Caracas Chronicles

(A series of posts on how Venezuela can begin to grow again. For some background, see here and here)

The second regularity the authors find in The Growth Report is that “macroeconomic volatility and unpredictability damage private sector investment and, hence, growth.” In other words, succesful countries manage its macroeconomy to make it predictable enough for companies to feel free to invest. So … how do you accomplish that?

It helps to start with the basics. There are two different worlds people have in mind when they talk about the economy.

First there’s the world of fields and factories, offices and machines, and the people working on them making things and providing services that other people find valuable. Then, there’s the world of little bits of paper or – more often these days – electrons flying around between people as they try to keep score about who’s working for whom, who is providing which goods to whom, and who is trading which service with whom.

Economists call the first world the Real Economy, and its study Microeconomics. We can call the second world the Money Economy. Its study is called Macroeconomics. (Yes, there are things beside money in the study of Macroeconomics, but money, in my mind, is the common thread linking these issues together).

Leave it to Macroeconomists and things get horribly jargony and complicated very soon, but basically what the condition from The Growth Report says is: don’t re-invent the wheel every three years, don’t do things that deepen the cycles in the economy, and keep interest rates and inflation at steady, tolerable levels. Basically, get out of the way of the people who do the real growth: the guys (and guyas) working and investing and building actual things and providing actual services.

Monetary policy makers, in the scheme of things, are like referees in a fútbol match: you can tell they’re doing their job well when you barely notice them. When they become the story, it’s a safe bet they’ve monumentally fucked up.

It stands to reason. All those factories and offices and the people working in them have a given potential: an amount they could produce if they were all fully employed and working fully efficiently. A well run money economy can create the conditions for them to get as close to that potential as possible, (though we’ve known since the 1930s that there are certain times when the economy is producing much less than its potential, and in such cases printing money can actually raise the economy’s total output.)

What twiddling with the money can’t do is change that underlying potential: to do that, you need new people with new skills, more factories, bigger offices. And that’s all real economy stuff.

For the money economy, the downside is much bigger. Screw up your macroeconomics bad enough, and the score-keeping bits of scrip can actually get in the way of the people out doing the actual work of raising crops and manufacturing shirts and mobile phones and cutting hair and engineering bridges, like a useless ref ruining a futbol match with bad calls.

Money, in the end, is just information – information about the value of the thing being traded, information about the productivity of the worker getting paid. Sound macroeconomic policy is about keeping information true enough, clear enough, and accurate enough that it doesn’t gum up the actual workings of the real economy. It’s also about keeping money cheap enough and available enough that people can borrow it to exchange for the things that actually cause growth – namely, capital, whether human or otherwise.

In normal countries, the work of keeping the Money Economy orderly enough to stay out of the Real Economy’s hair isn’t easy, but neither is it some deep unknowable mystery. The details are obviously contentious, but the broad outline is fairly straightforward: you need a rough kind of stability in the ratio between goods traded and score-keeping bits of scrip used to trade them with. They need to grow roughly in tandem. Most importantly, you need to make sure large chunks of scrip aren’t suddenly created or destroyed overnight, because if they are, the jolt is felt right throughout the Real Economy.

If the pieces of scrip are scarce, interest rates will be high (everyone will want to borrow scrips, and there won’t be enough of them around) and then investment will suffer. If they are too available, everyone will have easy scrip and prices will rise fast.

Clearly, it helps to understand what the mechanisms are that send these ratios out of whack most often. The classic one, the one that comes up again and again in economic history, is runaway money-creation as a result of government debt.

The mechanism here is straightforward: governments that spend more than they take in through taxes can try to make up the difference by borrowing, but if they spend much more than they take in, it can be hard to find enough willing lenders. In those circumstances, the temptation is very strong to game the system by just getting the Central Bank to print up more and more bits of scrip to cover the government’s debt. “Monetizing the debt” is the lingo here, and it’s at the center of the reason why when I was a kid you needed Bs.4.30 (de los viejos) to buy a US dollar and these days you need Bs.43,000.

And so one rough-and-ready interpretation of the mandate to avoid “macroeconomic volatility and unpredictability” is just to keep the deficit down – if not at zero, then much closer to zero than it has been for most of our adult lives. That’s clearly not the whole story but, more than people realize, it’s the bulk of the story: look through economic history and you just won’t find very many cases of macroeconomic chaos in countries where the government budget is roughly balanced.

Of course, Venezuela is not a normal country: we’re a petrostate, and as such we’re much more exposed to violent shocks from world markets due to volatility in the price of the one commodity we export. A sound budget one year can be grossly deficitary the next, because oil income today can be three times as much as the oil income we get tomorrow. It’s easy to see how wide swings in oil income make it challenging to keep the Money Economy from screwing up the Real Economy: when things are good, you pump huge amounts of scrip into an economy and then take it out again seemingly at random when things go bad, as a world price we can’t really control fluctuates.

But even here there are mechanisms that could be used to manage the shocks. After all, the scrip that oil generates is gringo-issued and colored green, while our scrip is rainbow colored, pluriétnico y multicultural, and it isn’t written down anywhere as a law that all the green scrip has to be turned into criollo scrip.

You could just as well set aside some of the green scrip into a kind of holding pen when oil prices go up, refraining from issuing rainbow scrip against it until prices come back down again. In fact, you could even have a policy – sort of like China’s, or Norway’s – of trading only a portion of green scrip for your own rainbow scrip, setting the rest aside in an ever-growing pile.

This policy may be especially well suited to an oil economy, as using all those petrogreenscrips to buy up rainbow scrips drives up the price of the rainbow scrip, and that can screw up the Real Economy in its own way. The operative bit of jargon here is Dutch Disease, and it explains why so few oil economies manage to sell anything other than oil to world markets.

The debate here is complex: it’s true that if you refuse to turn all your green scrip into rainbow scrip, you’re by definition putting off consumption until later, and that may not always be justifiable – or politically sellable – in a situation when people are hungry now. But then, consuming all of the green scrip now and simultaneously making your industry uncompetitive doesn’t really look like a great way to prepare for the future either, does it? You can get any two Venezuelan macro nerds to debate this point ad infinitum – in fact, in a way, that’s all Venezuelan macro nerds have been doing since the Gomez era.

Here we’re get closer to the issue Venezuelans tend to think about as the issue when it comes to the macroeconomy: your system for interfacing between green scrip and rainbow scrip (a.k.a., el sistema cambiario.) It’s sort of a funny thing, because while there’s certainly an active and sometimes heated debate about this interface, very few professional macroeconomists would see it as the central problem of keeping the Money Economy from screwing up the Real Economy.

It’s true that an exceptionally perverse exchange system like the one Venezuela has now can (and does) wreak havoc with investment and growth. But it takes a rare evil genius like Jorge Giordani to pile on so many distortions into an exchange rate system that it turns into the way the Money Economy screws up the Real Economy.

Many, many different types of exchange rate arrangements are compatible with the kind of stable, predictable Money Economy you need to get money out of the way of growth. Even relatively heavy-handed capital controls can go hand in hand with a stable macroeconomic and fast growth – just ask anyone who lived in South Korea in the 1960s and 1970s − provided they’re administered by a Central Bank that refuses to create more and more money out of nowhere to pay runaway government debt. Venezuelans really need to be reminded of this.

Now, even if you’ve read this far and didn’t really follow the discussions, it’s no biggie. I haven’t the faintest clue how they manage to get a hunk of metal that weighs several tonnes to fly, but I don’t hesitate to jump on a plane when I need to travel. I do it because I trust in the professionalism of the aeronautics engineers who make the damn things, and because I trust that Boeing, Airbus, Bombardier, and Embraer won’t hire some shaman off of Sorte Mountain to design their planes. Aeronautics may be a deep mystery to me, but I know from experience that every day thousands of planes take off and land safely every day and I infer that flight is a problem that properly trained professionals have pretty much solved.

In much the same way, most of the world has figured out how to keep the Money Economy from screwing with the Real Economy most of the time. There are certainly exceptions – ask any Spaniard with a mortgage – but in a broad, general way, it’s a pretty good bet that a professionally staffed Central Bank that’s left alone to do its thing without interference from people who don’t actually understand the detail can usually be relied on to keep the macroeconomy from going spectacularly wrong.

The relevant bit of jargon here is “Central Bank Independence” and if you’re not convinced that’s important, if you hear the siren song of “democratization” of the Central Bank or “close cooperation with the Finance Ministry” and think they’re convincing, just ask yourself how you’d feel about getting on a plane after the “democratization” of Boeing’s engineering department or the takeover of Airbus’s R&D department by a bunch of brujos from Sorte.

This, I’m afraid, is the real problem with Venezuela’s Money Economy today, and the reason the recent appointment of Eudomar Tovar as BCV head is such a catastrophe. With Giordani, Edmee, Tovar, etc., we have a gaggle of shamans running the aeronautics department, and the macroeconomic plane they designed is the one Venezuelans have been riding for the last 11 years.

And so my recipe for macroeconomic stability for the next government is simple enough to put into two lines:

1. Stop always spending way more money than you make.

2. Find some really competent macro nerds, hand them the keys to the Central Bank, and let them do their thing.

That’s it!