Currency Controls and Other Mistakes

Here is a link to a good nuts and bolts article by Daniel, a blogger in Venezuela who writes at Venezuela News and Views. He also runs a small manufacturing business and has to import material not available in Venezuela for the stuff he makes. Bureaucratic controls on access to foreign currency make this extraordinarily difficult. Daniel observes,

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.

One of the problems in eliminating or even expeditiously minimizing foreign currency controls, even if Chávez is booted out in the next presidential election, is that the regulatory morass has become so embedded in the business decision making process that to do so would mean an even worse short term hit on small business.

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.

Venezuelan foreign currency controls are very different from the U.S. tax laws and regulations. However, an instructive parallel can be drawn between the two because in the U.S. many business decisions and many non-business decisions as well are based on the economic distortions embedded in the tax code and regulations. Substantial changes are needed and the gradual elimination of those distortions would help business and the U.S. economy greatly. However, undue speed would create a mess of “unexpected” consequences. The difficulty with quick and drastic changes to U.S. taxes would probably be worse than in the case of Venezuelan foreign currency controls, if for no other reason than that economic distortions have been embedded in the U.S. tax laws for a very long time and few businessmen now working can recall a day when their decisions were not impacted by those distortions.