Outsource, Simplify, Privatize: Five decisions for the new Venezuela

By Carlos Penzini

Venezuela stands at the edge of reconstruction. The decisions we make over the next 24 months will determine whether the next generation lives in a prosperous country or repeats the failures of the last 60 years. The choices are politically difficult. Intellectually, they are simple.

What follows are five economic decisions the new government must make. None requires new theory. All require the courage to apply lessons that history and the experience of other countries have already settled.

I. Monetary Policy: Outsource it Venezuela had a functioning currency board for 36 years. Most Venezuelans do not know this.

The Banco Central de Venezuela Law of 1939 established the free convertibility of the bolívar (the currency of Venezuela) and required the central bank to hold gold reserves equal to 50% of money in circulation. Interest rates were the only discretionary tool. Monetary policy followed the gold in the vault and the country’s trade balance. Presidents López Contreras, Medina, Betancourt, Gallegos, Delgado Chalbaud and Pérez Jiménez all governed without the power to inflate the currency.

The 1960 reform under our first democratic Congress preserved the essential discipline. The reserve requirement stayed at 50% of obligations, with up to 75% allowed in dollar holdings instead of gold.

Presidents Romulo Betancourt, Raúl Leoni and Rafael Caldera governed under those rules. Economist Luis Henrique Ball Zuloaga documented the result in El Diario de Caracas in 1995: Venezuelans lived through the entire 1960s and into 1973 with the lowest inflation rates in the world.

Then came 1975. The first government of Carlos Andrés Pérez modified the central bank law. Independence was eliminated. The reserve requirement was eliminated. The doors opened to what the political class called flexibilidad monetaria. Ball Zuloaga’s verdict: “It is not a simple coincidence that, from this moment on, our rate of inflation will skyrocket permananently and in less than one decade the bolivar ceased to be the model of international currency it had been for 36 years.”

What followed is the history every Venezuelan family has lived. RECADI in the 1980s. CADIVI in the 2000s. A continuous parade of exchange controls, each one enriching a connected few and impoverishing everyone else. Billions were stolen. Generations destroyed. The poorest paid the heaviest tax of all—the inflation tax, the most regressive levy ever invented, paid most heavily by the people with no way to move their savings into hard currency.

This is a Venezuelan problem, not a Chavismo problem. Governments of every stripe—democratic, military, populist, authoritarian—have failed at this responsibility for five decades. We are not serious people. We have demonstrated, conclusively, that we cannot be trusted with the printing press.

So take it away from us. Outsource monetary policy to the United States Federal Reserve. Adopt the dollar. Panama did it more than a century ago. Ecuador did it in 2000. Puerto Rico has it by virtue of its political status. None of these economies suffers hyperinflation. None devalues every six months.

None needs CADIVI.

Economist Pedro Palma, in interviews republished by the Academia Nacional de Ciencias Económicas, argues against full dollarization. He warns of “dire structural vulnerabilities” and proposes instead a managed bimonetary system based on the Peruvian model. He laments the loss of “ingresos públicos por señoreaje” and the inability to “implementar políticas cambiarias.”

Read carefully what Palma defends. Señoreaje is the government’s ability to print money and capture the difference between the cost of printing and the face value. It is theft from every citizen who holds the currency. Políticas cambiarias is the technical term for the machinery we knew as RECADI and CADIVI — discretionary mechanisms that channel rents to the politically connected.

Palma’s vision requires angels to run monetary policy. Economist Milton Friedman taught us to ask a different question. The question is not what system would work if managed by saints. The question is what system works when managed by ordinary people facing ordinary political incentives. Multiple generations of Venezuelan evidence have answered.

The Federal Reserve operates inside institutions, traditions and political constraints we do not have and will not build in a generation. The most patriotic monetary policy a Venezuelan government can adopt is the one that prevents future Venezuelan governments from destroying the savings of Venezuelan citizens.

II. Fiscal Policy: Simplify, Simplify, Simplify Doing business in Venezuela became a nightmare long before the regime collapsed the economy. The country accumulated a tangle of taxes, parafiscal contributions, municipal levies, regulatory institutes and inspectors. Each one demands a slice. Each one carries the power to harass, fine and shutter.

SENIAT, the national tax agency, sits at the top.

Below it, every municipality, every government institute, every ente descentralizado, runs its own collection scheme, often with no transparency and frequent overlap. Inspectors arrive without warning. Fiscalizaciones drag on for months. Government “entrepreneurs” stop by companies to negotiate the size of the bribe required to avoid the latest invented infraction. The tax code stopped serving any fiscal purpose decades ago. It became a coercion mechanism, a tool of political control, and a source of private rents for the people who run it.

The data on this question is settled. Wherever the cost of doing business is high, growth is slow.

The World Bank’s Doing Business indicators, the Fraser Institute’s Economic Freedom of the World, the OECD’s compliance cost surveys—every serious measure shows the same pattern. Countries that simplify their tax codes and reduce compliance costs grow faster, attract more investment, and produce higher wages.

The new Venezuela needs one tax. A flat 10% on personal income. That is it.

The exemptions: No tax for pensioners. No tax for anyone below a defined income threshold. No corporate income tax.

Why no corporate income tax? Because corporations do not actually pay taxes. People pay them—workers in lower wages, consumers in higher prices, shareholders in lower returns. The corporate tax produces an entire industry of tax avoidance, transfer pricing and accounting acrobatics that adds nothing to national wealth. Eliminate it and the activity it suppresses returns to the productive economy.

Why a flat rate? Progressive tax codes are political playgrounds. They invite carve-outs, exemptions, deductions, credits and special treatment for favored industries and constituencies. Each exception requires lawyers, accountants, lobbyists and inspectors. The flat rate fits on a postcard and the citizen can audit it himself.

Why 10%? Because that is roughly the level at which compliance becomes more attractive than evasion, where the marginal disincentive to work is small, and where revenue is sufficient to fund the limited functions of a government that has gotten out of the business of running the economy.

Eliminate the rest. Eliminate the parafiscal contributions to the dozens of institutes. Eliminate the special regimes for sectors. One rate. One filing.

One agency. The Venezuelan citizen and the Venezuelan business should be able to comply with the entire national tax code in an afternoon.

III. Industrial Policy: Privatize, Privatize, Privatize The regime destroyed more than 75% of the Venezuelan economy. Thousands of companies were nationalized, expropriated or seized outright. The list is long: PDVSA and the entire oil services sector, the basic industries of Guayana—steel, aluminum, hydroelectric power—electric utilities, water utilities, airports, highways, cement plants, ports, agricultural processors, banks, supermarket chains, and hotels.

Most of what the regime took, the regime destroyed in the taking. Plants stopped producing.

Looters stripped the equipment. Political appointees with no relevant experience replaced operating personnel. Whole industries that had functioned for decades collapsed within a few years.

Friedman explained why this is structural.

There are four ways to spend money. You can spend your own money on yourself, in which case you care about both how much you spend and what you get for it. You can spend your own money on someone else, in which case you care about how much but not what you get. You can spend someone else’s money on yourself, in which case you care about what you get but not how much. Or you can spend someone else’s money on someone else, in which case you care about neither. Government is always the fourth case.

Add to that the absence of profit-and-loss feedback, the political pressure to preserve jobs regardless of productivity, the incentive to deliver favors rather than service, and the inability to dismiss anyone connected to the right political patron. The institution that emerges is structurally incapable of running a productive enterprise.

If we had put the Venezuelan government in charge of the médanos de Coro, the country would have run out of sand in a few years.

The path forward is direct. Return every expropriated property and company to its prior private owners. Where the prior owner has died or refuses, auction the asset to the highest credible bidder under transparent terms. Do not stop there. Privatize PDVSA itself, let global capital and expertise rebuild what was destroyed. Privatize the basic industries of Guayana. Privatize power generation and the electric grid. Privatize water utilities under regulated concession. Privatize airports and highways.

Puerto Rico operates privately managed airports and toll highways efficiently within an American legal framework. Venezuela can do the same.

Then go further. Chile demonstrated more than 40 years ago that pension privatization works. Workers own their retirement accounts. They invest in diversified portfolios. They retire with real assets in their own names.

Adopt the Chilean model in full. Privatize el Seguro Social.

Privatize healthcare. Convert public hospitals to private ownership under competition. Provide vouchers for the poor where targeted assistance is needed, but let providers compete for patients on quality and price.

Friedman proposed school vouchers in 1955.

Sweden adopted them in 1992. Chile uses them. Florida uses them. The principle applies to hospitals as well as schools. The provider that depends on customer choice serves the customer well.

The provider that depends on government budget allocation serves the government.

The general principle: The government should own and operate as little as possible. It cannot run anything well. Let it stop trying.

IV. State Policy: Get out of the way President Trump and Secretary of State Marco Rubio have stated clearly that the goal of any change in Venezuela is prosperity for Venezuelans. The historical record on how prosperity gets created is unambiguous. Billions of human beings climbed out of poverty in the last 50 years — more than at any time in human history — and not one of them was lifted out by central planning. Every poverty reduction at scale, from China to India to Vietnam to Eastern Europe, followed the same prescription. The state stepped back and private initiative filled the space.

The Venezuelan state today employs millions of people in functions the country does not need. Public employment selects against entrepreneurship and rewards conformity, time-serving and political loyalty. The structure of the institution shapes the people who work inside it. The structure produces the outcome regardless of who walks in the door.

The reconstruction of Venezuela will require enormous quantities of labor. Construction, manufacturing, services, agriculture, energy, infrastructure—every sector will need people. Move government employees into the private sector where their effort produces wealth instead of consuming it.

Fund the transition with the proceeds of oil sector privatization. Pay each transitioning public worker a severance equivalent to two or three years of their public salary, distributed in monthly payments while they retrain or relocate. The total cost is a fraction of what continued public employment would impose over the next decade. The dignity restored to people who become productive again is incalculable.

V. Legislative Policy: Garbage Collection Computer scientists have a term for what happens when a long-running program accumulates fragments of code and data that slow it down. They call it garbage. The system needs to collect and discard the garbage to run efficiently again. Legislation works the same way. Year after year, laws pass, regulations multiply, agencies expand.

Each one builds on the last.

Most outlive their original purpose. The aggregate weight strangles the economy.

Venezuela needs a massive garbage collection.

Convene a commission with the explicit mandate to delete laws, regulations and government processes wherever the deletion does not create immediate harm. Most won’t. The default presumption should be removal. The burden of proof should fall on whoever wants to keep a rule on the books, not on whoever wants to take it off.

Take labor law as the case in point. The interim government has signaled openness to “revising” the labor code. Most of the private sector has fallen into the trap of debating which amendments to propose.

The amendments framing concedes the premise.

The premise is wrong.

The current Venezuelan labor code, with its prestaciones sociales, its inamovilidad, its government-mandated bonuses, its rigidities around hiring and firing, its bureaucratic procedures for everything, is a major reason Venezuelan formal-sector wages collapsed and Venezuelan employment fled to the informal sector. Every protection enacted in the name of helping workers ended up reducing the demand for workers, raising the cost of legal employment, and pushing economic activity into the shadows where workers have no protections at all.

Send the Venezuelan labor code to the trash bin of history. Replace it with a minimal framework: at-will employment, basic protections against fraud and physical danger, freedom for workers and employers to negotiate compensation and terms directly. Florida operates this way. Texas operates this way. Most American states operate this way. Wages are higher, employment is fuller, and workers have more leverage—because employers must compete for them.

The same principle applies across the regulatory state. Eliminate price controls. Eliminate import licenses. Eliminate exchange controls.

Eliminate the dozens of permits required to open a business. Eliminate the parastatal agencies that exist only to collect rents and harass producers.

Whatever cannot be eliminated should be radically simplified, automated and pushed to electronic processing with deadlines that bind the government rather than the citizen.

Common Sense These five decisions are common sense. They are common sense made obvious by 60 years of evidence in Venezuela and two centuries of evidence around the world. Almost nine million Venezuelans now live in the diaspora. Millions more remain in poverty inside the country. They have been forced into common sense by impoverishment. Those who will rebuild the country owe them policies that match the sense they have already acquired the hard way.

Outsource. Simplify. Privatize.

*The author is a Venezuelan-American and managing partner of VRM Penzini Capital, a private equity group with holdings across financial services, media, energy, consumer and spirits. He belongs to a family with a continuous presence in Venezuela since 1550.