CADIVI is dying, just like its father

Tal Cual is reporting on some welcome news from the front lines of Distorsiolandia.

Ricardo Villasmil, Henrique Capriles’ main economic adviser, is quoted as saying that a Capriles administration would legalize Venezuela’s parallel exchange rate, and would gradually move toward eliminating all currency exchange controls.

The Capriles camp had already announced that it would not do away with Venezuela’s nefarious currency exchange controls at the outset. Rather, they said they would maintain it with the hopes of creating the conditions for a future phase-out.

This reluctance to pledge an all-out dismantling of Cadivi created quite a debate when it was first reported.

Villasmil is now being quoted as pledging to legalize the secondary market. Venezuela would then move toward a formal, multiple exchange rate system, with more transparency and clearer rules. He says this would be a powerful signal of where things would be headed, and that they view it as a first step toward the end of CADIVI.

We have long argued on this blog that CADIVI is at the heart of Venezuela’s economic and moral decay. The opportunities for arbitrage by just playing the system are enormous for the well-connected and out of reach for ordinary Venezuelans. It may not be an exaggeration to say that Cadivi is the main reason why we have wasted away the massive oil boom we have been living through.

With oil going down the toilet, any administration that comes in after October 7th may very well have to do away with Cadivi. Regardless, it’s nice to hear our camp say it has to go as a matter of principle.

44 thoughts on “CADIVI is dying, just like its father

  1. A great analysis of the mechanics of kleptocracy is at I recommend it. The argument, greatly simplified, is that a non-convertible currency and high inflation are necessary to maintain a kleptocracy, because they create a negative real interest rate. With such funding available for state-owned enterprises (SOEs), these companies are able to remain in existence much longer than if they needed to actually pay regular interest rates. While the SOEs exist and keep getting free money from “savers,” the managers are able to steal at will.

    • A real eye opener about China. And also, repeating something that so many serious economists before 1930 said that I lost count. High inflation and artificially low interest rates ARE CONFISCATION AND THEFT. Against everyone not connected to the State’s machinery for producing fake money. And they were used by every totalitarian (or cash strapped or deficit ridden regime) even then, for that purpose.

      For example, Keynes:

      And no matter what you finance through debt, no matter what “prosperity”, inflation will eat it out and the poorest and most disadvantaged (in that they don’t have access to financial instruments) are chewed the hardest.

      Now, Venezuela does produce oil for export and little else. So we are a petro-kleptocracy, I guess.

  2. Now what we lack is a framework, a tentative time frame for CADIVI’s dismantling. Gradually but starting on January 2013. Moderation but firmness of purpose is the key. We should be allergic to shock policies and to revolution equally. How about gas prices?

    However, no cost measures are available in a place as economically sick as Venezuela. They could well begin by re-legalizing currency transactions as well as allowing the ownership and trade of titles, bonds, bank accounts and whatnot in foreign currency, in Venezuela. Maybe we need a little “dollarization”.

  3. It may not be an exaggeration to say that Cadivi is the main reason why we have wasted away the massive oil boom we have been living through.

    Juan, you know that argument does not hold. I can’t remember where I saw yearly statistics about it, but CADIVI’s total amounts don’t come even close to being the main waste.

      • Alek,
        a) I don’t know if those numbers have been audited or not. My guess is that they haven’t.
        b) There seems to be an awful lot of public entities not listed. PDVSA is not on there, nor are many ministries. Is it comprehensive?
        c) The numbers don’t include private citizens’ CADIVI dollars.
        d) How do we know the size of the main waste? What do we compare this total to?

        These numbers are a long way from disproving my admittedly timid claim.

        As per “you know that argument does not hold,” I don’t appreciate being called a liar just because.

        • See, I read the claim in a more figurative sense: that a system where the easiest way to huge wealth was twiddling the separate exchange rates was a kind of muriatic acid sprinkled liberally over the carcass of our moral compass. That the moral atmosphere created by Cadivi gives a green light to every aspiring crook and scammer and cash fiend with total impunity. I didn’t think it was a technical, macroeconomic type claim – really a moral one.

          • … twiddling the separate exchange rates was a kind of muriatic acid sprinkled liberally over the carcass of our moral compass…
            moral atmosphere created by Cadivi gives a green light to every aspiring crook and scammer and cash fiend with total impunity.
            double WOW…
            you must have slogged through Aristotle and St. Thomas in your younger years :-)

          • I’m not sure the moral green light was needed for the omnipresent Venezuelan scammer–Remember the decades old CAP 1 saying, “with pride”–“.No me lo des, solamente pongame donde lo hay!”

        • Oh cmon Juan, you know I meant no insult. It’s just that I don’t see how such a statement can be validated taking into account the opacity you’ve described.

          As per the total size of rhe waste, we have written about that in the past: Chavez’s hanky panky, military purchases, give aways to many countries, misiones, etc.

          FT is right and I agree that it is more a figurative claim about how CADIVI exemplifies the fucked up morals of Venezuelans.

          • Most Venezuelans did not decide to create CADIVI, neither profit from it. I think that Juan’s point is that this is a sign of the moral decay of an alleged socialist government that spends billions of dollars subsidizing the travels and studies abroad of the middle and upper classes and making a tiny elite filthily rich. I agree with Alex that a lot of amos del valle are profiting largely from this, but then when you see the common talk in the opposition, people criticizes as pedigüeños those who take money from the misiones, but no one question CADIVI as pretty much the same thing with the difference that is actually a larger subsidy.

  4. Now, if only they would propose making price and exchange controls unconstitutional, then we’d be talking about a real future.

  5. off topic, but continuing the macroeconomic bent:

    “El sistema capitalista está en una profunda crisis y la manifestación evidente es la desaceleración económica” de los países desarrollados, que transformó el riesgo de la caída de la demanda de crudo en una “amenaza clara e inminente”, dijo Ramírez.”

    I love the irony in this quote. Firstly, he’s accepting that the developed nations are the capitalist ones. Duh! Then he’s accepting that the developed nations are the ones that create the bulk of demand for energy. Duh! Then he’s accepting that Venezuela depends on that demand, therefore on the developed nations, therefore on capitalism, to prop up the supposed revolution. Duh!

    Doesn’t he put 2 and 2 together? The revolution depends on capitalism to survive, but capitalism makes nations developed without socialism. He needs to wake up.

    • Don’t worry too much for Ramírez extorres. If the rumors are true, after Diosdado, he is the “revolutionariy” that understand the most the value of capital and its accumulation. Men like this have no ideology, they are just thieves who said whatever they think they need to say to remain in their cambur to keep getting rich, capitalistas salvajes y sin moral.

      • My mistake, Ramírez is nothing. I should have said, don’t chavistas put 2 and 2 together, that even their top dogs acknowledge the superiority of capitalism, and the revolution’s dependence on it. It’s the people falling for these controlism forms of government that worries me.

        • I agree that people falling for this is worrisome. Regarding the top dogs, there might be a few trasnochado communists who believe this crap (But I think they don’t hold much power). People like Ramirez have no ideology or ideas on policies, they are just thieves. If it were from them the country would be Russia with them establishing oligopolies to keep getting rich.

    • Extorres a couple of following points:
      1) I guess a true revolutionary would say, “if lower oil prices are the price that we have to pay for capitalism to unravel then it’s worth paying”. Complete opposite from what he is saying
      2) In a very short sighted way, this lower oil price may lower the populist vote winning expenditure, so may not be that bad from an opposition campaign point of view, unless now they just plan to spend the same and have to get into more debt, which would not surprise me.

    • He does, sort of. Everybody in the world has to admit that they depend on societies very different from what we consider optimal. Witness for example how the developed nations depend on China and viceversa. It’s called trade and ironically enough is part of the life of followers of nonsensical economics that try to negate it. But… he is a top kleptocrat in a kleptocracy masquerading as a Socialist Revolution, so he has to say lines like these and appear about as clueless as the faithful.

      However I feel sorry for whoever has painted his mind into a corner to the point that they are forced to be faithful with these guy as one of the high priests.

      • loroferoz, I disagree. Capitalism does not depend on non capitalist governments to develop and succeed. Your example can easily be countered by asking what if China were not communist. Would developed nations have to find other China’s to continue being developed? No, they would just continue to be capitalist with the new China.

        In Venezuela’s case, Ramírez is openly admitting that the lower demand for oil is putting chavismo at risk. His statement is not about trade, as you so forgivingly put it; his statement is about dependence on the eneryg guzzling demand to keep chavismo propped up.

        I guess at the root of it is the fact that capitalism is not a form of government, per se; it is a way of understanding economy. People sometimes forget that, because some forms of government are based on the laws of capitalism, and others pretend that they are above capitalism, but even the economy of the strictest communism in history obeyed the laws of supply, demand, price, value, risk, flow, … Capitalism is not a goal; it’s a way.

        • Well, of course Venezuela could still export oil somewhere, if there were not developed nations with civil liberties. Just much less than now.

          Conversely a liberal China would be orders of magnitude more prosperous and with a more equal distribution of wealth and driving the development of Africa? and the Middle East. I liked it more when it was Korea, Taiwan, Indonesia or Hong Kong that rolled out the cheap goods. Even if some of these countries had dictatorships these were several orders of magnitude less bloody than China’s.

          But Ramirez is still a kleptocrat trying to frame the threat he sees to his cushy position into a words for the clueless faithful.

          • “Venezuela could still export oil somewhere” Yes, it could, but Ramírez’s comment is precisely that the option of not exporting it to the developed capitalist nations, his little “anti capitalist” movement is at risk. That’s my point, that his controlist movement depends on capitalism based nations, they don’t depend on his.

  6. Cadivi, apart from corruption, has another reason for being: To provide an artificial low rate of exchange with which to magnify for international organizations (U.N./Leftist press/etc.} the wonderful unreal economic “logros” of the Revolution regarding Minimum Wage/GDP/et. al.

    • Excellent article. Gradualism/ dual rates initially seem like good ideas. I also believe the economic reasons for the Caracazo are overstated. Political instigation (some even say from anti-“Paquete” Adecos themselves) was probably far more important. However, the “Pueblo” is far needier now than back then, and won’t need much of an excuse to “saquear”.

    • I also think that Grisanti was talking about hypotheticals or possible ways of dismantling Cadivi. Instead, I read Villasmil’s statement as a campaign promise from the candidate’s top economic advisor.

      Grisanti is inside the bubble, but last I checked, he still works for Barclay’s. Ricardo works for Capriles.

  7. I was just a kid during the Recadi regime but I remember Jonathan Coles gave my class a lecture at IESA about the devastating effects of putting an abrupt end to the exchange control. He mentioned It was destructive for every participant in the economy.
    But the corruption derived from this exchange control is sickening, outrageous, disgusting. Its perversions have gotten to the point that greedy and immoral businessmen import billions of dollars in food just to justify what really is an exchange rate business and then let the food rot because it was not their intention in the first place to distribute food but to arbitrate the exchange rate.
    If Capriles doesn’t get rid of the exchange control at once, the horrid, repulsive corruption will continue because it’s not that Chavistas and government functionaries are the only ones becoming rich from the exchange control. Many so-called anti-chavistas and “honorable” businessmen with last names that could fit the category of “amos del valle” are profiting from it and they’re just waiting to get their hands on the big jackpot once their buddies hit the stage as minister of finance or whatever other position they might exploit.

    • Something important to understand is that the shock therapy we received back then was not a decision, but the only option that there was available.

      Today, it is not the only option.

      • Anyway, I don’t see how can an exchange control the sort we’ve been subject to for 9 years be removed gradually. I’m no economist but think about it. Once you legalize the parallel rate, the government will put a break to the sale of subsidized dollars while every single player in the economy will be free to change all their bolivares to safer currencies.

        Everyone will go to the parallel to buy and it will rise without control unless the goverment intervenes by selling currency. The strong inflationary effects and the drop in international reserves will occur anyway. Unless the government continues issuing debt for current expenses which I guess would be out of the question under Capriles.

        In my opinion the best and only realistic option is abolishing the exchange control while aggressively controlling the currency market (which the govt would have to do anyway under their proposed dual mechanism).

        • I think this is a widespread – but very wrong – misreading of the situation.

          Venezuela is the ONLY natural resource producer in the region that’s NOT fighting a tendency to currency appreciation. Why? Because Chávez’s policies are insane.

          Absent insane policy-makers, a floating bolivar would tend to appreciate, not depreciate, at least after an initial spike. That’s the whole premise of Grisanti’s view, and of Villasmil’s promise.

    • to justify what really is an exchange rate business and then let the food rot because it was not their intention in the first place to distribute food but to arbitrate the exchange rate.
      Is that what happened on the docks? It’s the only damn thing that makes sense. Distribution of the product would become an avoidable expense if the cash flow came from arbitrage.

  8. Ho hum…..don’t you guys ever have anything original to say? Every time there is a blip in the oil price……the end is nigh. How many times have we heard the same apocalyptic BS. And if you are right and the county could go bust, the Chavez government would pass emergency legislation and confiscate what wealth there is left in Venezuela. So much the worse for your class.

    But that will not happen since the odds of oil falling back to under the budget level of US$40/barrel is remote. With Venezuela’s external debt just 23.7% of its GDP there is no problem. And forget the internal debt as that can be devalued out of existence anytime.

    The mind blowing news about President Capriles going to allow the parallel exchange rate to be legalized is just part of your dream which will turn into a real nightmare when Chavez or even his replacement wins on October 7th. Don’t you think that all the pieces are in place to make it impossible for capriles to win……under any circumstances? You all know that he is a tyrant and a dictator who does not believe in democracy -:) Whay do you think that Chavbez formed an “anti-golpe” battallion or brigade. Take off the gringolas.

    Now when will Capriles speak for an hour or so and actually say something after being introduced again by Erika de la Vega to give the event a whole bunch of credilbity? It was so f***ing pathetic words fail me to comment on such a show of mediocrity. Capriles needs to read some books.

    • Psssst, clown shoes. This post is not about the ceremony after each presidential hopeful registered.

    • “Confiscate what wealth is left in Venezuela”–What, Where– the banks?–to complete the financial destruction of Venezuela?? Oil at $40 is a real possibility (barring an initial spike to $200 after an Iran strike), as the rolling worldwide debt recession could cause an international financial collapse (some smart money thinks this can easily happen). Then Venezuelan GDP would be more than halved in $, and additionally when GDP is realistically valued at a non-Cadivi then Bs. 10-15/$, the ratio of Venezuelan $ external debt/GDP would be well over 100%. Venezuelans would have a hard time finding enough food to eat–this is a very possible Chavez legacy. As for Capriles being “a tyrant and a dictator who does not believe in democracy”, I guess you’re trying out a new comedy routine, or simply using your Cuban/Chavez tactics of blaming the other for what you are.

    • Arturo, by dictator and tyrant you meant Chavez or Capriles? I am guessing you meant Chavez which leaves me somewhat confused because you accept he is a dictator but at the same time you despise Capriles.

  9. Cadivi, recadi, and all the opaque, corruption laden measures are ways to share the amoral embezzlement of public funds.

    Its a policy to enlist acomplices to the pin~ata, so that fewer outsiders are “free of fault”.

    Venezuela, has been said before, is a society of “complices”, where incumbent and aspiring political groups do not challenge the status quo, but only who holds the “coroto”.

    I am not discussing how the best way would be to dismantle the parallet Foreing X controls would be, its out of my experience/knowledge zone, but what I can say is that the incentive to manage such an insider’s dream, weights in the message/ intent of a gradual decoupling….

  10. Les mando los inks de la entrevista completa que le hizo Reuters a Ricardo Villasmil, que al parecer se presto a confusion. La oposicion no plantea eliminar de un solo golpe el control de cambio ni legalizar el mercado negro, lo que plantea es ir desmontando los controles progresivamente, comenzando por el retorno del mercado permuta a manos de particulares e importadores, como operaba antes, lo cual permitiria tener un tipo de cambio flotante con un mercado de divisas licito.

  11. Thank God we can put Venezuela back into the international world of the future, free of the corruption of the black market!

    Let’s get behind this idea.

    Our will and faith in this regard can take us out of the past and bring us to the light of a new era focused on the technology and economy of the international market place where Venezuelan resources can truly benefit the international world and the Venezuela people at home and abroad!

    Let’s get behind this idea, and face the change with an open heart and mind based on the vision of an international country where visitors and investors will feel welcome to explore and enjoy the this marvelous country we live in.

    Venezuela, a country of enormous potential and diversity rich in culture and resources, deserves honest leadership that focuses on the future free from the economic practices that enrich the privileged and keep this wonderful country in the mire of confused and corrupt leadership.

    Let’s get behind this idea, and vote for the change we all feel and know we need.

    Mike K :>) KHIM Ex-patriot Venezuelan Resident

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