Archive for August 16th, 2008

As inflation destroys people´s purchasing power, it erodes the popularity of the Venezuelan Government

August 16, 2008

Hidden in page C3 of today El Nacional (by subscription) is a statement
by the Vice-Minister of Agriculture, who goes by the name of Richard
Canan, where this brilliant official of the Chavez administration says
that he rules out the possibility that price increases and the removal
of some prices from the control list as a cause of inflation. According to
Canan, this is a rotten statement by those who pretend to toy with the
hunger of the people and their anguish. Cana proceeds to argue that
with the measures taken by the Government of increasing the prices on
many times, many under control, prices will actually go down and there
will be no impact on the new “CPI”.

A few years ago, I would have blasted Canan, explaining his ignorance
and wishful thinking, but we have gotten used to such stupidity and
ignorance that it is no longer even worth discussing it. No matter what
Canan may say and argue, the people of Venezuela will never be
convinced by arguments that go counter to everything they experience in
their daily lives. Official inflation for Food and Beverages was up
over 49% for the last twelve months and it would be hard to convince
people that somehow this is being managed well by the Government.

In fact, price increases have been surprisingly high in the last few
weeks. I am continually amazed by how much pocket money I am
spending lately on the few items I buy with the cash I take out of the
ATM every week. I find that based on my particular expenditures, “my
CPI” is up over 100% in the last twelve months on what I spend, on
sodas, coffee, restaurants, fruit, bread and cheeses which is what I
typically buy with my pocket money.

And inflation remains one of the most significant problems facing the
Government and I really see no way out for it, without a substantial
burst in inflation before the problem can be mitigated. And I really
don’t see President Chavez taking the measures required to lower it.

Minister of Planning El Troudi looks simply incapable of doing much to
fix the problem, missing one inflation target after another, and seeing
inflation rise after trying to cool the economy in the first six months
of his tenure in the Ministry. As if inflation levels were not already
high, monetary liquidity, the amount of money in circulation which was
held constant until June 20th., has since then increased by 6.7% as the
Government spends in the face of the November regional elections in
order to increase its popularity.

The Government has very few tools to fight inflation at this point. It
has spent inordinate amounts of money to import food and other items at
the official rate of exchange, which has not changed in four years, and
this has not made a dent in inflation. It has lowered the VAT,
eliminated the transaction tax and spent huge amounts of money in
lowering the parallel swap rate, none of which has really meant much to
the structural inflation present in the system.

The fact is that the Government has created an atmosphere of fear and
controls that does little to promote production to satisfy the demands
of the population. And I really don’t see much that the Chavez
administration can do to change this. As long as there are threats to
private property and controls on prices, there will be little
investment by the private sector. And Government nationalizations and
interventions do exactly the opposite as these companies become more
inefficient and increase their costs. Just this week Sidor not only
asked the Government for more money, but it was also reported that its
output is already down 15% since revolutionary management took the
company over. That impacts inflation directly.

Then there are the effects of exchange controls which have not only
obliterated local production, imagine trying to compete for four years
with 25% inflation while imports are held at the same rate of exchange,
but introduce huge inefficiencies into the system. Companies simply
suffer huge delays in receiving foreign currency, which forces them to
temporarily go to the parallel swap market or simply delay or drop
production until some official in some of the ministries involved in
approvals takes the time to sign one of the dozens of approvals
required.

And then there are exchange controls. As long as they are in place, and
the difference between the official and parallel swap rate so large, it
will be difficult for the Government to induce or promote an increase
in local production which would have a significant impact on inflation.
No matter what you produce, from foodstuffs to products, the fear that
the Government will all of a sudden begin massive imports of whatever
you produce will always limit how much a company will expand its
production significantly.

In the end, the steps required to have inflation go down go counter to
the policies Chavez and his revolution stand for and believe in. Price and exchange
controls will stay in place, high spending levels will remain in place
as long as Chavez needs to prop up his popularity and the
inefficiencies and the threats to the private sector will never go away
as long as Chavez has a say in it.

Which is not to say that a new Government would be able to solve the
problem either. The solution starts by going through very unpopular
devaluations and removal of price controls which would generate a burst
in inflation that would hurt the popularity of anyone that implements
it. Add to that the populist nature of most political parties and ideas
in Venezuela and structural inflation is here to stay for the
foreseeable future.

Sad, because inflation is about the worst possible tax on poor people
who have limitations in expanding their incomes and spend most of it on
foodstuffs which always leads the local CPI. That is why I have always
been in favor of fully dollarizing the economy after a one-time adjustment in
prices. As long as oil prices stay high, Venezuela will not be very
competitive on anything but oil and dollarization of the economy would
at least provide a stable level of income to the poor, rather than the
instability and pain they have lived with for the last twenty-six years.

But I see no end to it, even if inflation may in the end represent
Chavez’ demise as it really gets out control in the next two years. In my mind, inflation and lower oil prices will lead to a sharp drop in Chavez´popularity, which will increase political tensions and instability in Venezuela.

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