As inflation spikes and very expensive imported goods start to turn up at Venezuelan stores, many journalists and economists are busy writing epitaphs for Venezuela’s price control regime. But controls are actually alive and well. In fact, the crazy framework devised by the best and the brightest chavista policy minds allows for these increases, which are part of the latest attempt by the government to prevent a deeper humanitarian crisis.

Price controls don’t just mean constant prices. Prices can and do change under this regime,  but within the framework specified by the controls instead of changing as a consequence of shifts in market supply and demand. So, when we see official prices in Venezuela rising, it’s wrong to say that the government has lifted the controls. They are still there. We must look under the hood to see what’s going on.

So, when we see official prices in Venezuela rising, it’s wrong to say that the government has lifted the controls. They are still there.

Within the control framework, official prices can change while fully complying with regulations under two scenarios.

The first and most obvious involves basic goods to which the government directly sets prices. They have a total control over these prices: they decide when they change, and by how much.

The official price of Harina Pan, for example, started the year at Bs.19, and it’s now at Bs.190. A totally normal 900% jump. Baby formula went from around Bs.900, to Bs.5500. Same goes for other products produced locally suddenly reappearing on the shelves, such as shampoo and detergent. The government has been increasing these prices by three of four digit percentages without much fanfare. We no longer learn about it in the press, but in the stores.

The second scenario involves prices which are indirectly controlled by the government through the Law of Fair Prices. This law limits the gross margin of companies and shops to 30% over the costs. So when costs rise – and they have been increasing by a lot – the official prices go up as well. Besides the multiple minimum wage raises, the SIMADI exchange rate has more than tripled during the year. That rate is used to mark the costs in the calculation of the “fair” price of most of the goods and raw materials imported by the private sector.

For example, say that wages account for 20% of the price of a good, and 40% depends on imports, and let’s assume unrealistically that the rest remains constant. The increases in the minimum wage and the SIMADI rate between January and September, of 300% and 225%, respectively, would increase the price of that good by 150%. Add the latest hike in the minimum wage of a few days ago, and we’re at 180%. And it would be perfectly legal and in compliance with the price controls.

Part of the confusion about the fake death of the controls stems from the newly imported goods hitting the shelves at high prices, which the government says are “international prices”. These goods, mainly food coming from Brazil, are likely being imported in a rush without complying with regulations, with the government looking the other way. They lack labels in Spanish and there’s no sign of their sanitary permits in the package (if they have one), both big no-noes for imported food.

The prices are not really international prices: many of them are priced several times over the retail price in other countries. The Brazilian rice being sold in Caracas is priced at two to three times the price in Brazil. And the difference cannot be attributed to import taxes: these basic goods have been exempt of customs duties for over a year.

These Brazilian goods seem to be a stopgap measure to improve food availability. But even at those prices, whoever is importing them can still comply with the controls. They just need to cheat: importers can artificially inflate the invoices of imported goods, like they have been doing since the first day of CADIVI, and thus increase the costs for the price calculation.

What must be understood from these two perfectly legal scenarios, and the mixed third scenario, is that the fact the government allowed prices to increase by a lot the past few months doesn’t mean it will allow prices to move freely moving forward. The government has neither lifted nor abandoned the controls: it has set higher prices by decree or stealthily, and increased the markers of the costs (wages, exchange rates, etc).

The government has neither lifted nor abandoned the controls: it has set higher prices by decree or stealthily, and increased the markers of the costs (wages, exchange rates, etc).

The question is then: Why is the government raising prices and/or allowing them to increase?

It looks like the radical faction of Maduro’s economic advisors has suffered an embarrassing and comprehensive defeat at the hands of… basic arithmetic. With official and “fair” prices set well below production costs, producing most things in Venezuela was a losing proposition, and importing them too. It’s an astonishingly simple fact, understood even by former chavista governors turned entrepreneurs.

This is part of the government’s clumsy, wrongheaded and unsound economic adjustment they have been implementing during the year. There were two big problems that the government needed to address to survive the year: the $20-$30 billion hole in their external balance, and the lack of food in the country.

The first one they have mostly handled by cutting imports by a patently irresponsible and inhuman 45% – which severely worsened the second problem – and by loading PDVSA with more debt to delay debt payments this year.

To address the second problem, they are allowing prices to rise so that private domestic food production can recover even if just a little, and also to make private imports with black market dollars viable, and to reduce the incentives of bachaqueros and smugglers.

These two moves can barely be called an adjustment plan. It’s more like a drunk guy with no knowledge of medicine patching a war wound. But good or bad, it’s likely to allow the government to stagger into 2017 without a total collapse of the economy.

For the government, that’s great news. The economic situation, while still disastrous, is unlikely to worsen to full-on famine in 2016, leaving them free to focus on their most urgent task: unmercifully crushing the opposition once again. In 2017, there will be plenty of time to think how to solve the two most pressing problems they’ll face that year: the $10-$15 billion hole in their external balance, and the lack of food in the country.

6 COMMENTS

  1. The Government strategy next year will be the same of this year, they will just keep begging for money to buy them more time, and will keep public spending really low so they can meet with their external debt obligations. All though, oil production is on free fall and analysts are pretty sure Venezuela oil production average will be significally under 2 million bpd next year, due to there debt obligations to oil services companies.. Also, venezuela oil exports to USA has reduced from 700,000 bpd to 600,000 in the last months, which is maybe the only income the nation is receiving right now; Venezuela consumes about 700,000 bpd in gasoline and other oil byproducts. So, will we start seeing large car lines in gas stations in 2017?

  2. And how does the govt expect to climb out of the hole they have dug for themselves? Oil price isn’t going to shoot upwards any time soon. Oil production is still falling due to lack of investment in the industry and PDVSA’s inability to pay suppliers. China has cut off new loans. All the gold in the reserve isn’t enough to pay the country’s debts. Local food production collapsed long ago and there is no money to import enough to feed the country. Health care and education have gone down the drain and crime has reached a level unheard of in any civilized society.

    The govt can buy time with a cynical dialogue with the opposition but how much time can it buy? This is like a man about to be evicted from his house trying to delay the inevitable by engaging the bailiff in conversation while his wife sobs in the background and his kids cry from hunger.

    What will 2017 bring with the govt’s refusal to change course and refusal to accept international aid? It’s not the opposition the govt has to worry about it’s the hungry mobs on the streets. Will the soldiers who are themselves hungry beat down the starving population to protect the fat cats? I wonder.

  3. It’s a good article, and explains things, clearly drawing the distinction between press rumors of “lifting price controls” and what is actually happening. The thing is that it’s painful to read, and confusing – not confusing for the article and the explanation, but for the bizarre construction of price controls to begin with. The only thing more confusing (to me) is the “divisas” thing. There may be other things I haven’t even looked at or tried to understand, like some deal about unitary something, or units of something.

    Still leading with my chin here: when the term “free markets” is used, it does not carry political bias. You could conceivably have a fascist government with free markets. It’s a bit more difficult to conceive of a communist government with free markets, because socialists, underneath the rhetoric about saving the poor and healing the sick and walking on water and all — socialists are all about “I dominate you.” Socialists make your choices for you.

    Free markets allow prices to find their own levels, based on supply and demand and competition. And that includes currencies. This is a really simple concept. You even see it in action with your kids. The child wants candy or a toy; you don’t have it in the budget. A negotiation to find an equilibrium price is opened. Supply (you) and demand (the kid).

    Even the Cardinals in the Vatican are active in supply and demand – every day. They are rich. They make investments. They budget. And I bet there are some “interesting discussions” involved.

    Free markets are holy, and have the full endorsement of the Catholic Church.

  4. El control de precios y de cambio sólo ha sido para el chavismo un componente en su aberrada obsesión se mantener el monopolio del poder económico y político contra Venezuela.

    Un ejemplo de esto son las impresoras fiscales, el gobierno chaburr… chavista saca primero una ley que obliga a TODO trabajador que sea dueño de un negocio a comprar y tener una de ellas, bajo la amenaza de multas milmillonarias que fácilmente pueden quebrar a cualquiera y que pueden ser zampadas por cualquier mono con carnet del seniat que ande de mal humor ese día o que sólo sea un coño de su madre.

    Pese a que las impresoras fiscales son “homologadas” por el mismo seniat acá en Venezuela, el organismo te ordena de forma explícita y tajante que estás obligado a comprársela a un vendedor nacional, que te va a meter un precio hilarantemente demencial por el aparato, pese a que no cuesta ni una fracción de eso en una página como amazon.

    Vean el precio de una impresora fiscal en amazon: 177 dólares

    Ahora cáiganse sobre su parte antero-posterior con el precio de la misma impresora acá en Venezuela: SETECIENTOS. TREINTA. MILLONES. (de los viejos, claro) ó 730.000 Bolívares de los debiluchos.

    ¿No se supone que si esto es OBLIGADO por ley entonces debería entrar en el ramo de los artículos que se pueden comprar con el mítico “dólar a 10”? Que daría una impresora de casi 75.000 dólares entonces, ¿O cuál es la tasa del simadi que está ahora? Creo que está por los 660 Bs/$, ¿Entonces la impresora costó con el cambio legal para importar todo lo demás más de 1.100 dólares?

    Carajo, es que ni por mercado negro la cuenta cuadra, a 1750Bs/$ da que la impresora supuestamente está costando más de 400$, y la fulana leyecita esa te dice que un importador no puede meterle más de 20% de ganancia a un perol que importa.

    Este es sólo un ejemplo de cómo toda la política económica del chavismo no es más que un parapeto que sostiene un monopolio especulador demencialmente brutal contra la misma población del país para llenarle los bolsillos a un par de docenas de enchufados. Pedirle al chavismo que “levante” los controles es como pedirle a un malandro que deje la pistola y se entregue a la policía luego de haberse puesto de rodillas ante sus víctimas para que estas le den una paliza por lo que ha hecho.

    PD: Habían enlaces a las fuentes de las páginas, pero los quité porque no dejaba enviar el comentario.

  5. Así mas o menos el populismo, y como Chavez y Trump derramaron sangre antes de ser candidatos, esta grabado, y dejaron peor lo que recibieron!

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