Caracas Chronicles

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.