About that Economic War In Venezuela Again

AC in NC writes:

While I would not deny that the private sector might be doing something to add pressure on the system, I don’t think that is the root cause. The government price controls, starting with currency valuation and gasoline subsidy, are the reason for the inflation.

I know there will be an objection that rice is different from gasoline or that the private sector is not allowed to sell gasoline. But just as an example, how could the private sector import gasoline and make a modest profit selling it for US$0.60 per gallon (recently raised from US$0.06)?

The cost of imports is not going to be related to the official exchange rate. It’s going to be related to the black (free) market exchange rate. What does the private sector have to exchange with the world to pay for those imports?

My understanding is that you can make a modest profit on price controlled goods. Also only some  things are price controlled. Anyway the private sector has refused to import or make any price controlled stuff anyway, so why are they complaining that they are being forced to sell at a loss? They’re aren’t selling any of that stuff and they never have, so how could they be selling at a loss?

It is also my understanding that the government dollars are perfectly sufficient to buy whatever you want. In other words, the government gives you $500,000 to import stuff, you can go out anywhere in the world and get $500K worth of goods for that.

I don’t see what the gas subsidy has to do with anything. Gas is sold at a very, very cheap price in Venezuela. How is this dirt cheap gas fueling inflation? Inflation is caused by high prices, not extremely low prices.

The government recently devalued the currency somewhat but not nearly as much as it needs to be devalued. Nobody wants to devalue their currency as it can cause all sorts of problems and it is a sort of a sign of defeat and waving the white flag of surrender. So I would agree that Maduro has completely blown it by not letting the currency float. Devaluing the currency is a very tough decision decision to make and it would probably be very unpopular with the people. Maduro just did not have the guts to make a potentially very unpopular decision.

The private sector is drowning in money. They are making money hand over foot.

The stores are stocked to the rafters in the rich areas. There are no shortages of anything, not even one thing. You still think is a natural state of shortage.

The private sector gets government dollars to import products. Those dollars are very cheap and can be used to import whatever they want and they are very much sufficient to import whatever. The state gives the private sector the dollars to import stuff. Or maybe they sell it to them? Not sure how that works.

They import the stuff, but when they do, they divert a lot of it to the black market where they can sell it for a lot more, or they smuggle it out of the country to Colombia where they can get a lot more money for it. So there is your shortage right there. The private sector does not want to sell at normal prices on the normal market because they can make so much more money on the black market or smuggling.

Also increasingly the government would give them money to import stuff, and they would not even use the money to import things at all. In other words, they would not do what they said they were going to do with the money. Instead, they would take the cheap money and play games with it on the black market currency market while lying and saying they were using it to import stuff. So after a while, the government got very leery about giving out cheap dollars to import stuff with. Then the private sector started screaming that the government wasn’t giving them any money to import stuff with and that was the reason for the shortages.

If the shortages are not caused by an economic war, why are the shelves full in the wealthy areas? Nobody has any problems making money there.

If there is no economic war, how come before every single election since Chavez came into power, serious shortages of many different products would suddenly appear about 1-2 months before the election. Why did these mass shortages appear if there is no economic war?

If there is no economic war, then why after the Opposition won the latest Legislative elections, did many products formerly in serious shortage suddenly appear on shelves in large quantities all over Venezuela?

If there is no economic war, then why does the government seize huge warehouses full of hoarded goods all the time? They seize these warehouses constantly. Recently they seized a warehouse full of 21 million syringes that had been hoarded.

You say there is no economic war?

8 Comments

Filed under Economics, Government, Latin America, Politics, Regional, South America, Venezuela

8 responses to “About that Economic War In Venezuela Again

  1. AC in NC

    Robert wrote:

    “The state gives the private sector the dollars to import stuff. Or maybe they sell it to them? Not sure how that works.”

    Just as you are not sure how the USD distribution works (and I’m not either … I would guess they sell for Bolivars but the USD’s would’ve been acquired at a steep price as the official rate wouldn’t purchase USD’s in the open market), I’m working at a severe disadvantage as to how much of the Venezuela economy works in practice.

    It just seems whether on the macro market level or the individual actor, when currency devaluation takes hold it no longer makes sense to hold cash but rather chase and hoard any hard asset you can get. Prisoner’s dilemma.

    There’s a compelling argument that inflation isn’t an increase in prices as much as it an increase in currency chasing products and the price increase is the side-effect. So when you give away gasoline for virtually free, you do several things: (1) You fail to import wealth from the petrol you could’ve sold for full value; (2) You distort demand and inefficiently use it; (3) you incent hoarding of something with greater value than price, and (4) you increase the money chasing other goods.

    Price discovery is important and mischief arises when it is suppressed.

    • By selling for cheap what was sold at a higher price (oil) the state is not failing to harvest wealth but instead is redistributing wealth from the state to the people.

      How can anyone hoard gasoline and who hoards gasoline in Venezuela?

      If the only thing that makes sense is to hoard goods, then why are the shelves full in the wealthy areas? Why are 35% of all imported goods immediately smuggled to Colombia and sold there? Why are are so many goods sold on the black market? The capitalists are selling tons of stuff but they are selling it on the black market and smuggling it out to be sold in Colombia.

      • AC in NC

        Maybe better to say the state is failing to harvest capital. If the distribution is consumed, the opportunity to leverage the wealth as capital for increased productivity is lost.

        I should have said hoarding other non-perishable staples (not gasoline).

        Again I don’t follow first-hand sources of that economy, but speaking generically, it looks like the pegged and misvalued bolivar is causing sellers to scramble to recoup costs outside the official price structure or via stable currency across the border. As to the shelves in the wealthy areas, I can imagine interventions that ensure that constituency is placated or that they can pay the black market price with a wink and a nod.

        It just strikes me as a death spiral:

        Oil Crashes, Revenue Crashes, Difficulty to fund Imports, Sale of Central Bank Gold Reserves, Devaluations start, Shortages start to develop, People panic and buy up what’s there to covert a depreciating bolivar to a non-perishable staple, state tries to help with price controls, sellers can’t recoup costs, import shortages in spare parts and such impact productivity in exporting industries exacerbating the cycle, people’s productive time gets consumed just trying to survive.

        It’s heartbreaking that all this plays out in human misery.

        Venezuela simply has to create more wealth. Wealth comes from growing, and mining, and drilling, and manufacturing. The oil drop from $100 to $30 a barrel for a country where Oil Exports are 50% of GDP is simply devastating.

        • You are implying that selling at normal Venezuelan prices that you might find in the store would cause wholesalers to lose money. I am not sure if that is true, but I will look into it. I have never heard that shortages were associated with inflation. Actually it is baffling to me how you can have any shortages of anything in a market economy. It would seem that the only shortages you might have would be artificially created.

          Personally I think it is a matter of greater profits. They are smuggling to Colombia because you can sell goods for so much more over there. And you can sell products on the black market for much more than you can get for them in the stores. Or you can just play games with the currency market in the black market and just rake it in that way. I would assume that if the capitalists have to choose between a very high profit and a much lower profit, I assume they would go for the higher one. The way I see it that is what they are doing. I guess you can hardly blame them.

        • My understanding is that oil production is fully 96% of the Venezuelan economy, whatever that figure means. But I did read it.

        • William

          Robert-I think on a macro level that second comment is true. On a micro level not so much……

        • AC in NC

          You would not have shortages in a market economy except naturally occurring ones and “elasticity of demand” will accommodate those.

          Shortages definitely are created artificially. I would argue that Venezuela is not a market economy in the sense that is required for shortages to be self-resolving. Price controls and currency devaluations are not examples of market economies. That’s no different in the United States. With a resonably stable currency from 1780 to 1950 (1935 really but it took 15 years of inflation to make this observation true) annualized inflation rate in the United States was 0% (Zero Percent). Since the Nixon-shock, artificially induced generalized inflation has be forced on the US Consumer due to deficit spending creating too much currency chasing goods and services.

          It would take a very specific look into the exact nature of the market systems in Venezuela to determine if the sellers are in fact able to recoup the costs necessary to continue procuring imports necessary to continue operating and whether any profit they could generate would be fair compensation for their effort and risk.

  2. AC in NC

    50% was from whatever latest data was available in the source I referenced. 2014 I think. I wouldn’t be surprised if 96% is the current figure and further indication of the massive distortion in how it’s economy needs to be functioning to be healthier.

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