Caracas Chronicles

So these two stories have been making the rounds recently. The first has Caracas as the 9th most expensive city in the world (comically sandwiched between Paris and Geneva). The second has the bolivar – as measured by Big Mac purchasing power – as the most over-valued currency in the world. Both are subtly wrong, in ways that Finance Minister Jorge Giordani must find gratifying.

Take first that EIU study showing Caracas as the most expensive city in the Americas above, say, New York, Vancouver and Sao Paolo. Can this possibly be true?

Well, it could be, but only if you’re a dumbass gringo who shows up in Caracas and whips out an overseas credit card every time he has to buy a cachito. See, when you swipe a foreign card you get charged a dollar for every Bs.4.30 you spend. And, obviously, at this official rate Caracas prices are silly – anyone up for a $9.40 kg. of bread? Which is why only psychopaths (or people on devil-may-care expense accounts) use gringo credit cards in Caracas!

Sane travellers do the responsible thing and buy bolivars illegally from some random guy they meet at the airport – which gets them a cool 60%-80% discount on everything.

Thing is, if you still believe in Bs.4.30 dollars, we may need to sit down for an earnest talk about the Tooth Fairy. Because we’re in the realm of fiction here: for the average Venezuelan importer, the prospect of obtaining dollars at Bs.4.30 a pop is no more real than goblins who hand out magic cash for fallen teeth.

Yes, the EIU’s report comes with an explanatory note about exchange rate distortions, but the note itself makes an obvious mockery of Caracas’s place in the rankings – so why include the city at all?

Fact is, official rate dollars are reserved for public sector imports and bolibourgeois insiders. And it’s no wonder: the official price of dollars is so absurdly cheap that the Central Bank’s dollar reserves would run out in nanoseconds if wider access was allowed at that price, as everyone who holds bolivars rushes to trade them for bargain-basement dollars.

In some ways, though, the story about the crazy overvaluation of Venezuelan currency as measured by the Big Macs it can buy is even more misleading. Because, sure, the Bs.39 you need to buy a Big Mac in Caracas would theoretically get you $9.08 at the official rate but, again, unless you’re one of a dwindling set of red cronies, that’s of no relevance to you.

If you’re a normal mortal with Bs.39 in your pocket, you’ll be lucky to find anyone to take them off your hands for more than two or three bucks. At that rate, the bolivar is strongly undervalued. Remember, a Big Mac costs $4.37 stateside. The Bs.39 in your pocket are going to buy more Big Mac in Caracas than the $2 or $3 that you could get for them would buy stateside.

The trouble with both of these stories isn’t just that Bs.4.30 long ago ceased to be an even vaguely realistic price for a U.S. dollar in Venezuela. The trouble is that the government has managed to drive the alternatives so far underground that there really isn’t a usable rate you can put in its place anymore.

In Caracas, the dollar black market operates more and more the way your neighborhood cocaine market operates – transaction costs are through the roof; reasonable, risk-averse people won’t participate, and as a result the price on offer to you depends entirely on the personal connections you happen to have with a series of sharks willing to take big risks for a chance to make big profits.

So is the price 14? Is it 20? More? Is there just no supply at all? All those answers may be right, and at the same time, depending on who you are, who you know and who you deal with.

What we don’t have, really, is a market: a place where prices convey meaningful information about relative scarcity. Fourteen years on, Giordani got his wish: economic agents can’t “dollarize” their prices because there isn’t any identifiable, agreed-upon, generally accessible prize people can refer to when they want to trade bolivars for dollars.

But if that’s the case, applying the Big Mac Index to Venezuela is as silly as attempting to place Caracas prices in international perspective.

[Hat tip: Omar.]