

      Folks, stop bullshitting yourselves with Cuban romanticism and using Venezuela to make you look better. Cuba is a BASKETCASE before Venezuela. Get your heads out of the sand. El Cubano esta peor hoy que nunca. The only thing better in Cuba is the homicide rate.

      Delete
  5. excelente post

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  6. Anonymous3:32 PM

    According to the Agriculture Department of the government of Canada, Cuba imports 80% of the food it consumes. The main food supplier to Cuba is the United States, despite the embargo (all payments are in cash, probably Venezuelan cash). Since 2003, Cuba has paid more than $1.5 billion for American food imports. I wish this was not true, because I have relatives there who have lost some weight.
    Tony.

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    Replies
    1. Charles Lemos10:23 AM

      Cuba does import food primarily wheat, rice and meat but it imports no where near the 80 percent you cite.. And it spends not quite $2 billion USD annually on food imports but it is self-sufficient in three critical components of the Cuban diet: vegetables, beans and roots/tubers. After the collapse of Cuban agriculture in the 1990s given a lack of agricultural inputs such as fertilizer and pesticides, Cuba was forced to go "organic." The results have been quite successful. Cuba was the only country in the Caribbean Basin to augment its food production in the decade from 2001-2010. In beans, production increased 345 percent. Your relatives did lose weight in the 1990s, the average Cuban lost around 10 lbs, according the WHO. They've gained that weight back.

      Do note this: I'm not saying Cuba is this amazing place but rather than Cuba isn't a bad a place or as evil a regime as Cuban-Americans painted it out to be. Their anger consumes them and for the most part I have found Cuban-Americans to be vile, hateful people. Marco Rubio, Ted Cruz, Lincoln Diaz Balart and Robert Melendez are cases in point.

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  7. Charles Lemos10:04 AM

    Here you go: $14 billion in Swiss Bank accounts. To put this in perspective, Venezuela had $21 billion on reserve at YE 2014 and has debt maturities due in 2015 of nearly $11 billion.

    http://www.ibtimes.com/hsbc-leaks-venezuela-had-third-largest-amount-money-stored-swiss-banks-report-says-1811706

    ReplyDelete

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