Sunday, January 04, 2015

The productivity problem in Venezuela

The mismanagement of Venezuela has created a rather weird economical crisis: very high inflation with a collapsing production.  The result is that in spite of potential high prices nobody wants or can produce; and a bankrupt regime cannot import all what is needed to replace the missing production. The question begs: why has production collapsed in Venezuela even though we have the resources and the people to produce?

I am not going to discuss the early Chavez years polices that brought us to this cliff.  You all know about political expropriations, rampant populism, waste of resources overseas, etc... What was lost then is lost and cannot be rebuilt just like that. What interests me are the reasons that do not allow the remaining producers to, well, produce. The problems are thus: very low worker productivity, huge administrative costs caused by the regime's policies, unreasonable taxes (I am not writing excessive, I am writing unreasonable), impossibility to get all the supplies, services and raw materials you need to be able to produce.

Low worker productivity

You cannot have 15 years of "proletariat" speech, of hatred to the capitalist oppressor, of plentiful of rights for the workers without any obligations, and what not without consequences. To this you add the new labor law decreed in 2012 to help Chavez reelection and basically there is no way you can have productive workers. Even the good ones, the ones that believe in the company, that believe in bonus, promotions and other incentives of modern capitalism are dragged down by those who for all practical purposes are sabotaging their work, .

The point here is that it is nearly impossible to fire someone making no more than 4 minimum wage, representing in production services at least half to 2/3 of the personnel. To fire someone you need to catch him raping a secretary during office hours or have her recorded on tape stealing from the cash register. Technically if you give a "double" severance package and get the permit from the "inspectoria del trabajo" (local labor ministry delegation) you could fire anyone. But the Inspectoria never grants its permission (unless it is a state company asking for it, as you would expect in a dictatorship). The only option you have is to negotiate with the trouble maker a sum that goes well above legal severance pay. And the difference is described as bonus to the worker for excellent services, since it is not legal to fire...

I let you guess how this increases labor costs, including increased costs from demoralized workers that see the creep getting away with murder. Of course, in 90% of the cases the trouble matter is a chavista or pretends to be.

It is imperative to have a labor force that works again. We are not in the early XIX century of human exploitation. There are plenty of laws now protecting the health of the worker, ensuring decent wages, protecting them from all sorts of abuses. But if you want to be competitive in the world you need workers to also do their share.

My suggestion here is that the regime changes the no-firing policy for a no reduction of payroll. That is, you can fire whomever you want, at double cost, BUT you need to hire a replacement in, say, 2 months. The commie regime would certainly refuse that because it is a way to accept the return of some meritocracy. However, speaking from ground zero, I can assure that "constant payroll" would increase in a matter of months productivity by as much as 20%, helping inflation control.

Huge administrative cost provoked by the regime needs to control it all

The best example for that is that NO TRUCK with food items or supplies for the manufacturing of food can take up the road without permit from the government. It is incredible that the regime accuses the opposition to promote contraband at the borders SINCE the only way to circumvent SADA and other organizations of that ilk is through regime internal complicity. And that complicity can only come through the army that patrols the roads.

But there also many useless regulations that create costs. Rather than go into the details let me tell you what is actually the worst outcome: constant inspections. They are very costly because the state inspectors are very arrogant, demand that all activities be stopped at least on administrative level so that they can be attended immediately and at will for any item they wish to see. Never mind that if the inspectors come from Caracas you have often to pay for all of their expenses...

These inspections have only one purpose: scare the private sector, put political pressure on business owners, try to subvert the mood of workers when inspectors manage to find an irregularity.  Reducing them or making them more sensible could increase productivity by, my guess, 5%. It also would reduce costs in that most business now are paying administrative workers, and lawyers, strictly to deal with the morass of paperwork demanded. I suggest that a company that passes an inspection should be exempted for at least one full yer before there is a return of the given bureaucracy, except, of course, for the sanitary inspections. Today companies like Polar are inspected and reinspected and rereinspected through the year....

Unreasonable taxes

In Venezuela taxes are excessive for the development level of the country, but there plenty of ways to lower the bill. This is not what I have in mind. What bothers me are unreasonable taxes.  Let's discuss the LOCTI, the law that forces business to invest part of their receipts in technological development.

For this blogger the LOCTI may have been the only "good" law that Chavez ever promoted. Companies were supposed to invest a percentage of their receipts, not their earnings, on technological development. That investment had to be approved by the regime's corresponding office but you were reasonably free to present your project, or give your money to a campus of your choice or pay for training for your workers. If none of them applied to you, then you could give it to the state that would invest in research or higher education.

The law worked so well for a couple of years that the regime had to change it. See, everybody understood that being forced to invest in technology was not a bad thing, and that it could make you more competitive and productive by international standards. Ourselves did three projects approved, one supporting a researcher, one to buy a heavy analytic laboratory equipment and one for a series of course for our administrative personnel. And we were duly inspected and pass the inspection with flying colors, proving that not only we did do the investment but we put it to work and even increased payroll.

What did the regime do? It forced everyone to put the money with the state and ONLY if your project was approved you would receive the funds. In the last 3 years we have not been able to have anything approved IN SPITE of our favorable track record. And as far as I know NONE of my customers have had their projects approved.In other words, LOCTI became a mere new tax that nobody knows where it is spent. Though we are all sure that corruption benefits from it.

My suggestion is that there is a need to review some laws that have become abusive ways to tax business. For example, bringing back LOCTI to its original purpose would update reasonably fast the technology of the business still alive. make them more competitive, more productive. I would be willing to bet that LOCTI back to its old self could have by itself a 5% hit in productivity in less than two years at a minimum cost for the state.

Impossibility to get raw material, supplies and services

The three points that I mentioned above would cost little to the country and would allow productivity to increase a lot just within a year, while allowing a better control of inflation (bringing it down to lower two digits is another story, but we have to start somewhere, don't we?).

The big problem we have RIGHT NOW, is that inventories of raw materials are low. Ourselves have no inventory for about half of what we could produce and no more than a month for what we can produce. When we reopen in two weeks we will be able to produce at 25% only, for a couple of months at most. It is that simple, and that simple for all business in Venezuela today.

We cannot solve easily this situation as oil prices are down, as the regime fiscal situation is a mess, as there is simply no $$$$ to buy raw materials outside as we produce very little of them here. I will discuss that in a following post. However there is something simple that the regime could do right now to help restart the economy. Absolute priority for the few $$$$$ available should be for food, medicine and spare parts. Forget about TV, travel, new cars, whisky, Italian panettone and the like for a couple of years. The only imports for the next year should be raw material for;
- a few targeted food items that can start fast. For example I can vouch that poultry and pork production could be sufficient within a year. Within two years we could get back in onions, tomatoes and few other vegetables if local producers were allowed to bring the supplies they need (privatize Agrosileña?). We could ban imports of pasta but allow freely import of wheat to do all the pasta we need here.
- raw material for medicine manufacturing (we can do a lot of generics already, we only need the regime to allow for those imports). And medical supplies of course, as our big ticket item that could be provided for easily by cutting half of the oil we send to Cuba.
- spare parts of any type. No more new trucks or cars for a year but at least all the spare parts the ageing transport system needs.

That is it, the only three things that can come in for at least a year. We need workers to be fed, cured and we need stuff to be distributed across the country. I know, it sounds very primitive, very fourth world. But that is what chavismo turned us into. No?


I am not inventing the wheel here. But I am offering simple measures, that would have a relatively low cost for the state and that would allow production to jump start. I am willing to bet that if the above is applied in the next three months in a year from now we can end the recession. That is the advantage of a destroyed economy, when you start from 0, such as after a war, growth is fast. And chavismo has been like a war. We are now in a post war recovery if the regime changes, if its only objective is not anymore corruption and looting.

One can always dream.


  1. Daniel, the key to handling state inspectors is to rent extra space, equipped with computers, copy machines, coffee pots, and a tray of small empanadas. This extra space has to be manned by knowledgeable employees transferred from the appropriate departments. Given their vindictive tendencies it's better to hang photographs of Chavez, Maduro, and Fidel Castro on the walls. Management must wait at the front door and greet them when they arrive around 10 am, and stand by to answer any questions they may have. This system worked fairly well for my company until it closed and left the country.

    1. Right. But only fairly large companies can afford that. And when the inspectors want to roam the company you cannot stop it.

    2. Daniel, the system they have is cuban inspired. The structure is intended to destroy independent businesses. They don't think they can allow such businesses to thrive because that sets up a semi independent entrepreneurial middle class. The cuban regime is used to controlling people by overt repression (beatings, jail, torture, execution), and by denying them decent work. This means they are on a path to destroy small and midsize business.

      A large business is easier to inspect and control, it's not as likely to bribe inspectors, and the set up invites foreign multinationals with the low ethics standards needed to cooperate with these guys. Unfortunately such multinationals are easy to find. They love the lack of free unions, the discipline of a highly structured society where slaves are kept in line by the state control apparatus.

      You may answer, "but look at cuba, they are opening opportunities for free enterprise", and my response is to look carefully at what they do. The idea scares them, so they put a lot of constraints on such businesses, and meanwhile they are maneuvering to bring in large foreign multinationals.

      I had a debate with Miguel Octavio about this problem. What is emerging is a very sophisticated dictatorship. It is hereditary (Raul's replacement is Alejandro Castro), it has a heavy dose of personality worship (Chavez, Castro, and Guevara Cult), it is a new 21st century brand of fascist populism. And it is imperialist. They have enormous influence over Venezuela, Nicaragua, Bolivia, and a couple of small Caribbean midgets. They scare the rest. They are financing and guiding their franchise in Spain (Pablo Iglesias and Podemos).

      And if you tell me a small ragged band of Caribbean dinosaurs can't emerge as a valid Neo fascist enterprise, consider what the Vatican did on the back of a crumbling Roman Empire, the power of the Venetian merchants, the Vikings, and other times in history when a small, rather primitive group with a key ingredient managed to expand and control a lot of territory, even if that glory only lasted a few hundred years.

    3. Daniel, I'm afraid Fernando is correct and even optimistic. It's deliberate.

      And Cuba is actually a 'nice' case. The Castros need a population to run the country. No so much for Venezuela.

      Venezuela is a resource country. For dictatorial rulers, wealth is to found in the sandstone layers below the ground, not in the people above the ground. The population is extraneous and useless to the rulers, even a hindrance to them. You don't even need your population to run the oil industry. You can externalize it to foreign oil companies.

      So, the poorer and weaker whoever the rulers didn't manage to exile or kill, the better for the rulers. If it means the remaining population has to live in squalor at subsistence level, "great".

      If you want to see the future of Venezuela if those guys manage to stay in power much longer, look at Equatorial Guinea.

    4. Anonymous11:02 PM

      I too agree with Fernando. I also think that the exchange rate system in place is aimed at thwarting local production (beside nourishing corruption). How can a local producer, facing a >60% inflation, compete with foreign goods imported (albeit every so often) at SICAD 1 rate? The whole system seems intended to force the Venezuelan people to revert to government aid for survival. Unfortunately the government is now bankrupt.

  2. The reality is you can slow the crash but with this regime in play you are going to have run away inflation and no production. The private sector either has little money left or is foreign either way will not invest in this gov't no matter what changes it makes. With oil ad low as it is with no sign of a turn around in coming year the countries productive system will only further diminish. Now if this gov't is to fall and a secure component one was to arise then with so much of the productive system missing the country would turn around very quick. Foreign investment would flood in given the potential wealth and opportunities the country could offer. Investing a dime in this country under this regime is simple stupidity regardless what changes they make. And foreign investment is the key to stopping this free fall.

    1. It won't fall. Nine years ago I sat at a meeting in Venezuela in which we discussed whether the regime could survive given their irrational policies. My bosses brought in a few "experts" in economics and political science who in general agreed it was impossible for the regime to survive. But these experts had never lived in a gulag, and I suspect they never read 1984. Thus, they forgot to factor in that lowering the standard of living and using a very repressive system will turn people into rather docile concentration camp inmates. The North Korean Kims, the Khmer Rouge under Pol Pot, Cuba under the Castro family, and Myanmar under the military junta are good examples of how one can squeeze down on human beings and keep them enslaved. And unfortunately nations which claim to be for human rights are led by short sighted and venal politicians, and have business elites who are quite willing to work with these monsters. The Maduro regime won't fall. It will just turn Venezuela into a living hell. And nothing will be done about it.

    2. Although I fully agree with you on the bleak and dire outlook there is a difference. Big money likes the unrest caused by these incompotent unruly dictators. They keep disorder and make capitalistic places like the USA look good in comparison. Also the dysfunction of the worlds largest oil reserves looks good to the fracing companies. However at some point big money will want that oil field in Venezuela and will toss out the dysfunctional Chavistas. Big money controls all the world.

  3. Charly2:58 AM

    "The only imports for the next year should be raw material ......". Reasonable solution only work with reasonable people. I have in my living room a beautiful natural spruce tree imported from Canada thanks to CADIVI, CENCOEX or whatever one wants to call this monster these days. The other day I go to the local CM looking for toothpaste. The whole personal hygiene shelf is loaded floor to ceiling with ORAL-B mouthwash. Go to the local FARMATODO, also only mouthwash in sight. So we mouth wash and gargle at satiety these days. Do you want me to carry on with examples?

    1. Mix the mouth wash with baking soda and you get a pretty decent toothpaste. But you got to mix it just a minute before you put it in your mouth. The baking soda can be bought on the black market.

  4. Anonymous4:48 AM

    All logical thinking. But the idiots in charge of your country dont know how to do anything other than scratch their asses.

    Unlikely any of this happens ever.

  5. Anonymous9:40 AM

    El hombre nuevo va a tardar varias décadas en desaparecer por causas naturales. El hombre viejo es uno que se hace chavista. El resto somos escuálidos.

  6. For the oil industry, you missed some of the elephants in the room. After the strike of oil workers a few years ago, Chavez broke the strike and permanently fired the oil workers. The workers fired were mainly the more educated worker who mainly had no choice but to leave Venezuela to continue to work in their field. This was the great brain drain of the Venezuela oil industry.

    Due to the brain drain, Venezuela had a much greater need for foreign workers and large multi-national oil companies especially given some of the heavy oil that takes large capital investments and a very experienced engineering and program management team to get it done. Initially, the internationals were invited in - but Chavez changed the terms of the leases unilaterally. For the companies that decided to stay and work with Venezuela, he later changed tax rates a few different times. Basically, this caused the international oil companies to maintain only the minimal investment needed to try to recover at least part of their investment.

    For small companies, the picture is even worse. What Venezuela has done to some of them is to force them to sell their oil to the government oil company which in turn sells the oil internationally. The problem is that the government then only provides some of the money due to the small oil company. This essentially steals the last value of the company from them and prevents them from investing.

    The final issues are the ones that everyone else has. For the non-government company, they can't get any hard cash to buy supplies and parts. The government oil company has no extra cash as the government siphons it off for social programs.

  7. Venezuelan President Nicolas Maduro reiterated on Wednesday that Venezuela is not “a broken country” after his meeting in Beijing with his Chinese counterpart Xi Jinping.

    “Sometimes there is a whole international conspiracy to try to appear in the world to Venezuela as a broken country. Venezuela has an economic power, productive people, with the highest oil reserves in the world,” said the president after the meeting to several media.

    Maduro said his government is able to “get the financing” that his country needs to “ensure the functioning” of the economy.

    Currently Venezuela is in recession, with annual inflation of 64% in 2014 and a shortage of about one third of the staple products.

    Maduro is on tour in China since Tuesday, wherein according to analysts he expect to get more financial support at the big drop in oil prices, the source of 96% of foreign exchange into the country.

    China is a strategic ally of Venezuela, and in recent years, granted to 42,000 million in long-term loans, and 24,000 according to official data have already been canceled.


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