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A Gedanken Economic Experiment in Venezuela

By Miguel Octavio

A reader sends me a note, asking me how I can be against the Government giving out bolivars at the official rate to foreign companies to pay dividends. The problem to me is the distortions and perversions you create with exchange controls. Moreover, you should set priorities and in any Government, whether “revolutionary” or not, you would think that health and food would be the priority. I am against exchange controls, period.

They are and have always been a source of immense corruption and have never proven effective. Right now, dozens of Government officials are getting very rich thanks to them, orders of magnitude more than in the previous which were also a disgrace. The corrections they generate when they are removed are always traumatic. You would have thought that in Venezuela people would have learned the lesson, but clearly they have not. However, imposing exchange controls is a also source of additional power to be tapped by the power hungry. Going back to my reader, just imagine the following Gedanken Economic Experiment and you will understand:

The Manager of a foreign multinational is told every year to repatriate 50% of all profits in the form of dividends. Suddenly, exchange controls are imposed. There is an official rate of Bs. 1600 and a parallel rate of Bs. 3200 per US$. 50% of your profits are one million dollars at the official rate or Bs. 1.6 billion. You have been eyeing that land next to your factory which costs Bs. 3.2 billion or US$ 2 million at the official rate, or 100% of your profits for the year. Instead of paying the usual dividend of 50%, you pay 100% of all profits at the official rate, send US$ 2 million to your home office and immediately take one million and exchange it back in the parallel market at Bs. 3200. You have your home office buy that land with this money, courtesy of the Venezuelan Government, which paid for half of it and they also get to keep the original one million dollars in profits. You then pay rent to the home office for the land, which you can deduct from profits and pay less taxes. Magic? You bet! Such is the world of exchange controls.

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