Venezuela inflation
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Transcript of Venezuela inflation
2.1. Inflation rate in Venezuela, causes and consequences.
Venezuela’s annual inflation rate has surpassed 30% after consumer prices surged in
April of 2010. The Central Bank and National Statistics Institute on reported a 5.2%
increase in consumer prices during April, driving up the annual rate to 30.4%. Moreover,
the President Hugo Chavez and his government have been struggling against the highest
inflation rate in Latin America and a weakening economy in general. In 2010, the prices
increased 11.3% from January to April, up from 6.7% inflation in the same period. As we
can see in Figure , The inflation rate of Venezuela has been increasing more from the
year 2008 to 2011. The peak of this inflation rate is 2008 when it reached to 36%. The
lower has been in July of 2011 with 23%. However, eventhought it seems the inflation
rate is decreasing in July 2011, in August of the same year it went up again to 28%.
In addition, Venezuelan has been suffering from high inflation rates for many years. The
figure has been between 25 and 30 % per year. Inflation has continued to rage even
though GDP growth has been negative in 2009 and 2010, and will likely be negative to
neutral in 2011. The high inflation rate led the government to impose price controls.
Controlled prices range from the price of foods to what a parking lot owner can charge
per hour. In some cases, prices have been frozen for years, leading businesses into poor
maintenance, causing the inability to hire more workers, and driving some to near or full
Figure 1 Venezuela Inflation rateSource: Central Bank of Venezuela (2011)
bankrupcy.
Price controls have also led to spot shortages. Fresh milk, for example, isn't easy to find
beacause its price is controlled. Long duration milk is found easily because its price isn't
controlled. Powdered milk has been difficult. Sometimes the government tries to attack
shortages by importing food. This means Venezuelan people have seen chicken
shortages, but later they saw lots of chicken in the markets, some of it in poor condition.
Hundreds of thousands of tons of food have been found rotting in import containers held
by the state owned company PDVAL (Productora y distribudora de Venezuela en
Alimentos), which in English means a company that produce and distribute Venezuela’s
food. This appears to be caused by a broken supply chain - they bought the food but
didn't figure out how to set up the distribution system to get it to the markets.
The government continues to insist the problem is caused by "speculation" and by
"monopolies". They seem to ignore a very simple fact: They are printing a lot of money,
and this increase in the money supply isn't matched by an increase in the supply of goods
and services. When people find their pockets full of money, they want to spend it. And
when there aren't enough goods on the shelf to satisfy their demand, then of course prices
rise. This of course prices rise is the key point. The incompetents running the economy
don't get it. If a guy owns a pig, and finds 10 buyers willing to give him around 1000
bolivars for the pig, then he'll sell the pig to the first buyer offering 1001 Bolivars. In
other words, that farmer will sell the pig for the highest price he can get. The same
applies to the guy washing cars, or the maid offering her services, or the importer
bringing in a socket wrench (who also has to account for currency devaluations, paying
off the corrupt customs officials, and actually getting the dollars to buy the socket wrench
abroad).
As long as the government is tossing around money to buy votes, or printing it to pay its
bills, then there's going to be excess money floating around, and the price of just about
anything they don't control by fiat is going to increase. Their response has been to
increase their controls. They want to control housing rental prices. They of course control
the salaries of government workers (who are now very underpaid and are starting to
complain). Now there's even talk by the Chavez suppporters in the Assembly of
controlling the salaries of workers in the private sector - they don't like to see private
sector labor making more than government sector labor, so they're going to "equalize"
everybody into poverty. The bottom line is inflation continues to rage, they think they can
keep on printing their monopoly money forever, price controls are being extended, and
the country continues to suffer from both inflation and recession.
The price increase has two faces. A visibly expressed in the figures published measured
and the Central Bank of Venezuela, the other hidden in the shortage. The causes of
inflation in Venezuela are clearly identified, the prevailing fiscal deficits, monetary
financing and exchange rate devaluation. Without the understanding of these elements is
very difficult to design and implement policies to reduce inflation and for that reason it is
observed at the high monetary and fiscal authorities lurching, falling or stepping VAT
price controls and visible change when that such measures can do nothing to stop the
sorrel prices.
Inflation is an enemy of the economy since it affects competitiveness by making
imported goods cheaper and more expensive the products in the international market,
lowers real wages and a negative impact on tax revenues and thus worsens the fiscal
imbalance. Inflation also affects the allocation of resources to more profitable activities
that are socially more appropriate for a country. For these reasons the fight against
inflation is to be taken seriously. But cost of living next to the rising cost of living in
Venezuela is deepening another phenomenon that is related to the dark side of inflation:
the shortage. This is quantified by the BCV (Central Bank of Venezuela) but
unfortunately their data are not published. The scarcity of essential goods is a
phenomenon typical of economies heavily regulated by the State in which the episodes
socialists, Cuban style, are the most notorious examples. In a statist socialist economy
and destroys the incentive to produce since it is the government so centralized, who
decides what and how much is produced. Due to the shortage of milk, meat, eggs and
sugar, among other items, the Venezuelans have seen endless hours in queues to buy a
few goods. This represents an enormous cost in lost man-hours that have either been
miserably to engage in productive activity rather than being consumed in search of food
which are not currently available. A conspiracy From the ranks of government has
claimed that the shortage is due to a conspiracy without the officials take into
consideration the complete failure of an agricultural policy that began encouraging the
use of farms and the destruction of productive capacity and then establish strict price
controls and then install some kind of port economy by encouraging imports, Venezuela
has made a huge deposit of goods coming from all over the world and are strangling the
profitability of agricultural and industrial sectors. These imported goods currently look
cheap but tomorrow will be expensive when you inevitably have to adjust the exchange
rate, as they inevitably will happen in Venezuela. With all the resources that the State
funding has been dedicated to Zamora farms, ranches Florentine, agricultural
cooperatives and social production enterprises endogenous nuclei, Venezuela should have
guaranteed the supply of essential food commodities. But it is because these units have
been a source of corruption and tax authorities and because nobody is going to invest
resources in the farming activity in a context of price controls and risk stifling their goods
seized and confiscated by the action of a government hostile to private enterprise and
instead of seeing those who dare to invest as oligarchs valued as allies, enemies who must
be destroyed.
In order to understand more about this, we have prepared a history fact from 1951 to
2001:
Period Description
1951-1973
(Price
stability)
During this period, the Venezuelan economy presented one of the lowest
average inflation in the world, 1.6% and a significant rate of GDP
growth, 5.7%. Among the characteristics of this period we can note that
the prosecutor was disciplined management. In effect fiscal deficit as a
percentage of GDP did not exceed 1.5% and there was never a deficit
situation three consecutive years. Consistent with that discipline,
prevailing exchange rate regime the exchange rate was fixed. One can say
that during this period of fiscal management was the anchor of price.
1974-1978
(Low
inflation)
During this period the average inflation increased to 8.4% while the average
growth fell to 4%. Keys features of this period were controls of
massive wage and price policy of direct and indirect subsidies. Both
policies, unsustainable over time due to the accumulation of
produced distortions in the labor market, product and external
sector, enabled the growth of prices that were less than it has to be for the
strong demand of products, fiscal pressures and monetary policy easing.
During this period, there was the attempts to dominate the inflation with
price controls and granted subsides from the treasury. However, there were
abundant resources available.
1979-2001
(High
inflation)
During this period, inflation averaged 32.6%while the pace of economic
activity grew by 1.3% yoy. Between1950 and 2001, the volatility of the
economy, measured by inflation increased, and there was a substantial drop
in economic growth. It is noteworthy that during this period were
implemented within three economic adjustment programs.
We characterize the behavior of the Venezuelan economy in these last two decades as
volatile, mainly associated with the inability of cushion the external shocks from the oil
market and to produce institutional reforms, especially in the tax area. When there is a
favorable shock of oil the spending increases, when the shock is reversed spending is
maintained or even increased, then resort to borrowing.
The effect of spending increases the expectations of devaluation. then, comes a
strong exchange rateadjustment causing price corrections. After each episode
of significant price rise, the average rate of inflation is at a higher level, due largely to the
higher level of incorporation of price expectations formation process. On the other hand,
Chavez had explained that devaluation would enable the government to maintain public
spending, which was enough for his critics to claim that all this was linked to the
parliamentary elections scheduled for September this year. At present, the president's
ruling United Socialist Party of Venezuela (PSUV) and its minor allies wield an
unchallengeably massive majority at the one-chamber National Assembly, leaving only a
few seats for dissident voices.
In other words, we attribute the acceleration of inflation in the period 1974-1978 to the
imported inflation. In the presence of a fixed exchange rate in an economy with
Venezuelan importer and bias, increasing prices abroad, due to the increase in oil
prices in the mid-seventies, resulted in an increase in inflation in Venezuela. For its
part, Lovera (1986) emphasizes that the substantial increase in public
spending after 1974, beginning the first oil boom, led to an imbalance between supply
and demand domestic aggregate. This imbalance, could be mitigated in terms of its effect
on the growth of prices, the ability to import that conferred increasing flows of foreign
currency from oil sales. The vision expressed by these studies is shared by the empirical
study of Rodriguez (1986) who using annual data for the period 1969-1981 found that the
external inflation is a determinant of domestic inflation. Obviously, this estimate is
not robust in the sense that it was made with a series contained little information and
so few degrees of freedom.
2.2. The consumer prices over general goods such as food, clothes, housing. Is Venezuela economy stable in this?
Venezuelan economy is characterized by a shortage of food. The growing problem of
food shortages in Venezuela has become a real point of discussion. If you go to any
supermarket or small shop and people are talking about it, complaining that they can't
buy what they need and sharing anecdotes about how expensive products have become.
The rising discontent over food shortages has become a major challenge for the
government of Venezuela's socialist President Hugo Chavez. More than a few analysts
have pointed to the issue as one of the factors behind the defeat of Chavez's proposed
constitutional reforms that aimed to strengthen popular power and help open the
transition to socialism.
The percentage of people who felt that shortages were a problem increased from 64% in
the third quarter of 2010 to 78% in the last. At the same time consumption has been
dramatically increasing in Venezuela, fuelled by a significant economic boom and the
Chavez government's social policies that have greatly increased the spending capacity of
the poorest. In addition, it has also some historical information since 2004, in which the
consumption has more than doubled from US$24 billion in 2004 to $52 billion in 2007.
The increased consumption, with production falling well short of demand, partly explains
the shortages.
In addition in April, 2011, the government raised the price on cans of powdered milk 48
percent to 23.7 bolivars ($5.50) and on corn oil by 36 percent, according to a resolution
published in the Official Gazette. The costs of sunflower oil and mixed vegetable oil
were also raised. We have to remember that Venezuela is a net importer of food, food is
the principal driver of inflation in Venezuela, according to the central bank, and
consumer prices may climb more than 8 percent in the rest of the year. The trigger is a
devaluation but the reality is that Venezuela has severe inflationary inertia.
Figure 2 CPI November 2011 Source: Central Bank of Venezuela (2011)
In Figure, we can see how in November 2011 the consumer prices index shows how the
food and non-alcoholic beverages represent an increase of more than 34% compared to
the Jannuary accumulated that was 27.70%, this number is skyrocketing. The prices for
food are increasing much more than housing, water, recreation, electricity, gas and
clothing. However, there are prices that are as well increasing like the food, such as the
transportation, furniture, household and restaurants and hotels. In addition, consumer
prices in Venezuela rose 27.4 percent in March from a year earlier, the most among 78
economies tracked by Bloomberg. Prices rose by 5.2 percent, the most in seven years, in
April 2010 from a month earlier after the government raised price caps on dairy products
and cheese.
The International Monetary Fund (IMF) forecast inflation in Venezuela will accelerate
29.8 percent to 31.3 percent in 2011. Moreover, Chavez devalued the bolivar for the
second time in less than a year in January by weakening the exchange rate on so- called
essential goods such as food and medicine by 40 percent to 4.3 bolivars per dollar and
unifying the two fixed foreign- exchange rates. The government, which controls the price
of more than 100 basic food goods, raised price caps on bread and pasta last month by as
much as 33 percent. In other words Venezuelan population cannot buy their dayly food to
survive, they are very expensive and they cannot afford it.
In addition, the food prices rose 33.8% during 2010, a significant increase compared
to 2009 which was 20.2% as inflation data released by the Central Bank of Venezuela.
Foods closed the year with inflation above the general rate, which was 27.2% second
group of goods with high, rises after alcohol (40.3%). Since 2003 the national
government introduced price controls in this sensitive area, which experts
say Venezuelans spend up to 40% of their income. Currently 18 items are
regulated covering some 256 products and presentations. One example of this, is what a
citizen said:
Maria de Abreu, another Caracas resident doing her grocery shopping, complained that
she couldn't find powdered milk. "It's regulated and you can only get a can per person.
And so what people do is that they bring along a friend and another and yet another and
that's how they get enough for their family,"
Figure , show how the markets looks like in Venezuela, they are empty of people, and
the food is getting bad because no one can afford it, prices are skyrocketing, people does
not earn the money for their dayly supplies. There's also a shortage of coffee. As soon as
new supplies arrive, shoppers say, they have to run to the store to get some because it
runs out very quickly. Venezuela has the highest annual inflation in Latin America. In an
effort to curb this inflation, the government set price caps on as many as 15,000 goods in
late November. The price of 18 products, including toothpaste, soap and diapers, which
are considered "basic," was immediately frozen.
The reason for this is pretty obvious. The communist government is going out of its way
to record and regulate all economic activity in their country in order to tax those evil,
sulfur-scented people trying to make money by selling necessities like food to the
proletariat and cap prices to control their profits, all while inflation is up nearly 30% in
Venezuela. As a result, there’s a lot less incentive and a lot less capital to make the
investments necessary to produce enough food for the people.
The fact that the government’s central bank has doubled the money supply over the past
four years has nothing to do with prices going up, according to Chavez. With price
inflation running at an annual rate approaching 30 percent, the President prefers to blame
the consumer and ignore the natural consequences of the government's actions. Karlin
Granadillo, who heads up the price control agency, said, “The law of supply and demand
is a lie. These are not arbitrary measures. They are necessary.”
The price inflation driving up prices has been exacerbated by currency controls that
prevent consumers from converting their depreciating local paper money into dollars or
euros, thus giving them little option but to spend it before prices rise further. But the
impact will hit the poor the hardest.
Food shortages have sporadically plagued Venezuela since 2003, when Chavez started
trying to dictate prices. As he tightens his grip on power, they will only increase. The oil
wealth pouring into Venezuela has been so mismanaged that inflation has hit an
accumulated 78% over the last four years. Consequently even basic food staples are hard
to find except on the black market.
We have to remember that one of the key reasons why it is important to keep inflation in
check is that it inevitably leads to price controls, a cure that is often worse than the
disease. Venezuela is only the latest in a long line of countries that have tried and failed
to cure inflation with such methods. When the government controls the prices, they
become 'fictive' they are no longer controlled by demand and supply, and thus are
meaningless. Meaningless prices cause misallocation of resources and a significant
lowering of productivity.
2.3. Important factors affecting Venezuela’s economy
President Chavez is pushing Venezuela towards an economic system he calls 21st century
socialism. He continued in this direction despite suffering defeat on his proposed
constitutional amendment in December 2007. Government takeover of strategic sectors
of the economy is the top priority in this socialist agenda. The Chavez government
reversed the privatization of the national telecoms company and took over electric,
steelmaking, and cement companies. Next on the agenda is seizing control over the food
production, processing and distribution chains.
The government pursues a policy of establishing the hegemony of social over private
property. Social property is in essence centralized state property as the farms and firms
the state takes over in order to establish “social property enterprises” are not handed over
to those who work there but managed from the center. As a consequence, Venezuela’s
economic environment is increasingly hostile to private activity, including investment.
This comes at a time when falling oil prices warrant an open door policy of promoting
and welcoming investors.
To make things worse, the Venezuelan economy’s dependence on oil prices has forced
the government to scale back spending for social policy and direct transfers. Private
consumption is posed to contract, which is likely to trigger social unrest. As protest
actions increase in number and intensity, repression will have to be scaled up. All this
bodes ill for the social peace of Venezuelans in the coming years.
Currency and Price Stability
Venezuela’s inflation rate of over 30% in 2008 was the highest in the hemisphere and one
of the highest in the world, fuelled mainly by inorganic money issuance and government
handouts for consumption. Imports soared to over $50 billion. Plummeting oil prices and
an over-optimistic budget estimation of oil revenues forced the government to announce
tighter fiscal policies. While the announcement was unspecific, it may include the scaling
down of handouts and social policies, smaller salary hikes, higher taxes, and devaluation.
Even the sacred ultra-low price levels for petrol are now under revision. All this spells
trouble as the unions rediscover their temporarily lost goal of fighting in the interest of
workers (even if they are supporters of the Chavez regime), consumers complain about
inflation, and businesses close down due to excessive controls and shrinking margins.
Inflation has increased steadily, from 14% in 2005 to 17% in 2006, 23% in 2007 and 32%
in 2008. Most tellingly, there was no difference in inflation rates between goods subject
to price controls and uncontrolled products. With a rate of 45%, food prices rose faster
than most other items. Only hotel and restaurant prices registered higher inflation.
The government’s stubborn clinging to the grossly overvalued exchange rate may help to
dampen inflation, but it tends to exacerbate Venezuela’s port economy paradigm by
bringing down import prices while rendering national production uncompetitive. Even if
this was politically welcome because it weakened the entrepreneurial elite, it will be all
the more damaging in the future as a major adjustment will be inevitable in a then much
more fragile national business environment. To make things worse, the government has
removed what was left of the central bank’s battered autonomy has been removed by
forcing the transfer of more than one-quarter of the reserves to its Development Fund, an
institution that is exempt from the parliament’s budgetary control. The operations of the
Development Fund remain opaque.
The government’s economic policy is unsustainable. Serious problems exist with regard
to achieving stability. A case in point is the transfer of $12 billion from the currency
reserve to the Development Fund, an action tantamount to printing money because the
dollars handed over to the central bank by the state petroleum company PDVSA were
converted to bolivars that were then used by the company to pay for royalties and taxes.
In order to fund government programs, the same dollars have been converted again,
probably on the parallel market, where they help to drain liquidity but, at the same time,
provide higher-priced dollars for consequently higher-priced imports. These imports, in
turn, fuel price increases. The country’s hostile business environment does not help to
ease its economic burdens.
Private Property
The constitutional guarantees for private property exist on paper, but they are not
implemented consistently or safeguarded adequately. In practice, the government has
embarked on a campaign of taking over what it claims to be “strategic interests” of the
people. These interests include food production, processing and distribution, construction
materials, utilities, media, telecoms, and even buildings, real estate and hotels. The Law
on the People’s Access to Goods and Services, issued by presidential decree under
special powers in mid-2008, provides for tight controls of complete production chains
and allows state organisms to seize and then distribute goods when they suspect hoarding
(the dividing line between legal stocks and hoarding is ambiguous). The government,
acting “in the people’s interest,” requires no proof in order to seize private goods. The
guarantee of due process and the right to judicial review of administrative decisions are
likewise ignored. The second half of 2008 saw the confiscation of raw materials and
processed food in several private production and distribution facilities
Despite nationalizations and constraints, the private sector still represents about 60% of
the GDP and about 68% of formal employment. Private companies can no longer act
freely, because the state controls everything from cost calculation to output, distribution
and retail prices. This even includes products not subject to price controls. The
government has taken over strategic business sectors and is threatening to seize the rest
unless companies bow to what the government interprets as the people’s interest. Many
Venezuelans remain unconvinced by the government’s actions with regard to
socialization of private enterprise. More than half of the people (55%) think
entrepreneurs are doing a good job and that a market economy is the only way towards
development. Only 41% trust the parliament and a little less than half think the
government is doing a good job (48%) or trust it (47%).
References
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Rodríguez, M. (1986). Causas y Efectos de la Inflación y de las Políticas
Antiinflacionarias en Venezuela “ Pensamiento Iberoamericano, No. 9
Inflacion en Venezuela. (2010). Retrieved December 14, 2011,
fromhttp://www.guia.com.ve/noti/14692/las-causas-de-la-inflacion-en-venezuela-
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fromhttp://www.bcv.org.ve/Upload/Publicaciones/doc37.pdf