RSS 2.0 FeedVenezuela — Inflation -> Price Controls -> Shortages
by Brad WarbianyAnd the economists in the room smack their foreheads and let out a resounding “D’UH!”*
Yep, what a surprise:
At the Coche wholesale food market in southwestern Caracas, business is topsy-turvy: Vendors say they have nothing to sell.
“Our suppliers are saying, `No, we had an accident at the plant,’” said Jose Branco, manager of a dairy store in Coche, the Venezuelan capital’s largest open market. “So we have to limit the amount of product we sell to each customer.”
The tale is being repeated throughout this country of 26 million. The reason: Inflation is now so high that the government has put price controls on basic goods such as chicken, beef and sugar, leaving vendors in search of an escape hatch.
…
The inflation rate in Venezuela has now hit 20.4 percent, the highest in the Western Hemisphere, amid the widespread changes instituted by President Hugo Chavez.
The retail sellers understand what’s going on. And they know they’re stuck between a rock and a hard place:
At the Coche wholesale market, meat seller Varela says the prices have left him in a quandary.
“I could sell the meat secretly, because there’s demand, or I could not sell because the price isn’t any good, or I could change professions,” he said caustically.
So he can break the law, or he can go out of business. Either shows the folly of price controls.
As any economist will tell you, when you remove the profit margin, done here to the point where often a business will lose money by selling at the approved prices, you see the end of supply:
Wilson Rangel, who runs a meatpacking plant in the Baruta municipality along the southern edge of Caracas, said he used to get 120 cows a week. But last week, he said, he received 20 because it’s not profitable to slaughter cows at such low prices.
“There are five slaughterhouses around here, but the cows aren’t coming,” he said.
Cheese, sugar and chicken supplies have also dwindled. Blocks of cheese can cost distributors more than double what they sell it for, they said; sugar supplies have slowed.
Now remember, with high oil prices, Chavez and Venezuela are flush with money. So why can’t the people of Venezuela get a hold of things like beef, chicken, cheese, and sugar? Maybe some of the Chavez apologists can explain this to me?
Of course, the Venezuelan government has a “plan” to stop the inflation that has hit such high levels. But Venezuelan financial analysts think they’re offering empty promises.
Annual inflation reached 20.4 percent in Venezuela in February, as soaring government spending pumped cash into the economy and exchange controls trapped money in the system.
“Prices are going to fall a little bit in March because they cut the value-added tax,” Miguel Octavio, head of research at BBO Financial Services in Caracas, said in a telephone interview. “But that doesn’t mean inflation will slow for long. It’s temporary, it’s a one shot deal.”
…
Octavio, who called the central bank’s 12 percent target “unbelievable” given the 3.7 percent inflation the country racked up in the first two months of the year, doubted the government’s measures.
“These things attack the effects of inflation, not the origin of the problem,” he said. “Unless the government announces it’s going to start spending less tomorrow, I don’t know what they’re talking about.”
Hmm… The answer is to stop printing money to cover your overspending… I only wish our own politicians would figure that out.
* Okay, so most economists don’t regularly use “D’UH” in their vocabulary.
This analysis isn’t entirely incorrect, and it does address the particular challenges or pitfalls of Venezuela’s perhaps overly directed economy. However, it is missing a bit of historical context, and this analysis would be better served if it attempted to address it’s own question:
“So why can’t the people of Venezuela get a hold of things like beef, chicken, cheese, and sugar? Maybe some of the Chavez apologists can explain this to me?”
This demand/supply problem, to overly simplify a historical dilemma, is not unique to Chavez’s Venezuela. The situation where much of the South American population lack access to sufficient resources predates Chavez’s policies, and is not news.
What is news is that we have a leftist strong-man in power to blame, rather than
right-wing oligarchs. That being said, Chavez supporters should note this article’s key premise that Chavez’s solutions can cause other unintended economic consequences.
But what else is new in South America’s less-than-pretty politics?
Comment by Chavezesque — March 13, 2007 @ 1:05 pm“This demand/supply problem, to overly simplify a historical dilemma, is not unique to Chavez’s Venezuela. The situation where much of the South American population lack access to sufficient resources predates Chavez’s policies, and is not news”
Same old crap.
Please! Chavezesque Can you stop blaming someone else and start working if you have the capability to do so. I doubt it.
Eight years in power and still complaining.
Comment by Hector — March 13, 2007 @ 2:23 pmChavesesque,
I won’t dispute that South America hasn’t always been the most economically advanced region. That being said, I think we have a clear case of an economy that could be strong being destroyed by socialist policies. After all, as the story points out, his price controls are contributing to the lack of produced resources (such as cattle), which were in greater supply before he came to power.
Or, if you look at another option: Taiwan. It’s a rock with 23 million people on it, light in natural resources. Yet capitalism and trade has allowed it to thrive, while the communists across the strait have languished in poverty. What happened when the communists in China started to respect individual property rights a little bit? Their wealth increased.
I’m just pointing out that the road Chavez is going down has been tread many times before, and always ends up in the same place: equality of misery.
Comment by Brad Warbiany — March 13, 2007 @ 2:43 pmBrad,
We all know its Bush’s fault. He gave all of Venezuela’s food to Halliburton and they took it to Dubai.
Comment by Kevin — March 13, 2007 @ 2:48 pmHector,
So, the current economic problems related to supply are entirely caused by Chavez?
If Chavez had solved Venezuela’s economic problems is 8 years, he would be a genius. Sadly, he is merely a man, prone to inflationary mistakes.
However, I agree, 8 years in power is probably enough. This should be Chavez’s last term.
Comment by Chavezesque — March 13, 2007 @ 2:48 pm“Or, if you look at another option: Taiwan. It’s a rock with 23 million people on it, light in natural resources. Yet capitalism and trade has allowed it to thrive, while the communists across the strait have languished in poverty. What happened when the communists in China started to respect individual property rights a little bit? Their wealth increased.”
Of course, each Asian Tiger, including Taiwan, or its road to economic development followed an economic policy that focused heavily on direct government ownership and intervention. China’s current policies are as draconian as ever, however they have changed their veneer.
I mean, aren’t we being a little simplistic here?
Is it really socialism v capitalism? Maybe it’s because I’m from Canada, and we’re oblivious of this great epic battle, protected as we are.
Anyway, Venezuela is a country that suffered a political class indifferent to its teeming poverty, and Chavez is a result of these harsh politics. We do no-one any service by painting him red as the devil, without looking at flaws in the entire system.
Comment by Chavezesque — March 13, 2007 @ 3:19 pmIt’s not necessarily socialism v. capitalism, although that’s most of it.
My point is that while good governance leads to slow, steady economic growth, bad governance leads to quick demise. Chavez, flush with oil cash, tried to be a good socialist and help everyone out. In the early days, he actually didn’t do that much worse than what came before him.
But he’s starting to get too sure of his own ability to control the economy. Thus, high inflation, price controls, nationalization of industry, etc. Then, he tightened his power by getting himself declared dictator for 18 months, and attempting to end term limits that would force him out of office.
What we’re seeing as he consolidates his power is a situation where individuals don’t know whether their money will be worth anything in a month, whether their private businesses will be nationalized in a day, and whether they’ll run afoul of the authorities. They’ve replaced the rule of law with the rule of Chavez. In that environment, you see serious capital flight, followed by economic collapse, followed by totalitarianism.
All I’m doing is pointing to the signs as they happen.
Comment by Brad Warbiany — March 13, 2007 @ 3:42 pmChavez’s economic policy is like solving an impossible problem: you can’t fix an exchange rate, limit money transfers and take control of the central bank. If you try to do the 3 together, then you are sure that your economy will go bankrupt if it does not run at the same speed than the one trading in the currency you try to follow (in this case USD). And by incrasing like mad government spending, he makes the Venezuelan economy boom, with no possibility of controlling it. If one of the 3 conditions was relaxed, the monetary system would not be falling apart:
Comment by bb — March 14, 2007 @ 3:50 am- exchange rate: if it was floating,then bolivar value would decrease (as it is the case in the black market), and the economy would slow down (auto-regulation)
- money transfers: if people could exchange bolivars for dollars, this would soak up some of the extra currency in the system and avoid inflation
- central bank independence: if Chavez was not controlling the central bank, they could adjust interest rates to limit investment (private and public) which would slow down the economy down to a reasonable level.
What is more critical is that by taking all its measures, Chavez is seriously undermining the credibility of the currency, and when it definitely vanishes, then the whole monetary system will break down: even with a booming economy, thriving oil revenues, people will live in hyper-inflation. This may be the end of its mandate (unless he takes a more authoritarian turn).