I have
written many times about the distortions that have been created in the
Venezuelan economy that will eventually lead to a blow up, as artificialities
can only last so long in any economic system. I have also argued that some of these
distortions like exchange controls and the large amount of official deposits exist
because of corruption; there is no justification for them. Of course, you may
argue that I am not an economist, but in fact, what is most bothersome is that neither
are those running the economy. The Minister of Finance is a mathematician,
Nelson Merentes, who knows very little about economics and was a very mediocre
mathematician too. But in reality he does not set economic policy, that is left
to Jorge Giordani, the Minister of Planning. Giordani has a Bachelor’s degree
in Electrical Engineering and a Masters and a PhD in Planning, with specialization
in Urban Planning.
Giordani
has always had strange economic ideas. He spent his life studying the
possibility of moving most of the Venezuelan population to the Orinoco river basin, arguing that that is where the water
is and the river could move whatever industrial production there was in his
hypothetical cities. He obviously never lived there and “enjoyed” the
horrendous heat in those areas while theorizing from his air conditioned office
at UCV’s Cendes Institute. In a 1994 paper, which is unfortunately not on the Internet,
Gioradni and some friends argued that the only way Venezuelan Science and
Technology could become relevant, would be to isolate the economy of the
country from the outside world for a few decades. In that paper he actually
praised the North Korean economy for its stability (??). When
Chavez first became President, they allowed the Minister of Finance from
Caldera’s Government (A sociologist!) to stay on, in order to calm down
markets. But as soon as it was politically correct, Giordani replaced her with
a real economist and close buddy from Central
University, the first economist to hold
the position in almost a decade in Venezuela! At the time, I praised
the nomination even if the economist, Jose Rojas, was an academic economist who
specialized in something like solving complex statistical differential
equations. At least he was a professional of the field and would be careful
about inconsistent policies which have always been the karma of Venezuelan
Government’s as they all eventually lead to blow ups. Unfortunately,
it was Giordani who had Chavez’ ear and thus, economic policy was set more by
Giordani than Rojas. Giordani centered policy on holding the currency constant,
which is allright in my book, except that rather than issuing debt abroad at
low interest rates, he refused to go to the international markets and thus
increased the stock of local debt at 20+% interest, while devaluation was less
than 10% per year. When oil prices dropped in 2001, he was forced to use the
Macroeconomic stabilization fund for current spending and once the money ran
out, a maxi devaluation had to be implemented in February 2002. That
devaluation has been the main cause of GDP destruction during Chavez’ seven
year’s in office.
Rojas and
Giordani disagreed strongly on economic policy, which led to his departure in
2002, when he was sent to the IDB as Venezuela’s representative. Giordani
disagreed with him but still trusted him, so that in 2004 Rojas was brought
back to Venezuela as VP of Finance at PDVSA, where he was eventually fired when
he had strong disagreements with Chavez’ father in law, General Prieto.
Well, this
week I came across a report on the Venezuelan economy written by none other
than Jose Rojas himself, who now apparently has an office as an economic
consultant. Given the fact that he is indeed an economist, that he was part of
the Government and as far as I know, is still a Chavez supporter, I think it is
worth reviewing some of Rojas’ conclusions, most of which are quite similar
(and scary!) to things said here and elsewhere, but this is a Chavista speaking
now from the outside of the Government:
--“The
Venezuelan Central Bank is the subject of external political tensions and to
the economic decisions that affect the stability, independence and compromise the
effectiveness of monetary policy at a time that more control is needed….it (the
BCV) does not have the instrument of exchange policy that would allow it to
regulate the monetary mass through the monetary destruction via the exchange
and strengthen reserves” --“The
exchange controls, the preponderance of public funds in the public financial
system, the discretionarily in the use of public funds, the dissapearance of
the Treasury unit from the Ministry of Finance, the establishment of compartments
for banks’ portfolios and the progressive statization of the economy and
productive activities is such that there exist an incommensurate increase in monetary
liquidity with the risk of generating a financial crisis” --“There
is a decision to maintain the exchange controls, fix a maximum for
international reserves, use international reserves and create extra-budget mechanisms
for expenditures such as Fonden, that allow for the execution of a parallel budget”
--“Paid deposits
are increasing at the same rate as liquidity, which has a “snowball” effect
which creates the need for more operations of liquidity absorption (by the
Central Bank) which in turns generates more liquidity” --“There
is a subsystem formed by PDVSA and the group of Government institutions that administer
“funds” and execute payment orders issued directly by the President over the
trusts that are part of CVP in Bandes. To this subsystem we add CADIVI (the
exchange control office) that substitutes the Central Bank in the definition of
monetary policy” --“PDVSA maintains
dollars that are not exchanged via the Central Bank and that it exchanges via
public financial institutions that do not perform exchange operations via the
Central Bank but use bolivars that come from oil dollars previously exchanged. These
enter the economy with any counterpart in the monetary base” --“The
Finance Ministry buys bonds in dollars with excess reserves. The Bolivars
corresponding to these reserves are not destroyed and stay in circulation…the
bonds are sold to at the official exchange rate to financial institutions which
exchange them for dollars and then sell them into the parallel market, issuing
new bolivars (I disagree with this, there
are no new Bolivars issued)…the Bolivars exchanged for the bonds go to the Treasury
and are spent as “new” income. (This I
agree with)" --“This
leads to anarchy in the institutions that issue money, direct financing of the
Executive branch, progressive deterioration
of the value of the currency which could lead to a financial crisis in the
absence of a real counterpart that backs the health of the economy” And then
comes one of the scariest conclusions: “The only
way to go from a market economy to a centralized economy would be through the
destruction of the financial system….” Nice, no?
And this is the analysis of a Chavista!
9:41:34 PM 
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