Sunday, 26 April 2015

Things just keep on getting worse in Venezuela

From the Financial Times,
Mr Maduro’s escalating nationalist agitprop — including the unveiling of Venezuela’s longest flag — comes as he faces accusations of mishandling the economy. Two years since he took office, even former officials call the country “a laughing stock”.

“It’s as if we have the Midas touch in reverse,” said former finance and planning minister Jorge Giordani earlier this year. The country, which sits on the largest oil reserves in the world, suffers from “fiscal nymphomania”.

Venezuela’s economy is forecast to shrink by 7 per cent this year. Inflation is expected to top 150 per cent, fuelled by printing money to fund a fiscal deficit estimated at 20 per cent of gross domestic product.

Asdrúbal Oliveros, head economist at local consultancy Ecoanalítica, estimates the drop in government revenues caused by the collapse in oil prices squeezed imports by 22 per cent last year and will slice another 31 per cent off imports this year, crushing supplies of essential goods. “It is going to be a very tough year,” said Mr Oliveros. “The crisis is hitting all social classes.”
A large reason behind Venezuela’s topsy-turvy economy is its system of parallel markets and multiple exchange rates.

The minimum wage, for example, is 5,620 bolívars a month — worth $892 at the main official exchange rate, or just $21 at black market rates. Government stores sell food at regulated prices, but shortages mean many consumers must turn to the black market.

“Everyone is hustling,” said Luis Vicente León of Datanálisis, a local pollster. “Some 70 per cent of people queueing at state stores simply resell their goods on the black market. There are arbitrages everywhere.”
Yes price controls do drive black markets since people see the obvious arbitrage opportunities and take them. No amount of enforcement of price regulations will stop this. Deregulating and allowing the law of one price to take effect will. Such adjustments will, in the short term, be painful but the longer reform is delayed the more painful the adjustment be.

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