The recipe for disaster of Chavez’ economic policy is enhanced to insure failure

January 21, 2008

If human beings learn from their mistakes, you would think that by now Chavez and his buddies would have learned something about what works and what does not work in terms of economic policies. It is getting to be quite tragic that the more shortages become widespread, the more the “solutions” are borrowed from the same recipes that have failed Hugo Chavez in his last nine years of Government.

First, there is this infinite belief that the Government “can do”. Unfortunately, so far in nine years, all of the Government’s commercial projects have failed miserably. Remember the sugar revolution that was coming to Venezuela under the advise of the Cubans? When it was announced in 2001, we were told that by 2005 Venezuela would have become a net exporter of sugar. Instead, the programs have been mired in delays and corruption and it is early 2008, three years late, and none of the sugar processing plants promised, funded and started in 2001 are fully functional.

Even if they were, there would be a problem. Those that were supposed to grow the sugar cane are either gone or growing something else, either out of frustration over the delays or because the sugar cane plantations that were productive, were invaded, confiscated or abandoned by the policies of the revolutionary Government.

But they don’t ask: Do any of our commercial intiatives even work? The answer may be too painfull.

Second came the controls. Much like any Government official in any part of the world, ignorant in economic principles, the Venezuelan Government decided five years ago to freeze the prices on more than 400 products, many of which can’t now be found around, as producers simply shift to non regulated crops or stop working the land. What’s the point if you lose money? It’s called motivation, survival of the fittest, simple logic.

But instead of accepting the failure of the price controls, the solution is to continue the controls and threaten the producers like in the case of milk. The first threat, is that the Government will expropriate your farm if you export to Colombia. Thus, the autocrat can export the money of all Venezuelans at will, giving it away when it is actually needed right here, but local producers can’t try to sell their products with a gain in Colombia, because the same person fails to agree with that whim. Maybe Chavez fails to realize that he lost the referendum and economic freedoms are still in the Bolivarian Constitution.

Even worse, Chavez also threatens those that produce cheese with their milk. You see, most cheeses have no price controls (some do, curiously those are exactly the ones that are hard to find) and liquid milk is regulated, so producers, following the laws of economics, prefer to produce cheese and make a profit than sell milk and lose. Clear choice, right? Not for Chavez and the revolution.

What’s next, a decree prohibiting the production of cheese? For the people, shortages of milk or cheese are not too different, they have never had shortages like this in the terrible forty years of the IVth. Repubic and maybe Chavez has forgotten how common it is to have an arepa with cheese in the morning. It actually sells more than hamburgers in Venezuela, in case you were wondering.

Third, when you realize things are not working, start importing food yourself (back to the first mistake) and distributing it, but, here is the clincher,  at the official rate of exchange. Thus, while local producers have had to face 80-100% inflation in the last four years, your imports are still at Bs. 2.15 per US$, essentially driving local producers out of business. Throw in more labor legislation and higher labor costs just for fun.

Fourth, when nothing seems to work shoratges the rule of the day and inflation out of control, make your policies even worse. Given your recipe for assuring the destruction of your own production system, when this happens, then decide like they did yesterday to:

—Remove all taxes for the importation of foodstuffs. Locals still have to pay taxes, VAT and financial transaction tax included.

—Allow anyone, to import as much food as they want without payng taxes at the official rate of exchange of Bs. 2.15 per US$. The theory is you will lower prices, promote imports and there will be plenty for everyone. Nobody asks where the money will come from or what happens to the local producer who by now is close to bankrupt. I guess it does not matter, if he tries to make a profit or export it, we will intervene them anyway.

—Have PDVSA become a food producer. Given that the company is a farce, that production is down, management is corrupt and second class, work accidents up, the given them another responsibility so they can screw up something else and distract the company from its true purpose. Of course, blame the “hoarding, contraband and the illegal trade of products” for the problems, not your stupid economic policies or you inability to stop contraband or persecute hoarding you have “only” been in power for nine long years after all.

Thus, the recipe for disaster that has caused the shortages and the inflation, as I have been warning about for over two years, rather than being discarded or analyzed critically, is overhauled to add steroids and amphetamines to it, to insure things get worse, not better. It is sort of the world backwards, as if they were asking what does economic theory and history say, to do exactly the opposite.

And when things get even worse, they will analyze the recipe again, blame everyone but the Government for their problems and start again.

Unless the whole thing blows up…and it will…

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