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.

60 Responses to “Gradual Versus Sudden Policy Change: Controls and Inflation”

  1. Andres F Says:

    Yes, controls, and liquidity from oil prices :)

  2. Kepler Says:

    Me convenciste.

  3. Juan Cristóbal Nagel Says:

    At least you recognize they will be unpopular measures, which is precisely my point.

    • moctavio Says:

      All measures to remove distortions are unpopular. In the 80’s Paul Volcker increased interest rates to 17-18% to get rid of inflation and he did it. Nobody agreed with him. But the point is that you have to get rid of all of these perversions, use the money properly and efficiently and let prosperity begin!

    • amieres Says:

      When Miguel said unpopular I thought he was referring to the poll back at CcsChron where his proposal got less than 33% support.

      Who in the world would protest the elimination of exchange controls?
      Is working with CADIVI such a joy that people would go up in arms if they could just buy dollars in any bank agency?

      I know you’re going to say that the people in CADIVI that are making millions would not like it’s elimination, but I doubt they’re going to protest. They’ve had a good run but even they know it has to end with a new government. They’ll probably be more worried not to end up in jail. They’re not going to protest. There are other things that chavistas may want to fight for, CADIVI is not one of them.

  4. Carolina Says:

    One question: this looks reasonable regarding inflation, but is there a similar chart showing the cost of “cesta basica” during the same periods?
    My feeling is that its cost went up by 30%, and then stayed there? That’s maybe why the inflation rate doesn’t go up, because the prices never went down?
    How about comparing these charts with the price of the cesta basica and salaries at the time? So that way measuring the overall cost of living and not only the inflation, would be a better way to measure the impact?

    • island canuck Says:

      Carolina a simple subsidy to the Mercal chain would solve the cesta basica problem. Not control of individual prices but a review of income / costs that would allow a slower increase in the cost of items to the poor.

      The rest of us would have to live with any increases. Right along beside control de cambio is control of prices. That is the reason we have so many shortages & lack of choice today. It’s insidious & eats away at the productivity of the country.

      I agree with Miguel – painful but necessary.

      Another question: How will we deal with these abusive laws like the new rental law & the control of prices & profits law? Without a voice in the AN how will change them?

      Can we immediately hold recall votes? What is the time limit needed?
      I firmly believe that once the king has fallen we will regain some sanity in many parts of the country.

      • island canuck Says:

        Forgot to say, of course, the whole of Mercal is a cesspit of corruption & will have to also be fumigated.

      • amieres Says:

        The first step is to actually obtain a majority in the AN. After loosing the presidency and with Chavez bad health I doubt chavismo would stay monolithic. There will be many “saltos de talanquera” even with that law forbidding it.

    • amieres Says:

      When inflation goes down doesn’t mean prices go down, it means they don’t grow as fast.

  5. moctavio Says:

    Of course they stayed there. But they stopped increasing. Which is what does not happen if you do it gradually.

  6. Kepler Says:

    What about comparing it with oil prices? Well, perhaps the relationship is not so evident: oil prices take some time…and yet it would be interesting to check that out

  7. luis vegas Says:

    There will not be new local or foreign investments, nor job’s generation, in an enveriroment
    of exchange control !!

  8. jau Says:

    Miguel, of course that you have to get rid of all these Chavista controls that promote corruption and imports, killing local production, we have to nurture local competitiveness and with Cadivi, price controls, etc that is impossible.

    But, Venezuela is like a crack addict, if you want the country to sober up, you better tie it firmly down because when you cut on the drugs, the country is going to convulse pretty hard. I do not think that any newcomer will have enough control over the country to impose radical and necessary changes without compromising the country delicate stability.

    BTW, I think that the biggest cancer that Venezuela has is the military, and we have to get rid of it, but that is a completely different topic.

  9. A.J. Says:

    Consider me “moctavista”. Jejejejejeje. Nah, I’ve allways been sure about it. It’s like a Band-Aid. Just rip ir off.

  10. glenn Says:

    I agree with you with one caveat. At the same time, I would convert to the dollar. It’s not preference to the USA, just a matter of convenience and hemispheric use. Then all the games stop and Venezuela know exactly where they measure up against all world economies. You don’ t need suspect central bank bolivare currency issues to know. It all becomes clear.

  11. Eduardo Says:

    In Peru, there were TWO economic shocks: one in october ’88, and another in 1990.

    The inflation in 1988 was running around 20% PER MONTH. And in october, the governmenet applied a shock HALFWAY (similar to Caldera’s in Venezuela), without eliminating the deficit. The inflation this month was 100%, and afterwards it “stabilized” in 25-30% PER MONTH.

    The end: cruel and useless.

    In 1990, there was a brave shock, (the so-called “Fujishock”), and all subsidies were eliminated in one step. 100% inflation the next DAY, 400% this month.

    In the whole 1991, inflation was around 100%; similarly, in 1992 it was 50%, and in 1995 was around 10% (ANUALLY).

    Harsh, but succesfull. And Galbraith notes in his book “MONEY”, people are willing to endure some sacrifice to stop inflation.

    So, I completelly disagree with the politic of changing a little time by time.

    • deananash Says:

      Maybe I’ve lived in China too long, but Democracy doesn’t work nearly as well with an ignorant population.

      Peruvian President Alberto K. Fujimori received(s) far too little credit for what he accomplished in Peru. And yes, I am aware of the human rights abuses that he orchestrated. I’m reminded of the old saw, “Freedom isn’t free.”

      You’ll recall that Peru was being terrorized (much like Columbia would be a decade or so later.) In both cases, it took a very heavy hand to bring things under control.

      Perhaps the only “quick” (5-10 years) way out of Venezuela’s mess would be a right-wing, pro-capitalist, military leader. The country has been invaded by Cuban mercenaries who aren’t going to relinquish their meal tickets so easily.

      The examples to follow are Chile, Peru, Columbia and China. All of them had to overcome deep-seated craziness. The first three are all democracies and China is more free every day. Actually, MUCH MORE FREE every day. (Not perfect, not by a long shot, but moving down liberty’s highway nonetheless.)

  12. A. Barreda Says:

    I guess nobody is against shutting down CADIVI, but there are concerns about the consequences. You say that it’s gonna be hard, but there’s no way around it. I agree with you. There is no other way. The president must do what’s right, not what’s popular. That’s his job.

    The problem is, that after 13 years of populism, people got used to that. It doesn’t matter if it doesn’t work on the long term as long as they can make ends meet now.

    Given that elections are nothing but a popularity contest and we got the recall vote, that might mean that the new president will not last more than 3 years. Can things be fix in that period without rocking the political boat?

    What I mean is that, yes, we have to walk the tightrope (kill CADIVI ASAP), but not before we set the safety net (cash transfer or whatever you like).

    Can that be done on day 1. I guess it could, as long as the transition period (5-6 months) runs smoothly, which is not a given, especially with the tHugos stealing everything that is not nailed to the floor.

    • Eduardo Says:

      Populism and alcoholism end when the situation is so painful that you need to face the problem.

      You can choose one quick exit, that in todays Venezuela could take maybe one year, or you can wait until you reach “low” hiperinflation (Bolivia and Peru in their time) or astronomical one (Zimbawe’s).

      • CharlesC Says:

        “Populism and alcoholism end when the situation is so painful that you need to face the problem.”Eduardo-it doesn’t have to go that far.
        This reminds me of something I have been wanting to mention-insanity in
        Venezuela-a. people need to be educated about it, take a tour of the nearest mental institution,for example.
        b.too many people are mentally ill and not getting treatment,
        c.I honestly believe starting with the “President” himself -and most of those
        around him-are all seriously mentally ill-like an epidemic in Venezuela.

        • CharlesC Says:

          It seems to be a “taboo subject” in Latin American countries-
          mental health.And, I wonder why people do not recognize
          that young people joining gangs and displaying these
          gang behaviors-is a mental health issue?
          In my opinion, chavistas have a mental problem.

      • A. Barreda Says:

        The problem is that we haven’t hit rock bottom yet. The party is not over and the host just got a credit line in that chinese restaurant to keep the party going! And the average guy doesn’t give crap about the cost, because he is having a blast!
        The next president is going to be the guy who has to shut down the music, kick the drunkards out of the house and finish the party. And nobody likes a killjoy.
        Probably to finish the party is the logic thing to do, but not the popular one, especially when everybody’s having so much fun and the alternative is hardship.
        So, how can you put an end to the party and not get kick out of the house?

  13. extorres Says:

    Imagine a hospital that has been fudging with the thermometers so that patients never seem to have fever, so nobody has infections, so antibiotics are no longer purchased, so budgeted money for antibiotics is pocketed, etc..

    A new hospital manager comes in. Should he fix the thermometers gradually, or have them start measuring correct temperatures right away?

    • Syd Says:

      hmmm on the analogy.

      Every one can agree that accurate interpretation of fever (a harmful effect) is necessary and beneficial.

      But, can everyone understand that elimination of money windfalls through artificial mechanisms (a harmful effect) is necessary and beneficial?

      Seems to me, a marketing/education plan is in order.

      • deananash Says:

        Agreed. WITHOUT education (and marketing is a great way to do this), all efforts are doomed. UNLESS, you have a very strong, strongman, a la Fujimori, Pinochet, or Deng Xiaoping.

        They’ll trample on some people’s rights in the name of the greater good. I happen to believe that sometimes this is what’s called for. I respect and acknowledge that other educated people disagree with me.

      • extorres Says:

        Temperature is an objective measure. That one would want to use it to detect fever does not limit it to interpreting harmful effects. Same with price. It’s an objective measure. That one would want to use it to detect runaway inflation or other harmful effects makes it quite analogous. Anything that tampers with a thermometer’s measure is as pernicious to its usefulness as anything that tampers with a price’s measure is pernicious to its.

        The same way a doctor does not need to educate his patients as to the importance of a proper reading on a thermometer to fight against any tampering, neither should a politician regarding price and policies that tamper with price. What a doctor does is explain fever and treatment. A politician, analogously, should explain inflation and treatment.

        What is crucial is that treatment never should include tampering. And Tampering should be done away with, as quickly as possible, for proper treatment decisions. moctavio’s cash distribution for mitigating the effects from removing tamerings is the proper way of dealing with any lack of education regarding price.

  14. Bloody Mary Dry Says:

    Although economically I absolutely agree about benefits and necessity of the exchange control elimination, under the current scenario in Venezuela is not just like removing a Band-Aid at once, is more like removing a gauze from a third degree burn at once, all the skin will go out with it, infection will come and the patient will die.
    I agree with Jau, except that I don’t believe that military is a related but separate problem: Military is always the problem, and that’s the infection that I’m describing.
    From my “more political” point of view, the candidate must promise a prompt control elimination, and present excellent signal in all other measures (including imports and custom policies). Investors will be keen to come immediately to take a piece of the cake in Venezuela, and will try to take advantage of the parallel market, which consequently will push down the $ price. Then, when the flow has been inverted (more dollar pursuing to enter than those that want to fly), more products will be competing within the market, and the burn will be cured (people will have seen benefits in a short period of time) which will avoid the infection.
    For those who don’t believe investor will come so fast, just look what happens with the prices of Venezuelan bonds when a bad news about the health of the president is circulating.

  15. luis vegas Says:

    Incredibly naif, it is pure financial speculation ! the short and long term solution is to lift completely the exchange control !! the rest is wishful thinking !!

  16. Carolina Says:

    I just came across with this jewel:

    He won with that speech.

  17. Armando Says:

    Miguel: Will you come back to Venezuela to fix this mess if the oppo wins? Francisco and Juan? anyone?

    • deananash Says:

      Armando, I would LOVE to return, and since my work is education, as poverty reduction, you’d think I’d be welcome.

      But the sad truth is, as a blond hair, blue/green-eyed American, it would simply be too dangerous. What a pity. For me, having lived in 5 countries on 3 continents, well, nothing beats Caracas.

      Funny, I’m most welcome in Asia, except the Philippines. (Another Spanish occupied country, I do sense a pattern.)

      • firepigette Says:

        Deananash,

        I am ( another blond now- dyed- red-ish- green eyed- gringa lady)who taught in a private school under Chavez for 4 years without a problem.I recently found out that several new gringas have started teaching there recently.I personally know one very gringa lady still there now…she plans to stay because she doesn’t think she could support herself here in the US, for a lack of the right credentials.

        The problem is more with crime than with race or nationality in my opinion- unless things have changed just recently..

        • CharlesC Says:

          Yes, safety is my number one concern. Not just my presence-because “being
          there” would entail- doing business, having things, driving about, moving products for example- all the time worrying about security -night and day-with good reason.
          I could just stay home and do nothing- or go shopping, travel to beach, farm, etc.
          but even there -I feel watched too much. And, it is strange for a man-other men think i am interested in their wife -for example (and women are interested in me..)
          -friends want to compete and become enemies..Oh I have plenty of quiet, mild wonderful friends, but so many are drinkers, loud, rowdy and jealous, etc.
          just saying…Hard to do normal things, normal business, normal life-even for people who live there.

        • moctavio Says:

          Sorry, I have seen hatred that I had never seen in my life in Venezuela. Just because…I have “white” friends who have felt it, after going back after years not being there. I have heard people talking about the well to do in a tone I have never heard before. It has changed and It will be hard to recover the equality and solidarity I sued to feel in Venezuela.

          • CharlesC Says:

            I was wondering why- people want to challenge me, just because I look too white-like a gringo. I am so shocked how well the youngsters know about Chavez…
            -but none of the bad things. Can’t mention those things.

          • firepigette Says:

            Miguel, that is so sad…..

          • island canuck Says:

            I have not encountered that feeling here in Margarita.

            Maybe I don’t get our enough or Margarita is just so tourist oriented that it’s not the same here.

            • firepigette Says:

              Island…that might be true…I know many folks in Margarita from other places like Russia and the US….in fact there is quite a big Russian community living near Pedro Gonzalez, and they all feel quite comfortable with Margarita,except for the crime……

              There has always been a small element in Venezuela of racial snobbery..against the whites, which is why Chavez can say what he does…but before this it was just small and harmless…apparently now thanks to Chavismo it is growing.

              Before it was harmless enough as to cause me little grief.I remember when one of my daughters was born, she was born with reddish skin and dark curly hair and her grandmother was ecstatic thinking she was a negrita, but soon she became pale and her eyes turned blue and her hair straightened out and her gma was so disappointed.

              I however could sense there was no malice…so I took it well….I mean it was a harmless kind of ” racism”.She just wanted the baby to look like her side of the family.

        • Syd Says:

          I personally know one very gringa lady still there now…she plans to stay because she doesn’t think she could support herself here in the US, for a lack of the right credentials.

          Sounds like “dumping” in business. The lack of a teacher’s credentials is not good for a US school but it’s ok for a private (American?) school in Venezuela.

          • firepigette Says:

            Syd,

            Who said it was good for any country? Please read:

            “I personally know one very gringa lady still there now…she plans to stay because she doesn’t think she could support herself here in the US, for a lack of the right credentials.”

            The US has one set of credentials required, Venezuela other ones.It is that simple.

          • Syd Says:

            What set of credentials are required to teach in (an American?) private school in Ven?

            • liz Says:

              Syd, facilito:
              In venezuela if you’re gringo or british you can teach the language of Shakespeare in lots of ‘institutos’ like Berlizt, Losher etc. They test your language abilities, give you a short training and that’s it!

              To teach in a formal school (primaria, bachillerato) you need a bachelor’s degree in just about anything and a special course called “componente educativo” (I believe is a 1 year thing taught at institutos universitarios). And of course you have to be bilingual. But, there’s always a but… you can be an assistant english teacher in any school with some knowledge of the language and any associate degree. Not much needed.

              And anybody with no formal training and a decent english command could be a private tutor. The pay varies… but if you’re able to find a bunch of students to fill your working hours, it’s not that bad.

              I don’t know about the policies stateside, but I imagine they are very different. And of course they don’t need as many english teachers.

          • Syd Says:

            Thank you Liz. I know that the “private school” label can be stretched by some employees and students alike. I also know that some who teach English (even Venezuelans) can stretch their command of the language, when they deal with the non-discerning. And finally, with only the skimpiest information that has caused a gringo lady grief, I can only resort to conjecture.

            I’m very familiar with lay private schols (of both foreign and Venezuelan origin), in Caracas. And in the foreign origin schools, teachers have to be accredited with the regulatory body for international schools, preferably be trained in the country of origin, and preferably have experience with the curiculum for that country of origin.

            I remember hearing, while I was in the later grade school years, in Caracas, that some teachers would go back to their country of origin, during the summers, for knowledge/pedagogy upgrades.

            • liz Says:

              Well, the thing is that I do believe that is easier to find an english teaching gig here than in the States. Private schools will always be a better choice here, but they are not as good as they used to be. Like the ones we went to -many moons ago :D

              Believe me… I know some venezuelan ladies that teach english in private schools. My own teenage son has a better command of the language! In fact his teacher is recommending him to tutor other students.

              I could do it. I just don’t have the patience.

            • Syd Says:

              Liz, if your son is undecided on a career, later on, he might want to consider applying to teach English and Spanish at a school in China!. There, he can start to pick up Mandarin or whatever dialect surrounds him. I’ve known two people; one went to Japan; the other went to Korea. I think the contract was for a year in each case.

  18. Tuco Juan Pacifico Ramierez Says:

    well…at least you arent argentina…. it seems they are genetically incapable of figuring out how an economy is supposed to work…..it seems every ten years….. whats next? another invasion of The Falklands? They better do it now while Obozo is prez because no one is afraid of him and the Kenyan will not aid Britain

    http://www.bloomberg.com/news/2011-10-26/argentine-oil-mine-exporters-ordered-by-government-to-repatriate-funds.html


  19. Miguel para completar el analisis, incluye el comportamiento del tipo de cambio luego del levantamiento del control de cambio de caldera: Luego del levantamiento, el tipo de cambio BAJÓ con respecto a la última lectura del cambio libre (Brady) buscate esa data.
    Mi opinion es que si sueltan el control, tendremos un cambio “libre” de alrededor de 7,0 muy inferior del tipo de cambio utilizado por todos para fijar precios de bienes localmente….soltar el control es lo mejor que se puede hacer…

  20. moctavio Says:

    Totalmente de acuerdo. El mercado Brady abrio como en 535 con el anuncio y rapidito se fue a 470, nivel en el que se quedo durante mas de 24 meses. Pero ademas, como dije em mi post anterior, mentalmente los precios se fijan al cambio virtual no al oficial.

  21. loroferoz Says:

    How about doing it in two steps?

    First one, done as soon as the new President assumes office, is to scrap exchange controls. Meaning, anyone can buy foreign currency and banks and exchange brokers are allowed to sell them. This, with a promise not to ever reinstate exchange controls again. A market price should assert itself, much lower than the black market price. People would not be rushing after dollars as frantically as if Chavez had been reelected. National production would not suffer. This is not something the exchange control mafias could stop or sabotage.

    Second, gradually scrap CADIVI’s regulated sale of foreign currency at below-market price. Or rather shift the sale of “preferential” dollars towards critical areas. This could be done by simply raising the price of CADIVI dollars.


  22. [...] VENEZUELA Gradual Versus Sudden Policy Change: Controls and Inflation [...]


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