Venezuela Update
(Juan Barreto / AFP/Getty Images)
The situation in Venezuela just keeps getting worse. But at
least one media outlet finally has the correct analysis of the
problem. It’s not low oil prices. It’s socialism. Period.
Comradely gestures to be sure, but sugar production has
rapidly declined ever since the seizures. In May, scarcities
got so bad that Coca-Cola temporarily suspended production of
its popular line of soft drinks, saying it couldn’t buy enough
supplies of the industrial sweetener.
The source of this amazing insight is the Los Angeles Times
(August 11). Reporters Chris Kraul and Mery Mogollon begin
their article with an anecdote about sugar production. A mere
10 years ago Venezuela imported very little sugar. Domestic
production was only slightly lower than demand. Today the
country imports 80 percent of domestic consumption. Why? In
2006 former dictator-for-life Hugo Chavez nationalized many
sugar refineries (10 of the 16 plants), turning their
operation over to “worker cooperatives.” He also seized
thousands of acres of sugar cane fields and converted them
into communal properties. In other words, competent managers
and engineers were replaced by Chavenista factotums. (Side
note: compare this with the U.S. Office of Personnel
Management situation.) The result was inevitable →
The fundamental source of the problem is price controls.
Persistent shortages are always caused by some mechanism that
prevents price rationing. In this case, it’s government
policies.
Another Solution That Won’t Work
Current president Nicolas Maduro has now decreed that many
people will be forced to work part-time on farms. Yeah, that
will work. Here’s the story from CNN:
In a vaguely-worded decree, Venezuelan officials indicated
that public and private sector employees could be forced to
work in the country’s fields for at least 60-day periods,
which may be extended “if circumstances merit.”
“Trying to tackle Venezuela’s severe food shortages by
forcing people to work the fields is like trying to fix a
broken leg with a band aid,” Erika Guevara Rosas, Americas’
Director at Amnesty International, said in a statement.
Maduro seems unable to understand that there are many jobs
that require actual knowledge and skill. In his view, labor is
completely fungible. This is, of course, completely at odds
with reality.
From the same story:
Venezuela is the world’s worst economy, according to the IMF.
It’s expected to shrink 10% this year and inflation is
projected to rise over 700%. Beyond food shortages, hospitals
are low on supplies, causing many patients to go untreated
and some to die.
Price Controls With Inflation?
Ironically, despite price controls, Venezuela’s inflation rate
this year will be at least 700 percent. That’s the figure the
L.A. Times reports as the IMF forecast.
(click for larger image)
Prof. Steve Hanke (Johns Hopkins, Cato Institute) tracks
troubled currencies. He compares the black market exchange
rate with the official exchange rate to calculate the implied
inflation rate. Incredibly, the markets are predicting that
the inflation rate will be about 60 percent.[1] Personally, I
think this is a black market failure.
[1] Steve H. Hanke, The Troubled Currencies Project, Cato
Institute – Johns Hopkins University. Retrieved on 8/13/2016
from http://www.cato.org/research/troubled-currencies-project.
Venezuela Revisited
This story would be funny if there
wasn’t so much human misery involved.
Venezuela has been
dealing with true shortages for several years. I’ve written
about this before (including the above photo). Contrary to
the story told by the media, Venezuela’s problems are not
caused by low oil prices. Low prices do not cause persistent
shortages. The only cause of a long-term persistent shortage
is a price ceiling that sets the maximum legal price below the
equilibrium price. That creates excess demand and a need for
non-price rationing.
One side effect of price controls is black markets. Pricecontrolled goods are sold illegally, often at prices higher
than the equilibrium price would be.
To counter this
Venezuela has kept its borders closed. Yesterday (July 16)
the government opened the border with Colombia for eight short
hours. In that time an estimated 35,000 Venezuelans crossed
into Colombia to buy things not available in their country.
These are not luxuries in most cases. Food and medicines are
two of the most-sought-after products.
In other news, Venezuelan President Maduro has put the
military in charge of the food distribution system to ensure
that the price controls are enforced.
The unspoken (but
obvious) reason for this is to make sure the military is wellfed. Citizens will get anything that is left. Oh, yes, it’s
easy to predict that a few members of the military will resell
some of their purchases on the black market.
Venezuela News
Venezuela Truck With Sign (click for
larger inage)
Apparently many trucks in Venezuela are now sporting signs
like this one.
Rough translation: no food on board.
The
reason, of course, is massive food shortages caused by the
government’s equally massive price controls.
Food truck
hijackings have become common.
Ain’t socialism great?
Venezuela Reminds Us Again
Why Price Controls Don’t Work
In a front-page story in today’s Wall Street Journal (February
28, 2014, p. A1) Venezuela reminds us again why price controls
don’t work. The image below (from the same article) shows a
very long queue waiting to get into a supermarket. Those at
the end of the line will get nothing.
Scarce goods and services (pretty much anything with a price)
must be rationed somehow. Letting the price of a good adjust
takes care of the problem automatically.
If the price is
below equilibrium, quantity demanded will exceed quantity
supplied. The price will rise until the two quantities are
equal.
If the price is above equilibrium, quantity supplied will
exceed quantity demanded. This surplus will cause sellers to
reduce the price to get rid of the excess supply. Once again,
the market moves toward equilibrium.
If a price ceiling is imposed that is below the equilibrium
price, some other rationing mechanism(s) must come into
existence. The most common is queuing. People at the front
of the line can buy as much as they want at the low prices.
People at the end of the line get nothing.
Is price rationing fair? I have no idea. But I do know that
queuing is a bad substitute. The people at the front of the
line will be those who place a low value on their time: the
unemployed, the elderly, and children. The folks bringing up
the rear will be those who place a high value on their time:
those with jobs, parents trying to care for their children,
and others similarly situated. The real question is whether
this system is more or less fair than price rationing?
Postscript: another technique used for non-price rationing is
black markets.
Many goods will be available in the
underground economy.
The price there will usually be far
greater than the equilibrium price. There are two reasons for
this.
First, there is significant additional risk to
operating illegally. That risk must be compensated with a
higher price.
Second, those who buy in the underground
economy usually have demand curves that are not very sensitive
to price. Less elastic demand means higher prices.