Aristobulo Isturiz: currency exchange control (CADIVI) is a political decision

Some times we can rely on loud mouthed chavista to candidly confirm what we were all saying but they were denying.  Today we got representative of Caracas, the very erratic Aristobulo Isturiz, who told us from the National Assembly the following:
El control de cambio se lo van a calar hasta construir el socialismo, el control de cambio para nosotros es político, si lo quitamos, nos tumban
Currency exchange controls you are going to get screwed with them until we build socialism. Currency control is for us political, if we remove it, we are ousted.
Most of the vulgar colloquialism is lost in translation but I trust you get the idea.

A few days ago there was a vivacious debate between my two esteemed competition, on one side Miguel abrogating the immediate removal of currency controls on February 2013, and on the other side  Juan Cristobal defending the position of his candidate to keep them.  I participated briefly in both threads because I was not in full agreement with either one.  But briefly also because my point was different and I had to wait for today's Aristobulo's tirade to find my final words on the subject.

See, Miguel comes from the financial world, and Juan Cristobal from the consulting one, but neither one is busy in the debilitating everyday battle of form filling to obtain precious dollars at the preferential rate.

In my business we depend for 80% on imported raw material to be able to manufacture whatever we may have in our order books.  We do not have 5 products that can be made 100% with raw materials found in Venezuela.  Thus, CADIVI fights are an essential part of our daily routine to an extent that is hard to imagine.  As a political control I can assure you that it is a very effective tool although somewhat overrated and by now overused.  The basic reason is that instead of spending time conspiring I have to spend it in the myriad of permits that are required for me to ask for dollars, even before I know whether they will be granted.

Things can be pretty bad sometimes.  We almost went bankrupt last year because they did not sign our "solvencia laboral" for four months.  They were not refusing it, we had all the requirement, there was just no one around to sign it, allegedly.  But when finally they came around and started signing, ours was rejected because by then some of our required permits had expired!  Luckily we were ready and they had already been renovated but we had to rebuild the dossier and to have it signed required an extra month. For five months we could not import anything and at the end we were working less than half speed.  A couple of month more and we were out of anything to sell, closing down.  Just because of some incompetent and/or malevolent bureaucrat somewhere.  And stop me from starting of the bundles we lost to corruption because a comma was ill placed according to CADIVI, or the custom agent, or the Nazional Guard signing the port exit paper, etc...  All made possible because of the strict CADIVI requirements.

Thus CADIVI has become an enormous source of graft, from shady financial transaction worth millions of USD to petty corruption in Venezuelan entry points.  It is not that CADIVI is particularly bad, Venezuela had other experiences before, it is becasue CADIVI has now lasted 8 years and a whole "economic" system has developed around it.  Too many people, chavistas or not but all pretending to be fanatics, live out of that and they are certainly not going to willingly give it up.  Confronting these people outright could bring down to a halt all import activity of Venezuela as they cannot be replaced from one day to the other unless you simply decree free entry to any goods, something that will not fly even with your anti Chavez electoral base support.  But then again you cannot leave the system in place because those people who stay quiet in the first weeks of your presidency will get ready to sabotage you if they sense your desire to dispose of their major income source.  Amen of your credibility shot for allowing such corruption.

True, the financial aspects of CADIVI can be dealt from day one as they involve big sums but relatively few people (who are already rich enough), but the corruption of CADIVI and the harbors is not something you can tackle just like that. There are two reasons for this.

First, CADIVI has affected and penetrated economic decision to such an extent that removing CADIVI at a single stroke will affect the most the people least connected with international financing. The paradox of CADIVI is that for many small business like mine it has been the perfect excuse not to depend on credit lines or paying in advance for the goods we buy. Our providers must accept CADIVI terms or give up their sales in Venezuela. In fact the delays of CADIVI have been sometimes long enough that when the time comes around for us to pay our foreign bills as much as half of our imports are already processed or sold and we have the money in the bank to pay. Suppression of CADIVI will favor immediately foreign companies who already have a foot hold in Venezuela and who will be able to immediately flood the market while local folks like us will require to set up a credit system to stay in business. A fast removal of CADIVI could wipe out the remains of Venezuelan industry except for the big ones like Polar who have managed to have some reserves outside.

Does a new administration want to take such a risk?

Second, there is the historical fact that lack of real justice and property rights has made Venezuelans a race of business people who take out of the country all that they can take out. Judicial insecurity at all levels has gone much, much worse under Chavez but it always existed, trust me on that one. Thus the tradition in Venezuela is for people who have access to a significant amount of money to send enough abroad so as to be able to retire outside of Venezuela if needed, and if you really have a lot of money, set up your kids outside, just in case. Chavistas have followed that tradition and plus, because they have much less problems than us to access the financial deals existing as a consequence of CADIVI (Miguel has a blog almost devoted to the different schemes).  And you may note that even those who have not much money still manage to have a checking account in the US with a few thousands of dollars, just in case.

Removing CADIVI controls implies liberating the exchange and I can guarantee you that if you add the chavistas out of office and expecting to go to jail for corruption to the anti chavistas that are afraid of a prompt and violent return of chavismo, the run on the Bolivar will be epochal.

Needless to say that the regime is well aware of all of that, that it set up itself in such an impossible situation, such as it happened with the gas price, to cite another example of chavismo paralysis.  They use CADIVI as a political tool for survival alright.

What is the way out?  Because we need a way out as the corruption is simply unbearable for the country, blocking any real economic growth.

My plan would be for the opposition candidate to announce that CADIVI would be removed ASAP, in a delay no greater than one year, once measures to protect the poor are set in place (promising Mercal subsidies only in poor areas?).  However from day one there is one thing that the eventual winner can do: devaluate, let the currency float, free it for travelers and make CADIVI a mere clearing house.  That is, you need to avoid a run on the Bolivar and only a prompt devaluation and some controls may avoid that.

In this scheme CADIVI does not approve for imports anymore, anyone can have access to dollars, but you only get them once your importations have cleared customs in Venezuela.  That is, buying dollars will remain limited to people who travel and to those who need to pay their bills for legally received goods.  PERIOD.

As time passes, as the macroeconomic imbalances of the country start resolving, as subsidies for the people really affected by devaluation and adjustment take hold, then you can start lifting other restrictions until you have a free economy again. I personally think that some mild controls, as they exist in many a prosperous country, are necessary because it will take years to reinvent the Venezuelan judicial system well enough so that people want to consider retiring in Venezuela.....

This, my friends, is the view from ground zero, for those who depend on CADIVI today and know it is easier to get worse than better.