The roadmap, part III: Creating an ecosystem for growth

Another world is possible

Another world is possible

(A series of posts on how Venezuela can begin to grow again. For some background, see here and here)

The second regularity the authors find in The Growth Report is that “macroeconomic volatility and unpredictability damage private sector investment and, hence, growth.” In other words, succesful countries manage its macroeconomy to make it predictable enough for companies to feel free to invest. So … how do you accomplish that?

It helps to start with the basics. There are two different worlds people have in mind when they talk about the economy.

First there’s the world of fields and factories, offices and machines, and the people working on them making things and providing services that other people find valuable. Then, there’s the world of little bits of paper or – more often these days – electrons flying around between people as they try to keep score about who’s working for whom, who is providing which goods to whom, and who is trading which service with whom.

Economists call the first world the Real Economy, and its study Microeconomics. We can call the second world the Money Economy. Its study is called Macroeconomics. (Yes, there are things beside money in the study of Macroeconomics, but money, in my mind, is the common thread linking these issues together).

Leave it to Macroeconomists and things get horribly jargony and complicated very soon, but basically what the condition from The Growth Report says is: don’t re-invent the wheel every three years, don’t do things that deepen the cycles in the economy, and keep interest rates and inflation at steady, tolerable levels. Basically, get out of the way of the people who do the real growth: the guys (and guyas) working and investing and building actual things and providing actual services.

Monetary policy makers, in the scheme of things, are like referees in a fútbol match: you can tell they’re doing their job well when you barely notice them. When they become the story, it’s a safe bet they’ve monumentally fucked up.

It stands to reason. All those factories and offices and the people working in them have a given potential: an amount they could produce if they were all fully employed and working fully efficiently. A well run money economy can create the conditions for them to get as close to that potential as possible, (though we’ve known since the 1930s that there are certain times when the economy is producing much less than its potential, and in such cases printing money can actually raise the economy’s total output.)

What twiddling with the money can’t do is change that underlying potential: to do that, you need new people with new skills, more factories, bigger offices. And that’s all real economy stuff.

For the money economy, the downside is much bigger. Screw up your macroeconomics bad enough, and the score-keeping bits of scrip can actually get in the way of the people out doing the actual work of raising crops and manufacturing shirts and mobile phones and cutting hair and engineering bridges, like a useless ref ruining a futbol match with bad calls.

Money, in the end, is just information – information about the value of the thing being traded, information about the productivity of the worker getting paid. Sound macroeconomic policy is about keeping information true enough, clear enough, and accurate enough that it doesn’t gum up the actual workings of the real economy. It’s also about keeping money cheap enough and available enough that people can borrow it to exchange for the things that actually cause growth – namely, capital, whether human or otherwise.

In normal countries, the work of keeping the Money Economy orderly enough to stay out of the Real Economy’s hair isn’t easy, but neither is it some deep unknowable mystery. The details are obviously contentious, but the broad outline is fairly straightforward: you need a rough kind of stability in the ratio between goods traded and score-keeping bits of scrip used to trade them with. They need to grow roughly in tandem. Most importantly, you need to make sure large chunks of scrip aren’t suddenly created or destroyed overnight, because if they are, the jolt is felt right throughout the Real Economy.

If the pieces of scrip are scarce, interest rates will be high (everyone will want to borrow scrips, and there won’t be enough of them around) and then investment will suffer. If they are too available, everyone will have easy scrip and prices will rise fast.

Clearly, it helps to understand what the mechanisms are that send these ratios out of whack most often. The classic one, the one that comes up again and again in economic history, is runaway money-creation as a result of government debt.

The mechanism here is straightforward: governments that spend more than they take in through taxes can try to make up the difference by borrowing, but if they spend much more than they take in, it can be hard to find enough willing lenders. In those circumstances, the temptation is very strong to game the system by just getting the Central Bank to print up more and more bits of scrip to cover the government’s debt. “Monetizing the debt” is the lingo here, and it’s at the center of the reason why when I was a kid you needed Bs.4.30 (de los viejos) to buy a US dollar and these days you need Bs.43,000.

And so one rough-and-ready interpretation of the mandate to avoid “macroeconomic volatility and unpredictability” is just to keep the deficit down – if not at zero, then much closer to zero than it has been for most of our adult lives. That’s clearly not the whole story but, more than people realize, it’s the bulk of the story: look through economic history and you just won’t find very many cases of macroeconomic chaos in countries where the government budget is roughly balanced.

Of course, Venezuela is not a normal country: we’re a petrostate, and as such we’re much more exposed to violent shocks from world markets due to volatility in the price of the one commodity we export. A sound budget one year can be grossly deficitary the next, because oil income today can be three times as much as the oil income we get tomorrow. It’s easy to see how wide swings in oil income make it challenging to keep the Money Economy from screwing up the Real Economy: when things are good, you pump huge amounts of scrip into an economy and then take it out again seemingly at random when things go bad, as a world price we can’t really control fluctuates.

But even here there are mechanisms that could be used to manage the shocks. After all, the scrip that oil generates is gringo-issued and colored green, while our scrip is rainbow colored, pluriétnico y multicultural, and it isn’t written down anywhere as a law that all the green scrip has to be turned into criollo scrip.

You could just as well set aside some of the green scrip into a kind of holding pen when oil prices go up, refraining from issuing rainbow scrip against it until prices come back down again. In fact, you could even have a policy – sort of like China’s, or Norway’s – of trading only a portion of green scrip for your own rainbow scrip, setting the rest aside in an ever-growing pile.

This policy may be especially well suited to an oil economy, as using all those petrogreenscrips to buy up rainbow scrips drives up the price of the rainbow scrip, and that can screw up the Real Economy in its own way. The operative bit of jargon here is Dutch Disease, and it explains why so few oil economies manage to sell anything other than oil to world markets.

The debate here is complex: it’s true that if you refuse to turn all your green scrip into rainbow scrip, you’re by definition putting off consumption until later, and that may not always be justifiable – or politically sellable – in a situation when people are hungry now. But then, consuming all of the green scrip now and simultaneously making your industry uncompetitive doesn’t really look like a great way to prepare for the future either, does it? You can get any two Venezuelan macro nerds to debate this point ad infinitum – in fact, in a way, that’s all Venezuelan macro nerds have been doing since the Gomez era.

Here we’re get closer to the issue Venezuelans tend to think about as the issue when it comes to the macroeconomy: your system for interfacing between green scrip and rainbow scrip (a.k.a., el sistema cambiario.) It’s sort of a funny thing, because while there’s certainly an active and sometimes heated debate about this interface, very few professional macroeconomists would see it as the central problem of keeping the Money Economy from screwing up the Real Economy.

It’s true that an exceptionally perverse exchange system like the one Venezuela has now can (and does) wreak havoc with investment and growth. But it takes a rare evil genius like Jorge Giordani to pile on so many distortions into an exchange rate system that it turns into the way the Money Economy screws up the Real Economy.

Many, many different types of exchange rate arrangements are compatible with the kind of stable, predictable Money Economy you need to get money out of the way of growth. Even relatively heavy-handed capital controls can go hand in hand with a stable macroeconomic and fast growth – just ask anyone who lived in South Korea in the 1960s and 1970s − provided they’re administered by a Central Bank that refuses to create more and more money out of nowhere to pay runaway government debt. Venezuelans really need to be reminded of this.

Now, even if you’ve read this far and didn’t really follow the discussions, it’s no biggie. I haven’t the faintest clue how they manage to get a hunk of metal that weighs several tonnes to fly, but I don’t hesitate to jump on a plane when I need to travel. I do it because I trust in the professionalism of the aeronautics engineers who make the damn things, and because I trust that Boeing, Airbus, Bombardier, and Embraer won’t hire some shaman off of Sorte Mountain to design their planes. Aeronautics may be a deep mystery to me, but I know from experience that every day thousands of planes take off and land safely every day and I infer that flight is a problem that properly trained professionals have pretty much solved.

In much the same way, most of the world has figured out how to keep the Money Economy from screwing with the Real Economy most of the time. There are certainly exceptions – ask any Spaniard with a mortgage – but in a broad, general way, it’s a pretty good bet that a professionally staffed Central Bank that’s left alone to do its thing without interference from people who don’t actually understand the detail can usually be relied on to keep the macroeconomy from going spectacularly wrong.

The relevant bit of jargon here is “Central Bank Independence” and if you’re not convinced that’s important, if you hear the siren song of “democratization” of the Central Bank or “close cooperation with the Finance Ministry” and think they’re convincing, just ask yourself how you’d feel about getting on a plane after the “democratization” of Boeing’s engineering department or the takeover of Airbus’s R&D department by a bunch of brujos from Sorte.

This, I’m afraid, is the real problem with Venezuela’s Money Economy today, and the reason the recent appointment of Eudomar Tovar as BCV head is such a catastrophe. With Giordani, Edmee, Tovar, etc., we have a gaggle of shamans running the aeronautics department, and the macroeconomic plane they designed is the one Venezuelans have been riding for the last 11 years.

And so my recipe for macroeconomic stability for the next government is simple enough to put into two lines:

1. Stop always spending way more money than you make.

2. Find some really competent macro nerds, hand them the keys to the Central Bank, and let them do their thing.

That’s it!

23 thoughts on “The roadmap, part III: Creating an ecosystem for growth

  1. What’s the point of your economic management recipe when crime is rampant, with no real attempts to get it under control?


    • Well, this is just one post in a long series, and narrowly focused on the macroeconomy. Obviously, you don’t solve every problem in the country with a stable macro framework – that’s sort of the point of the piece!


      • Except that I think crime (and the establishment of a good, solid rule of law) is the most crucial aspect, when considering ‘sanamiento’ of the economy. None of the other considerations make any sense without touching upon the rule of law. That’s why management of crime should be the number one mention in your series. The alternative reminds of when I’d study for my exams in 3er or 4to grado. My Dad would test me before hand. And when he’d ask me to name the 5 largest rivers in Vzla. I’d begin my answer with el Sipapo, because I found that name so amusing. My Dad would knock his head trying to get me to understand that when listing items in order of importance, start with the biggest first, as in el Orinoco.

        Crime, Quico. Rule of law. Number One.


    • you will never completely control crime without some sort of solid economy, people need to have a stable job and a decent salary, if you can get far more money easily as buhonero or as a thieve it will always be an option for some people, crime needs to be tackled in a three way approach, 1. strong economy 2. heavy hammer of justice (aka plomo al hampa) 3. good education that indoctrinates good values instead of a revanchist history


      • But I think that syd is onto something, maybe we should the effort to fight crime as the key to change our society, use crime fighting as a kind of political metanarrative: Crime, needs to be fought, by Rule of Law, which in turn is created by institutions, such as an independent Central Bank,..


  2. Whoa, hey, those last two points assume that sound economic policy matters more than elections… since when has that been true?

    If sound economic policy is going to keep me from cooking up madly profitable guisos… why would I ever want it?


    • Well, this is just one post in a long series, and narrowly focused on the macroeconomy. Obviously, you don’t solve every problem in the country with a stable macro framework – that’s sort of the point of the piece!


      • Oh, I know, to be followed by discussions on high savings, market allocation of resources and building a capable government.

        I guess my point will be better discussed in the 6th part of the series (capable government) as it requires an understanding of bigger picture, long term thinking that only exists when capable, high-quality people are in government. Till then, then.


  3. It is obvious that your two simple points make sense. It is obvious to us.
    The problem is what Charlie mentioned and, above all, the fact those people, left and right, who prosper in the current and previous messes will do anything, absolutely anything, to get rid of you. That means provoking a Caracazo 2 or worse.
    So: I think the question for people of good faith and some brains is not so much whether your proposals are good – they are, they are the ones Norwegians and others like them have been implementing – but how to get there without the vested interests – again, from both “left” and “right” – using very filthy schemes to eliminate you.


    • Well, this is just one post in a long series, and narrowly focused on the macroeconomy. Obviously, you don’t solve every problem in the country with a stable macro framework – that’s sort of the point of the piece!


  4. So who would the macro nerds be?

    Got any suggestions?

    And yes, I know that this is just one post in a long series, and narrowly focused on the macroeconomy, but still, got any names?


    • No offence, but this sounds like “who will be our leader next?”

      Maybe the question is where you would get the macro nerds, what institutions you would trust to hire them from.


      • I think the person matters more than what institutions s/he comes from. Case in point: Felipe Perez has a Ph.D. in Economics from the University of Chicago… but it’s pretty clear he was no Chicago Boy (and if only you knew the circumstances under which he got his degree…)


      • I think it is not “who will be our next leader”.

        Even the most urbane macro-nerd will tell you it’s one thing to direct the Macro Economy of a coountry, and quite another to have the political and diplomatic stones to direct a nation.

        Zapatero a sus Zapatos and all that………


      • Given that I’ve been classified as Macro nerd, I’d like to point out that your definition of Microeconomics and Macroeconomics are, to say the least, very “sui generis”. Just to clarify, Micro is the study of how individual economic agents (e.g., firms, consumers) make decisions. It’s divided mainly in 3 subfields: Decision Theory, Game Theory, and Mechanism Design.
        On the other hand, Macro is the study of economic activity and prices in the overall economy. That is, it looks at the aggregate, which it includes money. Macro can be divided between the study of the long run (economic growth) and the short run (cyclical fluctuations). You can also split macroeconomist (specially those who study the short run) between those who think money is not important to determine real variables (output, real wages, employment, real GDP growth) and those who think that the quantity of money is a key variable. The former group, known as Neoclassical or supply-side economist, believe in the so-called Classical Dychotomy which tells you that real variables are independent of the money supply (money neutrality). In this model of the economy money only matters to determine the price level and nominal variables. The latter group, the Keynesian or new-Keynesian, think that money is important because there are price rigidities and other market frictions that render money ‘non-neutral’.
        Most macroeconomist think though that this is a non-issue as far as the study of the long run is concerned. In the long run, money is neutral and therefore doesn’t affect real variables (which is what we care about). This is because price rigidities and other market frictions are only relevant in the short run. In the long run, these rigidities disappear and, as a result, we are in a Neoclassical world.


    • The boring answer, of course, is José Guerra. Who certainly is qualified, and senior enough to do it – though disqualified in my book by the fact that he doesn’t read Caracas Chronicles!

      The smart thing, I guess, would be to put the four of them in a search committee…


  5. “1. Stop always spending way more money than you make.”

    I never understand why is this so har to understand to any goverment, it is idiotic to think that you need to spend heavily to win elections, sooner than later the money will run out and you’re going to lose anyway, specially if you are allowing corruption to take away billions of goverment dollars.


  6. There’s an inherent problem with a system expecting independence from bodies that are dependent at conception. For example, how can BCV be an independent body when its leaders are chosen by another body. So the suggestion that nerds must be found to then be allowed to run the thing suffers from this problem: someone else finds them and gets to pick and choose non independent nerds, and then someone else gets to decide how much they allow, that is, how long a leash to give them.

    There’s also an inherent problem with a system that permits spending more money than it makes. It needs to either have a safeguard to prevent the spending, or have a severe enough consequence as deterrent in case of overspending. The way the system is on paper, it all too often states what can or cannot be done, but it fails to provide the consequences for when these directives are disregarded.


  7. Some excerpts that may be relevant to this discussion:

    ‘Empirical evidence demonstrates that greater central bank independence fails to reduce inflation and improve macroeconomic performance in developing countries. … Moreover, empirical evidence shows that central bank independence is not associated with high rates of economic growth or employment, financial stability …, budget balance or a reduced tendency for the central bank to monetize fiscal deficits.’ (Ha-Joon Chang & Ilene Grabel, ‘Reclaiming Development: An Alternative Economic Policy Manual’, Zed Books, 2004, p. 183-4)

    ‘The obsession with budget balance in developing countries is misguided. … The increase in economic activity that is associated with government spending does not necessarily cause inflation in countries with significant excess capacity (as is the case in most developing countries). Empirical evidence does not support the claim that central banks generally monetize budget deficits by increasing the money supply … . Careful study of this matter … has demonstrated that the relationship between budget deficits and money supply in developing countries is far more complex than most … acknowledge.’ (Ibid, p. 193)

    ‘Historically, periods of rapid economic growth in Continental Europe, the USA and Japan were associated with large programmes of public expenditure and even large budget deficits. … [T]argeted public expenditure played a key role in the rapid growth of the Asian NICs. Public expenditure in Latin America in the 1940s and 1960s … contributed to the rise of the region’s impressive economic growth during this time.’ (Ibid, p. 193-4)

    And so on. Also, maybe part of the reason why – when you were a kid – you needed only Bs.4.30 to buy a US dollar is that ‘Venezuela had a fixed exchange rate in the 1970s and early 1980s’, and ‘[a]s a result, the currency was persistently overvalued’ (Gregory Wilpert, ‘Changing Venezuela by Taking Power’, Verso, 2007, p. 11). Lastly, perhaps Venezuelans do not ‘really need to be reminded of … runaway government debt’ just yet, given that Venezuela’s domestic public debt is currently ‘not [at] a particularly threatening’ level, and its interest payments as a percentage of its public sector export earnings are ‘also not very high’, according to an economist who has a much better track record than you do (Mark Weisbrot, ‘More Room for Debate on Venezuela’, The Guardian Unlimited, January 9, 2013).


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