A Glimpse of the Past (Part I) — Price Controls in Venezuela
From the time period 1950s to late 1990s, Venezuela was one of Latin America’s most prosperous economies. But its downwards spiral to heavy food scarcity and a crashing economy in the present times puts up questions as to where things went wrong. The answer lies in the government intervention by Venezuelan leaders–Hugo Chavez and his successor Nicolas Maduro.
In the 1980s and 1990s the health and nutrition indexes in Venezuela were low and there was rampant social inequality in access to nutrition.Hugo Chavez’s time as the President of Venezuela saw him taking a lot of socialist economic measures. It started in 1998 when Hugo hiked the oil prices,revitalized the OPEC and used it to charge the West more for the oil by holding the supply. The profits he gained in the mid-2000s from the oil prices led him to initiate the Bolivarian Missions whose aim was to expand access to housing, healthcare and food.
A price ceiling was fixed in 2003 on all staple food items.This was to facilitate cheaper food supplies to the people and economically weaker sections.Hugo set the military and the National Guard to crack down on any smuggling of food. There was an abundance of instances like in 2009, Chavez ordering the military to seize rice farms and make them produce at full capacity,which Chavez feared they were withholding from, considering the price ceiling.
But the price controls led to shortage of food as suppliers could no longer afford to import necessary goods which put increased stress on domestic production.As a short term back-up measure, the Venezuelan businesses imported basic food items thanks to the influx of petrodollars from the high price of oil and petroleum in the markets. The government imposed fair priced goods but goods weren’t simply available at the markets because it wasn’t profitable for the producers.
This has led to a growth in black marketing where in even engineers and lawyers are smuggling goods like pasta and petrol across borders earning more in a few days,than they would in the irrespective professions.“Repressing the black market, smuggling or trading is going to deteriorate the economic picture even more. It will lead to even higher inflation and higher scarcity of goods.” said Alberto Ramos, senior analyst at Goldman Sachs in New York.
2008 saw the government spending nearly $7.5 billion in procuring basic food items but even then high levels of incompetence and deep seated corruption led to the food rotting before it could reach the supermarket shelves. The food shortage rates rose between 10% and 20% from 2010 to 2013.By mid-2011, food prices soared to 9 times as high as before the price controls.
Considering elections lined up, Chavez persuaded the Venezuelan legislature to decree the 2011 Law on Fair Costs and Prices,which actually made inflation ‘illegal’.A newly created ‘National Superintendence of Fair Costs and Prices’was empowered to establish fair prices at both the wholesale and retail levels. Companies that violated these price controls were to be subjected to fines, seizures and expropriation.
This led to massive hoarding up of necessities like toothpaste, toilet paper with people buying up 12 packets (4 rolls each) in one go. Such trends saw the supermarkets being emptied out even before stockers could get in the supply.
In 2014, Chavez’s successor Nicolas Maduro passed the Fair Prices Act through which it banned profit margins above 30% and chalked out prison terms for offenders of hoarding and over-charging. To ensure that the government’s socialist economic strategy, informally called Dakazo was being upheld, Maduro sent out inspection teams comprising of inspectors, lawyers, military personnels to check on the ‘fair prices’. To carry out his Merry Christmas Plan, Maduro sent about 34000 officials as part of inspection teams to monitor the prices at the malls and shopping centres around the country.
In one day alone, around 331 audits were held as confirmed by SUNNDE(Superintendency of Fair Prices). Strict measures to check irregular invoices, speculative profit margins and missing price tags during the Christmas shopping period, were put in place.
The fall in oil prices combined with product shortages and hostility towards the private sector such as levying allegations of illegal hoarding and black marketing against CEO of the country’s largest private food supplier, Empresas Polar, Lorenzo Mendoza — are all evidences of the inefficient management of the socialist model of price controls.
The price mechanism set by both Chavez and Maduro had earned them political popularity. Chavez had a broad support base from the poor who were glad to have the subsidized state-run supermarkets These policies initially won the government plaudits from the U.N. Food and Agriculture Organization but later were the reason for black marketing and hoarding of supplies which means that the unintended consequences were definitely more than the intended ones.
I won’t call the move to impose price controls as justified because when price ceilings are implemented, the price coordination mechanism is flipped. An artificially low price set by the government leads to a spike in demand, whereas the producers are not willing to sell at that price considering that their profit margins drop considerably. As demand exceeds supply, shortages emerge and consumers are left to cope with them or deal with inferior quality goods in the market. This leads to lower consumer welfare
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