Thursday, July 07, 2016

Diary of Venezuelan businesses demise

It is now vox populi that Venezuela is suffering a major politically induced economic crisis which has yielded bread lines and people dead from the lack of medicine. The two root causes are well known. Historically it starts with a dependency on a major resource to feed a dysfunctional patronage and welfare state; oil. Populism has been the continuing line of politics since the late 60ies, a line dramatically expanded by Hugo Chavez since 1998. To this tradition Chavez added incompetency, empty ideas, willful prejudice, corruption and even drug traffic, the lone prosperous industry in Venezuela these days.

It is not the aim of this entry to detail the catastrophe that has befallen Venezuela. I will only write some of the key events that have happened to my business, making it nearly bankrupt not through my own possible incompetency but through regulations that have strangled the life of all private business that are not associated with the corruption of the regime.

Chavez started with a new constitution that had a "free property, but..." feel. At first things kept as they were in 1998 which is to say not very well. But we could work, we could import raw materials to work, an important element since already in 1998 Venezuela was a net importer of raw materials and semi processed goods. Still, my business, agribusiness in nature, was able to do some small exports and was poised to expand these significantly to Colombia. Other plans included a project to export to Europe a choice crop from our family farm once our volume justified the export needs and costs, a farm for which we had obtained organic certification.

Then, slowly but surely the regime started to establish a series of controls that wrecked the economy. I am not going to go through them chronologically, just giving a main list.

In fairness not all chavismo intents were nefarious. For example the LOCTI law was voted to promote investments in technology by the private sector. That law created a tax that you could be exempt of if you used the tax amount in an investment project. That is, if your project was approved you could purchase, say, research equipment and then import it tax free to Venezuela. You could also include in the deal expenses to develop the system in your business. It was not a tax break per se, but autonomy in using some of the tax money for a productive project. An incentive to invest, in other words.

We did that, we purchased an analytical tool worth at the time 50,000 dollars, including miscellaneous expenses. Plenty of people did as we did, small projects like us or large laboratories set ups. But we should have known that such goodwill and constructive legislation would not last. First came the state inspections to verify whether we had actually done what our project stated. One day I saw a contingent of a dozen people arrive unannounced to inspect our purchase. We wasted two days explaining everything. We passed with flying colors, of course, but we already noticed the growing distrust of the regime as to anything private. And the increasing bureaucratic nature of the regime to send a dozen people where a single inspector would have sufficed, for one day at most.

You could be forgiven to believe that our track record would have allowed us to invest in yet a new piece of advanced technology, but this was never to pass. The regime saw LOCTI as a way to distract tax revenue for the state, not for the technological advances it brought to the country, in addition of creating new high paying jobs. The LOCTI was modified. Now only if the government approves the project would you get from the government the money for it, allegedly out of the tax pool collected. That is, first you should keep paying the LOCTI tax required without any guarantee that someday you could recover part of it in a suitable project. Of the diverse companies I do business with, not a single one has had a project approved in the last 7 years (never mind my own group). LOCTI is now just an additional tax burden. Note that one of the LOCTI goals was to finance public research. This one today is nearly zero. Nobody knows where LOCTI money goes but we all must pay.

Another shock came when currency control was installed in 2003. From then on you had to seek an import permit from the government to obtain the foreign currency you needed for such an import. This generated an extraordinary graft industry, a self explanatory consequence that I will not detail. What it meant to us was the creation of three job positions of people devoted only to tracking all the required paperwork. That is, these three people do not take any part on the purchase decision process, they only do the paperwork. Their only "productive" contribution, occasionally, is to supervise the arrival at harbors of some of our imports.

If this above is a direct cost, and if corruption is an indirect one, there is major indirect cost associated with such a control system: the impossibility to draw a coherent developing plan. All your projects are at the mercy of a bureaucratic erratic delay and when you deal with perishables you need to be conservative and slow down you growth since the failure to receive in a timely fashion corn for your feed or fertilizer for your crop can ruin you. In other words, you cannot start producing until you are certain that you will get it all at hand, a process that can add months to your production delays. Never mind the costs from holding stocks.

Speaking of erratic supplies. These were made worse by the policies of expropriation of good land and good farms. As rice farms were intervened, as supplies for cash crops was interrupted through expropriations of agricultural giants like Agroisleña, it became increasingly difficult to obtain a regular supply for your crops and animal feed, hence the continuous drop in production in these fields, to today's shortages. And never mind that the currency exchange control fostered corruption to the point of favoring for years overpriced imports that destroyed the local production which is today missing.

This already would be enough, but it is not all. Another apparent good intention of the regime was to improve workers safety. Unfortunately this one through the LOPCYMAT law did not even have a few halcyon days like LOCTI did. This new law was conceived from the start not only as an improvement on mandatory safety measures for workers, a commendable goal by any standard, but also as a way to infiltrate politically the work place. It is a requirement that elections are held among workers to set "safety delegates" personnel who benefits of union privileges, namely impossibility of being fired during their tenure.

That is still something we can work around. What is not is that these elected representatives must attend, at business expense, monthly day long seminars which are basically an exercice in indoctrination against the evils of capitalism that is intent on killing workers or something to that effect. These seances come with red Che posters and assorted insults if the safety delegates do not show enough enthusiasm for their mission and if they do not report enough irregularities from their employers. Never mind that to face the sometimes ridiculous requirements of the law we have had to hire special consultants to organize the safety books, organize the workers elections for safety delegate and what not. Needless to say that after an early sense of empowerment those safety delegates became tired of the whole charade and now business must beg for workers willing to run for these elections and in our case even offer bonuses for those willing to put up with the chores imposed on safety delegates.

Other bureaucratic workers right were reinforced. Although not properly a bureaucracy, the near impossibility to fire workers also generates many costs. Besides the need to negotiate in advance settlements with nasty workers so that they "willingly resign their job" there is a whole addendum of paperwork required that we did not use to have. For example we now have several lawyers on call to deal with those situations. This in addition of increased HR departments work as we now have to provide, for example, "entertainment" for workers and their families. This gives you an idea of the paternalistic functions which are foisted on business.

Another ruinous aspect is the price control system. Fortunately the products I work with are not subjected to price control. Yet in theory we cannot have more than 30% pricing over our production costs. So this adds increased pressure on the costs department, more work, so that we have a finely tuned cost system and we can keep our benefits at no more than 28% and avoid those ruinous inspections that can block for days all the workings of a company. Yes, when these inspections come by law the inspectors can demand any paper they want and you must provide for them no matter what you are doing. That is, for the duration of the inspection you can only attend to the very basic needs of your company as these inspectors literally suck the life out of you. Let me remind you that a 28% gain with an inflation in the three digits means that you actually lose capital over time. Never mind that you need to adjust prices at least once a month, hence more calculations. But I digress.

There are more examples I can give but to finish this let's revisit the organic crops we were planning on developing to get enough volume to justify exports. Sometime in 2002 or 2003 if memory serves me well Chavez decided that Venezuela should not export food, that it was a crime against the Venezuelan people to sell its food overseas. I am not going to insult the reader intelligence discussing the ignorance of Chavez as failing to understand that it is OK for Venezuela to export tropical fruits in exchange of apples and wine.

The fact of the matter is that not only we had to stop the small exports we were already making, and lose all the marketing made before, losing those markets, but even the organic farm project was stopped. We did not renew our organic certification. We stopped planting new land. We basically maintained what we had, at a loss, in the hope that someday exports be authorized again. To which I must add that the devastating insecurity that now hovers all of the farm land of Venezuela has made it impossible for us to visit the farm for the last 4 years. We have to rely on intermediaries and hope for the best. Owners of land simply cannot reside on their lands anymore as they will, within days, be attacked by armed gangs bent on ransom. If you persist then you must pay for armored vehicles and at least a couple of body guards. More costs that not every business can afford.

There are also two other factors straight from bureaucratic hell that counters any attempt at improving production. Some stuff can only be bought through the government now, for example grain for feed. Needless to point out how delays increased and corruption costs became prohibitive: in some cases businesses have had to pay 6 times over the official price on some of the grains needed, money paid through false factures for false services rendered. Another beauty is that nothing that is used to manufacture food for human consumption can circulate on Venezuela roads without government permit. That is, if I want to deliver a truck of, say, morning cereal, I need to declare it on line, await permission and declare it again once it has been delivered before my customer can use it. Imagine the delays in a country where Internet is more and more deficient. The information must even contain the ID card number of the driver! Any missing detail and you risk confiscation of your goods on the road at one of the Nazional Guard check points. You can figure out the added costs, including corruption of guards that check you out on the roads.

I trust that after this text you will understand better how come there is no food on the shelves in Venezuela. If I were working in the pharmacy sector, or textiles, or whatever I could probably write a similar tale of bureaucracy run amok. There is no mystery as to why Venezuela is not producing anymore. It is not due to the fall of oil prices. It is due to the incompetence, neglect, and stubborn ideology that is the core of the Chavez project. Let's not forget that in addition to bureaucracy there are many problems with production: devastated infrastructures, from roads to electrical plants; outdated production methods that make us non competitive since we have been frozen for 10 years now; difficult living conditions which make workers less productive (like when they rush out of office during working hours to stand in line for a pound of flour). Etc.

All business in Venezuela still operating and involved in the production of hard goods are nearly bankrupt, holding for dear life. There is no security, not to your property, not to your persona. You cannot plan your production in a rational way. The crisis aggravation has made it nearly impossible to get foreign currency from the regime. Our production system is falling behind the rest of the world in quality and competitiveness. In short, we work harder than ever for less production than ever, while struggling to stay alive as we see all our gains basically end up in the pocket of corrupt officials while el pueblo stands in line and starves.

There is only one question to be answered in future history books: how much of this destruction was willfully planned from the start. It is frightening to think that a regime deliberately planned for the impoverishment of its fellow citizens. But there is no other explanation that holds, in particular since Maduro replaced Chavez in 2013. Then the price of oil went down and the regime found no other palatable solution for their needs but to increase control and keep the level of corruption money, discovering that blackmailing el pueblo was easy if that one was hungry.

What we need, fast.


  1. Excellent, pragmatic business example of what goes on in Kleptozuela.

    "It is due to the incompetence, neglect, and stubborn ideology that is core of the Chavez project."

    This is where I disagree.

    Although Daniel did rightfully mention the key word a dozen times in this post, it is the root of all "negligence" or fake Chavista "ideology", or even "incompetence".

    Sure, there are few educated, competent Venezuelans left in that nightmarish place, most of us got the hell out long ago. For the same reasons this article describes: risk of being killed any day, crime rates through the roof, and the difficulty to conduct an honest, proper business, without engaging in bribes, tricks and endless bureaucracy. So about 1.5 Million of the few educated, competent professionals left to Madrid, Miami, or wherever they could.

    Still, that's not the main reason Vzla is bankrupt, and a veritable mess. It's Galactic Corruption; everywhere, at all levels, not just the Chavista "government" and the politicians, and the richest bolichicos. No. Everywhere. "El pueblo" is largely immoral and corrupt too. They will jump at any opportunity to steal something, or cheat at something, or invent some "tigrito" or twisted "guiso".

    The guards, police, union workers Daniel mentions are just a few example. All Corrupt to the bone. The "bureaucracy" mentioned here, which exists everywhere, not just public but also private agencies, is also rooted on massive Corruption schemes. To extort everyone for money, to get paid more for less work, to get rich.

    This massive "bureaucracy" is nothing but mechanisms designed everywhere, at all levels, so that crooks can steal money. "Chavistas" or not. There are really very few true "chavistas" a dead crook, a dead "ideology" and a fake one from day 1, of course.

    No one really believes in "socialismo" or in helping "el pueblo", all Millions and Millions of Enchufados was is money. The root of all evil, as they say. Why the increasing drug trade? Money. Profits. Why the so-called "incompetence", the stupid exchange controls or "precio justo" and all the dumb rules? To steal Money, that's why.

    Klepetozuela is nothing but a doomed country filed with crooks, everywhere, at all levels, not just the politicians. Everything is rotten, most industries, PDVSA, Corpoelec, you name it. All twisted crooks, "bajate de la mula, cuanto hay'pa eso, como quedo yo ahi?" Not all, but most pueblo people are twisted, zero morals. Most private businesses too. Not all, but most.

    Add the lack of real Education for 90% of the populace, to the 90% corruption, and you get the utter disaster we call Venezuela today. And it's only gonna get worse, MUD or no MUD.

    1. This comment has been removed by a blog administrator.

    2. corruption is just personal profit from ones position . The genius of capitalism is that society and the law is arranged so that the human urge to profit benefits society and that corruption in the free markets does not exist. The essential evil of socialism is that society and the laws are arranged so that ALL profits are purely personal , none benefit society and every transaction becomes either corrupt or unprofitable . Anyone who extols, preaches or practices socialism is engaging in evil whether that is their intent or not . For a more theoretical exposition as to why socialism can NEVER EVER work , just as a matter of economics , one should look to Von Mises (either Human Action or Socialism ) . Simply put prices arent possible under socialism and as a consequence resources cannot be utilized profitably . Thus most projects result in products worth less than the resources and labor used to make them .

  2. "There is only one question to be answered in future history books: how much of this destruction was willfully planned from the start. It is frightening to think that a regime deliberately planned for the impoverishment of its fellow citizens."

    There is an English language adage that I think applies, "never attribute to malice that which can be adequately explained by stupidity... but don't rule out malice."

    In this case, the question is whether or not malice can be ruled out. I believe that the Hugo Chavez very much disliked most capitalists. But like socialists in the past, have found that it is difficult to run any kind of productive enterprise without businessmen. He could not get rid of them entirely - however, he could make it more difficult for them. The few bright spots in Venezuela could probably be attributed to the passing influence of some advisor. As time went by, Chavez become more and more corrupted by the power and insulated by advisors. He might have really believed some of his own rhetoric about Capitalist and US plots against him.

    Thus, the system in Venezuela evolved in a manner that is very antagonistic to business. But Chavez and Maduro probably never intended for "El Pueblo" to go hungry or become more poor. It is simply an inevitable consequence of the mixture of economic ignorance, belief in socialist ideas and dislike of capitalists.

  3. Sorry for the typos and missed words. I promise to proofread in the future.

    Last comment: and why all the Corruption, World Record Crime and murder rates, horrible economy and inflation, etc? Because there is no accountability, no punishment, no rule of law. Because all the cops, guardia, judges are all also totally Corrupt. Thieves.

    The only way such a total mess can be fixed, like it or not, is with a very, very tough government. A right wing Dictatorship, sorry to say. Yes, a Pinochet or a Perez Jimenez of sorts, unfortunately. Thousands less people die, they get educated, there is law and order, and when they get out people are more disciplined. And they steal a LOT less than adecos/copeyanos and Chavistas. And they build infrastructure for decades to come. Look at the economy under the infamous Perez Jimenez, and what he built in just 5 years, look at Chile now after Pinochet. Sadly, that's the only way for Vzla to get better.

  4. Although as Sledge says corruption runs a muck, I find it very difficult to believe corruption and stupidity is what lead Venezuela to where it is today. I think it is very clear Chavez never cared for the poor and likely did not hate the capitalist as was ultimately one. He used the poor who made up the majority of the country to create a dictatorship. But as a very rich man explained to me once money is not important to the super rich, as they take it for granted, power and control is how they measure themselves. They often feel other people are lessor people then them and should quiver in their presence and be subservient in all ways. I believe Castros/Chavez made a powerplay on Venezuela using oil wealth, and existing capital wealth to abuse the voting system to gain the ultimate control. Once in control they want to take all from the populous such that it is completely dependent on them and further the populous falls greater the spread of their superiority.

    1. Canadian, I reiterate massive Corruption at all level is the main cause for Vzla's disaster, by far. Many got very rich long ago, yes, and craved the Power, more than money. But rich crooks like Cabello still want to stay in power because they risk JAIL time, and confiscation of their stolen properties worldwide. Look at Rincon. Plus many are involved in drug trade, so they want to stay in VZLA to avoid the DEA.

      That said many others, at all levels, from union workers to customs workers, to average public employees on all ministries, to mid-level managers, Millions of people still crave money and are desperate to steal more. Which they do every day, in smaller amounts. That's the corruption I talk about, everywhere, by the millions of people, in every town.

      Finally, why do you think the Exchange Controls and Price Controls are still in place? Everyone knows they are destroying the economy. But they use such stupid tools to STEAL money. Not to mention putrid companies like PDVSA with thousands of corrupt employees, or Corpoelec, or the mining industry. etc. Heck, even a Perrocalientero (hot-dog sales man in the street) or an average taxi driver usually tries to steal every chance they get. Corruption in Kleptozuela is everywhere. That's the problem. Because there's no punishment, no laws, and even the Judicial system is corrupt, not to mention the BCV, or the infamous military crooks.

    2. Sledge although there is no doubt thieft is rampant and you may be right it is the root of the issues I believe it too is part of the overall design. Complete destruction of society including education and industry allows the 100s of billions stolen at the top to go unpunished and for the people left to have very low expectations. Maduro is by design to be the blunder. At some point a new Chavisno will come in and reduce the crime and ensure people can eat and have healthcare. Likely will happen when oil goes high and the people will settle on this new form as acceptable. At which point Venezuelans will live as Cubans and the Castros will not only have drugs at a larger scale but oil too. All this was acheived with mastermind to steal billions tge country and future trillions. The only questions that remains given the Venezuelan people have played out exactly as hoped is whether the USA elite are rewarded or do they at some point end this in order for benefit of the USA elite.

    3. Also the current environment will sort out the lions from the sheep. Once all lions are jailed or left the country all that will be left is the spineless sheep who will gleefully accept a Cuban way of life.

  5. Lesson learned: when populists who visit Fidel and Raúl take over government a very strong effort has to be made to force them out. And all your capital has to be moved out gradually but without any misgivings. The going price for your business is whatever you can get. Get it all out and if you wish work hard to knock off the communists.

  6. Now we got it from the horse mouth. Thanks Daniel.

    One small point: "...discovering that blackmailing el pueblo was easy if that one was hungry". That was discovered a long time ago in the life of the robolution. I remember Gaicaipuro Lameda then president of PDVSA being horrified when Fidel told him exactly that and that was in 2000 ( So it was in the card since the beginning, probably when coup monger Chavez was being brainwashed by Fidel before 1998.

  7. Anonymous8:19 PM

    Someone mentioned how good it was during Perez Jimenez, and he is correct. Yet, the day after he left the hatred came out together with crime and corruption. Similarly when Gomez died.

    This process has been in development for lusters. Venezuela just never had any game, that's the truth. We never had any game because we convinced ourselves a long time ago that planning and reasoning are futile. What happens today is just a natural consequence.

    But enough of the past, what can be done now? Just electing someone else won't do



  9. Boludo Tejano6:56 AM

    Daniel Duquenal on Twitter:
    How Joseph Kennedy ended up as a vulture preying on the remains of Venezuela carcass. Shameful!

    Citizen Joe wants his nearly free oil to keep coming, so he can continue his "doing well by doing good" $400k a year gig, even though Venezuela is bankrupt. Conclusion: Citizen Joe is a scoundrel. What's the surprise? After all, Citizen Joe is a Kennedy.[As a childhood friend worked at Hyannisport one summer, I have some rather strong opinions on the family.] Scoundrel Joe, meet Scoundrel Nicolas.

    Maybe Citizen Joe can do a favor for Nicolas. Citizen Joe may have some contacts at the DOJ-or higher- that could drop the cocaine smuggling charges on the nephews of First Lady Cilia. We've seen how that works recently.

    Your blog post is a masterfully written but sad rendition of the results of the "an additional control or regulation will make it better" mentality. If things don't turn out as expected, an additional regulation will do.

    As Chavez saw Fidel as the big brother and Cuba as the model, it is quite likely as you posit, that Chavismo's ultimate goal was the destruction of productive private enterprise, with only the State and its cronies still standing. Killing the golden goose of private enterprise that lays the productive eggs is no big deal, because all private enterprises are all evil, blood-sucking entities. But if said private enterprises support Chavismo, then perhaps they can be deemed honorary socialist entities, such as big media.

    [Recall the Chavez quote where he said that if Fidel could be President of the World for a couple of years, he could set things right.]

  10. Sounds like where the EU bureaucracy is headed. What a mess.

    1. What I admire in you is your sense of perspective, of finding links where there are none, or refusing to have your ideas swayed by the environment, of not letting facts and history and context trouble you.

  11. I pretty much agree with most of what you say, but despite all my hatred towards chavismo, I don't necessarily think the broken country we have now is the end product of Chavez's malice, but the incompetence of the regime as a whole.

    All the complex legislation we have here is something you see in every normal European, just poorly implemented. Corruption has been our demise, especially because in many ways chavismo is a new governing that was not used to power as the old guard from "la cuarta", When you couple that with the unprecedented amount of oil income hcavismo has seen, corruption looks even worse.

    Also, as a 27 year old I will always blame a clueless opposition for "awakening the monster", Chavez was controversial before 2002, but the coup really turned him nuts and made him wanna hold on to power even more. Legislation before 2002 was different, but not bad per se, this is shown by the fact that the laws you mention are all post 2003.

    1. When you do the stuff Daniel mentions above you are not incompetent you are determined to destroy all successful business. When you arm the thugs after you already control the country and allow prisoners to carry guns you clearly are set on destroying all relavence of civility. Whether the govt is incompetent or not it has set out to acheive exactly what it has. Once anyone with fight in them has left, is dead or in jail the remainimg sheep will happily accept a Cuban life style. And the worse part is even most of the educated are chalking it up to incompetence and corruption and missing the real Cuban masterplan. In the end Cuba has a much bigger drug empire, has oil revenue and all that helped keeps their stolen wealth.

    2. Half the stuff mentioned exists in other countries, the purpose of laws like LOPCYMAT (which happens to exist since 1986 but was never enforced) and LOCTI is pretty standard in most developed countries, it's just poorly implemented here.

      I'm assuming when you say thugs you're talking about colectivos and such, no argument there, that definitely serves to show the dark side of the chavismo.

      I don't think Venezuela was victim of a Cuban masterplan any more than it suffered the missteps of a poor opposition, which BTW failed so hard because it's early core just wasn't used to not holding constitutional power nor did they start to understand chavismo until it was too late.

  12. Yesterday, Maduro made the military responsible for food deliveries, according the the news.

  13. Total control of the economy is, I think, what Daniel identifies as the cause of the failure of the Venezuelan administration. When things don't work out these guys bring in even more controls (of price, production, distribution, currency, education, medicine, etc). This is what socialists/communists believe in. Corruption is just the tropical flavor, not the cause.


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