Will the last firm in Venezuela please turn off the lights?

Caracas Chronicles recently had a fantastic post called “The Myth of the Bs.6.30 Dollar.”  It was written by an anonymous reader about the reality of getting foreign exchange legally in Venezuela.  I often talk about currency overvaluation, black markets, and capital controls in my development classes, but this is the first time that a participant has made it so clear that even the “lucky few” that have access to foreign exchange aren’t really so lucky after all.  I’m keeping this post for all of my future classes.  The system of acquiring legal foreign exchange in Venezuela is called CADIVI and here are some of the best excerpts from this person’s tale of woe:

Here’s how the long, tortuous process begins:

“Just to register in RUSAD and gain the olympian privilege of submitting a request to CADIVI, you need to tick a long series of boxes. Needless to say, you need to register your company, which is not as straightforward as you might think. Then you need to gather slew of stamps and certificates: a labor “solvencia” showing you’re in compliance with a thicket of labor rules, the INCES certificate, RIF, your IVA solvencia, your ISLR solvencia, your Fondo de Ahorro Obligatorio para la Vivienda (?!) solvencia, your municipal tax solvencia, etc. etc. etc. By the time you get the last solvencia on your list, the first one has probably already expired: go back and get it again. 

There is a 24 page document explaining the minute details you need just to be able to register to ask for dollars (not to actually receive them.  Some of these details include how you can (or cannot) bind papers together.

If you are importing anything non-essential (which apparently includes “chemicals, fertilizers, live animals and some minerals”), then you need to show that Venezuelan companies either don’t produce the product you want or at least not of sufficient quantity.  Welcome to import substitution industrialization folks.  You only thought (hoped) it was dead.

So, how do you prove that either of these facts are true?  According to the author, you need to either be exceedingly lucky or hire a fixer, (a.k.a., a gestor). This will cost you anywhere from 0.30 to 10 Bs per US$ requested, depending on the product. The process takes from 2 to 3 months, and you bear the risk of being rejected at any time for any reason.”

He or she points out that “in some cases, you may also need a SENCAMER certificate – don’t even ask – that’ll add another couple of months and 0.30 to 5 Bs per US$ to your tab.” lovely.

So what’s next in this government circle of hell:

“The next step is securing the Authorization to Acquire Foreign Currency. That one takes about a month. After this you are allowed to import under a set of very strict and always-changing CADIVI deadlines and requirements. Not complying with any of these can lead to your import being disapproved by MILCO and/or CADIVI, in which case you and your overseas provider won’t get paid.”

So how can you possible work on this and still run your company?  The short answer is you can’t.  The author recommends hiring 10 people if you are a small to medium sized business and 100 if you are a large one.  These people will spend 100% of their time on ticking the boxes and “supervising every step of the process, as a misplaced coma can – and will – cost you hundreds of thousands of dollars.”

After you’ve been approved, the sad fact is that you won’t get your actual dollars for another year. As the author rightly points out, no supplier is going to wait that long to be paid.  So now what?  The author recommends either hiring a “very expensive fixer (5 to 20 Bs per US$) to speed it up” or go to the black market to secure the dollars. If you go the second route, you have to ensure that the foreign supplier give you the dollars that CADIVI eventually pays out a year later.  Obviously neither of these options is very attractive.

The entire process takes between “15 and 24 stressful months, at a cost that could be anywhere between Bs.7 (if you’re very patient and unfathomably lucky) and Bs.30 per greenback.”  Good news though: Maduro in his infinite wisdom has decided that the process really needs two more layers of bureaucracy.

Given everything I read about the business climate in Venezuela, my question is how anyone can stay in business at all.  I’m surprised the economy functions at all.  The government seems hell-bent on driving all private companies out of business.

You must be this poor to loot that store!

The looting and loss of life in Argentina is tragic.  For those not al día, here’s some background.

Inflation in Argentina is running at 25% plus, though official statistics drastically under-report it. Partly as a result, police forces throughout the country have been striking for higher wages. Thousands of Argentines have been taking advantage of their absence to liberate stuff from stores and businesses. At least 8 people are dead because of the looting.

Christina Kirchner responded as follows:

“President Cristina Kirchner railed against both the looters and police in a speech Tuesday to mark the 30th anniversary of the end of country’s dictatorship and return to democracy. To “see people who have cars looting is shameful,” she said. She also blasted the “extortion” from the police and accused unnamed political opponents of instigating the unrest.”

Hijole!

So, if you are too poor to own a car then looting is OK?

Hey Madam President: if inflation wasn’t so high and you hadn’t bullied your statisticians into lying about it, maybe the police wouldn’t be striking. 

 

Always look for the union label, Mexican edition

I didn’t think my opinion of the Mexican teacher’s union could be an lower, but the WSJ had a great piece yesterday (sadly gated) about the current union mindset.  It was not impressive.  I’m not sure where to start, so I’ll just list some of the best parts:

1. I don’t really care if students learn the words to the national anthem, but parents in one Oaxacan town found out that teachers were making students sing a popular leftist song instead.  Apparently, said song “acts as an unofficial anthem to a local chapter of the teachers union.” 

2.  The union is “steeped in Marxist ideology and a proponent of class conflict has blocked access to national highways and established huge tent cities in Mexico City to house protesters” since August. On its website, the CNTE says it is “independent of the bourgeoisie and its state.” Many of its members consider it to be a revolutionary movement fighting for the poor and powerless against the rich and powerful in Mexico. The “movement,” as CNTE teachers call their union, is on a crusade to stop the Mexican government’s educational reforms.”  If they were truly a movement fighting against the rich and powerful, they should have started by taking down La Maestra, the super corrupt leader of the union for 20 years.

3.  The union is known for their “legendary strikes”–literally every spring for the last 30 years, sometimes lasting for months.

4. Some union leaders may have links to a left-wing guerrilla group called the “Popular Revolutionary Army, or EPR, which authorities say has engaged in kidnappings of businessmen.”

5.  Some members complain about the amount of non-teaching work the union forces them to do, including “months-long marches and sit-ins.”  The union “excoriates by name teachers and local officials who it says have betrayed union principles.”

6. In San Lucas, parents have complained that the teaching is “both bad and politicized.”  The teachers do very little teaching and “rarely used textbooks.” But they did have students put on “plays and dances where students dressed up in black balaclavas and carried wooden rifles typical of the Zapatista rebels.”

7. And the corruption runs deep: “State documents show that Oaxaca’s government also gives millions of dollars to community groups run by union-affiliated activists, which lobby the government for money for social projects. Grants to these groups—which use the money to help solidify their control in communities—are rarely or ever supervised or audited, say three former top Oaxaca government officials. Last year, for instance, the Popular Revolutionary Front, a unit of the Communist Party of Mexico, Marxist-Leninist, which says it coordinates many of its activities with Section 22 [of the teacher’s union], received $3.2 million from the Oaxaca state government for an office building, cars and a swimming pool in an eco-tourism project, Oaxaca state government documents show.”  That sounds like some good Marxist-Leninist ideology at work!

The union has denounced what it calls “political slander” by the administration.  Their counterargument isn’t very convincing though.  For instance, the union leaders say that “The government, which for decades has sunk the country in the most abject misery, has no right to accuse us of anything and that the oligarchs of Mexico’s political class are the worst extortionists; they steal billions of pesos from the country every year.”

Asia Deja Vu

It’s back to the future in the far east.

First comes word that Kim Jong number Un is partying like it’s 1949, air-brushing his victims out of official photos. Do you think they have photoshop in the Hermit Kingdom?

Second, Singapore flashed back to 1969 with its first riot in over 40 years. Just like the earlier one it was racial/ethnic in origin.

Historical Political Economy

I find that some of the most interesting development papers are ones that have a historical perspective.  These two papers look really interesting and are heading to the top of the stack.

1. “The transatlantic slave trade and the evolution of political authority in West Africa” by Warren C. Whatley

I trace the impact of the trans-Atlantic slave trade on the evolution of political authority in West Africa. I present econometric evidence showing that the trans-Atlantic slave trade increased absolutism in pre-colonial West Africa by approximately 17% to 35%, while reducing democracy and liberalism. I argue that this slavery-induced absolutism also influenced the structure of African political institutions in the colonial era and beyond. I present aggregate evidence showing that British colonies that exported more slaves in the era of the slave trade were ruled more-indirectly by colonial administrations. I argue that indirect colonial rule relied on sub-national absolutisms to control populations and extract surplus, and in the process transformed absolutist political customs into rule of law. The post-colonial federal authority, like the colonial authority before it, lacked the administrative apparatus and political clout to integrate these local authorities, even when they wanted to. From this perspective, state-failure in West Africa may be rooted in a political and economic history that is unique to Africa in many respects, a history that dates at least as far back as the era of the transatlantic slave trade.

 

2. “Bounded Leviathan: or why North and Weingast are only right on the right half” by Maria Alejandra Irigoin and Regina Grafe

The great merit of North’s and Weingast’s insight into the importance of a ruler’s credible commitment to protecting property rights is that it is both parsimonious and it lends itself beautifully to generalizations. It has e.g. inspired the economic literature on the importance of legal origins” (LaPorta et al., 1998, 2008), which seemed to vindicate the notion that post-Glorious Revolution English institutions were particularly conducive to economic growth. More recently economists have acknowledged that growth in fact depends on state capacity. This encompasses not only investor protection (legal capacity) but also the ability of the state to finance itself, fiscal capacity. (Besley and Persson, 2009, 2010) show that the protection of private property rights and that of public property rights to taxation are linked and most likely co-evolutionary. However, the precise relation between the two is anything but clear. This paper argues that North’s and Weingast’s models one-sided focus on state coercion that threatened subject’ property rights has obscured the relation between coercion used in revenue collection and total revenue role of fiscal capacity. We suggest a very simple model to show that this relationship between state fiscal capacity and legal capacity is not linear, especially in the phase of nation state building. Before 1800 states faced one of two very different central challenges. 1) States that already exhibited high levels of coercion had to try to keep in check the ruler’s potential for predation as North and Weingast argued. 2) States that used very low levels of coercion faced a coordination problem instead of a predation issue. The case of Spain provides empirical evidence for the existence of states where an increase in coercion would have improved fiscal capacity, but high levels of legal capacity paradoxically prevented the ruler from adopting this path. Finally, we use financial market developments to show the serious welfare implications that resulted from such a lack of coordination and integration.

 

“Be Indian, Buy Indian”

The Economic Times of India has an awesome blog post about patriotism and dogs.  I assume this is a parody of government policies, but I’m not totally sure.  I figure if it is a goof, it is funny; if it isn’t a goof, it is even funnier.

There are a lot of great tidbits in the post, but I will just list a few of my favorite below:

1. “We probably have 40 million dogs in India. (If you have seen a figure of 10 million, that’s only for proper pets. And if you have seen a figure of 19 million, that’s from the 2007 Census.) With 40 million, or whatever is the number, of unemployed and under-employed dogs, why do we need foreign ones? This craze for foreign dogs must be controlled. Why should pets be brought from Thailand, Malaysia, Russia and Uzbekistan?”

2. “I am eagerly waiting for DGCI&S data for 2013-14, specifically, 01061910. In case you are wondering what this is, it is the HS (harmonized system) 8-digit code for dogs. But DGCI&S data are still for April-June 2013, perhaps too early for this import substitution strategy to show up.”

3. “With India’s strengths in human and canine resources, India is singularly well placed to capture the world canine market. That vision is lacking. Commerce Ministry needs to announce an export promotion scheme for dogs, whereby you can import dogs, subject to a license, but only for re-exports, after value addition. We have plenty of expertise with schemes like EPCG. For example, for every dog that is imported, there can be a re-export obligation of 3 puppies over a 6-year-period.”

Update:  I just followed said blogger @bibekdebroy and the story was indeed satirical.  Bibek tweeted the following awesome story (at least for everyone besides the German Shepherd and his owner).  I figured since the story was canine related that I would include it.

Real dog story. 10 years ago. Delhi airport. Will not name airline. You can guess. Foreigner used to work in India. Returning home..

pet pedigree dog also going back to Germany. In cargo hold inside crate. Delhi airport. Crate came open. Dog ran away. Airline in fix..,

..One bright airline employee came up with ingenious idea. Caught one of the strays roaming around near airport & put that in crate..

. Hell broke out in Frankfurt when a mongrel instead of German Shepherd discovered in crate. Papers only said “pet dog”, not naming species.

The paperwork was such that the airline managed to get away.

An A for Effort, Peruvian edition

The World Bank has a round-up of the 2012 PISA scored that were just released.  There really weren’t any surprises in the top group, which consisted primarily of East Asian countries. But there was some good news for Peru, which has improved more since 2000 than any other country (by 76 points in math, 57 in reading, and 40 in science). Of course, they were starting from a low base, but it is still impressive.

Here are the countries that have improved the most in each category:

math-pisa2012

 reading-pisa2012
science-pisa2012

“You must be this tall to ride this ride” – Mexican edition

Tom Vogl has an interesting piece coming out in the Journal of Development Economics entitled “Height, Skills, and Labor Market Outcomes in Mexico.” Click here for the NBER working paper version.

Vogl studies about 4,000 men* in Mexico aged 25-65 and finds that “each centimeter of height earns these men 2 percent higher wages, a premium similar to those observed in other devel- oping countries but more than twice those observed in most wealthy countries.”

So what accounts for such a large height premium?
1. He shows that cognitive ability (as measured by test scores) can only explain a limited amount of the height premium.
2. About one half of the premium is due to the education level and occupational choices of taller men.  Said men tend to specialize more in jobs that require cognitive ability and less in ones that rely on physical strength.

He also has some interesting results on indigenous populations, which tend to be shorter and have lower wages on average in Mexico.  If you are interested in the subject or in Mexico, it’s definitely worth checking out the whole article.

*Note that he doesn’t report the results for women but writes that they are broadly similar.

 

Is the gasoline subsidy behind Venezuela’s high inflation?

Some facts:

Gasoline now sells in Venezuela for a few measly US cents per gallon, let’s call it $0.05.

To meet demand, Venezuela imports around 25% of the gasoline sold there at international market prices.

Daniel Pratt summarizes the situation succinctly: “Tienes un billete de 100 y lo estás vendiendo por 5. Eres un güevón”

Meanwhile, the price of Venezuelan oil has fallen to a 16 month low of around $94 a barrel.

With costs soaring and revenues flagging, the national petroleum company, PDVSA is borrowing heavily from the Central Bank.

Image

 

So as Francisco Toro sees it, the Central Bank is printing money to finance the national gasoline subsidy (which is the highest such subsidy in the world today), and that’s inflationary.

Francisco amends Daniel Pratt as follows: “Tienes un billete de 100 y lo estás vendiendo a 5. No sólo eres un güevón, sino que tarde o temprano todo se irá a la mierda.”

Amen?