Diary of Venezuelan businesses demise
It is now vox populi that Venezuela is suffering a major political induced economic crisis which has yielded bread lines and people dead from the lack of medicine. The two root causes are well known. Historically it starts with a dependency on a major resource to feed upo a dysfunctional patronage and welfare state; oil. Populism has been the continuing line of politics since the late 60ies, a line dramatically expanded by Hugo Chavez since 1998. To this tradition Chavez added incompetency, empty ideas, willful prejudice, corruption and even drug traffic, the lone prosperous industry in Venezuela these days.
It is not the aim of this entry to detail the catastrophe that has befallen Venezuela. I will only write some of the key events that have happened to my business, making it nearly bankrupt not through my own possible incompetency but through regulations that have strangled the life of all private business that are not associated with the corruption of the regime.
Chavez started with a new constitution that had a "free property, but..." feel. At first things kept as they were in 1998 which is to say not very well. But we could work, we could import raw materials to work, an important element since already in 1998 Venezuela was a net importer of raw materials and semi processed goods. Still, my business, agribusiness in nature, was able to do some small exports and was poised to expand these significantly to Colombia. Other plans included a project to export to Europe a choice crop from our family farm once our volume justified the export needs and costs, a farm for which we had obtained organic certification.
Then, slowly but surely the regime started to establish a series of controls that wrecked the economy. I am not going to go through them chronologically, just giving a main list.
In fairness not all chavismo intents were nefarious. For example the LOCTI law was voted to promote investments in technology by the private sector. That law created a tax that you could be exempt of if you used the tax amount in an investment project. That is, if your project was approved you could purchase, say, research equipment and then import it tax free to Venezuela. You could also include in the deal expenses to develop the system in your business. It was not a tax break per se, but autonomy in using some of the tax money for a productive project.
We did that, we purchased an analytical tool worth at the time 50,000 dollars, including miscellaneous expenses. Plenty of people did as we did, small projects like us or large laboratories set ups. But we should have known that such good will and constructive legislation would not last. First came the state inspections to verify whether we had actually done what our project stated. One day I saw a contingent of a dozen people arrive unannounced to inspect our purchase. We wasted two days explaining everything. We passed with flying colors, of course, but we already noticed the growing distrust of the regime as to anything private. And the increasing bureaucratic nature of the regime to send a dozen people where a single inspector would have sufficed, for one day at most.
You could be forgiven to believe that our track record would have allowed us to invest in yet a new piece of advanced technology, but this was never to pass. The regime saw LOCTI as a way to distract tax revenue for the state, not for the technological advances it brought to the country, in addition of creating new high paying jobs. The LOCTI was modified. Now only if the government approves the project would get from the government the money for it, allegedly out of the tax pool collected. That is, first you should keep paying the LOCTI tax required without any guarantee that someday you could recover part of it in a suitable project. Of the diverse business I work with, not a single one has had a project approved in the last 7 years (neither heard of any from my clients and providers). LOCTI is now just an additional tax burden. Note that one of the LOCTI goals was to finance public research. This one today is nearly zero. Nobody knows where LOCTI money goes but we all must pay.
Another shock came when currency control was installed in 2003. From then on you had to seek an import permit from the government to obtain the foreign currency you needed for such an import. This generated an extraordinary graft industry, a self explanatory consequence that I will not detail. What it meant to us was the creation of three job positions of people devoted only to tracking all the required paperwork. That is, these three people do not take any part on the purchase decision process, they only do the paperwork. Their only "productive" contribution, occasionally, is to supervise the arrival at harbors of some of our imports.
If this above is a direct cost, and if corruption is an indirect one, there is major indirect cost associated with such a control system: the impossibility to design a coherent developing plan. All your projects are at the mercy of a bureaucratic erratic delay and when you deal with perishables you need to be conservative and slow down you growth since the failure to receive in a timely fashion corn for your feed or fertilizer for your crop can ruin you. In other words, you cannot start producing until you are certain that you will get it all at hand, a process that can add months to your production delays. Never mind the costs from holding stocks.
Speaking of erratic supplies. These were made worse by the policies of expropriation of good land and good farms. As rice farms were intervened, as supplies for cash cops was interrupted through expropriations of agricultural giants like Agroisleña, it became increasingly difficult to obtain a regular supply for your crops and animal feed, hence the continuous drop in production in these fields, to today's shortages. And never mind that the currency exchange control fostered corruption to the point of favoring for years overpriced imports that destroyed local production which is today missing.
This already would be enough, but it is not all. Another apparent good intention of the regime was to improve workers safety. Unfortunately this one through the LOPCYMAT law did not even have a few halcyon days like LOCTI did. This new law was conceived from the start not only as an improvement on mandatory safety measures for workers, a commendable goal by any standard, but also as a way to infiltrate politically the work place. It is a requirement that elections are held among workers to set "safety delegates" personnel who benefits of union privileges, namely impossibility of being fired during their tenure.
That is still something we can work around. What is not is that these elected representatives must attend, at business expense, monthly day long seminars which were basically an exercice in indoctrination against the evils of capitalism that is intent on killing workers or something to that effect. With red Che posters and assorted insults if the safety delegates do not show enough enthusiasm for their mission and if they do not report enough irregularities included. Never mind that to face the sometimes ridiculous requirements of the law we have had to hire special consultants to organize the safety books, organize the workers elections for safety delegate and what not. Needless to say that after an early sense of empowerment those safety delegates became tired of the whole charade and now business must beg for workers willing to run for these elections and in our case even offer bonuses for those willing to put up with the chores imposed on safety delegates, chores that require several hours a month, at business expense of course.
Other bureaucratic workers right were reinforced. Although not properly a bureaucracy, the near impossibility to fire workers also generates many bureaucratic costs. Besides the need to negotiate in advance settlements with nasty workers so that they "willingly resign their job" there is a whole addendum of paperwork required that we did not use to have. For example we now have several lawyers on call to deal with those situations. This in addition of increased HR departments as we now have to provide, for example, "entertainment" for workers and their families. This gives you an idea of the paternalistic functions which are foisted on business.
Another ruinous aspect is the price control system. Fortunately the products I work with are not subjected to price control. Yet in theory we cannot have more than 30% pricing over our production costs. So this adds increased pressure on the costs department, more work, so that we have a finely tuned cost system and we can keep our benefits at no more than 28% and avoid those ruinous inspections that can block for days all the workings of a company. Yes, when these inspections come by law the inspectors can demand any paper they want and you must provide for them no matter what you are doing. That is, for the duration of the inspection you can only attend to the very basic of your company as these inspectors literally suck the life out of you. Let me remind you that a 28% gain with an inflation in the three digits means that you actually lose capital over time. Never mind that you need to adjust prices at least once a month, hence more calculations. But I digress.
There are more examples I can give but to finish this let's revisit the organic crops we were planning on developing to get enough volume to justify exports. Sometime in 2002 or 2003 if memory serves me well Chavez decided that Venezuela should not export food, that it was a crime against the Venezuelan people to sell its food overseas. I am not going to insult the reader intelligence discussing the ignorance of Chavez as failing to understand that it is OK for Venezuela to export tropical fruits in exchange of apples and wine.
The fact of the matter is that then not only we had to stop the small exports we were already making, and lose all the marketing made before, losing those markets, but even the organic farm project was stopped. We did not renew our organic certification. We stopped planting new land. We basically maintained what we had, at a loss, in the hope that someday exports be authorized again. To which I must add that the devastating insecurity that now hovers all of the farm land of Venezuela has made it impossible for us to visit the farm for the last 4 years. We have to rely on intermediaries and hope for the best. Owners of land simply cannot reside on their lands anymore as they will, within days, be attacked by armed gangs bent on ransom. If you persist then you must pay for armored vehicles and at least a couple fo body guards. More costs that not every business can afford.
There are also two other factors straight from bureaucratic hell that counters any attempt at improving production. Some stuff can only be bought through the government now, for example grain for feed. Needless to to point out how delays increased and corruption costs became prohibitive: in some cases we have had to pay 6 times over the official price some of the grains we need, money paid through false factures for false services rendered. Another beauty is that nothing that is used to manufacture food for human consumption can circulate on Venezuela roads without government permit. That is, if I want to deliver a truck of, say, morning cereal, I need to declare it on line, await permission and declare it again once it has been delivered. The information must even contain the ID card number of the driver! Any missing detail and you risk confiscation of your goods. You can figure out the added costs, including corruption of guards that check you out on the roads.
I trust that after this text you will understand better how come there is no food on the shelves in Venezuela. If I were working in the pharmacy sector, or textiles, or whatever I could probably write a similar tale of bureaucracy run amok. There is no mystery as to why Venezuela is not producing anymore, and it is not due to the fall of oil prices. It is due to the incompetence, neglect, and stubborn ideology that is core of the Chavez project. Let's not forget that in addition to bureaucracy there are many problems with production: devastated infrastructures, from roads to electrical plants; outdated production methods that make us non competitive since we have been frozen for 10 years now; difficult living conditions which make workers less productive (like when they rush out of office during working hours to stand in line for a pound of flour). Etc.
All business in Venezuela still operating and involved in the production of hard goods are nearly bankrupt, holding for dear life. There is no security, not to your property, not to your persona. You cannot plan your production in a rational way. The crisis aggravation has made it nearly impossible to get foreign currency from the regime. Our production system is falling behind the rest of the world in quality and competitiveness. In short, we work harder than ever for less production than ever, while struggling to stay alive as we see all our gains basically end up in the pocket of corrupt officials while el pueblo stands in line and starves.
There is only one question to be answered in future history books: how much of this destruction was willfully planned from the start. It is frightening to think that a regime deliberately planned for the impoverishment of its fellow citizens. But there is no other explanation that holds, in particular since Maduro replaced Chavez in 2013. Then the price of oil went down and the regime found no other palatable solution for their needs but to increase control and keep the level of corruption money, discovering that blackmailing el pueblo was easy if that one was hungry.
It is not the aim of this entry to detail the catastrophe that has befallen Venezuela. I will only write some of the key events that have happened to my business, making it nearly bankrupt not through my own possible incompetency but through regulations that have strangled the life of all private business that are not associated with the corruption of the regime.
Chavez started with a new constitution that had a "free property, but..." feel. At first things kept as they were in 1998 which is to say not very well. But we could work, we could import raw materials to work, an important element since already in 1998 Venezuela was a net importer of raw materials and semi processed goods. Still, my business, agribusiness in nature, was able to do some small exports and was poised to expand these significantly to Colombia. Other plans included a project to export to Europe a choice crop from our family farm once our volume justified the export needs and costs, a farm for which we had obtained organic certification.
Then, slowly but surely the regime started to establish a series of controls that wrecked the economy. I am not going to go through them chronologically, just giving a main list.
In fairness not all chavismo intents were nefarious. For example the LOCTI law was voted to promote investments in technology by the private sector. That law created a tax that you could be exempt of if you used the tax amount in an investment project. That is, if your project was approved you could purchase, say, research equipment and then import it tax free to Venezuela. You could also include in the deal expenses to develop the system in your business. It was not a tax break per se, but autonomy in using some of the tax money for a productive project.
We did that, we purchased an analytical tool worth at the time 50,000 dollars, including miscellaneous expenses. Plenty of people did as we did, small projects like us or large laboratories set ups. But we should have known that such good will and constructive legislation would not last. First came the state inspections to verify whether we had actually done what our project stated. One day I saw a contingent of a dozen people arrive unannounced to inspect our purchase. We wasted two days explaining everything. We passed with flying colors, of course, but we already noticed the growing distrust of the regime as to anything private. And the increasing bureaucratic nature of the regime to send a dozen people where a single inspector would have sufficed, for one day at most.
You could be forgiven to believe that our track record would have allowed us to invest in yet a new piece of advanced technology, but this was never to pass. The regime saw LOCTI as a way to distract tax revenue for the state, not for the technological advances it brought to the country, in addition of creating new high paying jobs. The LOCTI was modified. Now only if the government approves the project would get from the government the money for it, allegedly out of the tax pool collected. That is, first you should keep paying the LOCTI tax required without any guarantee that someday you could recover part of it in a suitable project. Of the diverse business I work with, not a single one has had a project approved in the last 7 years (neither heard of any from my clients and providers). LOCTI is now just an additional tax burden. Note that one of the LOCTI goals was to finance public research. This one today is nearly zero. Nobody knows where LOCTI money goes but we all must pay.
Another shock came when currency control was installed in 2003. From then on you had to seek an import permit from the government to obtain the foreign currency you needed for such an import. This generated an extraordinary graft industry, a self explanatory consequence that I will not detail. What it meant to us was the creation of three job positions of people devoted only to tracking all the required paperwork. That is, these three people do not take any part on the purchase decision process, they only do the paperwork. Their only "productive" contribution, occasionally, is to supervise the arrival at harbors of some of our imports.
If this above is a direct cost, and if corruption is an indirect one, there is major indirect cost associated with such a control system: the impossibility to design a coherent developing plan. All your projects are at the mercy of a bureaucratic erratic delay and when you deal with perishables you need to be conservative and slow down you growth since the failure to receive in a timely fashion corn for your feed or fertilizer for your crop can ruin you. In other words, you cannot start producing until you are certain that you will get it all at hand, a process that can add months to your production delays. Never mind the costs from holding stocks.
Speaking of erratic supplies. These were made worse by the policies of expropriation of good land and good farms. As rice farms were intervened, as supplies for cash cops was interrupted through expropriations of agricultural giants like Agroisleña, it became increasingly difficult to obtain a regular supply for your crops and animal feed, hence the continuous drop in production in these fields, to today's shortages. And never mind that the currency exchange control fostered corruption to the point of favoring for years overpriced imports that destroyed local production which is today missing.
This already would be enough, but it is not all. Another apparent good intention of the regime was to improve workers safety. Unfortunately this one through the LOPCYMAT law did not even have a few halcyon days like LOCTI did. This new law was conceived from the start not only as an improvement on mandatory safety measures for workers, a commendable goal by any standard, but also as a way to infiltrate politically the work place. It is a requirement that elections are held among workers to set "safety delegates" personnel who benefits of union privileges, namely impossibility of being fired during their tenure.
That is still something we can work around. What is not is that these elected representatives must attend, at business expense, monthly day long seminars which were basically an exercice in indoctrination against the evils of capitalism that is intent on killing workers or something to that effect. With red Che posters and assorted insults if the safety delegates do not show enough enthusiasm for their mission and if they do not report enough irregularities included. Never mind that to face the sometimes ridiculous requirements of the law we have had to hire special consultants to organize the safety books, organize the workers elections for safety delegate and what not. Needless to say that after an early sense of empowerment those safety delegates became tired of the whole charade and now business must beg for workers willing to run for these elections and in our case even offer bonuses for those willing to put up with the chores imposed on safety delegates, chores that require several hours a month, at business expense of course.
Other bureaucratic workers right were reinforced. Although not properly a bureaucracy, the near impossibility to fire workers also generates many bureaucratic costs. Besides the need to negotiate in advance settlements with nasty workers so that they "willingly resign their job" there is a whole addendum of paperwork required that we did not use to have. For example we now have several lawyers on call to deal with those situations. This in addition of increased HR departments as we now have to provide, for example, "entertainment" for workers and their families. This gives you an idea of the paternalistic functions which are foisted on business.
Another ruinous aspect is the price control system. Fortunately the products I work with are not subjected to price control. Yet in theory we cannot have more than 30% pricing over our production costs. So this adds increased pressure on the costs department, more work, so that we have a finely tuned cost system and we can keep our benefits at no more than 28% and avoid those ruinous inspections that can block for days all the workings of a company. Yes, when these inspections come by law the inspectors can demand any paper they want and you must provide for them no matter what you are doing. That is, for the duration of the inspection you can only attend to the very basic of your company as these inspectors literally suck the life out of you. Let me remind you that a 28% gain with an inflation in the three digits means that you actually lose capital over time. Never mind that you need to adjust prices at least once a month, hence more calculations. But I digress.
There are more examples I can give but to finish this let's revisit the organic crops we were planning on developing to get enough volume to justify exports. Sometime in 2002 or 2003 if memory serves me well Chavez decided that Venezuela should not export food, that it was a crime against the Venezuelan people to sell its food overseas. I am not going to insult the reader intelligence discussing the ignorance of Chavez as failing to understand that it is OK for Venezuela to export tropical fruits in exchange of apples and wine.
The fact of the matter is that then not only we had to stop the small exports we were already making, and lose all the marketing made before, losing those markets, but even the organic farm project was stopped. We did not renew our organic certification. We stopped planting new land. We basically maintained what we had, at a loss, in the hope that someday exports be authorized again. To which I must add that the devastating insecurity that now hovers all of the farm land of Venezuela has made it impossible for us to visit the farm for the last 4 years. We have to rely on intermediaries and hope for the best. Owners of land simply cannot reside on their lands anymore as they will, within days, be attacked by armed gangs bent on ransom. If you persist then you must pay for armored vehicles and at least a couple fo body guards. More costs that not every business can afford.
There are also two other factors straight from bureaucratic hell that counters any attempt at improving production. Some stuff can only be bought through the government now, for example grain for feed. Needless to to point out how delays increased and corruption costs became prohibitive: in some cases we have had to pay 6 times over the official price some of the grains we need, money paid through false factures for false services rendered. Another beauty is that nothing that is used to manufacture food for human consumption can circulate on Venezuela roads without government permit. That is, if I want to deliver a truck of, say, morning cereal, I need to declare it on line, await permission and declare it again once it has been delivered. The information must even contain the ID card number of the driver! Any missing detail and you risk confiscation of your goods. You can figure out the added costs, including corruption of guards that check you out on the roads.
I trust that after this text you will understand better how come there is no food on the shelves in Venezuela. If I were working in the pharmacy sector, or textiles, or whatever I could probably write a similar tale of bureaucracy run amok. There is no mystery as to why Venezuela is not producing anymore, and it is not due to the fall of oil prices. It is due to the incompetence, neglect, and stubborn ideology that is core of the Chavez project. Let's not forget that in addition to bureaucracy there are many problems with production: devastated infrastructures, from roads to electrical plants; outdated production methods that make us non competitive since we have been frozen for 10 years now; difficult living conditions which make workers less productive (like when they rush out of office during working hours to stand in line for a pound of flour). Etc.
All business in Venezuela still operating and involved in the production of hard goods are nearly bankrupt, holding for dear life. There is no security, not to your property, not to your persona. You cannot plan your production in a rational way. The crisis aggravation has made it nearly impossible to get foreign currency from the regime. Our production system is falling behind the rest of the world in quality and competitiveness. In short, we work harder than ever for less production than ever, while struggling to stay alive as we see all our gains basically end up in the pocket of corrupt officials while el pueblo stands in line and starves.
There is only one question to be answered in future history books: how much of this destruction was willfully planned from the start. It is frightening to think that a regime deliberately planned for the impoverishment of its fellow citizens. But there is no other explanation that holds, in particular since Maduro replaced Chavez in 2013. Then the price of oil went down and the regime found no other palatable solution for their needs but to increase control and keep the level of corruption money, discovering that blackmailing el pueblo was easy if that one was hungry.
Post a Comment