Archive for October 24th, 2011

Gradual Versus Sudden Policy Change: Controls and Inflation

October 24, 2011

Continuing my unpopular posture on the need to remove exchange controls essentially immediately after taking office (If elected), today I look back at two similar unpopular measures and their impact on inflation (I wish I could measure the impact on corruption, but I can’t)

First, we look at inflation rate right before, during and after the 300% devaluation of CAP II:

Right before CAP took office inflation was running at 5% a month, they devalued increased the price of gasoline and obviously there was a huge jump, but by the end of the year inflation was below 2% per month.

If we look at Caldera’s devaluation:

which was much smaller (89%, from Bs. 290 to Bs. 530), inflation was running at around 8% right before Caldera named Petkoff and the currency was devalued on April 22nd. Once again there was a peak of inflation, but by the end of the year, inflation was just above 2%. Why didn’t it drop more? Simple, Caldera did not adjust the price of gasoline all at once, but did it quarterly over a year.

Thus, I reason, the new President will be riding high in popularity, bite the bullet, take the big hit on inflation (Take measures to mitigate the impact) and then in a few months you will be hailing how inflation has been brought down dramatically. And it will…And people will feel it.

Doing things gradually means living with the higher inflation and allowing corruption, arbitrage and all that to continue. We are not talking small time corruption, we are talking corruption to the core, big stuff, billions of dollars that can be used efficiently to generate jobs and make peoples lives better. There is an incredible opportunity cost in all of the distortions surrounding controls.

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