Francisco Toro

Feb
15
2011
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Venezuela’s Government Stranglehold

By Francisco Toro of CaracasChronicles

Venezuela’s increasingly restrictive foreign currency exchange control system is becoming a key instrument in the Chávez government’s bid to establish hegemonic control over Venezuelan society. By giving the government a stranglehold over the country’s economic life, currency controls have become a prime mechanism in crafting a new economic elite fully subservient to the governing clique.

Venezuela’s economy is uncommonly vulnerable to interference via currency controls. Of course, threatening long jail terms against those who sell foreign currency at market rates would be a strong tool for authoritarian control in any setting, but nowhere more so than in Venezuela’s “port economy” where most consumption goods are imported and paid for with the proceeds from oil exports.

In a country where, for instance, most staple foods are imported, giving the government the ability to decide who can and who can’t buy foreign currency, when and at what price, gives it unprecedentedly fine-grained control over who grows rich and who goes bust.

The reason is that Venezuela’s official exchange rate is extravagantly overvalued. According to economists the country’s “equilibrium exchange rate” – the rate at which the bolivar would likely settle if it was allowed to float freely against the dollar – is perhaps at twice the level of the official exchange rate.

Another way to say that is that the government deeply subsidizes the purchase of foreign currency, but only to the favored few.

And with the cut-rate dollars that only they can access, the favored few are able to import consumption goods and sell them on at prices that Venezuelan producers could never match. The result is a kind of backwards-dumping dynamic, where government policy systematically favors foreign-made goods over their Venezuelan counterparts.

One consequence of this is deindustrialization: the wholesale hollowing out of Venezuela’s light manufacturing base. Another is that favored importers – which includes the government’s own food distribution network – reap huge windfalls, while those without access to cheap, subsidized dollars languish.

It is lost on no one, of course, that political loyalty is the number one requirement for those obtaining those covetted cut-rate dollars, making the entire system a powerful mechanism to enforce political allegiance to the government on the part of a new class of crony importers.

Those without favored access to dollars – a category that includes all those so much as suspected of political independence – are forced instead into the now illegal “parallel market”: in effect, a black market where traders face lengthy jail sentences and heavy fines for helping others to finance  imports or save in hard currency.

The system criminalizes activities that would be routine throughout the rest of the region. Trying to save in foreign exchange is now a crime, as it is to take your gold jewelry with you on a trip and sell it for convertible currency abroad. Even citing the real (i.e., non-controlled) price of dollars in domestic currency is now a crime punishable with a fine worth up to Bs.55,000 – some $12,790 at the official rate, much less at the “Voldemort” rate. (It is, of course, illegal for me to tell you what the real going rate for dollars is.)

Illegal currency traders are nothing if not resourceful: they have set up and maintain anonymous websites to share reference prices, and communicate actively to keep the market operating.

Secure smartphones – particularly Blackberries – have become the tool of choice in enabling the market to operate. Still, insecurity runs deep: trading in this way is now technically punishable with up to 7 years in prison.

Of course, as with any illegal market, Venezuela’s unregulated currency market seems a magnet for organized crime. A market where contracts are not enforceable through the courts tends to turn into one where contracts are enforced through the barrel of a gun. Already, stories of drug traffickers turning to illegal bolivar trading as part of sophisticated money-laundering operations are widespread. Everyday people and legitimate businesses barred from the regulated currency control system are increasingly drawn into contact with these criminal elements merely to carry out the kinds of necessary trades that would be routine anywhere else in the hemisphere.

And, of course, by criminalizing the kinds of business transactions that legitimate businesses need to carry out routinely to remain in operation, the government could well arm itself for a broad crackdown on the private sector down the road.

With dozens of companies now technically in violation of Currency Control laws, much of Venezuela’s private sector has been forced into a semi-clandestine position, permanently one investigation away from shut-down and the arrest of its top executives.

Charges, if they do come, will be technically “correct” – in the same way the charges against Rosa Parks were technically “CORRECT” under Montgomery, Alabama’s existing ordinances on bus-ridership.

Keynes once famously wrote that “There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency.” Surely, no currency is more debauched than that which cannot be legally traded.

 
Dec
14
2010
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Expropriation and Punishment

Workers Face Intimidation and Reprisals in the Wake of Agroisleña Takeover

by Francisco Toro (@CaracasChron)

As soon as he heard that President Chávez had issued an expropriation decree for Agroisleña – a major agricultural extension service firm providing seed, fertilizer and credit to more than thousands of growers – José Rocha knew his life was about to change forever. He couldn’t have guessed, though, was that it would all happen so fast.

“State Police, National Police, Army, National Guard, Bolivarian Militia: they all showed up the next day,” says Rocha, 35, who’d worked at Agroisleña’s tech support help-desk for over 15 years – his entire career. From then on, Rocha would be working under the gaze of heavily armed men.

More disconcerting than the regular police and Armed Forces presence, he says, were these guys wearing green Che Guevara T-shirts with double-barreled shotguns slung across their backs milling ominously around the plant. “I don’t know which group they belonged to – I’m not an expert in these things,” Rocha says, “but they didn’t seem to be part of any organized security force, maybe they had something to do with some private security detail.” One thing is for sure: when people like that overrun the place where you work, you don’t waltz up to them and ask for I.D.

This takeover on October 4th set the stage for a tense few weeks when Agroisleña’s employees would have to get used to working in a heavily ideologized environment or suffer the consequences. According to another company worker who spoke on condition of anonymity, “we couldn’t have any meeting inside the office without at least two or three members of the takeover team coming to listen in.”

For Rocha, the pressure was intense: “imagine having to work with armed people looking over your shoulders at all times,” He says. “They made it clear to us that people who didn’t share the president’s ideology wouldn’t have a future inside of the company,” says Rocha.

It was no bluff.

Within a few weeks, he was fired.

The story of Agroisleña started in 1958 when a Spanish immigrant from the Canary Islands, Enrique Fraga, founded the company. The company grew to be the leader in the agricultural services market in Venezuela and even exported goods to other Latin American countries.  At the time of its expropriation, the company employed 2,500 employees and was said to be responsible for 12,000 more indirect jobs.  Many of the farmers it serves were themselves descendants of Spanish immigrants that still practice agriculture.

Today, two months after the Agroisleña takeover, some 100 former employees have been fired, with another 15 or so choosing to quit rather than endure the heavy intimidation. At the same time, over 300 company salesmen – who work largely on commission – haven’t received their sales bonuses since the takeover. And, by all accounts, morale among those left behind is low and deteriorating.

Of particular concern is that none of those who have lost their jobs have received their statutory severance pay; the cornerstone of Venezuela’s social safety net. Weeks of protests outside Agroisleña’s head office in Aragua State have ensued.

Technically, Venezuelan workers have an absolute legal right to severance pay. A form of “deferred compensation”, severance pay in Venezuela is actually a portion of employees’ salaries that employers are legally obliged to set aside each month and deposit in a ringfenced, interest-bearing bank account, to be paid as a lump-sum when an employee leaves the company.

There are virtually no circumstances under Venezuelan labor law where an employer is allowed to withhold severance pay; doing so is tantamount to picking the fired workers’ pocket. These days, though, Venezuelan labor law seems to apply to private sector employers only. The takeover board isn’t just refusing to handover employees’ deferred compensation, it’s refusing to even schedule a meeting with the fired workers to talk about the issue.

For José Rocha, there could hardly have been a worse time to lose the only job he’s ever had. His first-born son is just six months old now, leaving his wife to support the family on her salary alone. “I spend most of my time at home now,” he says, “taking care of the baby.”

Venezuelan labor law, as amended under the Chávez regime, bans firing parents of children under one year old. That, needless to say, made no difference either.

Still, what rankles Rocha the most is the petty humiliations he was subjected to.

“They didn’t really bother to tell me what was going on,” he says, “one day I came into the office and found another person sitting at my desk. Simple as that.”

After milling around the office for some time, unsure what to do, he was approached by one of the new security personnel who told him he could no longer be in the building and escorted him to the front desk. Only after pleading with the guard to explain what was going on did the new Human Resources team get around to informing him he’d been fired.

“Imagine you’ve been working for a company for 15 years and when they go to fire you they send a guy with a gun to physically throw you out!” he says, bitterly.

For Rocha and his former co-workers, the future is full of uncertainty. “They say the company was exploiting us, but the truth is that I’d made plans for my future that went hand-in-hand with the company’s future,” he says. All of that is now shattered.

When Venezuelan firms get nationalized, the government usually portrays the move as a way to defend the workers from the predations of their capitalist paymasters. Agroisleña was no exception. It’s just that the workers so bravely defended by such measures are, more often than not, oddly abstract: the actual, flesh-and-bone people who work in expropriated companies, in contrast, get screwed.

 
Dec
6
2010
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Pinching Polar on Both Ends of the Supply Chain

How to control a company that’s too popular to take over

by Francisco Toro

President Chávez has a problem. Amid his continuing push to nationalize as much of the Venezuelan economy as possible, he’s finding that some of the firms he’d intended for a state takeover are widely popular with Venezuelans. Chief among them is Empresas Polar, a food and brewing conglomerate that is now Venezuela’s largest privately owned firm. While Polar is a key target for government takeover, the government has been stymied by the fact that, as a June survey found, 76% of respondents have a favorable view of the firm, and just 19% a negative one. Worse yet (for the government) 83% of Venezuelans don’t want Polar nationalized, against just 13% who favor the move.

So what do you do when your number one target for expropriation also turns out to be one of the most trusted and respected institutions in the country? Simple, you squeeze them via the supply chain.

In recent years, the government has taken over record numbers of both Polar’s upstream suppliers and downstream distributors.  November saw the takeover of the Venezuelan affiliate of U.S. based Owens-Illinois, a bottle-maker that supplied the containers many Polar products are shipped in. The government similarly took over Agroisleña, a Spanish agribusiness firm involved in seed credit, agricultural extension and fertilizer and pesticide distribution to many of the farmers who sell to Polar. It has continued to consolidate control over food distribution channels, taking over control of the largest supermarket and hypermarket chains – Cada and Exito – from a French-Colombian joint venture and continuing to expand its own Mercal and PDVAL branded neighborhood shops. And, needless to say, the lands where many Polar products are grown have been a key target for state takeover.

This strategy appears to be the fall-back option for a government that seems to be calculating that, for now, nationalizing Polar would carry unacceptable political costs.

In July, when the government stepped up its rhetoric against private enterprise considerably, President Chávez made a particular point of threatening to expropriate Polar and personally attack its CEO, Lorenzo Mendoza. He chose a symbolically loaded opponent. Founded in 1929, the firm has long been an icon of the Venezuelan industrial sector, and its brands, ranging from Harina PAN and Mavesa to, of course, Polar Beer, are some of the most readily recognizable in the country. Polar is also the Venezuelan licensee for such international brands as Pepsi, Quaker Oats and Lipton Tea. The company is Venezuela’s largest employer as its 17 production facilities in Venezuela employ some 32,000 people with thousands of more jobs created indirectly by its operations.

Last summer, in a series of moves that many believed to foretell an expropriation, the president repeated charges of hoarding, price gouging and “boycotting the government” against the firm, usually couching them in his trademark aggressive, vituperative language. The firm countered using in situ government inspections of its production facilities and distribution chains, and the associated paperwork, to refute the allegations. After seizing 114 tons of food from Polar warehouses recently, the government underscored its animosity by pulling down a large Pepsi advertising sphere, long stationed on top of Polar’s headquarters’ building, and something of a Caracas landmark.

The move came days after the president declared “economic warfare on the bourgeoisie” and seized 18 small and mid-sized food sector wholesalers on similar hoarding charges. In the same week, Energy Minister and PDVSA head Rafael Ramírez had laid out the government’s plans to attain “hegemonic control” over the nation’s food processing and distribution infrastructure.

That “hegemonic control” makes it almost superfluous to take over Polar itself: the firm could just as easily be controlled indirectly, through a shower of regulations and, especially, through control of all the firms it buys from and sells to. These days, Polar may still make the iconic “Harina PAN” needed to make Venezuela’s staple food – the “arepa”, a type of corn-based bread. But to make it, it must increasingly buy corn from state owned farms grown with seed credit provided by a state owned firm and fertilized with state-made, state-sold fertilizer. It must buy the corn at state-controlled prices through a state-controlled marketing board and must them sell it on to State-owned distributors for final sale to consumers – again at state-controlled prices – through State-owned supermarkets, hypermarkets and neighborhood shops.

Like the polar bear in its logo, Polar finds itself adrift – floating on a shrinking bit of sea ice amid a sea of Chávez-controlled buyers and suppliers. The question remains unanswered whether the vast majority of Venezuelans who value and oppose the government’s attempt to take over Polar, will take notice of Chávez’s sly way of putting the company in a box.