By Beatrice E. Rangel
Ricardo Hausmann, Harvard economics professor and Senior Advisor to the interim president of Venezuela, recently issued a warning to bond traders and all kind of financial intermediaries on the reasons that buying defaulted Venezuelan bonds would not be a good business.
This came as a cold shower for many who are thinking of going back to the good old rent extracting days.
To those who are part and parcel of the current predicament, Dr Hausmann warned "The haircut has to be large," referring to debt payments.
This means that the host of hoarders of Venezuelan defaulted bonds who have a speculative aim in mind will largely be left holding useless paper in the short term. Should this happen, the long arm of justice would befall on them as they were instrumental in monetizing the looting of the country.
Indeed, most intermediaries created the financial products that were needed for the Bolivarian clique to vacuum the riches of Venezuela and successively hide the loot in the most exuberant financial destinations like Andorra.
Hausmann's warnings take us to the Venezuelan Day After -- that hoped for period when the long Bolivarian nightmare is finally over.
The economy is all but destroyed including the oil industry which has been the traditional breadbasket. Inflation is rampant and uncontrolled, unemployment hit the 40% mark and trade logistics, production infrastructure and transportation systems have taken a dip back into the 19th century.
Just stopping this chaos will take a village.
Jump starting the economy will most probably take the world.
And this is precisely what Hausmann is saying.
We need the world to create a sound economy. Just taking away the suffocating bandage placed by the Bolivarian regime will demand about US$70 billion in IMF loans to back the currency and to create conditions for stability in the various markets.
Then there is the need for foreign direct investment which of course will never flow lest there is rule of law.
And finally, there is the need for talented people to come back and participate in the reconstruction effort.
And while there are such individuals all over the world, I suspect that the ones that have succeeded in their resettlement efforts will have trouble considering a return. Those, however, initiating their professional careers would be more willing to face this challenge.
This was envisioned by Dr Hausmann who created an outstanding students caucus dubbed Project Country where an in-depth discussion of the day after and its consequences takes place on annual basis. As a result, there are about 3,000 young leaders eager and ready to participate in the Venezuelan Day After.
The good news is that these young Venezuelans have had to engage in wealth creation to make their living everywhere they have gone. Thus, it is very unlikely that they would regress to the old rent extracting days.
The Venezuelan moment takes us back to the late 1990s when Eastern Europe was freed from Soviet servitude. Several nations entered the Day After. Notably among them is Poland which has built the most successful and strong economy in those emerging markets.
What is the Polish secret?
First, adjustment was holistic and executed in entirety.
Second, transitional measures to buffer the impact were ended as the economy responded and began creating jobs.
Third, debt payments were postponed until economic activity could bear the burden of debt payments.
Fourth, economic strategy was geared towards creating internal aggregate demand.
Finally foreign direct investment was directed towards industrial restructuring with a view to enhance export capacity and thereby reduce current account deficits.
On our side of the world there was another political transition that has been the worst failure in hemispheric history.
That sad attribute fits Haiti.
After independence, Haiti was forced to pay France a sizable debt which froze the country's march towards industrialization.
As a result, a rent-extracting elite entrenched itself in the country's soul. Rent extraction was bolstered by corruption and pillage during the Duvalier years. Governance was the byproduct of repression and looting.
As a result, the political culture of the country pushes individuals into dependence on the government or charity.
Today, according to the Council on Foreign Relations, "Haiti is the poorest country in the Western Hemisphere. More than half the population lives under the poverty line, and many rely on subsistence farming to feed their families. Haiti is also heavily dependent on external revenue: foreign aid accounts for more than 20 percent of the government's annual budget, while remittances from the Haitian diaspora account for more than a quarter of the country's gross domestic product (GDP)."
This despite an international supported drive for democracy that ousted military regimes in the 1990s and placed at the helm of government Jean Bertrand Aristide. The country was also taken over militarily to secure democratic governance.
Venezuelans today have the choice of creating a thriving economic power governed under democratic rules such as Poland or to drift into history very much like Haiti!!!!!
The outcome will largely depend upon the consolidation of a generational shift and the victory of Dr Hausmann over financial intermediaries.Beatrice Rangel is President & CEO of the AMLA Consulting Group, which provides growth and partnership opportunities in US and Hispanic markets. AMLA identifies the best potential partner for businesses which are eager to exploit the growing buying power of the US Hispanic market and for US Corporations seeking to find investment partners in Latin America. Previously, she was Chief of Staff for Venezuela President Carlos Andres Perez as well as Chief Strategist for the Cisneros Group of Companies.
For her work throughout Latin America, Rangel has been honored with the Order of Merit of May from Argentina, the Condor of the Andes Order from Bolivia, the Bernardo O'Higgins Order by Chile, the Order of Boyaca from Colombia, and the National Order of Jose Matías Delgado from El Salvador.
You can follow her on twitter @BEPA2009 or contact her directly at BRangel@amlaconsulting.com.