A Roadmap Out of Cadivi

A shorter version of this post appears in Foreign Policy’s Democracy Labs blog

Say “macroeconomic adjustment” and Venezuelans immediately cast their minds back to 1989. That year, an IMF-inspired shock therapy program pushed through by President Carlos Andrés Pérez set-off serious rioting throughout the country, costing hundreds of lives and undermining governability for a generation to come. The memory of those traumatic events still colors policy discussions today.

As October 7th draws near, the opposition is thinking through its macroeconomic approach to transition.

At first blush, the parallels are jarring. Just as in 1988, the country faces a fixed, severely overvalued exchange rate; a structural budget deficit fed by a sprawling, loss-making state-owned enterprise sector; rigid price controls; and ruinous gasoline subsidies. It’s enough to give any Venezuelan macro-economist the heebie-jeebies.

So is the country is on the verge of another massively disruptive adjustment experience?

Not at all, for two reasons: the economic fundamentals of 2012 are nothing like those of 1988, and the opposition’s presidential candidate now is nothing like the one we had back then.

Barring an unexpected collapse in oil prices, Venezuela will face next year’s adjustment from a position of strength this time. It’s one thing for a petrostate to undertake structural adjustment with oil trading at $16 a barrel, and quite another to do it with a barrel selling for $110. Masses of petrodollars will be flowing into state coffers every day, and while the incoming government in 1989 found the cupboard almost completely bare, Venezuela’s net foreign asset position is now estimated at $72 billion.

Economist Miguel Angel Santos stresses another key difference between then and now: private sector firms had been accumulating dollar denominated debt fast in the years leading up to 1989, which amplified the impact of adjustment on the real economy. In recent years, by contrast, Venezuelan private firms have been deleveraging abroad.

If starting conditions are different, so is the approach of adjustment advocates. Henrique Capriles Radonski has explicitly rejected shock therapy, committing instead to a gradual approach that could make 2012’s experience – dare one say it? – nearly painless.

Here’s how:

The first order of business will be unwinding CADIVI, Chávez’s foreign exchange control mechanism slash corruption cesspool.

CADIVI is charged with administering a massively over-valued exchange rate fixed at a ridiculous 4.30 “Strong” bolivars per dollar. That rate is available only for priority imports of food, medicine, and public procurement goods, all under supposedly-tight bureaucratic supervision.

In practice, 4.30 dollars are the unicorns of Venezuelan political economy. The supply of dollars at this lower rate has been contracting for years, pushing more and more importers into more expensive, often illegal ways of obtaining hard currency.

One way to cut this Giordanian knot would be to combine a more prudent approach to public spending with a switch from a static peg (Bs.4.30:$) to a crawling peg. That would allow for gradual, controlled nominal devaluation on the official market, clawing away at real over-valuation little by little. This crawling peg would be complemented by an overhauled SITME alternative exchange market, one that’s more flexible and openly accessible, and especially far more transparent.

This new, improved SITME would allow market forces some scope to settle on a reference price for the dollar – which is critical, because at this point the black market is so opaque, thin and dysfunctional, there really isn’t a reasonable market-driven reference price that would allow us to know what the “real” cost of a dollar is.

Creating market information on the real value of the bolivar is, therefore, step one.

This dual exchange rate strategy is Alejandro Grisanti’s preferred approach. The Barclays Capital economist – and key advisor to Capriles Radonski – foresees an initial spike in the parallel market rate, as some of the built-up demand for foreign exchange is met. If this initial spike threatened to overshoot, however, the new government could mitigate the jump by fixing a top price to the parallel dollar, leaving part of the pent up demand initially unmet.

What few in Venezuela seem to appreciate is that following that initial spike, the parallel dollar rate would likely face the same pressures towards appreciation that now face so many emerging commodity exporters. That’s been the experience in Peru, Chile, Brazil and almost every resource-dependent emerging economy over the last few years.

Because these countries export natural resources whose prices have been rising over the last few years, that has been the norm, and nothing suggests it is going to change in the near future. As the price of export commodities rise, more and more dollars flow in chasing the same number of local currency units. When that happens, the value of the local currency rises – simple supply and demand.

So long as government spending is kept within reasonable limits and Capriles gains investor confidence, there’s no reason to think the price of dollars would rise inexorably after Cadivi is brought to an end. In the medium term, we would tend towards convergence between a depreciating official rate and an appreciating parallel rate.

In time, the two would meet, spelling the end for exchange controls, imaginably in the not too distant future. This wouldn’t necessarily mean an end of government intervention in the currency market, however.

“In a country where the government supplies 95% of the dollars in the currency market,” Grisanti says, “there’s no such thing as a clean float.”

In practice, then, the Central Bank would retain plenty of tools to keep the exchange rate from gyrating too wildly this way or that – nobody, after all, can force BCV either to supply or withhold dollars from the market.

The real challenge in this scenario would be the opposite of what we’re used to: keeping the bolivar from strengthening too much. For Grisanti, that old bugbear of petro-exporters – Dutch Disease – is a much bigger threat to Venezuela’s economy in the medium term than the sharp, adjustment-induced devaluation Venezuelan economic agents fear so much.

How you achieve this is, again, a subject for debate. Plenty of Venezuelan economists favor a FIEM style stabilization fund, where excess oil profits are deposited in dollars to hold in reserve for a downturn. With Venezuela (and PDVSA) now owing tens of billions of dollars in high-interest bonds, though, saving at 2% while borrowing at 12% doesn’t seem like a very smart move.

Grisanti’s approach would divert excess dollars away from FIEM and into paying down Venezuela and PDVSA debt, i.e., retiring Venezuelan and PDVSA bonds. Only once debt has come down quite near zero would any kind of savings fund be favored.

Grisanti’s determination to keep the bolivar from rising in value too much is by no means a consensus view, though. Economist Omar Zambrano sees appreciation as an inevitable outcome of normal exchange market operations in a natural-resource rich Latin American economy, whether it’s Venezuela or Chile or Peru. In his view, appreciation need not be a binding constraint on the tradable goods sector, which can still flourish as the business climate is improved through microeconomic reforms.

Zambrano – who is not a Capriles advisor – focuses instead on the political attractions of currency appreciation. As a currency appreciates, it buys more and more in international markets – which isn’t good for local industry, but sure is great when you go shopping. By transferring purchasing power directly into consumers’ pockets, an appreciated currency could be a powerful force for maintaining political stability in what is sure to be a politically dicey transition – in effect, it acts as an across the board subsidy on everything foreign.

When that happens to Greece, or Japan, it’s just terrible: too many jobs in those countries depend on exports, whether it’s of electronics or of vacations, and those sectors suffer as the currency appreciates. In Venezuela, though, 13 years of Bolivarian socialism have decimated the tradable goods sector – most of the industries that would stand to lose from appreciation have shut down, been expropriated, or shrunk beyond recognitions.

The political economy “losers” from appreciation, in other words, are likely to be marginal players in the politics of the early Capriles administration. For Zambrano, now that Chavismo has given us lemons, we better appreciate the lemonade.

Zambrano’s point of view is provocative, but clearly a minority view among Capriles’s advisors. For an administration coming into power with a strong focus on job creation, allowing runaway appreciation to ensure short-term governability would look short-sighted. By gradually – but preferably quickly – phasing out currency controls and then seeking to balance exchange rate competitiveness with an effort to bring inflation under control through fiscal discipline, an incoming Capriles government could begin to clear the mass of economic imbalances of the Chávez era in an orderly manner.


I’m convinced that, if anything, the lessons of 1989 have been over-learned, building a strong anti-adjustment bias into Venezuela’s policy debate that inhibits even reforms everyone agrees are needed.

But 2012 is not 1988. In a context of triple-digit oil prices, Capriles’s commitment to gradualism could help accomplish adjustment without the costly social dislocations that accompanied an earlier vintage of reform.

85 thoughts on “A Roadmap Out of Cadivi

    • One of the biggest mental roadblocks (mojo**s mentales) shared by Venezuelans inside Venezuela is, namely that they expect gasoline to be almost free. Where almost means filling up with less money than you would give a beggar or pay for a small cup of coffee.

      It’s a fantasy definitely not shared by most Venezuelans living outside Venezuela or by anyone living in the Real World anyhow. Scotland is a whiskey producing country, yet I have yet to hear of a Scot that expects to have whiskey free. Italy produces a lot of wine, and Italians can score reasonably cheap wine or make it themselves at home, but free it is not. Ah, the wonders of populism, and why such a basic understanding of reality eludes Venezuelans…


      • I remember somebody in a VTV-short about “Oligarcas prices” said milk was so expensive, x-times as expensive as gasoline…


      • I guess that part of the problem is that for most guys OIL=GAS. Furthermore, they do not realize that oil production is not just digging a hole in the ground, i.e. HOLE-IN-THE-GROUND=$$$. First order of the day is to explain people that government is not a bottomless pit stashed with cash. The next gov has to explain that it’s not raising the prices because they’re soulless SoBs, but because they’d rather invest that money in better hospitals, schools, roads, and security. It’s just a matter of finding the right selling speech, I think…. or the right salesman.


      • But, but, but….. gasoline, like music should be free. Bands can make ends meet on concerts and oil companies can like umm, cut back on bribery or something, yeah, that’s the ticket, free gas, no bribery.

        /2 teenagers


      • Venezuelans feel and historically have felt that cheap gas was
        the only thing they got from the oil wealth.
        Hence the popularity of the missions, and they are right, if you looked at
        public services, schools, hospitals, housing. all bad, when they
        filled their tank they felt I’m are getting my share.


    • Shouldn’t the perfect solution for that dilemma be the age-old political cop-out of a referendum?

      Just show the people the numbers of how much money is spent in gas subsidies and ask them in a referendum to choose between continuing this or pushing that subsidy to something else. Give them a handful of options to choose from. Just make sure the government has no official position on this and shows no favorite outcome. It should be up to the people to decide on this and the government is just trying to make sure the will of the people is done, and that everyone knows the facts to make an informed decision.


      • Not so sure about that option, if the people says no to the raise, you’ll be stuck with the subsidy forever because it was “people’s will”, I think that as 89 proved the thing is you had to do it in a way that it doesn’t have that much of an impact on the price of public transportation, and sell it as cutting a subsidy for the rich, as most people in Venezuela doesn’t even own a car. When you are out and explain the subsidy to anyone from another country, its impossible for them to understand the logic of a government giving a subsidy that encourages the use of private vehicles increasing traffic and pollution.


  1. I know you say that as a teaser, but why not, not in the first year and not without explaining very well, why this is a need. I would reduce taxes for small cars (I would say, they should cost the same as in neighbour countries) and buses (for mass-transport), so more people could buy new, gas-saving cars, and going to production price in 3 or 4 years. It’s maybe a small item, but it is insane to “sell” gas at the actual price, favoring not exactly the poor and the nature.
    But this is not on the priorities I think.


    • With the right PR, it can be done.

      Think about it, what’s the percentage of people that really owns a car? Nationwide, not our neighbors. I know for a fact that I cannot even think of buying one right now, nor could I if I worked as professor at ULA (or any other public university). It is absurd that for me going to Caracas in bus costs way more than the price of gas for a trip in a brand new car bought by a Boliburgués. It is beyond unfair! If you give it the right spin, it can be done, but it is not easy and first we need to have the political will to do it, but people are not stupid. Thinking that they are was what brought us here.


      • Car prices in Venezuela are crazy. Now: an average Venezuelan should be able to buy a car by working more or less the same amount of hours a Mexican or a Colombian needs.
        There is not only a question of the price for a product but whether Venezuelans are ready to work as hard as others do for the same amount of products.


        • You have a point, Kepler, but would it be better to have “normal” prices for both, cars and gasoline? How come that car prices are so high? Aren’t taxes or is the Dollar-Bolivar exchange-rate (black-market should be).


          • Someone told me venezuelans buy cars because they are the only secure investment vehicles (literally) available.So the speculation drives up (literally) the price.

            Thanks for the interesting thoughts, once again.


          • Car prices are up because, as Canuck said, they’ve become almost a commodity, and also because their price is controlled. Thus, you have to bribe somebody at the car dealership or at the ensambladora to get a new one, or go to the “pre-owned” market and pay more for a 2009 Chevrolet Trailblazer than for a 2012 Kia Sportage at controlled price.
            It’s basically the same explanation you encounter for any shortage anywhere.


    • probably because the enemy of my enemy… is my friend. Look at the “friends” of Chávez… strange enough only North Korea is missed. Some coincidence there are a lot of “eternal leaders” among them too.


  2. I don’t think that I agree with your view of currency appreciation. First of all, even with sky high oil prices and controlled imports due to currency control, Venezuela has a negative trade balance against the world (Correct me if I m wrong), an increase in the quantity of oil exports or oil price would be gradual, in contrast a release of the currency control will skyrocket the imports until relative PPP is achieved.Meaning that the BSF would have a strong selling pressure on that side. Additionally there is the inflation phantom on the country, supposing that the Capriles shut downs the bill printers (Is he willing to risk a negative economic growth on his first year of government? and if he is not planning to reduce social spending how is he going to subsidize this? increase in debt?) either way this is a very strong depreciating pressure on the BSf. Additionally capital entering the country will be very slow, until people feels that Capriles government is stable and the shadow of Chavismo is no longer a threat. So I wouldn’t be so worried in the years to come about currency appreciation, that will be a problem to be addressed later in HCR government if he does things right.


    • Good points. And the shadow of chavismo will linger for a long time for sure.

      Also, everything that was suggested will require enormous discipline. I don’t know if things start to get “exciting” HCR will stay on track.

      An oil inter-generational fund for instance, will require not only discipline from HCR’s government but also for the next ones. It will require that the people treasure that fund as part of their patrimony and that they would be willing to defend it.

      Or perhaps the fund should be implemented in a Extorres style or as described by Laureano’s brilliant editorial:


      Overall, I am very happy to know that these things are being worked out by HCR.

      I might not agree with everything suggested here, but I generally agree that Chavez is leaving (economically) the country in a healthier state than Lusinchi did.


      • “Chavez is leaving (economically) the country in a healthier state…”

        Perhaps I am just quibbling of your selection of tenses, but let’s not count our chickens before they are hatched.


        • With all respect to Rodrigo, he is writing that, I have a hunch, from California where there are some more relaxed laws about……a word that starts with “w” and ends with “d” and rhymes with “need”?

          Seriously: Chávez no dejó un carajo.
          Oil prices are much much higher, namely at 110 instead of 12-18 dollars as in 1998 and they won’t drop in the near future. That does not depend on him. That could be our salvation.
          Still, Venezuela is structurally speaking – permit me to utilise that most Anglo-Saxon word – fucked.
          Un***ing it won’t be an easy task as most Venezuelans are firm believers in the cargo cult.

          As others before here have said, we need a hands-on quick financial education programme. Venezuelans have very little knowledge of a lot of things and they have been spoiled – at least some -. But they are not idiots. They can learn. Unfortunately, nobody has tried to teach Venezuelans on a massive scale what wealth and possibilities we have. Perhaps Uslar did, in his way, but almost nobody got it, even among the best educated. I don’t think it is the task of a president to do that. He would be burnt. But other people, some groups from civil society, have to do it.
          Who is going to do it? Parties? I don’t know.


          • Venezuela: FUBAR Country. Getting out of this mess will require real sacrifice. People should know this.


          • Venezuela is petrodollar junkie, that drug is highly additive and after generations of abuse rehab is not going to be easy. Cadivi or whatever incarnation exist in the future is going to be around for a long while.


  3. It took some time but I must say this article is really spot on. If a Capriles administration assumes, shock therapy would be suicidal. Gradualism is the way to go. However, handling an economic situation that we still don’t know completely will require strong will, clear actions and realistic goals. The most important challenge IMHO is not even economic, but comunicational. Explain to the citizenry the mess we’re into and how we’re going to get out of there, in an understandable way. It’s not a easy proposition.


  4. Why is the 1995 adjustment never mentioned. There was a full devaluation, full increase of gas prices. Nothing happened, it was sold adequately. The gap between the official and the parallel rate was not too different from 1989.


  5. Quico, I think it would help to distinguish two related but separate issues. The first issue is the existence of multiple exchange rate regimes. I see no reason for allowing this practice to continue, as it just provides one big transfer to a few lucky people. Even a dual exchange rate regime would maintain the distortions with no clear benefit. No one believes the current regime has been saving us from high inflation.

    The argument for “creating market information” seems to me to be about the exchange rate regime in the transition period (the second issue), rather than about the multiple exchange rate practice. If you believe that markets are going to go wild trying to price the bolivar, then fine, heavily manage the exchange rate and avoid large swings (perhaps after allowing an initial jump), although you must also be ready to sell reserves (including the FX still left in Fonden and other crazy funds, which should be given back to the central bank). If you’re running out of reserves, then clearly your monetary policy is too loose and an adjustment is necessary or your exchange rate is too low and a devaluation is necessary (or some combination of the two). No dual regime is going to save you from that dilemma, unless you start rationing the market for currency (but then you’re back to cadivi world).

    What is needed, in addition to a decent fiscal policy, is a clear nominal anchor to rely on. Our already high Inflation will increase even more once the price controls are abandoned and after the initial adjustment in the exchange rate. A peg (or crawling peg) is ok during the transition, but why not move from the get go to an inflation targeting regime, the regime of choice in most emerging markets today? This may require high interest rates at first to convince markets that the authorities are serious about inflation, and probably a mini revolution in the BCV, but it would allow greater policy flexibility down the road. It would also help clarify who is responsible for what. Otherwise, I just fear that this obsession with the exchange rate will continue to make the policy debate quite murky.


    • Thanks Rafael.

      I think Grisanti’s position is that after an initial spike in the second (Sitme-like) market, there’ll be such a rush of dollars coming into the country (via oil and FDI) that you won’t see reserves dwindle. Just the opposite. The medium term trend is likely to be towards appreciation – which is why the dual regime is a transition measure, what you do in the meantime while the depreciating CADIVI dollar catches up with the appreciating Sitme-like dollar.

      On inflation targetting, my sense is that to announce a real Inflation Target and stick to it is to wave a white flag in the fight agaisnt Dutch Disease. If you’re really going to raise interest rates as high as they need to go to bring inflation under control, you are going to find yourself in Brazil’s shoes very quickly. Omar Zambrano is all for it. But that’s just not a policy option an incoming Capriles Administration is likely to find very appealing, because they’re very clearly centering their approach on job creation. As you may know, al que tiene un empleo de calidad jamás el hambre le toca la puerta de su casa and all that…


      • Quico, I see. I guess my point is that the transition could also be managed without the dual regime but with some combination of exchange rate adjustment, interest rate hikes and FX interventions (all of which may be inevitable in the short run anyways), and clear guidance from the central bank and the government about where this is headed.

        Ultimately this is all about expectations. Unifying the exchange rate market from the beginning coupled with a well articulated communication strategy, could accelerate the stabilization process, because it would send a clear signal that the new government means business. As you said, we are not at the brink of a bop crisis so there is no need for an excruciatingly painful adjustment.

        On real exchange rate overvaluation, you are right, a period of large real interest rates would not help, but it would be a big success for the government if inflation is brought down (and as Omar Zambrano says, real wages would also increase with the appreciation). It doesn’t have to be overnight either so interest rates don’t have to jump through the roof. On employment, there are so many distortions right now that just removing them would have a huge impact, even with a somewhat tight policy. But you may be right, for a government that does not want to rough the waters too much, and that may not have a clear mandate for deep reforms, it may not be a viable option.


        • Hello, Omar Zambrano, here. Quico, thanks for the kind quote.
          My position on the issue is that we should allow a dual exchange only as a transition device towards a free exchange rate market arrangement. I see obvious advantages in adopting a inflation targeting arrangement (or sort of, like a soft implicit target ala Turkey) because I believe using the exchange rate as anti inflationary device is depleted as an instrument, but I’m conscious the economy need a credible nominal anchor (and I don’t believe fiscal policy will adopt the class of hard rules it’d need to become one).
          In my mid term scenario, we experienced nominal appreciation forces, not because of policy, but as a market result if HCR is successful fixing the economy, attracting FDI and generating the class of confidence boost necessary to repatriate capitals. In other words> Appreciation will follow the appreciation of the equilibrium real exchange rate after the boost in the oil sector that is implicit in HCR’s plan. At the end, under any exchange rate arrangement, being floating, crawling, a band, whatever, we will face the same policy option: We let the BsF nominally appreciate or not. Remember the exchange rate is the most powerful distributive tool in hands of policy makers in a petrostate. We can shoot for a slightly under appreciated Bsf to offer some exchange protection to tradable sector, but this will only come paying the price of accumulating massive reserves and expanding the monetary supply with the effects we know.
          My point is that the productive tradable sector in Vzla is so FU that, in the short medium term a flourishing light manufacturing or say, agroexport sector, is not incompatible at all with some tendencies for appreciation of the ExRate, is just not the binding constraint. Beside there is plenty of room for expanding employment in the Non tradable sectors (i.e. construction, services, etc)…

          In any case, is a fascinating policy discussion and I personally witness plenty of professional talent in the HCR team to figure it out….


          • Question from a non-macroeconomist: can a free exchange rate coincide with an under-valued currency and low inflation rates as long as the government sterilizes positive shocks overseas by buying foreign or domestic debt? If China does it, why can’t we?


            • If by free you mean floating, no. China has a semi controlled very hard peg. They keep de remimbi under valued by buying and accumulating massive quantities of foreign reserves (and therfore, expanding the internal credit) without so far creating inflationary preassures (helped by investment rates bordering 50% of GDP)… Also chinese external positive does not go directly into fiscal coffers…I do not think they are similar cases


            • You mean having a market of 1.4 billion venezuelans, most of them in the rural side and fueling an structural transformation in full speed by moving to Caracas? We can try ;)


            • Juan, more on the serious side,, I do think you can achieve what you mentioned, by imposing strict fiscal rules to isolate the economy from the volatility of the external side. Im talking an stabilization fund with strict accumulation/depletion rules and an structural fiscal balance rule a la Chile…


          • Hi Omar, it is a fascinating discussion indeed. Is there a clear view in the HCR team about the pace of reform, including on the exchange rate regime issue?


            • I can speak to that. The word I got from Grisanti is that they don’t think they can say anything about the PACE of reform at this point, simply because they don’t know what their net foreign asset position is going to be in February 2013, and they don’t know what oil prices are going to be then either. The phase-out period for dual exchange regimes could last anything from a few months (in the high reserves, high oil price scenario) to a few years (if circumstances aren’t so good.)

              Grisanti stressed that GRADUAL should not be seen as a synonym for SLOW. Gradual, for him, means as-soon-as-possible, but not all-at-once. I think that’s the thinking in the HCR team – if external circumstances cooperate, there’s no reason to drag the dual-regime period out any longer than necessary.


            • I have spoken with some of the people working for the HCR team, and I would agree that their approach is similar to what Quico just said, gradualism as in optimal sequence of events not as in pace. For full disclosure, I have made some collaborations to the campaign discussions but have never talked to Grisanti on this or any other issue


            • Gentlemen, you are way over my head on this but I can tell you that in my country, the price of oil is kicking the crap out of the manufacturing sector as our dollar rises. It seems to be a case of, get productive like the germans on steroids, or die. Its a curse. Do the Finns have it figured out? Okay, its Finland, but still…


          • Omar, what do you mean by an overvalued currency is not a binding constraint? Honestly that doesn’t make much sense, not to say any. Prices are always a “binding constraint”. If you sell at a higher price that your competition, you don’t sell anything. In the case of the exchange rate, the more it appreciates, the harder is for domestic producers to compete against imported goods. It’s also clear that you can also boost the tradable sector using other policies for any given exchange rate. How much this sector can expand using these other policies, however, depends negatively on how overvalued the currency is. That is, the more overvalued the currency is, the less scope the policy maker has to boost the tradable sector.
            You also point out that there’s plenty of room for expanding the non-tradable sector. That’s right but I don’t see why we should favor this sector over the tradable one. This is the sort of thing that introduces distortions in the economy which harm our growth prospects.
            It’s also true that there’s a tendency for the real exchange rate to appreciate in an oil-exporting country. As you said, we need to choose whether we want a more or less appreciated exchange rate. However, I don’t agree with your claim that a less (under?) appreciated exchange rate would necessarily imply a money supply expansion. As Juan already pointed out, you can always accumulate foreign assets as some Middle Eastern countries do.


            • Manuel,
              You re right, pricEs are always binding in terms of profits. Maybe I need to explain myself better. I used the term binding in terms of the existence or not of business in the T sector. there are multiple factors preventing the existence of Tradable industries (they do not exist, that s fact), from lack of infraestructure, to property rights, to risk of expropriation and squattering, crime, macro instability, etc. So if you agree there are multiple RER that makes a business in the T sector profitable enough to exist, given the relaxation of the other constraints, then you have it. In the short run you can have a boming tradable sector in the presence of preasures for appreciation. A good example of that is the incredibly dinamic agro export business in Peru, with the Sol in records high.
              i don t understand your comment on “favoring” one sector over the other, or “introducing” a distortion, remember this would be a market result from introducing a dirty floating exrate in a loos IT framework…that s the policy, appreciation would be a by product


            • I do agree that there multiple factors that make not only the tradable sector, but the whole economy, less productive and profitable. As I said before, if you have a very overvalued currency, improving infrastructure, property rights, etc. will only have a limited impact because ultimately those new firms/industries will have to compete with very cheap imported goods. I don’t think that that those other factors would make the economy so much more productive to offset the negative effect of a highly appreciated exchange rate. That’s why their impact would be limited.

              As for the part of my comment you didn’t understand, I was just trying to say that a policy of keeping a currency overvalued is effectively favoring the tradable sector over the non-tradable. Moreover, favoring one sector over the other is tantamount of distortions. That’s all I meant.

              I think, however, that I misunderstood you comment/proposal. I thought that you were proposing to have the exchange rate below its equilibrium value. That is, an overvalued courrency.. Now I see that you were arguing in favor of letting the exchange appreciate naturally given the structure of the Venezuelan economy and the fact that in the mid term we could be having a very favorable capital account due to a massive capital inflow. If that’s the case, that’d be a typical case of Dutch Decease. One positive effect of an appreciated exchange rate is the one you (or Quico) mention: it transfer purchasing power directly into consumers’ pockets. It has negative effects though. Clearly it isn’t good for the domestic tradable sector. If you assume that that the tradable sector is sufficiently more productive and has more value added than the non-tradable sector, the negative effects in terms of jobs, growth and, ultimately, welfare would outweigh the positive effect of cheaper imports. I think it’s safe to assume that the tradable sector tends to have higher productivity. Not sure if it’s sufficiently higher.


            • I agree, Manuel. Boosting employment in the more productive tradable sector is desirable for the economy as whole, I just think it will be more that a mid/long term challenge. In the short run, I think there is plenty of room to boost employment/growth in the now-almost-non-existent tradable sector and at the same time going for a floating (appreciating) exchange rate. The tradable sector for all practical matters will keep being rather small in the near future in terms of employment even growing at chinese rates, though…
              I think this has been a heck of interesting discusion..Abrazo


    • What about just dollarization? I understand that given the inevitable imperialistic accusations that would follow from Chavistas is politically unviable; but wouldn’t this be a better policy in purely economic terms? Look at Ecuador, the Correa administration has stuck with it (most Yankee of him) and the Ecuadorians seem to like it.


  6. How about expropriating all the buses, collectivos etc., having the useless militaries run the new state owned national transportation company, make public transportation virtually free, clean it up so its also safe and reasonably appealing, and then slowly ease up gas prices. Look at Mexico City. Your average working person can travel from end to end, fast, relatively safe, clean, for dos pesos (about the price of two Chicklets). I’m sure there are mafias running the collectivos so its a tough constituency to break up, but hey, give those guys unionized jobs and benefits and it will be ok.


    • One big irony is that in Venezuela, where government is expropriating everything, public transportation, which is government-run in almost any serious country, is controlled by a private mafia. I agree that an effective and cheap public transportation system (which is a necessity for most Venezuelans regardless of the gas subsidy) could counterbalance the removal of the subsidy and its effects on the majority and Venezuelans.


      • Everything in socialismo siglo 21 is ass backwards. The guy talks socialism but its really about strategically timed handouts and cronyism. He can’t even focus on what for any middle of the road liberal or social democrat would be obvious. His blithering idiot minister of health is on tv talking about what a great example the president is for people with cancer. Yeah, don’t get regular checkups (health care “system” ensures that), discover your illness somewhere between stage 3 and terminal, go overseas for treatment (sure, no problem), stuff yourself with steroids and go into full on denial mode, and as for chemo- good luck finding/affording that- may as well drink some chicha with rat poison and cross your fingers…(no, don’t do that, I don’t recommend that).


        • I agree that everything is backwards in socialismo, but the problem with Public Transportation comes from way back and is something that makes life much harder from many Venezuelans, you just have to go to Avenida Francisco de Miranda at rush hour and see people being carried like cattle in those hojalatas. A national program creating an efficient and state run public transportation is needed, and if any new government accomplishes that, it could contribute considerably with its stability.


  7. If Chavez, and his cronies go, a big “IF” no one mentioned all the credit card
    debt he will leave, the “China Visa Card” “the Citgo MasterCard,
    the PDVSA American express, the “Guns are US” from Russia, and least we forget
    all those lawsuits for all the foreign assets he stole, and we can’t
    imagine all the Venezuelans who will be lining-up to sue the Sixth Republic.
    ……ans so we are to believe the piddling $72 billion in
    reserves (if it exists) is going to cover all that debt?


  8. By the way, it takes some nerve to say, as Chávez did today, that the “bourgeoisie” wants to end the currency exchange controls, because it wants “cheap dollars” so they can buy them all up and take them abroad, leaving the country dry!


    I mean, honestly, this from a guy that SUBSIDIZES with cheap dollars everything from expensive trips abroad to imports of Svarovski crystals … well, it’s just a bit too much. The asshole obviously doesn’t read Caracas Chronicles.


    Get out of your palace, fat man. Go home to Cuba and meet your fate. I’ve had just about enough of your nonsense.


    • Juan,

      I sympathize with the feeling, but we are going to have to pretend to mourn if he dies. We cannot permit ourselves to engage in gloating, celebration, revenge, etc…

      We will need nothing less than somber calm and calls for respect for the constitution. If you just can’t hold in the satisfied grin, go do it in private. And yes, I understand the temptation, but everyone needs to be prepared. We cannot allow any excuse for violence or unconstitutional actions by the ruling party.


  9. Love the article, I am more positive about Venezuela’s future now, and i feel is gonna be even better because HCR and PJ are very right wing when you start talking about the budget, if he can make the nation budget reliable and responsible, the inflation will be substantially reduced, and of course corruption will be less in his goverment so that will create a better enviroment for the economy.


  10. “Masses of petrodollars will be flowing into state coffers every day,…”

    criminally… regressively… The worst tax on the poor ever. What’s most incredible to me is how many “educated” people support this, either out of ignorance, thinking they actually do good for the poor, or out of something worse.


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