Sunday, 30 September 2018

The Venezuelan economic policy manual (satire)

For the good governance and prosperity of the Venezuelan people, we recommend policymakers adhere to the following policy framework:

*Discover oil. A lot of it. Enough that if the oil wealth is responsibly managed, all Venezuelans can live prosperously.

*Divi up the spoils in the following manner: Allow foreign oil companies a significant share of the revenue in exchange for investing all of the capital, and providing all of the operating expertise, necessary to discover, develop, and operate oil wells. Allow the state to capture the balance, and use it to finance generous social programmes. Health and education to be sure, but also entitlements such as the provision of subsidised fuel, generous social welfare and pensions, and the investment programmes (and losses) of a large number of state owned enterprises. Employee as many people in the state sector as possible, at high wages, to reduce inequality and unemployment. Widespread entitlements will ensure popular support for your regime.

*Rely almost entirely on imports to meet domestic consumptive needs.

*Steadfastly refuse to acknowledge the volatility of oil prices, and avoid saving any windfall gains during oil price booms to smooth state spending during oil price busts. Ramp up state spending proportionately with rising oil prices, and capitalise boom-time prices into entitlements.

*When an oil price bust does arrive, instead of cutting state spending, renegotiate contracts with oil companies to increase the state's revenue share. Ignore sceptics who argue that if the state share is increased too much, investment into the sector will cease and production will eventually start to decline. After all, it's our oil, and we are entitled to our fair share.

*Continue the above, iteratively, through successive oil price cycles, until the state oil company controls 100% of oil revenues/concessions.

*In subsequent oil price downturns, and/or to compensate for declining oil output, resort to heavy international borrowing, and also raid the coffers of the state oil company. Ignore warnings that the latter might deprive the state oil company of funds needed to maintain investment to support production.

*If funds are still in short supply, default on your international loans. If people then refuse to lend you more money, supplement declining state oil income by printing money. The confiscation of private businesses and large agricultural land holdings may also help supplement state income, while furthering efforts to reduce inequality.

*At this point, undesirable effects such as currency depreciation and inflation may occur. Ascribe this to a capitalist conspiracy, and focus on addressing the undesirable symptoms of problems, rather than their underlying causes. Heavy state intervention will be required at this point, including capital controls, an exchange rate peg, and widespread price controls on consumer goods, to combat currency weakness and rising inflation. Also be sure to make it illegal for companies to fire workers, so as to sustain the people's purchasing power. Such policies will all be needed to defend the people against the capitalist pigs.

*Inflation will also have some positive benefits as well. For one, it will render private saving and investing for the future a futile activity. This is desirable, as it is solely the responsibility of the state to provide for the people's needs.

*The capitalists may fight back, however. You may notice people hoarding goods; black markets emerging; as well as widespread smuggling of price-controlled goods overseas. Private companies may also refuse to produce goods at a loss, in the furtherance of their conspiracy against the people's revolution. Goods may start to disappear from shelves at this point.

*Respond by nationalising these private loss-making factories and putting them back into production. The printing presses will provide more than adequate funding to keep them operational and producing goods for the benefit of the people. In addition, at this point, it is essential the state dedicate a huge amount of resources to creating new rules that regulate, monitor and police every economic activity by every person/company, lest smuggling and other capitalist plots be allowed to flourish. Ignore warnings that this will divert a tremendous amount of the country's potential labour resources into unproductive activities.

*Foreign exchange may also become scarce at this point. Ignore people that argue that this is due to an overvalued exchange rate - capitalist propaganda must be resisted. The lack of foreign exchange may make the procurement of imports and imported components necessary for import substitution difficult, further reducing the availability of goods. Be sure to respond by banning the import of unnecessary luxuries, and encourage Venezuelans to forgo other indulgences such as eating three meals a day and using toilet paper. A compulsory diet should do Venezuelans some good anyway, and reduced dietary intake will reduce the need for toilet paper, besides.

*Sell what little foreign exchange is available to the military and other well-connected state actors at the official currency peg, as their support will be necessary to suppress popular revolts incited by the capitalists and other enemies of the people. Some may describe this as corrupt, but it is for the ultimate good of the people, and the ends justify the means. Sell some to yourself as well, and become very rich. After all, all your hard work in fighting for the people justifies rich compensation.


Venezuela is an utter humanitarian tragedy, and the worst thing about it is that it is entirely man-made. Venezuela should be one of the richest countries in the world, and yet its people are literally starving. And the problems are so easily solved. All that needs to happen is the following:

(1) The exchange rate needs to be freely floated.
(2) The country needs to stop printing money.
(3) Price controls need to be eliminated, including fuel subsidies.
(4) The oil industry needs to be restructured to increase incentives for private investment, and a state oil royalty fund needs to be set up that smooths state spending through boom and bust periods.
(5) Mass privatisations of state owned enterprises needs to occur.
(6) The labour market needs to be liberalised, and other regulations on private business activity lifted.
(7) A significant reduction in state spending, employment, and entitlements needs to be implemented.

Knowing what needs to be done, unfortunately, is the easy bit. Actually getting it done is the hard bit. Venezuela actually attempted to implement the above in the early 1990s, but mass popular socialist uprisings overthrew the government, and paved the way for Hugo Chavez to come to power, and implement his policy agenda of "21th Century Socialism" (which, it turns out, looks a lot like "20th Century Socialism"). The forces of corruption and human stupidity are both powerful and tenacious, unfortunately, and is the cause of much unnecessary suffering.



  1. I feel like someone might be inverting a bit here... :)

    1. I'm not entirely sure I understand you? I like to invest in situations of distress, but in doing so it's important to make a case study of situations that have gone badly, badly wrong. I currently (or have ever had/have) no investments in Venezuela, and I have no particular opinion on the investment merits from here.

      The lessons I have drawn from Venezuela and other downturns in less-developed countries, is that the number one thing you need to be concerned about is a swing hard-left (not to be confused with moderate left) in government policy to the point of undermining private property rights, and preventing normal mean-reversionary market forces to reassert themselves.

      In Turkey at the moment, for instance, where I have made some investments, there is no evidence of a swing hard left. Erdogen is a nationalist, Islamist, and populist, but he is not a socialist - he is actually conservative in orientation and pro-business. This matters a great deal. Other imbalances can work themselves out over time if market forces are allowed to continue to prevail.


    2. While seemingly obvious on one level, this comment of yours might be deceptively deep and insightful on another, especially if you really have identified the number one risk when investing in less-developed countries. Again, that the risk would be a swing hard-left feels almost too obvious, if only because investing is fundamentally the problem of finding and acquiring assets which then take the form of private property, whose value derives from the profits generated by and secured by the rights to other private property. And yet the real value in the observation would be in correctly identifying its primacy. Further on, you assert that other imbalances can work themselves out if market forces are allowed to continue to function. Combined, these two assertions might make for an even stronger claim – the strongest version of which might be that the ONLY real risk when investing in a less-developed country is a swing hard-left. I am interested in testing this latter proposition and hearing any additional thoughts you might have in this regard.

      Again, for as simple as it seems, to the extent it is true, this fundamental idea of focusing on the political risk you specified should be extremely powerful for the way it should allow an investor to make investments in situations where the perception of risk is high, but the real risk has been identified and can thus be assessed.

      But back to the question of whether there might not be further risks worth enumerating or whether all other risks will pale by comparison and be eventually surmounted so long as market forces continue to prevail. For instance, the following might depend on your opinion of a person like Ray Dalio, but as I understand it, he recently posted a new version of work he claims to have done on debt crises, in which he argues for a type of debt crisis that should be endemic to less-developed countries. He calls it an inflationary debt crisis, attributes it to among other things dollar-denominated debts or really any other circumstances in which the country as a whole is essentially "short dollars." I am far from a macro expert, so I thank you for bearing with me, but it was your Turkey post that led me to do a little work on the recent cases of Argentina and Turkey, and Dalio's account seems plausible enough at a superficial glance. Now, I also looked at China over the past ten or fifteen years, as well as the U.S. from the late 60s into the 80s, in an attempt to try to gauge to what extent the presence or absence of inflationary pressure was simply a question of good versus bad monetary policy, including the regulatory regime for the banking system, plain and simple, and not further explained by the characteristics of countries in positions like the one Dalio describes. I did not feel equipped to draw a firm conclusion at the time. Nevertheless, could something like Dalio's hypothesis be added to a list of other risks, after the crucial risk regarding property rights that you highlighted above? Can you yourself think of other important, although secondary risks, notwithstanding your confidence in market forces more generally? Or, and it would mean it is a particularly powerful insight, does the "swing-left" risk really stand alone in a sense? Of course, perhaps it's obvious that sound monetary policy is a requisite, or a belief that sound policy will eventually be achieved, but perhaps you consider that implicit in the concept of market forces being allowed to work.

      I'm sorry to be all over the map here, but the true significance of this post only hit me after reading your subsequent comment. I would love to be able to invest more confidently in developing markets, and these feel like some of the most pertinent issues. Thanks for any thoughts you might be able to share.

    3. * Just for fun, I'll note that thus far you have been right about Turkey, and I have been wrong. Not in the sense of losing money, but in the sense of perceiving high risks of further inflation that the recent moves in the lira and the market seem to suggest will not come to pass (although I couldn't help putting on a very small position in Turkiye Garanti Bankasi based on your analysis and the apparently cheap valuation, so that's been a very minor consolation to date). Anyway, I'm still determined to work out the real implications of inflation for investing in developing markets someday, but it seems like a hard problem and feels like it could be a long time coming. Any thoughts, experience, advice you might want to share on the subject? Thanks, as always.

    4. Thanks anonymous - appreciate your thoughts.

      I would never try to argue that emerging markets don't face considerable cyclical risks, including debt cycle risks. They are significant. And foreign-denominated debt can be a big problem sometimes. The Asian Financial Crisis was devastating to countries like Indonesia, for instance.

      However, Indonesia did recover. It's stock market rose 10-fold in USD in the 2000s after the late-1990s wipe out.

      Overleveraged companies can go bankrupt, and banking equity can be wiped out in severe downturns. Not disputing these risks at all. But these are fundamentally economic/credit cycle risks which can be analysed. A slip into hard-left policies, however, can result in a total and permanent wipe out with no hope of any sort of recovery.

      Hope that makes sense.

    5. Thanks for those thoughts, Lyall. Lucid as always. Certainly lots of room to consider fundamentals, even to a degree which I find surprising at times. I recall you touching upon the difference between bank valuations in Argentina versus Turkey recently, despite what could be some superficial similarities. When I looked, I certainly found them striking, especially when taking political considerations into account, where I probably agree that an Erdogan-led Turkey should be more encouraging to investors, as of now, than an Argentina that looks ever ready to overrun a politician like Macri who might hope to make real reforms. If I had more insight into the latter situation, I wonder if I wouldn't recognize a version of "swing-left" political risks you highlight (or in this case, legacy risks from a "long past swing to the left"). Anyway, great food for thought, as usual, and much appreciated.

  2. I had a feeling this comment might be confusing. I simply meant that you are doing what Charlie Munger calls inverting. It seems to me if you wanted a prescription for how to run a nation into the ground, look no further than your bullet points for Venezuela. It was meant as a clever compliment and nothing more. Sorry for muddying the waters! Great post.

    1. No worries James - there was never any offense taken at all - I just wanted to clarify what you meant. I appreciate the clarification. Thanks!