The crowded bandwagon (cont)

We're all in this together

We’re all in this together

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):


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.

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

76 thoughts on “The crowded bandwagon (cont)

  1. Great reading. I would say that points number 6) and 7) are optional. You see, while the concept in theory looks nice (covering health and education costs), it also means two more accounts to manage per person, so administrative costs rise substantially. I think that the health and education deductions could go with the retirement fund, and rename it a “Social Security” fund, accesible only in case of emergency (ie. medical bills).

    Im not completely sold on the idea of school vouchers though (#7): why don’t improve public schools directly with those deductions?

    • Daniel: I can see that a couple clarifications regarding #7 are in order:

      7.a) In this context, “education” not only includes primary and secondary schools, but also university and, very important, recycling of workers skills (INCE anyone?).

      7.b) Given the amount of money available through TP, #7 can not sustain a solid education system by itself: it is supplementary. The final way the education system is structured is a very important issue that is not covered here.

      In a very personal note, I would prefer to keep the (very long term-minded) pension system separated from health and education systems, but that’s just my opinion.

  2. Dago: my congratulations for your full investigation, clear thinking, and near-complete fleshing of Torres’ idea to reality dimensions. The concept is more digestible now. Like DU, I saw administrative costs rise, to say nothing of bank fees, both of which would eat into the USD 2+ a day per person. These costs/fees should be noted.

    I also see the need for simple education so that all can understand exactly what this means, including the issue of how an undervalued currency favours local production and ultimately exports. Naturally, this concept is fraught with significant challenges, given the current, deplorable state of road infrastructure, to say nothing of restrictive laws and regs.

    One other issue that I see as problematic for a pseudo-socialist government is that the TP will mean elimination of favors, handouts and subsidies. That will kill electoral control of a dependent and anxious population. Do you think the current government wants to forego that power?

    • Thanks Syd!.

      The bank fees are certainly an issue. I’m no bank expert, but given that the overall amounts involved are big, there would be an incentive for the banks to compete on the fees in order to attract the biggest number of clients.

      Of course, the services provided would be minimal: An ATM card and little else. On the other hand, a sizable number of clients would work with banks where they already have other accounts (where salaries are paid, for instance), so a solution satisfying the involved parties could be worked out.

      Regarding the question about the government wanting to relinquish that power, I don’t think they would willingly do it. But I think the same about so called “4th Republic” governments, and a big chunk of the current opposition.

      What I do know, however, is that the first party that presents this proposal to “the pueblo” in an articulated, consistent and credible form will score a very big hit: All the other parties will be left in the awkward position of explaining why they are NOT going to give the Venezuelans what they are entitled by the Constitution.

      • Dago, great stuff, I laughed out loud at some of the warnings. Very entertaining too… another side benefit of implementing TP is giving broader access to bank services to people and that brings benefits like history to access credit and stuff like that. It’s incredible how much of our economy is informal and how many loan sharks benefit from the informal workers charging 10 percent a week for a short term loan, just because the person does not have a bank account and of course an overdraft line or a credit card is out of the question.

    • I do think that just holding and managing stable retirement funds (Accounts “B”), medical insurance funds (“C”) and possibly the children’s trust funds is reward enough for any bank holding such bank accounts, which should not charge a dime for the rest. Any bank charging fees on anything like that deserves to have business taken by clients to a bank not charging fees.

  3. I would suggest to merge “pension funds” and “medical insurance” as a single type of mandatory account, which would be only useable to pay for non elective surgeries and prescription drugs, and when retirement age is reached, it can be used freely.

    Also, in the case of a surviving spouse, when someone dies, the surviving spouse has 30 business days to apply for a funds transfer from the deceased spouse “pension+medical” into their own, this would only apply in the event of the surviving spouse having reached retirement age previously.

    • My only remark is that I would substitute “surviving spouse” by the “appointed person/institution”, being the “surviving spouse” the default choice if no person/institution was previously appointed.

      Given that ultimately this is personal money, it should follow the established rules for handling inheritance. Also, the “appointed person” opens the door for handling non-conventional unions (a concept I’m well aware not everybody agrees on).

  4. It would be interesting to apply “game theory” to all the above. First, all entities should be identified as “players” and their relationships identified. Apply each of the proposals to see how each player is effected in terms of rewards, incentives, and options. For each, determine who are their suppliers, clients, competitors, complimentors, etc., and finally see how the game can play out. The objective is to establish likely expectations and the metrics to score how each player “winning” or “losing”, rather than just jumping in and observing the chaos.

  5. A short-coming to be reckoned. We are in an oligopolistic environment: A market condition in which domestic sellers are so few that the actions of any one of them will materially affect price and have a measurable impact on competitors, a situation precipitated by chavismo policies that sacrificed domestic producers for the fantasy of 21st century socialism.

  6. My real objection has to do with volatility – oil prices fluctuate a lot, and without appropriate income-smoothing mechanisms, you could end up with a situation where the transfer is up 30% one quarter, then down 6% the next, then down 42% the following quarter then up 28% the next.

    It’s the same volatility and unpredictibility that’s made Venezuelan state finances chaotic for so long, except you’d be transferring it directly into every private household!

    More financially literate households would probably find it easy to compensate accordingly, but especially in the beginning many poorer households would get in trouble right away: taking on financial commitments in fat quarters that aren’t sustainable when prices drop.

    Of course, any mechanism to smooth out the ups and downs would detract from the simplicity of the proposal, but then that’s the tradeoff…

    • One way to solve this problem is incentivizing the households to do the smoothing of their consumption patterns themselves.
      One way to do this would be deregulating interest rates in the banking sector (or at least raising them to a positive real level); that way, you introduce the opportunity cost of consuming now versus saving for later. Other way is fostering the formation of capital markets, by allowing the moribund Bolsa de Valores de Caracas to start trading stocks and bonds of Venezuelan companies.
      The key here is saving: if there is not an economic rationale for withholding present consumption (as it is now, with very high inflation and very low real interest rates), people will not have an incentive for income smoothing; and is very likely that the opposite could be true: with good enough channels for saving, people will find that sometimes it makes more sense to postpone the purchase of that LCD or the newest Iphone, especially if their oil income is so uncertain and volatile.

      Granted, changing the mindset of millions of Venezuelan households accustomed to spending it all as quickly as possible is not going to be easy; but it is necessary, not only for this program to hold, but to boost long-term economic development.

        • Daniel whatever the merits of your idea this last part is really cooky, believe you me- you cant plan payments on the basis of 5 year averages of oil prices , the factors going into any such calculation are so many and so variable that there are a dozens of different possible results . I m even very doubtful about the oil income figures which the government reports because these can be modeled in many fanciful ways. for instance you may report as income whatever you invoice even if payment of the invoice is never recieved or its payment is deferred for 10 years or made the subject of complex financial conditions that most people outside the business cant even understand. You should be very wary of any figures the regime reports on the state of pdvsa’s operations or production statistics or finances .

      • “Granted, changing the mindset of millions of Venezuelan households accustomed to spending it all as quickly as possible is not going to be easy; but it is necessary, not only for this program to hold, but to boost long-term economic development.”

        I am extremely wary of arguments like this, at it is the sort of “these are what rational economic human beings SHOULD be doing” type argument that leads to disastrous IMF-style neoliberalization. If you analyzed Venezuela currently, there are plenty of reasonable arguments to be made that the political mess shouldn’t exist — that no population could be so gullible and dumb. And yet here we are.

        That said, I think the key to making a proposal like this is in building the correction mechanisms into the proposal itself. It can’t be education…education can help, but our baseline has to be the Venezuela of today and the Venezuelans of today.

    • On board with Quico’s comment. Savings is also a concern – less so, but concern nonetheless.

      My other concern relates to the oil tax. The best oil tax rate is not necessarily the smallest possible lump-sum rate, but the one that allows for public investments that yield a larger systemic impact than the corresponding private consumption/investment. The idea is that informed citizens will mind the use of public resources, not only because debt service means lower transfers, but because they have a real idea of the opportunity cost of financing the State. That would lead to better spending, and you DO want good public spending (especially in a country where the greatest lacks relate to public goods).

      Another small concern is whether you have to keep your pension, education and health income in a frozen account in Bolívares. That would suck if eventually you have a macro-devaluation, or if you remain with negative real interest rates in the banks.

      I love it how you frame the industry argument! However, one might think that a populist concerned with the very short run might prefer to expropriate and liquidate assets rather than promote production that will kick in in the mid run. That’s why it has to be accompanied with a good communications campaign.

      In general, I believe the idea has the potential to tackle the most pervasive political challenges, but we must not forget which are the priorities: stabilization, mended governance and good public spending. If this is seen as an anti-state proposal, we are politically screwed – and I may not like the proposal that much :)

      But this is in general the best blue print I’ve seen around. Kudos Dago!

      JR

      • “Another small concern is whether you have to keep your pension, education and health income in a frozen account in Bolívares. That would suck if eventually you have a macro-devaluation, or if you remain with negative real interest rates in the banks.”

        It would be a logical step to keep the money that is not spent inmediately in saving acounts in dollars. I guess it would also help avoid the devaluation…

        • A. Barreda:

          I would indeed like the TP transfers payed in USD, given that they were originally paid to PDVSA in USD. But I’m pretty sure this would imply a change in the Constitution (to allow the circulation of another currency besides the BsF), and I don’t dare the foresee the possible consequences of an open, mixed two-currency system. I’m not rejecting that, but I’m definitively in no capacity to factor that into TP.

          On the other hand, after the TP implementation phase is over there shouldn’t be strong pressures for a macro-devaluation, so an inflation vs interest balance should provide some protection of the long-term funds.

          Of course, if the Government keeps contracting lots of debts and starts printing money like mad, things will go awry fast. But that has nothing to do with TP, and in that case we will be screwed up disregarding if we implement TP or not.

    • Ah, it’s the same criticism that Behavioral Economists are trying to push: life is too complicated, people are too stupid to be rational! Let’s have the State make all the decisions for them. The end result of all this is … chavismo.

      • C’mon, that’s churlish.

        Imagine you’re sitting down to design a social policy from scratch, and have to decide the amount of fiscal commitment involved. Who in his right mind would say – “hmmm, let’s set up a random-number generator, run it once every three months, and let THAT decide how much money we spend on this…”

        Imagine you’re negotiating a job, and your perspective employer tells you he can’t commit to any given salary ahead of time, because he plans to change it randomly once every three months…how would you feel about this?!

        It’s just obvious that big trimesterly shifts in vulnerable households income would wreak chaos. It’s up to the people putting forward the proposal to address this problem sensibly, it’s no good at all to just stick your head in the sand and wish the issue away.

    • Creating the mechanisms to cope with volatility is a challenging task, and I believe the optimal solution only can be achieved in centralized manner: people receive the proceedings from a fund and not directly from the income stream of PDVSA. But that is the sort of empirical question that needs further research before final design.
      It is the fiscal side that I am more concerned. Dago, do you realize that your proposal takes away an income that makes 60+pct of the governement revenue in exchange of tax that if Im not mistaken is roughly 2% on the oil income?

      • Omar:

        I do realize that TP will certainly NOT support the current size of the Venezuelan Government. On the other hand, NOTHING can support the current size of the Venezuelan Government!!!.

        With over 2 million employees (and counting), the Venezuelan Government employs about 1 out of 6 working Venezuelans, which is a huge number of people devoted to activities that don’t support a productive economy (if we look at the current Venezuelan crime, infrastructure, education and health indexes, one may wonder if they support anything at all).

        Please bear in mind that the TP tax won’t be the only revenue source from the Government: As all the other governments in “normal” countries, “standard” taxes must account for the difference. But whatever way we look at it, the Venezuelan Government needs to reduce the number of public employees by a huge amount.

        Again, this pushes for a gradual TP implementation: Those public workers must be recycled, and jobs outside the government must be created. And that takes time and effort.

        • No, no, Dago. This is not a matter of ideological opinion or benchmarking what is the size of the state in advanced countries or bitching about how unproductive public employees are. You cannot cut down 60% of the Venezuelan State -not even gradually- without producing a total Mayan-style catastrophe. Period.

          This is what happened when policy is evaluated in a partial equilibrium setting, you are talking like -unproductive, corrupt and wasteful as it is- the current set of good a services delivered by the public sector is valued ZERO in the welfare of the general population. So you can give people 2$ a day and they will be UNIQUIVOCALLY better. This is certainly NOT TRUE.

          But again, maybe it is just me since I´m genetically suspicious of silver bullets since I learned as an undergrad that in policy making you should have at least as many instruments as objectives. In general, I´m not against the TP, it is just that I believe that blue prints come after an intense phase of analysis and design, no the other way around.

          • I’m generally relaxed about the specific numbers/size of the cut to the fiscal take implied in any proposal of this kind, as the scale of deductions is never going to be determined by one person, but rather by a political process where people will lobby, hard, to keep their budgets and extremist cuts will obviously not come to pass.

            Dago can talk a big game on a blog’s comments, but I’d like to see Finance Minister Dago in his meeting with the Bomberos’ union explaining to 300 burly firefighters why it is that he’s going to cut their pay by two thirds…only to be followed with identical meetings with the nurses’ union, then teachers, then funcionarios, then the army, then – this one will be good – the nice meeting where he explains to Wall St. that debt service is going down by 2/3rds, and a nearly endless etc.

            I mean, c’mon…

            • Quico:

              Je, je!. I’m definitively NOT qualified to be Finance Minister!. I’m not interested in being “Giordani reloaded” and reach my incompetency level… :-)

              The firefighters example is, however, unfortunate: In my opinion Venezuela do need more and much better paid and trained firefighters and policemen, so they would benefit big time from Finance Minister Dago…

              In any case the TP approach would be something like the following: The first year laws must be enacted, specific regulations written, C.I. databases purged, new accounts opened, ports cleaned, and potholes fixed, so things would continue roughly the same. The TP items #1, #2 and #3 are set to the (then) current, real levels, and #4 gets all the rest, so accounts A, B, C and D get zero.

              But President Quico announces that for the second year item #4 will get 95% of the previous year amount, and the remaining 5% will be distributed between #1, #2, and the corresponding accounts. You do carry it out, test the waters, adjust what needs adjustment, and the third year #4 will get 90%. Rinse and repeat, and see how far you can go, and how fast you can get there.

          • Omar:

            I confess that I don’t get your point here, nor the references to ideology, so let’s make a review:

            a) The taxes collected through TP are NOT intended to be the sole supporter of the Venezuelan Government. Therefore, the Venezuelan Government must get most of its revenue from other taxes.

            b) Getting government revenues from taxes having nothing to do with oil is a common practice in most places of the world (and it certainly works).

            c) The Venezuelan Government should, as any government, provide some services. Let’s say that Venezuelans are expecting law enforcement, infrastructure building and maintenance, education and health as some of those services.

            d) The quality and the quantity of the services provided by the Venezuelan Government are not adequate for the needs of the Venezuelan society.

            e) The Venezuelan Government employs more than 2 million persons, about 1 out of 6 working Venezuelans.

            f) Given d) and e), then we have a very sizable part (hundreds of thousands, maybe more than a million) of the working-able Venezuelan population involved in activities that produce no benefit for the Venezuelan society.

            g) In the current situation, the Venezuelan Government is contracting debt just to be able to keep its size (given that it is not improving nor increasing the services provided). This extra debt is not being channeled to provide better or more services, so it makes Venezuelans poorer in the medium and long terms (including the public employees).

            h) When the Venezuelan Government is no longer able to contract debt, a strategy being used in the past is the devaluation of currency and/or the generation of inorganic money. This effectively transfer the burden of sustaining the Government to the currently living Venezuelans, making them poorer (including the public employees).

            i) You can not fire overnight (nor “overyear”) hundreds of thousands of public employees: The social, political and economical consequences would be catastrophic (and no one is arguing for that here).

            j) If, on the other hand, the Venezuelan Government is not slimmed down, g) and h) will keep wreaking havoc.

            k) The proposed TP blueprint call for a transition period (5 years at least, most probably longer), that allows to progressively take away resources from unproductive economic activities, and pour them into productive economic activities, where “productive” is defined by the individual Venezuelan citizens (as opposed to a political party).

            l) The transition period allows for creation of jobs in those productive activities, and those new jobs will be partially filled by the public employees being slowly laid of from the Government.

            So: Which of the former items you don’t agree on?. In this way we can focus the discussion and take it down to Earth.

            • I like the idea of people getting their TP with a disclaimer saying that they would have gotten X bolívares, but that the government is taxing you by the exact same amount (X bolivares) in order to maintain the bureaucracy and give free heating oil to the people of Boston. That would be the starting point for people to begin demanding that government downsize.

            • I don´t mean to be snarky but I guess I agree with you: You didn´t get my point. The entire answer is a non sequitur, you can agree with items a) to l) (and boy, I agree with all of them, well except with g) which is only the word “and”) and still have doubts about the feasibility of your blueprint. I guess we are discussing positive/normative statements that can be opposed and true at the same time.

              Don´t be defensive, Dago. We are talking here about a radical change in the very “soul” of the nation. Don´t feel like you have to have all the answers. I certainly do not expect it´s a one-person quest to figure the entire thing out. This is not about who jumps into the bandwagon, I think the intellectually responsible thing to do is to raise doubts to shed light over the issue.

              Policy design and implementation is about how to achieve feasible objectives subject to constraints and stakeholders interests. Unless you are in North Korea, you cannot do policy design out in the air. Thank you for your answer.

              • Omar:

                When reading your last paragraph, I believe I now get your point.

                Certainly the current stakeholders interests are a big issue here. I think that the way to address that will fall squarely on the field of plain political manipulation: The likely politician trying to get advantage of TP would frame the issue so that a relatively small percentage of the population (about 2 million) is taking a disproportionally big share of the oil income corresponding to the other 26 million, and providing almost nothing in return.

                Politics as usual. We have had plenty of that, and we will keep getting it.

    • It is my opinion that the volatility problem is very deeply embedded in our economic system, so it can’t be solved nor mitigated by TP. The volatility is a natural consequence of having such a strong dependency on a single income stream, be it oil, cocoa, coffee or copper, so the real long-term solution is to have multiple (and non-correlated) income streams.

      A couple approaches to this issue include to ‘sanitize’ oil income keeping it mostly outside of the national economy (like Norway), and to set up macroeconomic stabilization funds (like FONDEM). I regard Norway’s approach as unfeasible for Venezuela, and we have seen that the stabilization funds are kind of Pandora’s boxes that may do a lot more harm than good. Of course, there must be other less known approaches, that someone with more experience may bring up for discussion.

      We must keep in mind, however, two important issues regarding oil income volatility and TP:

      a) The changes in oil income DO NOT follow a random process, but a “random walk” one: 10% inter-quarter changes are common, 30% changes happen regularly, 50% changes are very rare, 70% changes almost never happen, and so on.

      b) Giving that the transfers are computed with a time delay of one quarter, the oil price change may be outside of our control, but it will NOT caught us by surprise: In the last weeks of each quarter Venezuelans will have an accurate picture of what they are going to receive the following quarter, so we could somewhat cope with the changes.

      As reader ‘Faust’ (very funnily) put it, this may indeed be a good thing, because it creates an incentive for Venezuelans to be very aware of the world circumstances that may affect them, so they may take more sound economic decisions.

      Overall, this is another reason I support a gradual TP implementation: First you’ll receive like 5% or so of the final transfers, and that percentage would be raised along 5 or more years while the rest of the non-oil economy picks up. At the end of the process, most Venezuelans should have supplementary income streams so they are not relying ONLY on TP.

      I’m aware that, even in the best of cases, there will be a percentage of the population whose only income would be TP, so they will be vulnerable. As I said, TP is certainly no ‘silver bullet’, but we should end in a much better situation than our current one if we can use it as a tool to efficiently nurture our economic system.

        • A. Barreda:

          No foul play intended by not mentioning the Alaska Permanent Fund (APF). I indeed encourage anyone interested on APF to set up a Venezuelan-adapted APF blueprint that we can discuss about.

          Being said that, I would state what I currently don’t like about APF:

          a) It is a sort of “Petrostate-light” approach, where the decision making is shifted from the Federal Government to a smaller governmental body. I believe this really doesn’t tackle our petrostate woes. For instance, as a Venezuelan I find extremely fishy that Palin coaxed the APF to pay a special $1200 dividend in 2008. Maybe it is just me and everything was crystal clear, but I find the timing VERY suspicious.

          b) When discussing this issues we often miss a sense of scale, which is an important error for getting a workable solution. For instance, the Alaska population is a little over 730.000 inhabitants (less than the population of Puerto Ordaz+San Felix), while the Alaska area is almost twice as Venezuela’s. As a consequence, an Alaska natural resource-based allocation scheme will easily provide an order of magnitude more dividends, while at the same time being, AT LEAST, an order of magnitude easier to implement than in Venezuela.

          Of course, I may well be mistaken. In the end, what I would like is a realistic and effective scheme to set Venezuela into a development path. It really doesn’t matter to me where that scheme comes from.

          • What I find interesting about the APF is that the money for the cash transfers does not come from the oil industry dividends, but from the dividends of a special investment fund created for the long term. Even if the oil prices came down or the oil became obsolete overnight, we’d still have the fund there.
            Of course, there’d be still the problem of how to avoid corruption or mismanagement of the fund, but that’s not different to the problem we deal with PDVSA. The most important thing is – as you just pointed out – get rid of the political influence on the fund.
            I believe TP and APF are not mutually exclusive. We can choose TP, APF or a hybrid TP+APF…

            • A. Barreda:

              I agree with you that TP and APF are not mutually exclusive per se. That would be fabulous: A professional managed, corruption and political-manipulation free fund that smooths out oil income variations and provides income when the oil age is over, that at the same time doesn’t draws more than 5% from the currently available oil transfers.

              I must confess that I don’t see any feasible way that such a marvelous entity could be set up in Venezuela within a reasonable time frame. But I honestly hope it is just me lacking imagination.

    • Yes, smoothing is the way to go — and it is not so difficult neither to manage nor to explain, particularly if you “budget” a certain price for each fiscal year. (Chile does this for copper, for instance, when building their structural surplus.)

  7. “Remember that if you have children, you are going to be deducted an extra 5% per child”

    Can you explain what this means? Why are people taxed for having children? They already have their own money

    • JRAY5568:

      I shouldn’t have used the word ‘deducted': This is not a tax (the government is not keeping it), but a parent-child transfer. Sorry for that. Another thing I missed was that the parent-child transfer stops the quarter when the child reaches 18 years of age.

      There are several reasons I have put this parent-child transfer in place:

      a) IMPORTANT WARNING!!!: The TP may backfire, and VERY BADLY, if irresponsible parents find a way to get a few extra bucks by having children. As currently presented, the TP prototype opens the door for some scams through “C” and “D” accounts. This parent-child transfer reduces the economical incentive for this, while benefiting the child.

      b) The costs associated with the “maintenance” (so to speak) of an average human being are high during the first years of life, significantly drop during adolescence, keep low until around the late thirties, then they start to slowly climb, and became high again after the sixties. Account type “B” partially offsets the costs in the later years, and parent-child transfers partially offset the costs during the early years.

      c) On a more personal note, I think that setting a mechanism that discourages having children when you don’t have the economic means is an important measurement to foster development and fight poverty. If the parent-child transfer is not that important for you, you should probably have enough resources to provide for that extra child. If the parent-child transfer is a big deal for you, you should indeed refrain (at least for a while) of going for that baby.

      The demography situation in Venezuela has indeed improved a lot in the last 30 years, and we have a population yearly growth rate of “only” about 1.5% (Wikipedia values). Still, this implies that every 45 years we must DOUBLE all our infrastructure just to break even, which is a very big burden on a developing country.

  8. Obviously an interesting idea. I believe Alaska’s Sovereign Wealth Fund, which issues yearly cheques to all Alaska residents, deal’s with the volatility issue by basing the annual payout on a five-year average of the relevant price of oil.

    • the price of oil can be manipulated so that it seems much higher or lower than it actually is , specially if the oil company is in the hands of an unscrupulous regime , creative accounting of costs and incomes also cannot be ruled out .Venezuela has a more complicated oil business than Alaska , it has to deal with very high domestic consumption,not just one or two but many different kinds of crude oil which can be comingled many different ways . dozens of refinery products sold into the market or inside the country , many different ways of accounting for the oil being produced or sold , refined or transported ,determining the price of crude volume swaps etc etc . Ultimately the fixation of a share in a countrys oil income has to be done on the basis of conventional assumptions or fictions which people just agree to accept as accurate even if they arent .

      • In the end it’s about the bottom line. There’s always room for scams á la Enron, but that’s an accounting problem. Of course there’s the risk of corruption in ANY company – public or private – but the law is supposed to take care of that.
        I think that the an alternative like the Alaska Permanent Fund should be discussed and compared with the Torres’ proposal…

  9. This is a delightful analysis. Very good stuff. That said, I wonder if this would really lead Venezuelans to demand transparency etc. There are other oil producing areas (Norway, Alaska, Canada) which have been much more responsible in how they “redistribute” their oil wealth without having to redistribute the entirety of the profit (many will cut checks for some, but save the rest, etc). I suppose my point is that this proposal does not cut out the human element, it just shifts it. Now, the control and manipulation of PDVSA becomes the key way to manipulate and control the populace. I find it hard to think that the same people which let the government get away with the ridiculous abuses of the current day will be any better at playing shareholder to PDVSA, especially when the government starts claiming that the CIA is sabotaging Citgo and that’s why we have no oil profit, and so on.

  10. On the volatility issue, which is very relevant, see Pedro Rodriguez book (coauthored with his father, Luis Roberto). For a few years now they have been prosing a citizen’s fund. Their recently published book details the proposal.
    I personally think this type of DDM proposal should be explored starting with a more modest experience with the gasoline domestic revenues, a better designed version of the Iran mechanism.

    • Volatility is an issue, but the economic response is a big unknown all by itself. What would the consequences… how will businesses and consumers respond, especially in a market that is largely dependent on imports!

  11. Great stuff indeed! Thanks to Extorres and Dago for the effort.
    I had a funny thought about the scheme few years after its implementation:
    A: Epa Wilson que’s lo que? (leve toque con la punta de los dedos de ambas manos y luego choque de puños).
    B: Aquica bro, burda e´ preocupao porque leyendo el Financial me doy cuenta que lo del Medio Oriente es serio y los precios de petróleo van es pa´ bajo pana mío!
    A: De bomba guon, vacílate que yo leí ayer en blunberg que las ratas de Arabia quieren aumentar la producción y eso nos afecta es duro en el corto plazo.
    B: Yo no creo es en nadie papa, ayer me fui pa´ Banvalores y le dije al panita de allá que me dijera como invertir porque yo no quiero es perder real.
    A: Que va, buena esa, pero yo lo que estoy es frito; ya me metí en el peo de la Zuzuki, que lo que anda es duro, te paso ese dato, pa´ salí de ese rancho empire keeway que tenía de los tiempos de chavez. Te acuerdas?
    B: Nooo, que si me acuerdo? Tremendo coje c**o bro…
    A: Mira, estamos pendientes que ya va a empezar blunberg tv.
    B: Fino, bastese, estamos pendientes…

  12. Given that the transfer would be about an extra 10% of the average household income and about 18% of the minimum wage household income (as of today), could we expect some demographic changes? Perhaps a micro baby boom -Venezuelan style?

    On the good side, more people paying for the elderly, les taxes required for SS.

    On the not so good side, we will need to invest heavily on education if we are to absorb the upcoming labor force, more so if we want to use this opportunity to increase in a tangible way our future stock of Human Capital.

  13. Brilliant, and specially brilliant in the matter of incentives for sane behavior, on the part of citizens and on the part of government. Yes, Every.Venezuelan.Must.Pay.Taxes. The 3)Service of Sovereign Debt deduction is simply brilliant. So are i), ii) and iii)

    And of course, we all worry about short term volatility. But what can be worse than we have today?

    A saner State-citizen relationship and an undervalued currency should set matters right in a short amount of time. Besides now that income from oil becomes a thing to worry about, citizens shall demand (realistically) a cap to government spending, to making impossible promises, to contracting debt, and to monetary inflation.

    Our conventional wisdom has it that Venezuelans spend the money they get as if it burned their hands. Because it does right now. You get Bolivares (fuertes or debiles), you want to get rid of them because they lose value in months. It was not always like that in Venezuela. Not at any rate before 1983.

    But the biggest selling point for me is keeping the damn money out of the hands of our damn, , corrupt, thieving Executive (and I am not referring to Chavez only!), and maybe making our State into something other than the joke it is. Also, to prevent the Executive from (one way or the other) from using oil money to subjugate Venezuela into dependency to it, authoritarianism and demagoguery. The (almost) late Hugo Chavez was in this respect (only) the most brazen and the craziest, in recent memory.

  14. Great read.
    I think there could be another potential issue in deciding the level of present investment vs. present distribution to citizens. If PDVSA were a private company its strategic plan today would call for most or all of its cashflow to be used in the development of its (world’s largest) reserves with minimum or no dividend payments; but as it has the pressure from 28 million “stakeholders/citizens” that want money now, it would be forced to limit that investment in favour of present income distribution and therefore underinvestment in Venezuela’s oil capacities would continue.

    • GC:

      The level of investment in the oil industry is a very important concern that TP does NOT directly address. In this regard, TP just sets the matter straight by REALLY paying the “stakeholders/citizens” their dividend.

      On the other hand, what TP does address is the “foreign investment on oil” issue:

      a) The common citizens will be confronted with the decision of leaving the matter as it currently is, and see their dividend dwindle, or

      b) Allow foreigners to invest on oil. The foreigners will take away an important chunk (as they are entitled to do, because they put the money), but your dividend will increase along the way.

  15. I fear that I am not a great believer in the wizdom or capacity of ordinary people uncultured in the ways of a really complex business to make good judgment calls on how to run it , its catchy and likeable but basically very problematic . I see the problem as finding a way to prevent a populist or corrupt regime from exploiting its control of oil revenues for short term fundamentally warped political ends , Maybe a different approach can be taken to accomplish the same goal , for instance by setting up independent non gubernamental technically strong entities or funds to recieve and handle a large set part of the oil income being produced in the Country , maybe something like the pension funds they have in Chile or a politically insulated Oil fund like they have in Alaska, and entrust them with organizing the distribution of funds needed to sattisfy certain key public interests such as public health, education , old age pensions , public infrastructure and the like , apportioning the funds among carefully monitored institutions on the basis of strictly non political criteria looking at the long term benefits for the general public in a very pragmatical way.
    Its difficult but maybe if the institutions to be insulated from corrupt political influences are only a few ( rather than all of the countries political bodies and institutions) it might prove feasible . In ancient greece whenever a really difficult problem came up which traditional politics couldnt handle they would hire a man known for his wizdom to tackle the writting of a law that dealt with it in a real objective and practical way , We have all heard of the laws of Solon who was not a member of the legislative body which officially was responsible for law making , but a private individual of good reputation as a skillful and practical man of ideas. Maybe a role can be given traditional political institutions to oversee the work of these funds ( to avoid frauds and the like) but nevet to actually engage in the nuts and bolts decision making of day to day public interest activities.

  16. I’m no expert, but I wonder.
    Given current (alarming?) debt levels in PDVSA, won’t we have to at some point infuse capital to the company in order to finance investment?
    I figure there are two ways to do that:
    a) the government can capitalize it, or
    b) we can sell a non-controlling stake in it (a la Petrobras).
    I wouldn’t count on the former given the state of government finances and debt levels, plus by implementing this scheme it probably wouldn’t be a very dood investment for the government.

    So, my concern with this proposal is that the way it is structured it could make the latter imposible to do – ever – for political and administrative reasons, and this could hurt the prospects of PDVSA achieving all its potential.

    What am I missing?

    • federicoa:

      Uhmmm… I think that you are missing other possibilities besides a) and b):

      c) Renegotiate the agreements with ALBA partners, and make them pay a reasonable price for the oil they are receiving. Funnel the added revenue back to PDVSA.

      d) Set up the TP and, slowly, start taking the gasoline price to international levels. Citizens will feel the benefit directly on their pockets, and PDVSA will stop bleeding to death.

      e) Given that TP doesn’t care where the oil revenue comes from, open some undeveloped oil fields to direct foreign production. The companies may be Chinese, American, European, etc.: It really doesn’t matter. Charge those companies with the royalties and taxes established in the law and inject that revenue into TP. PDVSA will get extra income through TP items #1 and #2.

      Finally, I really don’t see why you think your b) option is at odds with TP. It really doesn’t matter who is the owner of PDVSA for TP to work.

      • Dago: With the utmost respect , the more I read about the many ingenious ideas that are mentioned in this blog on this subject the more I am convinced that gifted and smart amateurs cant really take a firm grip on all the many problems and obstacles and aspects that its conception and implementation involve . Not that some of the proffered ideals arent useful but there is so much more that is important and is never mentioned that I doubt that it can be practically done . for instance the oil sold to Alba countries should in some cases be totally discontinued ( supplies to Bolivia dont make any logistical sense , too expensive) , Cuba wont be able to afford the actual market prices of the oil they are getting , Nicaragua and all the tiny caribbean islands can probably pay for normal prices with a bit of help but no cash aids . Ecuador’s production is falling so they will be increasing their purchases of Venezuelan crude if they build their refinery but if they dont they should only be given products , All these sales represent only a fraction of Venezuelas total sales (once you take cuba out) . biggest impact will be that volumes are freed for selling at higher prices to other markets. Bringing in indiscriminately foreing investors and letting them run the business including the marketing of what they each produce de optimizes the profts which can be obtained from a centralized strategically focused marketing of all venezuelan crudes . One idea which can perhaps be salvaged is that of gradually raising domestic gas prices in line with increased contributtions to favourite social programs , at least for a while , so that people accept the increased gas price without becoming too angry at the increase . (believe this last idea was succesfully tried in Iran ) .

          • Dago . thanks for the back of the envelop calculation of how much pdvsa income can be enhanced if we were only a bit rational in how we do business with Alba members and China . This does help , unraveling the whole mess with china may perhaps take more effort , much of the projects are poorly conceived and the amount whih has to be invested simply to salvage and return oil operations to normal will be huge , signed contracts with Chineses and other local boligourgois contractors ruinously expensive and one sided with a lot of built in corrupt features. Sometimes the proyected expenses are wildly overun because the locals are so inefficient (but government protected)or Pdvsa so mismanaged . Then Pdvsa personnel is a big problem you cant just fire them whatever their ineptness , at the same time you need a good well organized well run organization if you are going to do anything and creating such organization takes time money and effort . Even if your policies are correct you need a good organizational instrument to play the brilliant music youve composed , always reminded of Lydell Harts comment on how the most brilliant strategic conception of WWI was the brainchild of a Colonel in the Austo Hungarian General Staff , but hwich because the Austia hungarian army was no inept that it coulndt follow in the difficult manouvers that his plans required ended up by producing a total disaster . And the above also applies to the rest of the gubernamental operations which will need huge investment before being restored to working condition , I fear there will be no amount left to distribute amont the common Venezuelan consummer . Whichever way you look at it anything you get which dont earn yourself with your own effort is a free ride that gets wasted away , specially given the venezuelan tipical spendrift mentality ( ta barato dame dos) attitude towards money. Even in the worse ot times friends in international consumer marketing business tell me that despite the awful govt imposed conditions , sales are good , better than anywhere else because consumerism is more a cult in Venezuela than communism will ever be. most of its of course imported goods. The list is endless and the space short but you get the drift.

    • This is an excellent point, Fede. Intertemporal and intergenerational optimality conditions is another edge that has to be taken into account in designing a TP

  17. “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.”

    That might seem like a comprehensive measure to solve our prison’s appalling lack of funds, but it could lead to an US-style “prisons are a business” model. Granted, Venezuela’s prisons would not actually be managed by the private sector (as it happens on the so-called “prison-industrial complex” in the US); but it would certainly create pressure from within the prison system and, consequently, corruption in the court system as a whole: if prisons get “X” amount of money from every inmate they have within their walls, the pressure from the people running said prison to get “X+1″ (more people in jail, more money) builds up until the people getting this money decide to mar due process to: a) keep that person in jail for as long as possible (X·time·number of inmates=big bucks); and b) use that money to pay up judges and prosecutors and incarcerate more people. I’m sure there are ways to circumvent the problem, but our court system is already bloated as it is without the incentive of widespread, “qué papita” corruption (As Biggie said “mo’ money, mo’ problems”.)
    I’m not saying that the courts are currently an utopia of justice and corruption-free (as anyone with two “dedos de frente” can notice); but dangling this bag of cash in front of people who would have both opportunity and means to take it would certainly not help the situation in the slightest.

    Perhaps the inmate’s account is put “on-hold” and a special tax deducted from it? Families can receive the inmate’s money? These are definitively not answers, as more taxes= now the State is the one being drawn by the possibility of increased income (although certainly it would not be as strong, as the revenue would be relatively lower than the one gained by a single institution). And what if the inmate doesn’t have a family? Who gets it? The State?. I don’t know, but we surely must find a way to avoid the pitfalls of giving this sort of cash cow to people in power.

  18. Dagoberto, I get that the Upstream Costs for oil (Lifting Costs plus Finding Costs) average around 30USD per barrel. How do you get such a low per person figure?

    • extorres:

      The figures in items #1 through #7 are reference values to kick-start the discussion, and they must be adjusted by more careful studies.

      Being said that, items #1 and #2 were chosen so PDVSA keeps about 55% of gross oil income. I understand that that is an improvement regarding the current situation.

      With the current Venezuelan oil basket prices, the 30 USD/barrel figure is just under 30%, which is not far off the percentage proposed in item #1.

      • Dago, I think there is a difference in premise. My premise regarding distribution of oil revenues is that PDVSA must pay for the oil it extracts, as would any oil company wishing to make money from Venezuela’s oil. Their payment is what would be directly distributed to the citizens.

        Given this premise, at 100USD/barrel and an upstream cost of 30USD, an oil company would break even paying 70USD/barrel for Venezuela’s oil. The model allows for the government to privatize PDVSA, invite entry to other private oil companies into the country, and be soley responsible for maximizing the sale price of the oil and monitoring none gets extracted without full payment. If, for example, oil companies still find it an interesting business to pay 60USD/barrel while only surviving off of the 10USD/barrel difference and that’s the highest they’ll go, then 60USD/barrel is what Venezuela would price the rights to extract it. This model, in my mind, would be applied to all natural resources, including gold, bauxite, coal, diamonds, etc..

        While we’re discussing, three other notes regarding my position.

        I believe the payments should be direct deposits into debit accounts on a daily basis, thus doing away with the lack of expertise in handling larger sums of money.

        I believe there should be no tax retention or any other form of taxation of these payments, leaving taxation to a completely independent system. I do agree all should pay taxes, but I have an independent proposal for that.

        I believe the volatility issue is solved by simply having all natural resources revenues entering a single BCV account, from which all direct distribution is made by averaging several months of inflow before dividing the outflow amongst all citizens.

        • extorres:

          Yes, I can see a difference in premise. They are not contradictory, though, given that the proposed blueprint also allows for foreign investment on oil, and accommodates for other natural resources to be included (not mentioned before to keep the explanation simple).

          One of the things that I found very interesting in your premise is the possibility to dynamically adjust that 60 USD/barrel figure to get the best value for the Venezuelans, but that’s another issue deserving more time on its own.

          I’m 100% percent with you on the daily basis of the deposits. The aforementioned per-quarter division is for computation and management purposes, but the final per-quarter daily value should be deposited daily and not quarterly. That detail was missing in the blueprint.

          On the taxes issue, we disagree, but that’s not new ;-) . Finally, the volatility issue is not solved but mitigated by your proposal, and I think it is really not too far from the per-quarter computation proposed here.

          • If you’re also thinking other natural resources, then, together with the shock absorbing mechanism being considered, the volatility issue can be considered solved in the semantic sense that volatility does not refer to any variability, however small; it implies wild and sudden fluctuations, which would be eliminated.

      • Dago, Perhaps a more compelling reason to avoid the oil tax that you mention, follows:

        What you propose is taxing an equal amount of the amount distributed equally to all citizens. For the poorest Venezuelan the amount distributed represents 100% of his income, so the percentage that the amount you propose to tax is of the total is equivalent to the tax rate this individual pays in taxes. In contrast, that same amount represents near zero for the richest Venezuelan. It’s extremely regressive.

        Your desire to tax the oil distribution, or impose earmarks for it is yet another example of the evil temptation of the black gold: the Lord of the Rings syndrome. The government needs to keep its hands completely off of the natural resources income, and derive its taxation exclusively from those making the most money so that the government’s only incentive is to try to make it make the market more efficient at getting people to make more money.

        But like I said before, I agree with everyone paying taxes, so I have a proposal to achieve that, but it’s not regressive, and it does not touch the oil revenues. Hands off to that.

        Besides, remember that for this proposal to win votes, we must keep it simple…

        • extorres:

          I will elaborate on why the taxes will anyway end up being progressive:

          The Venezuelan having TP as her only income stream ends up paying a little less than 6% in taxes (with the current example values). But the office clerk earning on top of TP a salary of about 7 USD/day will pay taxes of, let’s say, 8% on those additional 7 USD/day. She earns more, and therefore pays more taxes in both absolute and relative terms. The engineer making 25 USD/day is taxed 18% on her extra-TP income, and so on. The taxes will be progressive if the standard, non-oil-income-related tax revenue system is designed for being progressive.

          The peculiar feature of the proposed blueprint is that there is no such thing as not paying any taxes, but the overall taxing system should anyway be progressive if designed so.

          • You’re actually agreeing with me. If you look at just the TP taxation, it’s regressive. It’s very regressive. You’re just making up for it with an adjustment to the other taxation system(s), but you’re having to do it to make up for the regressiveness of the TP taxation.

            If we also agree that nobody should not be paying taxes, why won’t you reconsider keeping the TP simpler, and make up for the TP taxation with the other taxation system(s)? In other words, why have two taxations (a regressive one, and a doubly progressive one) rather than one progressive taxation that includes everyone?

            Here’s a reason that you mentioned in pro of TP that applies to the taxation of it: having a taxation on the TP is too much of a temptation for politicians to then keep fiddling with it. They’ll want to increase it. Look down the slippery slope, and they have most of the money, AGAIN, without ever letting the revenue enter the market and do its thing.

            It’s the Ring of Power; we must keep government’s hands off of it. Government must budget from the other taxation system(s) which must exclusively depend on resulting market enrichment, not on resource revenues.

            As to how to make sure that everyone pays taxes, consider this:

            If the nation has 90units of money and the government needs 10% of its buying power to fulfill its budget, it can do as it does now, which is tax 9units, or it could do what I propose, which is create 10 new units (making the total 100units) which is equivalent to a devaluation of 10%. I know it sounds crazy, but remember TP also sounded crazy at first, so give it a chance. Here’s a link that discusses it in more detail: http://www.neweconomics.org/publications/creating-new-money

            A 10% devaluation is simply taxing a 10% value from everyone’s money. But that would be terrible for the poor. The thing is, if the 10 new units are created 10/365th units per day, then the TP is in fact getting taxed 1/36th for everyone, but so is every other money out there. Since the poorest are the ones with least capital, that’s all they ever pay. The richest pay 1/36th off of their daily income, too, but also off of any accumulated value. So it actually boils down to a progressive flat tax.

            The interesting thing is that with the above you can eliminate all other taxation systems, and by adjusting the two variables: distribution and devaluation, you can have the highest efficiency government, with minimal corruption, minimal evasiveness, with zero poverty, fairness, etc.

            The nation would actually become, by definition, tax-free. This implies very important things. Obviously, all those who currently work for SENIAT and the related taxation process (eg. judicial process against evaders), would then stop being government overhead. But less obviously is that people and businesses would no longer have to report income or any other financials for taxation purposes. This means that all the manhours currently dedicated by people and businesses to taxation become either productive or leisure hours. The number of hours is HUGE. The efficiency of the businesses by eliminating this enormous overhead increases their competitiveness by leaps and bounds. It also makes it much easier for the poorly educated to start and run businesses.

            Since we’re discussing more details, for the record, I think debit cards of the minors should work just like the those of the adults, except that they can only be used to pay for cesta básica items. That is the single complication (and only as a protection of minors) that I would add to the distribution system. Having different directions and formulas for the money depending on financials defeats the purpose of unconditionality. We’d be back to the degrading process of having to prove you’re worthless to get benefits which simply imply a second class citizenry. Remember, it’s *their* money.

            Regarding attempts to control the social behavior of having more or fewer children through the control of TP monies is a policy no no. The very same economic disincentive that this type of control attempts creates a conflict of interest for the government which gets economically rewarded, in a sense, for fail results. The children issue, needs to be addressed by education and other social policies, not via controls over rightful monies. It’s theirs! Just because the government is the one handing over the money does not give it the right to dip into it. Hands off!

            As to prisoners, since I believe these cards should have constitutional rank, I don’t think any court should have the right to order control over it. It’s the citizen’s. What the court can mandate is that the citizen pay, but it’s up to the citizen whether the money comes from the card or from any other source of his. Again, the Ring of Power; hands off.

            If you really agree that we must get rid of the petro state model, you must review your complete blueprint to ensure that the petrostate mentality is nowhere in it. The foundation of TP is that 100% gets distributed. Paraphrasing Churchill, anything less that 100% and the petrostate is established, the rest is just haggling. It must be 100%, condition-free, or we don’t kill the petrostate model.

  19. The Upstream costs used to be about 3 USD in 2000 , these costs rise exponentially with mismanagement , deferral of maintenance and development activities , manner of managing each fields exploitation , field age , need for more intensive enhanced recovery processes , and of course inflation. Probably future upstream per bbl production cost will rise very substantially because there has been lots of neglect in keeping the fields in good state of maintenance , typically the maintenance which will cost you a 100 Dollars when originally needed will cost you 300 Dollars or more if deferred for two or three years .

  20. I have a Q:
    What about de problem of cycles in the economy.
    I mean, if you give money to people of the oil windfall, everything is going to be ok in the short term, even the “C” is going to get up, everybody is gonna be happy =) =)

    But, what about (i remember a minister saying to this question: and if not) is the oil prices get down. Los patrones de consumo, changes completely and entrepreneurs, average citizens and everybody loses money, get more and more debt’s that they can pay (Is normal, i live better now). Cause, you know, no body knows when the oil is going up or down?, so basically, the oil downfall is EVEN WORSE!.

    What i think the real issue here is the long term Volatility, and i dont see fix in this at least you build a long lasting institutional and transparent fund…

    • Luis Cardenas:

      The volatility is certainly and issue. And certainly TP (in this current blueprint) does nothing to address it. Some remedial measures have being advanced by the readers, but those come with their own problems, so there is no easy way out of it.

      The volatility problem is hard to tackle because it is at the very heart of how the Venezuelan economy is currently built: As long as an important part of the income depends on a single source, we’ll suffer from volatility. TP or not TP, all remedial measurements we come up with will essentially be a patch trying to hide a deep wound.

      What TP does, however, is to address that underlying problem in an indirect way: By setting the stage to foster a robust internal market and correcting the perennial overvalued currency issue, we may be able to develop alternative income streams without resorting to artificial (and so far very ineffective) measurements like tariff barriers, “compre venezolano” subsidies, and the like.

  21. Great post.
    However, you should know that there´s a formal proposal made by one of the authors on a new book titled “Petróleo como Instrumento de Progreso”. Here is an abstract originally published on Tal Cual by Arnoldo Gabaldón:

    http://gerenciayliderazgoresponsable.blogspot.com/2013/01/una-hoja-de-ruta.html

    http://www.iesa.edu.ve/publicaciones/ediciones-iesa/2013-febrero-04/1147=el-petroleo-como-instrumento-de-progreso-una-nueva-relacion-ciudadanoestadopetroleo

    This alternative proposal for a DD fund address some of the issues mentioned above, particularly those related to fiscal stabilization policy through taxing rules. In addition to this, the authors made an effort to exemplify a Health Insurance scheme financed through directly distributed oil rents.

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