The Road (that ought to be) Less Traveled II
In "The Road (that ought to be) Less Traveled" I remarked on the opening paragraph from a NY Times article entitled Chavez Restyles Venezuela With 21st-Century Socialism:
Firmly in power and his revolution now in overdrive, President Hugo Chavez is moving fast to transform Venezuela's economy by bucking free-market planning with what he calls 21st-century socialism: founding state companies, seizing abandoned private factories and establishing thousands of cooperatives and worker-run businesses.
The article's second paragraph reads as follows:
The populist government is reorganizing the country's colossal oil industry, taking a bigger share from private multinationals. Planners are reorganizing the banking system, placing stringent restrictions on lending while creating state banks. Venezuela is also developing a state-to-state barter system to trade items as varied as cattle, oil and cement as far away as Argentina and as near as Cuba, its closest ally.
Two themes raised in this article are troublesome and ominous signs- the reorganization and regulation of the banking industry and the creation of a "state-to-state" barter system. Let's take them in turn. Here's what Hayek wrote about the perils of "economic planning" some 60 years ago.
Economic control is not merely control of a sector of human life which can be separated from the rest;it is the control of the means for all our ends. And whoever has sole control of the means must also determine which ends are to be served, which values are to be rated higher and which lower-in short, what men should believe and strive for.
Central planning means that the economic problem is to be solved by the community instead of by the individual; but this involves that it must also be the community, or rather its representatives, who must decide the relative importance of the different needs.
The so-called economic freedom which the planners promise us means precisely that we are to be relieved of the necessity of solving our own economic problems and that the bitter choices which this often involves are to be made for us.
When we recall the opening words of this article "Firmly in power and his revolution in overdrive..." we get a good glimpse of where this road leads. Through control of the banking system, Chavez' visible hands, one which used to be seen holding a baseball bat, can influence, if not absoluately determine to whom money can be lended, in what quantities and at what interest rates. That may sound like "overdrive" to author Juan Forero, but history tells us otherwise.
This has been tried already. In virtually every country where this has been tried, the engine of economic progress stalled out , seized up, and was sold for scrap. And just such economic engine failure is the fate that awaits those few countries travelling the road to serfdom. Every one of the already-failed suffered from a lack of foreign investment and financial liquidity, the lubricants that keeps economic engines running smoothly. This fact bears directly on the next area of concern, the rise of "state-to-state" bartering. Here's how Wikipedia defines the term "barter"
Barter is a type of trade where goods or services are exchanged for a certain amount of other goods or services; no money is involved in the transaction. It can be bilateral or multilateral as trade. ... Barter trade is common among people with no access to a cash economy, in societies where no monetary system exists, or in economies suffering from a very unstable currency (as when hyperinflation hits) or a lack of currency.
Keeping those caveats in mind, consider some of what the UN Conference on Trade and Development (UNCTAD) said about bartering in Russia, the former guiding star of Socialism, its 2001 review of International Accounting and Reporting Issues:
Other issues that have reduced the transparency of enterprise activities and trading (in Russia) have been barter, siphoning off of enterprise profits, insider trading and bribery. It has been reckoned that 60 per cent of the economy is conducted through barter (EBRD 1998). Siphoning off of enterprise profits through friendly related parties has also been a major problem. Particularly after 1998, asset-stripping became widespread. “Mechanisms included transfer prices, share dilution, manipulation of debt-offsets, and diversion of cash flow and assets to related companies” (EBRD 1999: 259).
In other words, bartering has become one of several techniques by which profits have been stolen from state and ostensibly private enterprises and how they have been stripped of their assets. Given this context, it is no surprise that Russia has had more problems than most, the report tells us, in attracting external investment. In 1999 Russia attracted only 1/7 the investment that the Czech Republic did.
As a rule, investors like to be able to know what is happening with their investments. Bartering, while not inherently illegal or immoral, is subject to vagaries and misrepresentation that a price-based system of exchange is not. It is a system of exchange whereby "fair value" is exceedingly hard to determine and hence open to abuse. As one interviewee mentioned in the UN report said: “Barter prices are often inflated for the benefit of lowering tax.”
In a country where the banking system and other industries are coming under increasingly centralized control and where bartering is being proposed as a means of economic exchange, one or more of several things may be happening: (1) someone or some agency is in the process of siphoning off profits and stripping firms of their assets (2) there are serious liquidity problems (3) the currency is unstable or (4) external investors are pulling out financial, physical, and human capital faster than it can be replaced. Any way you add it up, a move to bartering is a sign of trouble.
If even one of these things is happening, then it is no wonder why the Venezuelan government is "seizing abandoned private factories and establishing thousands of cooperatives and worker-run businesses." They were abandoned because business people know when the conditions for running businesses in an efficient and transparent manner exist or not. A lack of transparency keeps investors in the dark about the real or projected returns that their investments can earn.
And this is far less than ideal state of affairs for bulding a modern economy. In fact, the only thing for which it is ideal is growing mushrooms, a crop which thrives in environments with a little daylight and lots of manure. Maybe that's why they want to barter for cattle?
Tags: chavez | Venezuela | Hugo Chavez | Latin America | socialism | Capitalism | juan forero | The New York Times | ny times | nytimes | NYT | New York Times | hayek |
Comments
it was quite interesting to read.
Posted by: sara | March 16, 2006 1:20 PM