The Energetic Gordian Knot

The energy sector is one of the most serious bottlenecks Uruguay is facing. Our country cannot sustain significant growth rates with the current capacity of energy production. Not only because it is already inadequate, but because there will be no major new investments if the country is not capable of ensuring a flow of abundant energy at reasonable price. What is offering Uruguay to the investor, nowadays? An energy saving plan?

As in the telecommunications sector, for too long the country has been hostage to corporate interests associated with the monopolies held by ANCAP (legal since the 2003 referendum) and UTE (illegal).

First of all, these monopolies have transformed private interests strategies into national ones. The corporatist strategies became the actual energy policies, revealing the accumulation of political power these bureaucracies have reached (defying not only the institutional republican order but the very legal system, as in the case of UTE).

Secondly, these monopolies have hindered innovation and experimentation in the field of energy production, leaving the country prisoner of methods repeatedly proven as inadequate and expensive.

Thus, in these three years of left-wing government (sort of...) interconnection with Brazil has not been solved, they keep on insisting with small diesel/gas generation plants at prohibitive prices, while the generation by private parties, which is explicitey authorized by the Law of the Electricity Sector Regulatory Framework (theorically in “effect” since 1997), still has to become into effect, because UTE does not apply it —despite official announcements— and insists on not handing the electric energy dispatch to a currently useless agency: the Administration of the Electric Energy Market (one of UTE directors suggested not doing it ever). UTE only opened bids for purchasing small amounts of energy from private parties. Those bids ended up with no offers (no one is willing to invest just for selling a few KWs to UTE).

Uruguay cannot stand anymore this state of affairs. Because, contrary to the “conventional wisdom” spread with true success by the combination of these corporate interests and outdated ideological views, the perpetuation of these monopolies has only deepened the ties of dependency of Uruguay, compromising seriously our sovereignty.

In addition, it is risking economic growth, as insecurity in the supply of energy is a factor —one of many this administration has put in place— that might discourage major investments in the productive field.

Current Minister Lepra is leaving his position and is gonna be replaced with Daniel Martínez, current CEO of ANCAP. Can we expect, then, a dramatic twist in an area that demands it with urge? We doubt it.

Martínez not only comes from one of the companies responsible for Uruguay's energetic ruin. He is inextricably committed to the alliance with PDVSA, an opaque bussines of unknown profits. Besides that, back in the 80's, Daniel Martínez was the president of ANCAP's workers union, that is, one of the sectors who profit the most from the monopolistic nature of ANCAP.

What Uruguay needs right now is (at least) to comply with the 1997 law: 1) transfer of the Electricity Charges Dispatch from UTE to the Administration of the Electric Market and 2) at the same time, fixing the royalties for the usage of UTE's electrical network by private companies, so as they can freely sell the energy generated by them at their own risk.

Additionally, other things should be done. But if those mentioned above are hard to materialize, these ones are almost “unthinkable” in the current political scenario: 1) the effective demonopolization of the importation and distribution of fuel; 2) additionally, getting a bussines partner for ANCAP via an international and open bid, so as the company can face competition in reasonabe terms; 3) repealing article 27 of the Law of the Electricity Sector Regulatory Framework, which forbids the nuclear energy in Uruguay, thus allowing the feasibilty studies needed to project the construction of a nuclear plant (after all, it is the cheapest and most environmental-friendly source of energy); 4) granting greater autonomy to URSEA (the regulatory unit of services of water and energy supply) with a new institutional position; 5) breaking up UTE in —at least— two different companies: a power generation company, in competition with private suppliers, and a transmission and distribution company, which might remain as a monopoly in principle. The reason for this break up is pretty obvious: if UTE remains as a single company, its generation sector will be competing with private generators for selling power to its monopsomic transmission and distribution sector. That absurd scenario would encourage unfair practices and abuses of dominant position.

Once again: the very least the government could do is to comply with the regulations already in place or, otherwise, come up with an alternative, such as a new regulatory framework or repealing the entire law and going back to the legal monopoly (a sweet dream for UTE's bureaucracy).

Cutting this Gordian knot is something we simply cannot afford to delay.

DID YOU SAY "DEFLATION"?

According to the Vázquez administration, until September there was no inflation. There were abusing business, rising international prices or there was no record of a “chaotic” rise of prices (an astonishing and innovative definition of inflation). Anyhow, albeit there was no inflation —according to them— the Minister of Economics repeated like a mantra that “the inflation is under control”. Until September, when the government showed up with a pack of seven decisions to control what was already under control and didn't even exist.

Conversely, now they say there was “deflation” in October. And some in the media echoed that expression.

Well, there was no “deflation” in October. Deflation is a decrease in the general price level over a period, as opposed to inflation. There was no decrease in the general price level, but just a decrease of the price index in October. Inflation is still among us.

What the government did was never directed to attack the root causes of inflation (an expanding aggregate demand, leaded by government spending) but just to control the price index to avoid the 10% threshold, which would trigger an unstoppable spiral.

Strictly speaking, what the government did was to take into account which items had a greatier impact on the index and, at the same time, the government was able to force their prices down. After that, the administration subsidized certain prices, negotiated others (so futile as the prices control policies), reduced those prices officially administered (health institutions, electricity, running water and telephone bills) and promised ANCAP (the oil and fuel monopoly) to decrease the tax on fuel for every new rise of the oil international price in the same percentage, so as to let the company stop losing money due to retail frozen prices.

All of that was directed to the index, the crude number, not inflation.

So much inflation is alive that we can track it by simply analying some of the index components:

“Food and beverages” had a 2.28% increase. Inside this component, we have —for instance— “Bread and cereals” (+2.32%), “Meats and derivatives” (+2.43%), “Vegetables, legumes and tubers” (+5.12%), “Fruits” (+7.46%), “Oils and fats” (+4.11%)... and so on. The only sub-component which actually showed a decrease was “Sugar, coffee, tea, yerba and cacao” (-0.25%). During 2007, inflation for “Food and beverages” has amounted 18.71% and the cummulative index variation for the last 12 months, a terrifying 20.24%. Guess who spends a greater amount of income on food and beverages? Yes, those who earn the less. For them, there was no index “deflation” and they're still being punished by the “under control” and “non existent” inflation.

The components which experienced reductions were “Housing” (-0,5%) —because of the reduction on the public monopolies prices, but not because of rents, which increased 1.16%—, “Health care” (-3.85%) —because of the decreed reduction on the health institutions bills— and “Transportation and telecommunications” (-3.02%) —because of the subsidized bus ticket in Montevideo.

Definitely, the government, index in hand, proceeded to push down the prices of the components which had the possibility to affect in order to reduce the index number. But inflation is still alive. So much that the Monetary Policy Committee had to rise the so called “Monetary Policy Rate” —the “call” rate used as referent for the monetary program— from 7% to 7.25%. It's reasonable: the “anti-inflationary” measures, because of their expansive nature, actually are fueling inflation. Therefore, there are no choices but to concentrate on the monetary tools, forcing more restrictive measures —hence the added fall of the exchange rate, affecting the exporters.

In a few words: there's no deflation, inflation keeps walking and the weaker —the poor and the lower middle class— keep on being punished thanks to an administation self-styled as their only defender.

Rato: US Dollar overvalued

This is not news, certainly. But I think it's important to have it in mind all the time. It's of utmost importance for both those who earn income in the US currency and those who live in countries forced to have their reserves in that currency too.

IMF's Rato-Dollar overvalued despite orderly slide

Sat Oct 20, 2007 7:25pm EDT

WASHINGTON (Reuters) - The dollar is overvalued in the medium-term even though it has depreciated in recent years, and markets are betting on the greenback to fall further, International Monetary Fund Managing Director Rodrigo Rato said on Saturday.

"In the medium term, the dollar is overvalued," he said at a news conference, adding "the markets are also betting right now that the dollar is overvalued."

He said the decline of the dollar, which has shed some 8 percent against the euro this year and hit a record low against a basket of major currencies, has been orderly and added that the exchange rate is set by markets.

"And in that respect, he said, "markets can behave differently sometimes than economic analysis".

© Reuters 2006. All rights reserved. Republication or redistribution of Reuters content, including by caching, framing or similar means, is expressly prohibited without the prior written consent of Reuters. Reuters and the Reuters sphere logo are registered trademarks and trademarks of the Reuters group of companies around the world.

Reuters journalists are subject to the Reuters Editorial Handbook which requires fair presentation and disclosure of relevant interests.

An article by former President Sanguinetti

I decided to translate this article by former President and current Senator Julio M. Sanguinetti because in my opinion he does a sharp analysis of the prevailing mindset in the Uruguayan government today. I hope this translation doesn't betray the main concepts and views he expressed in the original article.

EL PAÍS (Montevideo) – Oct. 21st, 2007

Poor middle class!

by Julio María Sanguinetti - Ex President of the Republic

In the 60s, Antonio Grompone —a vigorous mind of his time— stated that “in number, economic activity, mentality, problems, ideals, Uruguay is a middle class country”. He was speaking, as it's seen, of something bigger than income or occupation: a very diverse expression of society, ranging from a commerce employee to a medical doctor, from a government employee to a middle-range industrial manager, from a small bussines owner to a teacher or a member of the military, all of them identified, however, by a set of values, habits, beliefs, that defined the nation itslef. The poor wished to reach that level and the rich —which have never been too many in relative terms— hardly showed the arrogance to proclaim a different life concept, though they had the means to afford luxuries forbidden to the rest.

Later, Aldo Solari researched deeply this issue, being a pioneer in forecasting the aging process of our population. In recent years, with the relative decline of the industrial population and the vertical increase of the so-called services sector, a generation of young sociologists have tried to identify new features, but the fundamentals have not changed: Uruguay still has a middle class that exceeds half of its population; more than a homogenous group, identified only by occupation or income, is a diverse mass that has elements in common, specially in mentality —basis and sustenance of a peaceful democracy. That is the reason why, when the 60s were disrupted by the outbreak of the messianic violence of the guerrillas, ended in a deep institutional crisis.

The middle class remains the support of what Uruguay is as a nation. Historically, our national income distribution has been, therefore, the best of the continent, and the famous Gini coefficient, which measures it, always showed us as a society much more equitable than the one of the Brazilian great neighbor and also more balanced than Argentina. Today, with a self-styled “progressive” government, which has been already in office for two and a half years, the distribution remains the same, rather worse, and the only achievement, despite the tremendous growth coming from the foreign markets, is a very small decline of poverty, articulated on the basis of government contributions —for example, the “Plan for the Attention of the Social Emergency”— which as soon as they cease, they will leave everything worse than before.

The issue is that this middle class today feels attacked, ignored, even offended. They verify that in the present Uruguayan society, you are better off occupying a dwelling, getting ilegally connected to the electrical power network and not paying for water, forgetting the social security and taxes, because nobody will come to collect anything, while the poor citizen —even the most modest one— who lives within the formal economy, is becoming increasingly tortured. That the State is heavy is something we already knew, and we tried to remedy this, but the issue is that now this has been transformed into a proudly explicit policy; one that hits so repeatedly the same people, that it seems encouraging the emigration of the youngest ones.

Today, a young man with a one-person bussines, working in the computing field or providing a certain service, if he wins 30.000 pesos, for example, he has to pay around 1.900 pesos in social security, around 5.400 for VAT and more than 2.000 for the new personal income tax, which will be combined with the new tax on health, which starts between l,5% and 3% at this stage, and will reach 6% later on. So the State takes from the example's guy more than half his income. Does anyone think this encourages anyone to keep on struggling? Some might say that in the developed world taxes are too high, which is true, but for much higher levels of income, leaving a remainder far more satisfactory.

The health system deserves a paragraph for all it has of mistaken philosophy. What now is just an initial step, because they could not fund the original program —that terrible coercive system in which the right to join where you wanted to, was abolished. Those excesses have been postponed for the time being, because the explicit purpose is to go to a socialized system in which we will equalize downward. The rich will manage to get health care by their own and will take this as another tax, while the rest will be slowly falling into a system increasingly degraded. A National Board of Health takes control of the entire economic life: the “mutual associations” will not be charging anyone but the social security, there will not be competition anymore for quality since all the mutual associations will be paid the same, their investments in technology and infrastructure will be decided by the authority, and thus there will be only façades of institutions, which will not even be permitted to advertise under the law, all of them ruled by a sort of Big Brother installed in an office of the Ministry of Public Health.

That middle class we are talking about is also the largest generator of employment through small bussines, run by citizens who receive a good salary rather than big dividends. Now they are punished by the personal income tax and the new health system, while introducing new rises in the Real Estate Contribution, with these systems of distributive justice that end up being deeply arbitrary. In a country where 65% of the population live in their own house, one of the traditional aspirations of the average Uruguayan, the contribution is not a small thing, especially in a Montevideo already very expensive in municipal terms.

On all these issues you have to add the threatened public safety and an inflationary avalanche that is shaking everyone, despite these cosmetic efforts made by the government, trying to lower a bit the prices which are taken into account for the statistical index. (In other words, we do not subsidize the transportation tickets across the country, because it is very expensive, but we do so only in Montevideo because it is taken for the index). That is: the fight is against the official number, not against inflation, which should be actually fought by stopping a growing public expenditure, that increases day by day with thousands of employees entering the state and also with the costs of that makeup.

The corporatist, collectivist mindset, which sets the culture of those who govern us, emerges every time. Marxism is no longer explicit, because nobody believes in it. The communist authoritarianism is the old fashioned dream of just a small nucleus. But that equalizing downwards mentality, which is suspicious of individual initiative, hates healthy competition and, as a result, despises quality, that mindset is wrapping us step by step, and is what lies, deeply, at the bottom of this policy that hurts the heart of our society.

TRADE, NOT AID

TRADE, NOT AID

Billions of dollars in international aid have been poured in the so called “Third World” —a name which covers too many different realities. Albeit this aid, extreme poverty and violence still ramble in the “benefitted” countries. An aid that most of the time ends up in the hands of corrupted dictators, war-lords and/or NGOs which make from poverty their business.
At the same time, the most powerful economies deny the weaker economies the chances of trading freely their produce. By doing so, they are not only denying basic liberties but contributing, decisevely, to the constant reproduction of poverty.

The US economy is not an efficient rice producer. So, the growers receive important federal subsidies. The US pours the rice overproduction in the world market, subjecting the efficient rice growers to an unfair competition, keeping them from entering certain markets or making them to aceept a price that does not cover the costs of production. For example, Uruguayan rice has been severely affected in the Brazilian market because of the artificial price of the US rice.
The economies of the so called G-7 pay lip service to poverty but at the same time do not open their markets to the more effcient produce of the poorer countries. At the same time, they force those economies to respect intellectual property rights (which is correct), open up to the imports of goods and services from their economies and enforce legislation regarding the environment, the labour force and the taxing system, no less than equivalent to those existing in the “First World” countries. The purpose is to strip off the weaker economies of some of their competitive advantages.

Free trade brings cooperation between individuals, builds citizenship and sense of self dignity. The opposite means violence, war and poverty. And no aid can change it.

We, the "devoloping" countries, need trade, not aid.

Uruguay: Certain aspects you might be interested to know

Whether you are already a foreign resident in Uruguay, an actual or a prospective investor, an investments consultant, or just a tourist with a broader interest than just sightseeing, you may need to know what is going on in the Uruguayan political scene. That is, you need to know the facts, certainly, but you also need to know the actual significance of those facts in the context of the culture of the country.

As you already surely know, economics and politics are intimately intertwined. We do not pass judgment on that. We take it as it is. Therefore, getting to know the political reality of the country where you have already invested your money and/or your life expectations —or you are thinking of doing it— is of utmost importance. In that sense, an analysis that pays attention to details, focusing in the relevance of certain attitutdes, speeches and decisions in the broader context of a particular culture, represents an essential input for many of your decisions.

On March 1, 2005, a 34 years-old coalition of left-wing parties reached the government, in a historical shift of the traditional political balance in Uruguay. Has this circumstance affected the bussines climate in any way, either positive or negative? According to the conventional wisdom spread by many of the most important bussiness magazines and the multilateral institutions (IMF, WB, IADB), the economy of Uruguay —which is enjoying one of the best times in history due to the high prices of commodities— is doing superb, with a government that, despite ideology, has not changed thus far the free market policies, nor the sound fiscal policies and the responsible management of public debt that characterized previous administrations.

Is that really true? Is that the whole story or just part of it? What will happen to the “sound policies” if certain tendencies inside the coalition in charge of the government prevail over others, in a political climate affected in advance by the 2009 election? What is going on with property rights and the rule of law?

Besides that: which is the best currency to keep your savings relatively protected? The U.S. dollar is steadily deppreciating. The inflation in Uruguay is becoming (again!) a concern.

The educational field might interest you too. The long term prospects of what used to be on of the major assets of this country —and is not anymore— should be a matter of interest (and, perhaps, concern) if you are thinking of moving to Uruguay or becoming a regular visitor.

Besides all of that, you may want to know how to get accomodation, rent or buy a home, where to hang out, which are those tips any person should know in order to get along with Uruguayans in different situations.

Those are the kind of questions I'm ready to answer.