Katy says: – The past week saw a heavily-promoted presidential address that was supposed to contain the details of a stimulous package to attack slowing growth and soaring inflation.
All radio and TV stations carried the sad spectacle, with the nation’s top businessmen sitting in the audience, laughing and occasionally clapping, as Hugo Chávez gave them his usual combination of scorn and goodies. Yet lost in the shuffle were the announcements themselves, which, to paraphrase Rick Blaine, didn’t amount to a hill beans in this crazy country of ours.
There is a growing consensus that the problems in the Venezuelan economy stem from a lack of investment. Because neither the private nor the public sector invest enough, the supply of goods and services in the economy is not growing at the same pace as demand, which mainly comes from soaring oil prices.
The measures announced were supposed to stimulate investment. However, the government revealed that it does not really understand the reasons why the private sector invests in the first place.
Investment usually depends on the comparison of two things. Roughly, if the projected return from an investment exceeds your internal discount rate – for example, the return you would get from an alternative investment with similar risk – then you invest. Usually, you put the projected return on the left-hand side and the discount rate on the right-hand side, and compare the two.
The first important announcement was the elimination of the Financial Transactions Tax, a 1.5% levy on all financial transactions. On the surface, this tax was progressive, in that big businesses and the wealthy carried the biggest burden. It follows that its elimination amounts to a tax cut for Venezuela’s middle and upper classes, and a boon to the country’s banking system.
Normally, tax cuts would help investment. Lowering taxes helps raise the left-hand side of the equation (the return on the investment), so in theory some investments that would not have taken place before all of the sudden might seem attractive.
Yet this tax is not what is keeping the left-hand side of the equation low. The tax may be gone, but the expected return is still low because of the enormous costs and risks an investor faces in our country. Security risks, the threat of expropriation and the risk of not getting currency to import raw material are huge, and risks cost businesses money.
The second measure was a promise to speed up the approval of dollars at the controlled rate for machinery and equipment. On the suface, this measure too would seem to help investment. Yet the measure was announced as a temporary thing, subject to the whims of Chávez himself. Furthermore, there is no point in speeding up the flow of cheap dollars for machinery when there is no assurance you will get cheap dollars to buy raw material for your production process or to bring your dividends back to your country.
Ultimately, the exchange control remains intact, as does the risk of not getting your dollars in the future. You may now face less paperwork, but you are still at the mercy of Chávez and his boli-klepto-bureaucrats.
The last measure was a promise to shell out $1 billion in funds for investment projects. In theory this would help the left-hand side of the equation by lowering the cost of financing investment projects.
Again, on paper this would seem like a good move. But we all know what will happen: the well-connected will get their “projects” approved while good investment projects are left by the wayside, and the money will end up in the Cayman Islands with little to show for it. Even if the $1 billion were truly invested, this would only be a fraction of what Venezuela needs to invest each year in order to keep its economy running.
The irony of Wednesday is that Chávez feels he has to reach out to the very oligarchs he denounces on a daily basis, and yet he does so in an ineffective way. Time will probably show he got nothing in return yesterday.
Say what you will, but Fidel Castro would have never begged businessmen to invest. And if he was ever forced to, he certainly would have come up with a better plan than this. In proposing these half-baked measures, Chávez didn’t sell his socialist soul. He gave it away for free.