Caracas Chronicles

Note: Long-time reader Dago takes the Torres/Monaldi/Morales/Rodríguez proposal for handing out oil rents to citizens and then taxing them, and frames it in an interesting, approachable way. He also talks about the likely amount we’re dealing with here, and he ends with practical implementation issues, and how to (easily) overcome them. I found it thought-provoking.

Take it away, Dago.

The “Torres Proposal”: Some meat and bones, by Dagoberto Salazar.

The “Torres Proposal” (TP, for short) is an idea that has been going around for a while in this blog and in other mediums, often presented by user “extorres”. In a nutshell, it consist on directly distributing the net income from Venezuelan oil sales among every living Venezuelan.

In order to keep it clear from the beginning, this is not Rosales’ “Mi Negra” proposal. The TP takes all the oil net income and equally and unconditionally distributes it among ALL living Venezuelans. No exceptions, no burdensome rules, no bureaucracy, no “take away from the rich and give it to the poor”, and no strings (political or otherwise) attached.

From my point of view, the strengths of the TP are two:

1) It is ‘systemic’, because it simultaneously attacks many of the flaws of the Venezuelan petrostate – stuff that we’ve been discussing for years in this blog. I’ll elaborate on this further down.

2) It is ‘self-reinforcing’: once it begins, it automatically keeps building pressure to make it progress further. So beware: the TP will progressively take away money from left-wing social pet projects as well as from right-wing, half-baked economy stimulus packages. You’ve been properly warned.

I also think that, properly implemented, the TP plays nice with the Venezuelan culture and mindset, which is a huge advantage.

So let’s get down to business and talk first about the obvious, big, ugly elephant in the room: how much money are we talkin’ about? This computation must be carried out by people more competent than me on these issues, but as a rough approximation we may take OPEC web page figures for Venezuela: it states 88.13*10^9 USD of oil-related yearly gross income. Wikipedia says Venezuela’s current population is about 28.95*10^6 inhabitants. Therefore, we are taking about 3,044 USD/year per inhabitant, or 8.34 USD per day.

But before you get too excited, those are gross income figures for a very good oil year. When you factor in expenses, investments, realistic long-term average oil prices and other important issues, I estimate each Venezuelan will end up receiving on average a little above 2 USD per day, enough to push all of us above the poverty line, but barely.

That’s what we’ve got, pals. Let’s forget about that ridiculous idea that Venezuela is a ‘rich’ country and let’s start working with what we really have.

An important question that arises here is why should the income be equally distributed? Shouldn’t the poor receive more?

Well, the answer is straightforward: Venezuela is a very unequal country, where the A and B social strata comprises less than 5% of the population, so if you don’t give the wealthiest Venezuelans their share, you’ve just increased the others’ share from, let’s say, 2.50 USD/day to 2.63 USD/day.

Big whoop. In return, you have created ‘first rate’ and ‘second rate’ Venezuelans, which is unconstitutional and very bad; you have created a new bureaucratic structure that will eat away an important chunk of your gains, which is bad; and, worse, you have created a new socio-political arbitrageur, which is very, very, very, very bad.

Sorry, red commie pal, but you can’t have you cake and eat it too: if you want to get revenge on those A and B strata fat cats, the magic word here is ‘taxes’.

Besides the former, believe me when I tell you that in order for this to work at all in Venezuela, it must be simple to understand and it must be equal for everyone. Anything different will be regarded as very suspicious, as just yet another elaborated plot to ‘blergh me up’. That’s the Venezuelan mindset, and we have to deal with it.

So, I claimed that TP is ‘systemic’ in addressing petrostate flaws. Why?

a) State-citizen relationship: A lot has been already said on this. In summary, currently the state has the money and the citizen gets a bit of it by favors, handouts and subsidies. With TP, the citizen has the money and the State gets a bit of it through taxes, as in normal countries.

b) Resource allocation: Currently the president and his staff allocate money to pet projects, hair-brained schemes, and whatever plot they think they’ll get a political/economic gain from. With TP the citizen allocates her money where she decides is best for her, whether it is food, clothing, alcohol, education, home improvement, religion, books, drugs, a flat-panel TV or macramé. I have my own list, and I definitively have no superior moral position to judge the list of others (neither do you, by the way).

c) Corruption reduction: Must I state the obvious? If there is drastically less money going through the petrostate, the absolute value of the amount of money being wasted on corruption scams is also drastically lowered. This is a side effect of TP’s improved resource allocation.

And this is achieved without a single police, attorney, prosecutor, and comptroller being involved. You may call it a poor’s man approach on corruption, but it would be far more effective in absolute terms than anything tried before in Venezuela (or any other petrostate).

Of course, we are taking about Venezuelans here, and as a Venezuelan I’m the first to say that some corruption will go into TP. Dead people will get their share, people with two or more identities will appear, handicapped people will be robbed, etc. But in Venezuela we will have that no matter what program we devise, and the overall size of the loss will be much, much smaller than in the alternative. A careful implementation may mitigate most problems.

d) PDVSA management: Under TP, the better managed PDVSA is, the more money you’ll get, so there will be a strong economic incentive to maintain PDVSA clean and lean. Also, the more PDVSA expands, the more money you’ll get. Increase in oil production suddenly becomes the public interest.

Bonus feature: Indeed, under TP you don’t care where you get your oil income, as long as you get it. Therefore, it doesn’t matter if the income comes from PDVSA, REPSOL, CNPC or ENI. We could finally get past the stupid ‘sovereign oil’ discourse that has marred Venezuela policy for years, and pave the way for serious oil investment.

e) Gasoline subsidy: The more subsidized the gas prices are, the less money PDVSA has, which directly means less money in your pocket. Is it not better to have that money first in your pocket and then decide if you want to take the bus, the Metro, your car, your motorcycle, your bicycle or your sport shoes? The best way to get rid of a subsidy, is to create strong incentives for people to be against it, which the TP helps provide.

f) Currency exchange: The higher the Bolivar/USD exchange rate, the more Bolivars in your pocket – that simple. Therefore, TP pushes the citizens to favor an undervalued currency. Even more: the citizens are happy with an undervalued currency!.

Given that one of the main curses of our chronic Dutch disease is a push for an overvalued currency, TP sets an environment to counteract that effect and reach some equilibrium point. Properly set up, TP even pushes for the dismantling of CADIVI. An undervalued currency favors the development of local production, reduces imports, and is one of the factors to attract foreign investment.

g) Economic stimulus: Some of this may have been mentioned in the item about currency exchange. The TP favors an undervalued currency that fosters local production and foreign investment, while reducing imports. All of it without complex laws (and corresponding loopholes), tariff barriers, and without directly confronting the corruption at customs associated with that (not that corruption is not important, but it must be addressed somewhere else).

But there is more here: according to the ‘better resource allocation’ clause, what the TP does is to take those 35,000 USD that currently goes into buying that new Hummer H3 for a new bolibourgeois, and create demand for 35,000 USD worth of other goods and services.

If we take into account that most Venezuelans are in the C,D, and E strata, we can safely suppose that most of the new demand will be for relatively basic goods and services (food, clothes, etc.). Of course, some will buy a flat TV or the latest IPhone, but the bulk of the new demand will go for things that could be provided for, in a relatively near future, by the local manufacturing infrastructure… if we allow some time for it to recover from its pitiful state.

The former paragraph takes me to one of the drawbacks of TP: inflation. An undervalued currency and a surplus in money supply will certainly spur inflation. But let’s face it: we already have one of the worst inflation rates in the world, so TP won’t make things worse.

However, what really concerns me about TP is a spike in inflation in the initial phase. All that new demand appearing in a country like current Venezuela, with almost no private enterprise, terrible road infrastructure and huge corruption in ports is almost a recipe for disaster. If Venezuelans suddenly have the money to spend, but nothing to spend on, they will feel cheated, and very angry.

Therefore, I depart here from the Torres opinion about implementing TP right away, and opt in favor of a staged approach were the oil income percentage is slowly raised along, let’s say, 5 years, giving time for the economic network to recover and pick up the increased demand. This would also provide much needed time to slim down both PDVSA and the Government, and to shift those laid down workers to other parts of the economy.

I’m not specially worried about being stopped halfway in the implementation: Once you start it, it will build pressure to keep it going until no spare oil income is left at the hands of the government.

Implementation

The TP is no silver bullet but it may well be one of our best shots at getting rid of, or at least minimizing, some of our structural problems. Keeping that in mind, I present a draft of an implementation scheme. This is my own take on the problem (I indeed disagree with Torres on several issues), and the overall idea is to make it as simple to implement and as transparent as possible, while at the same time magnifying its strengths and minimizing its pitfalls.

The government starts by issuing a law to setup a special kind of bank account. Under this law, a given Venezuelan called Pedro Perez, with ‘Cedula de Identidad’ (CI) number 1.234.567, just needs to go to the any Venezuelan bank he likes and open an account with an unique number: #000.001.234.567. This account will indeed be the umbrella for several associated accounts, but we’ll get into that later.

One very important feature of this special account is that Mr. Perez can change the account to any other bank he wants, with at least one months’ notice, and the number will be the same no matter what bank he goes. One citizen = one account = one number. Even newborns must have their bank account, OK?.

Then, at the end of each quarter (let’s say we are in the second quarter, or 2Q) the government will compute the total gross oil income from the previous quarter (1Q), and will divide it by the number of Venezuelans that were alive for the full quarter, and the number of days in that quarter. People that died or were born (or nationalized) during 1Q will not get their quarter share. Simple enough. Transparent enough.

Then, the government will deposit the corresponding quarter share, in Bolivars, into each active account. The one-quarter delay will allow for updates in the database of living Venezuelans, and will keep the work manageable for a relatively small bureaucracy.

Additionally, an “on-hold” database will be kept. People in that database will have their share set aside in a ‘frozen’ state. People that have been reported as kidnapped or missing will be entered in the “on-hold” database, as well as people suspected of abusing the system by having two or more identities (i.e., CI numbers). Also, at the start of every quarter a small sample of the population (for instance, 1 per every 10000) will be randomly selected by a computer and put into the ‘on-hold’ database (and properly notified about that by their respective banks).

You must properly confirm your identity in order to get out of the “on-hold” database. The details of this may be somewhat tricky in order to avoid abuse of power by government officials, but the work load is doable and will keep the system mostly free from most types of scams. Once you get out of the “on-hold” database, you get all your frozen shares released into your account.

For argument’s sake, let’s suppose that the 1Q figure amounts to the aforementioned gross oil income of 8.34 USD per day. But hey: that’s gross income!!!. The government then will issue an statement of this sort (with my comments added):

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For the 1Q/20XX quarter, the gross oil income per inhabitant was 8.34 USD/day. The final amount being deposited will be computed according to the general and personal deductions established in the current applicable laws.

The general deductions currently are:

1) Oil operations: 3.02 USD/day. Remark: In order to get out a lot of money from oil today, you have to put in today a lot of money too. This money goes to the oil industry.

2) Oil investments: 1.56 USD/day. If you want to get out a lot of money from oil in the future, then you must also pay today. This money also goes to the oil industry.

3) Service of sovereign debt: 1.03 USD/day. If the government contracted debt, YOU contracted debt. Hint: Keep your government spending in check!.

Therefore, the current net oil income for the 1Q/20XX quarter is 2.73 USD/day. The personal deductions applicable during this period are:

4) Oil income tax: 0.16 USD/day. You live in the country, you get benefits from governmental services, then you must pay taxes, and let’s do it right away. Please don’t come on me with that progressive tax crap: we are not talking here about Sweden-level tax rates, but a very low and basic tax rate that, this is very important, makes the government more accountable in the eyes of every citizen. For other type of incomes (like salary) the tax rate will be different (and higher), and then you’ll have your progressive tax scheme. But.Every.Venezuelan.Must.Pay.Taxes.

5) Mandatory retirement fund: 0.14 USD/day. Someday you’ll be old, and the other Venezuelans don’t have to take the (full) brunt of taking care of you. Therefore you are forced to take aside 5% of your net oil income and put it in your account “Type B” (i.e. #000.001.234.567-B), and you can not touch it until you’ve reached retirement age. In the meantime, it will get the interests that your chosen bank offers for this very long-term accounts, or you can also allow for riskier investment.

6) Mandatory medical insurance: 0.27 USD/day. You must take a basic medical insurance, and for paying it you can draw funds from your “Type C” account. But drawing funds from your #000.001.234.567-C account is only possible for paying medical bills.

7) Mandatory education fund: 0.14 USD/day. This money goes into account type “D” and it can only be expend on education-related expenses (this one could be tricky).

In summary, taking into account the personal deductions, the amount to be deposit in your “Type A” account (i.e., your freely accessible account) for the 1Q/20XX quarter is equivalent to 2.02 USD/day.

Final issues:

i) Remember that if you have children, you are going to be deducted an extra 5% per child. That money will be added to the net oil income corresponding to each child and distributed into their accounts type A, B, C and D as established before.

ii) Remember that if you are under 18 years old, neither you nor your parents may touch your accounts, except for types “C” and “D”.

iii) Remember that if you are in prison, your net oil income (except for account type “B”) will be transferred to the institution operating the jail you are interned. The same happens if you are interned in a mental institution.

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Well, there you have it: a blueprint for a working prototype TP. Some meat and bones for a juicy, and focused, discussion.