Venezuelan devaluation and Giordani for dummies!

[UPDATED] The devaluation of last Friday will be a major problem for Venezuela, but then again it should not be that bad.  That is, if the government indeed had found the economic wisdom it has so lacked for the past 11 years.  Unfortunately reading planning minister Giordani words on the Sunday paper tells us that they still do not get it.

First, of course, I need once again to reintroduce Giordani, Chavez economic guru, who has been directly or indirectly associated to the Chavez economic policies since he took over in 1999.  As such, Giordani IS THE RESPONSIBLE for most of bad decisions taken.  By most I mean somewhere around 90%, not just half plus 1. Let's not forget that Chavez is a lout, a cheap soldier who might be a great politician but has neither the education or the instinct for economics. It has been Giordani's role all along to tell him what should be done to manage a modern economy. But then again Giordani was never interested in modern states economics, stuck somewhere in the socialo-communist models of the 60ies... You can find a previous portrait of Giordani misfit status that I wrote here. This is the minster who was in charge just before the devaluations of 2002 and 2003, and the corrupt currency exchange control plays of 2005 through 2009.

So what did the dear man said Sunday? Taken from El Universal:

First he congratulated the government will by indicating that the dollars for travelers will be at 4.3 instead of 2.15. Is the man serious? If this is such a good measure why not take it earlier? The country would have understood very well a "special rate" for travelers as long as these would not be limited in their lodging and food expenses. No?  Let's not forget that state employees sent on mission get a direct allowance in dollar and in cash without suffering the dollar limitations that we mere mortals have had to suffer since 2003.  When Chavez spends the night in some posh Madrid hotel, he blows up in dollars the yearly allowance of many a Venezuelan.  Is Giordani not aware of that?

And then blithely Giordani tells us that the devaluation is going to be good for local production and exports (he does not call it devaluation, he calls them "economic measures" which, like like it does for Chavez, tells us he is at least embarrassed at some level). Well, we must first be happy that he has moved from the 60ies to the 70ies economical principles when devaluations and hyperinflation were considered good tools for economic growth until some order came in the 80ies....

But let's assume that Giordani means well, that he is only a retard.  Economic recovery IS NOT GOING TO HAPPEN. The structural problems of Venezuelan economy cannot be solved, not even helped by a 100% devaluation.Is Giordani still unaware of the following facts?:

- The past decade has seen very little investment outside of distribution and oil industry.  Private investment has been limited to keep business running and in some cases moderate expansion.  Thus currently Venezuelan industry is outdated, uncompetitive, unable to sell products where it matters (read: where you get real dollars for your goods).

- In addition labor is very expensive in Venezuela and with a 100% devaluation we can expect wage hikes to hit the boards soon, not to mention that the new labor law discussed at the Nazional Assembly threatens to make labor not only more expensive but simply more unproductive than what it is already.

- Of course let's not forget the electricity crisis which already has affected business greatly and threatens to get worse, forcing suspension of production shifts, and shut downs for one or more days every week.

- Never mind the incredibly complex red tape associated with doing day to day business, a red tape that gets worse when you want to import or export anything.

- And while we discuss exports: to produce something, the Venezuelan producer needs to import often as much as 80% of its raw materials.  These now will be twice as expensive in average.

- And who is going to take a chance to increase production for export when there is no legal security?  This is particularly difficult for agricultural products that Venezuela could export in significant amounts if the country side where allowed to produce without the price controls it is subjected to, the land grabs that can come over your property out of nowhere, etc, etc....  By the way, is Giordani aware that the government policy has been to ban exports on things that were exported in the past, such as coffee?  Or that the problems with Colombia have killed the last industrial export market that Venezuela had?

- and let's not enter into the details of costs associated to corruption, deficient road infrastructure, insecurity, etc, etc....

It is not that the Venezuelan business is sent to face the world with an arm tied in the back, it is sent to face the world with an additional iron ball on their feet, chain gang style.

Thus the devaluation will fail to generate any growth in Venezuela. The economy will not expand this year because:

- inflation is going to kill purchasing power.

- business are not able to expand their production because too many are outdated and too many depend on raw materials and imported machinery which costs will increase. The paradox here is that Venezuela production was actually at the max in early 2009, unable to satisfy demand and thus helping in creating an inflationary system just as the government kept throwing money in the streets either through social programs or overpaid public employees. The most perverse "Dutch disease" combining stagflation with inflation scenario (sorry for this oxymoronish sentence but with Venezuela we are going to have to develop new economic terms to describe what is going on).

- but more importantly than all of the above: the private enterprise in Venezuela has absolutely no trust in the government whatsoever. As long as Giordani does not move ideologically in the 80ies or he is replaced by somebody more competent and less ideological, IT IS NOT GOING TO HAPPEN.

But let's be fair and recognize that when everything is said and done that Friday devaluation is not going to make matters much worse. The structural damage has already been done to the economic tissue of the country. Devaluation is merely going to aggravate an already bad situation.

Inflation in fact might manage to stay below 50% (but higher than in 2009 by at least 10 "official" points). Already roughly half of the country imports were done at the parallel market of around 6 Bsf. for an USD (higher in fact for fiscal reasons but this is deserving of a separate post). If now at 4.3 Bsf. MORE people get access to dollars we could indeed have a controlling effect on inflation. A temporal one but a positive effect anyway. Though we still cannot escape the price increases that come from the "favorable" rate going up from 2.15 to 2.60. Once we reach the end of the year, that the elections are over we might be in fact in a worse situation than what we were last Thursday.  I am afraid that this is the case: chavismo really does not care about the economy since it is bent in creating a dependent state where citizens depend on the state for their everyday needs, Cuba style, supposedly the best way to control people and limit dissent. As such Friday devaluation must be understood as a mere ploy to get more cash (in Bsf.) to pay Chavez's way through 2010 elections. Period.

If the government does not take stronger trust generating measures, the devaluation of of last Friday was like a soothing lotion applied to an open wound, without applying the necessary antibiotics. You know what happens to the wound in such cases.

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Update: for those who think I exaggerate and write from the gut, please welcome to the club the WSJ analysis which pretty much says the same thing as this post, with less raw meat.