Busting the myth of the Law of Fair Prices

Young and empowered
Young and empowered

FACT: on January 20, 2014, during an interview televised by Venevisión, Andreína Tarazón –National Superintendent for the Defense of Socio-Economic Rights- said that the Law of Fair Prices is a byproduct of President Maduro’s strategy to establish new, efficient, effective, and swift Government methods.

She claimed that the Law of Fair Prices “doesn’t seek to limit the private initiative, but aims to boost national production and secure the worker’s access to goods and services.” And about the penalties foreseen by the new piece of regulation, Tarazón said that they would be implemented progressively under the “principles of justice” and that “the Judicial System would play an important part in setting them.”

CONTEXT: the Law of Fair Prices was published on January 23, 2014 (G.O. Nº 40.340), after being decreed by Nicolás Maduro through the Enabling Law. On November 2013, right after the Dakazo, the Central Government started the so-called “economic offensive” through the inspection and audit of businesses that were supposedly speculating with their prices. The Law of Fair Prices constitutes a new phase of said strategy, seeking to “stabilize” the economy and specially the prices and the supply of goods and services: inflation reached 56.2% in 2013 –the world’s highest rate, and Venezuela´s highest level since 1996- and scarcity averaged 20.8% -the worst result in the range of public data available.

The Law of Fair Prices sets a maximum profit rate of 30% for any producer or trader, and established all goods and services required to produce or sell as being of “public use,” which simplifies any possible expropriation. The Law of Fair Prices also created Sundde, a Superintendency that assumes the duties of Indepabis and Sundecop, and is led by the also Minister for Women and Gender Equality, Andreína Tarazón. In particular, Sundde will determine prices and profit margins, and will be able to penalize any illicit behavior foreseen by the new Law.

DEBUNKING THE ARGUMENT:

  1. A novel policy. The goals and the tools found in the Law of Fair Prices are anything but new. The Central Government is known for its interventionist economic policies: (1) Current price regulations and foreign exchange control were first implemented in February 2003. (2) The Organic Law of Food Security and Sovereignty, approved by Chávez in 2008 through an Enabling Law, established that all goods required to guarantee food supply were deemed of “public utility.” (3) The Law of Fair Costs and Prices, approved by Chávez in 2011 through an Enabling Law, created Sundecop –a Superintendence- to audit and control production costs, to guaranty fair profit levels and to avoid price speculation. As for inspections go: (1) Indepabis, which replaced Indecu in 2008, has been inspecting producers and traders for years and applies sanctions that go from fines to temporary take-overs, without ever having been curtailed by any other branch of the government or the judiciary. (2) Sundecop has been inspecting, auditing and sanctioning producers since its creation. Expropriations –or threats of- are nothing new either: the Observatory of Venezuelan Property registered 915 expropriations in the trade and industry sectors between 2005 and 2011. And when it comes to criminal sanctions, 57 people have been detained for alleged price speculation.
  2. Efficiency, effectiveness and swiftness. Venezuela is among the countries that requiere the most time and money to do business: it takes 17 administrative procedures and 144 days to start a business, and the country is the 3rd economy with the most difficulties to fulfill tax obligations. The Law of Fair Prices adds even more bureaucratic obstacles: (1) It creates a Single Register of Economic Agents, only two months after the Single Register for SMEs was implemented and a couple of years after the Law of Fair Costs and Prices established a National Registry of Prices of Goods and Services which proved to be a rather complicated practice. (2) To request dollars –offered at the official exchange rate-, companies must request a “Certificate of Fair Prices” from Sundde. (3) To have access to dollars, companies must sign a letter of faithful compliance with the proper use of the foreign currency, a prerequisite set already by the Law of Cencoex (November 2013). (4) Goods produced or bought with legal dollars must be identified with a label. But even more so, it’s practically impossible to monitor real-time changes in prices in all stages of the production and distribution chains of any economy, which means: (1) Regulations are partially enforced, starting with a few priority sectors. In 2011, Sundecop started by regulating only 19 cleaning agents and personal care products, and Tarazón already said that the Law of Fair Prices would be enforced progressively. (2) Even with a short amount of regulated items, the bureaucratic system fails to identify the real costs of production and to implement the necessary adjustments. In determining “reasonable” profit margins, common costs and investment requirements were usually left out. And even though fixed prices were quickly left behind due to high levels of inflation, the regulatory body chose to keep artificially low prices for as long as possible, even if it affected the sustainability of the production process. This is why the fixed prices of the 19 items regulated by Sundecop were never adjusted. (3) Not all the companies can be inspected and audited. On the one hand, it results in a few “exemplary” sanctions to encourage other companies to self-regulate their prices –at least until the burden of the rising costs become unbearable-. On the other hand, targeted sanctions create incentives for corruption among the inspection officers, including extortion and the illegal sale of seized goods.
  3. Boosting the private sector and domestic production. Venezuela is the 9th  least attractive economy to do business in, the 8th least protective of its investors, and holds the highest country risk of any country in the world. Under these conditions, the number of employers dropped by little over 190 thousand between the 2nd semesters of 2011 and 2013, and Consecomercio stated that over 4.000 companies closed their doors over the past 10 years. Furthermore, Venezuela keeps attracting less and less foreign direct investments (FDI): by 1998, Venezuela pulled in 7.24% of regional FDI, but by 2012 the number dropped to 1.46%. Direct control policies, like the Law of Fair Prices, increase administrative and bureaucratic costs, heighten the risks for producers and traders, and undermine the trust needed to encourage the creation of formal companies and to attract potential investors. The situation takes a turn for the worst when, after Fedecámaras announced that they would request the annulment of the Law of Fair Prices before the Supreme Court, Tarazón said that their position was “laughable” and that they “shouldn’t be taken into account: it’s like a thief, a rapist or a scammer asking for the annulment of the Criminal Code.” Under these circumstances, it’s impossible for the private initiatives to trust in a Government that presumes that any producer or trader is a felon.
  4. Protecting the access to goods and services. The policies that have been implemented to guarantee the access of Venezuelans to goods and services have been anything but successful, degenerating into inflation and scarcity. Cumulative inflation between February 2003 –when the first price regulations were applied- and December 2013 was 1,047%, while the average cumulative inflation of Latin America and The Caribbean in the same period was 97.8%. More disturbing is the fact that Venezuela’s food and non-alcoholic beverages inflation accumulated 2,069%. At the same time, by December 2013 46 products reached scarcity levels of over 40% and 21 products exceeded 70%. Regarding the 19 items regulated by Sundecop, after an initial drop of prices –two months, to be exact-, inflation started to rise and averaged 20% in 2013. And while their scarcity levels averaged 3% in 2011, by December 2013 the scarcity of –for example- dishwashers (liquid, gel or cream) was over 35%, of floor waxes was over 70% and that of toilet paper exceeded 80%. It should be noted that the already traditional policy of “expropriate to produce” has also been ineffective, because the companies absorbed by the public sector show red numbers – as chronicled in our book “Gestión en Rojo”– and by mid-2013 Conindustria stated that 1.190 companies that were intervened over the past four years were “paralyzed” and that there were more problems in the sectors with the most interventions.
  5. Under the principles of justice. The vagueness of some key elements of the Law of Fair Prices puts serious doubts over its right and “fair” enforcement. There’s no clear accounting rules for calculating profit margins, and the definition of economic crimes leaves plenty of room for interpretation. For example, the Law of Fair Prices talks of “reasonable costs” and defines usury as “notoriously disproportionate advantage”. It also defines hoarding, boycott, “fraudulent alteration of prices” and “destabilization of the economy” as crimes of intent, without specific parameters to identify them. Moreover, the companies are subject to the –fair or unfair- decisions made by Sundde. The fact that Tarazón said that the Judicial System would play an important part in setting the sanctions is a cause for concern. Venezuela is the 3rd country with less rule of law, mostly due to the lack of separation of Powers.

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The Law of Fair Prices offers more hurdles and sanctions for private companies, reducing the incentives to produce in Venezuela. This Law might help shift the blame for the current economic crisis from the Central Government to the private sector, but it won’t stop the rise in prices or guarantee low scarcity. Tarazón’s statement is false.

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