Saturday, 11 June 2016

You know the economy is in trouble when .......

This report is from Reuters.
Venezuela is putting neighborhood committees linked to the ruling Socialist Party in charge of distributing basic foods amid increasingly violent unrest over chronic shortages that have battered the socialist government's popularity.

President Nicolas Maduro's government wants state agencies to buy some 70 percent of food produced in local plants and distribute much of it to the population, which is suffering under a severe recession and triple-digit inflation.

Officials say the system will cut down on smuggling of state-subsidized food by limiting the role of private food distributors, who Maduro accuses of hoarding goods and raising prices as part of an "economic war" against him.
The first question you have to ask is, What determines the prices the state agencies will buy at? If they force prices down firms will not produce or will produce and sell on the black market rather than sell to the state. The answer to shortages isn't more state control but a return to a market economy. It seems likely that the only "economic war" being waged here is that by the government against the people in Venezuela.
But the country's opposition is slamming the plan as a discriminatory rationing system that will worsen hunger and could give Socialist Party sympathizers the power to withhold food from government critics.

They say the committees, known by their Spanish acronym CLAP, violate basic freedoms and do not address the underlying causes of shortages, which include an unproductive economy and artificially low caps on food prices that stimulate smuggling.
In the working class community of Araguaney on the outskirts of Caracas, residents on Wednesday lined up to buy bags of groceries that included a chicken, pasta and corn flour for 2,300 bolivars, equivalent to around $2.30 on the black market exchange rate.

"It wasn't very much, but we have to accept it, because right now there's nothing," said Flor Gaviria, 36, who quit working at a pharmacy last year because standing in supermarket lines to buy food was too time-consuming to hold down a job.
There clearly is something very wrong with an economy when you have to give up your job so you can stand in line to buy food.

An obvious part of the problem is that
Local firms have little interest in producing because price controls often require them to sell below cost.

Residents are increasingly turning to black markets where product such as milk or sugar often fetch 10 times the regulated prices, creating a lucrative smuggling business.
With prices below cost, firms either stop producing or produce and sell in the black market or smuggle their goods into neighbouring countries where prices are not controlled. These are very predictable responses to price controls.

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