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Dec 21, 201012:00 AMMad @ Mgmt

with Walter Simson

'Ta Barato Too

'Ta Barato Too

Mad @ Mgmt addresses the concerns of middle market companies, including banking, family & succession issues, turnarounds & performance improvement and economic life in general. Walter Simson is founder and Principal of Ventor Consulting a firm dedicated to middle market companies.

In the 1950s, Venezuela emerged from a benign dictatorship and became a representative republic. At the same time, the county's oil reserves, which are primarily in heavy (read muddy and hard to refine) crude became salable as refining technologies developed. This was seen as a boon.

It may not have been. A developing country with modest agriculture, tourism and aluminum industries became a middle class nation with worldwide ambitions. Venezuela was a driving force in the formation of the OPEC oil monopoly. The country lost its tourism and agriculture and borrowed heavily against the oil revenue in order to develop the country. Illegal immigration soared.

In an effort to cut down on government borrowing, the congress mandated that all government debt needed legislative approval.

In the meantime, Venezuelans discovered consumer goods. Their overvalued currency, the Bolivar, provided terrific buying power — principally in Miami. The national motto became "'ta barato." This was the phrase "it's cheap" as translated in the national accent, which tends to drop the letter "s." As a matter of fact, the national joke was "'ta barato. Da me do." It's cheap. Give me two.

I think of this sophisticated, prosperous country often. I lived through the inevitable crisis that followed the external debtor's doubts about the country. As a matter of fact, I was a participant in the restructuring discussions between and among the country, its various executive and legislative functions and its lenders — including 600 banks.

As it turns out, the executive had found a loophole in the legislative approval process. Someone decided that the definition of "government debt" meant only debt that was greater than one year. So all the departments started rolling over their debts into short-term paper.

The aftermath was ugly. A financial and bookkeeping mess could have been handled in three to six months as long as the country's credit kept flowing, which in turn was dependent on good economic management. However, instead of working on management initiatives, the government's first reaction was to blame the banks. The intense political rivalry between the two political parties assured policy atherosclerosis. Street demonstrations were considered authentic political discussion. Congress decided that it had economic wisdom that it did not, and directed specific economic initiatives — sort of earmarks to save specific constituents from the pain the rest of the country was feeling.

And in the meantime, hunger, unemployment, strikes, and crime became features of life. The Caracas trash haulers went on strike and, because the country could not import the large green trash bags, streets became overrun with trash and rats. Capital flew out of the country, in most cases illegally. I was at a table with a central bank official, going over the details of new capital regulations, when he passed me a slip of paper with his wife's account numbers. "That reminds me," he said. "Move these to Miami before these silly rules go into effect."

I returned from this assignment shell-shocked by the economic destruction — and convinced that deficits in this country would lead us to the same end. Of course I was wrong ... at the time. But I quit my banking job and plunged into helping my dad turn around his printing company. My next turnaround assignment was at Freeman Shoe in Beloit, Wis. Believe it or not, Beloit started my 20-year like affair with Wisconsin.

Years later, the similarities between the Vennies' overvalued currency and ours is striking. For 15 years, our whole country has walked into a Wal-Mart and said the U.S. equivalent of "'Ta Barato." China has routinely undercut our costs — first via low-wage workers, then via low-value currency. This remains an issue, and our refusal to call them on it is unnerving. I understand the free-market theory that currencies will level, but not when one party is controlling the price, for goodness sake. We need to punish them for flooding the market with cheap goods.

We also need to export obsessively. Not just goods (because that bird may have flown), but services. Tourism, ad agencies, architecture. Sell overseas! And the education gurus better get the bug, too. Can you say "Executive MBA" in Mandarin? Why the heck not?

If we do not move vigorously to control our debt and expand the economy via innovation, the economic malaise will grow worse. High unemployment, changing congressional rules and social friction will sap confidence for the next 15 years, not just the next 15 months.

In Venezuela, there was an attempted coup ten years after the debt crisis. This was unthinkable in a country that had been so proud of having bootstrapped its way out of dictatorship. But it was a response to long-festering economic issues that became social ones. And the coup leader? One Hugo Chavez, who served a short stint in jail and is now the leader, if not dictator, of what is left.

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