Caracas Chronicles

(This is the second in a series of posts on where Venezuela stands on the list of characteristics shared by high-growth economies, as highlighted in The Growth Report; see background here)

Why do high-growth economies need the rest of the world? Before globalization became a buzz word, England and France were already powerful. Is it really true that the world economy helps a country develop?

The answer is: absolutely. The thirteen high-growth countries identified since the end of World War II have all exploited the world economy to their advantage.

There are two main things globalization makes available. First, it makes knowledge available. As many economists have said before, it is easier to learn something than it is to invent it, and copying something is the best way of learning.

One time, in the late 1980s, I was at the CCCT mall in Caracas and I saw a couple of poorly dressed people, staring in sheer fright in front of the escalator. They were Cubans; they had never seen an escalator before.

Obviously, if you’ve never seen an escalator, you can never make an escalator. Globalization helps you know what the latest technology is – whether an escalator, an iPad, or an FMRI scanner. Without it, you’re simply left behind. Just ask North Korea.

The second thing globalization provides is a market. For countries such as Venezuela, shutting yourself off from the rest of the world is simply not an option. Our domestic market is tiny, and our economy could never survive without international trade because, generally, the larger the market, the less it costs to produce one unit of something. This is what economists call “economies of scale,” and it is the main reason why producing cars en masse leads to lower costs per car than producing them a pedido.

The other thing the world market provides is clear information on what’s in demand, in the form of prices. Whether you’re producing aluminum or microchips, the price in the world market indicates which of the products you are producing is most valuable, which you should focus on producing, and which you should consider abandoning.

Without those signals, you end up with inefficient producers that become a drag for the state – using $10 worth of lemons to make $9 worth of lemonade. Without these signals, you are basically navegando por instrumentos, and economic decisions are produced on the whim by an out-of-touch bureaucrat. Without price signals, we end up with Chávez-like figures announcing new factories to produce Walkmans. (Eje Orinoco-Apure, anyone?)

How can Venezuela integrate more fully into the world economy?

I think the main roadblocks to our joining the globalized world are two-fold, and let’s call them “hard” and “soft.” Hard obstacles involve, mostly, infrastructure. Put simply, our ports, airports and roads are not built to integrate our products into the world economy, and to bring the world economy home.

The proximity of world markets is less a function of geographical distance, and more a function of the time and money it takes to get a product from the point of production to the consumer.

My brother-in-law, for example, works for the Chilean salmon industry, way down in Puerto Varas, 1.000 kms south of Santiago. He tells me it takes less than 24 hours between the moment a fish is harvested and the time it’s on the shelves in some Costco in Central Florida. That’s because Chile has invested in infrastructure – salmon packaging firms are right next to the airport, and LAN, the Chilean airline, has seized the market opportunity, so its logistics operation is top-notch. The fish leaves Puerto Montt airport, connects in Santiago, is in the US in the morning, and is hitting store shelves in the afternoon.

In Venezuela we don’t have that. Our ports and airports are so creaky and inefficient, we might as well live in Antarctica. It doesn’t matter one bit to be physically close to major consumption centers if unloading a container in La Guaira takes 19 days. And bringing the world economy closer to home means nothing if our factories are going to suffer from constant blackouts.

Of course, the next thing we need to take care of are the “soft” constraints, those that have to do with tariffs (the taxes we pay for imports, and the taxes that our exports pay in other countries) and exchange rates.

I think it’s no secret that, if Venezuela is going to develop, we are going to have to get rid of Cadivi at some point, but that’s the subject of another post. Our nation should have a stable exchange rate environment, and that means an undervalued currency, or more likely, a currency that takes into account the fact that $100 a barrel of oil is an extraordinary situation, not a permanent one.

Given that we should move to a situation where our currency is undervalued, we would do well with harmonising our tariff structure. There are way too many exemptions in our tariff code, and these need to be simplified. For example, did you know that imported cereals pay an 85% tax, while imported fruit pays 36%? What chavista genius came up with that decision? Harmonising and decreasing tariffs sends a signal to the world that we mean business, and that our business is trade.

I also think we need to focus on using the tools at our disposal to learn to export. For example, supermarkets in the Dominican Republic, Cuba, Jamaica, Nicaragua, and in all the other countries that live off our oil wealth should be stocked up with Venezuelan goods and services. By using our oil as leverage, we can gain access to valuable markets that can teach our private companies how to export.

Finally, we need to learn to use technology. The government’s role, here, is crucial. We need to come up with a number of industries in which we have comparative advantage, and provide the incentives for technology adoption (and hopscotching) on a massive scale. The government needs to use oil rents to help our country accumulate capital that will make us more productive in the future, and stop using it to finance the raspaítos.

For example, there is simply no reason why Venezuela is not a world-class plastics producer. There is simply no reason why we are not leaders in oil consulting services, refining, drilling, or in the production of machinery for these activities. No reason at all.

That, in a nutshell, is what we need to do: invest in infrastructure – and use the private sector for that! -, harmonize exchange rates, lower tariffs, open markets for Venezuelan firms, and bring technology home.

Easier said than done, I know, but that’s the way to go.

Note: I am not an expert on these topics that I write about. The point of these posts is to get a conversation going, so I welcome any criticisms or half-baked ideas that will surely be the norm. I also would love to hear what is missing from the list of things I highlight. This holds for future posts as well.