Inflation in Venezuela… Friendship is Not the Only Thing that Brings Cristina and Chavez Together
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“Venezuela, one of Latin America’s most populist countries has a very high inflation rate, control on market prices and shortages. This seems to be a constant practice for countries with this type of regime, and even more so in this region where governments define this practice as “redistribution of wealth”. It seems like the only thing that they distribute is inflation,” says Paola Pecora.
Whenever Chavez gets a chance, he gives speeches in which he pretends to support the people that socially need it the most.Paradoxically, their policies have negatively affected the general population rather than helping them, hitting the bread basket (canasta basica) harder in the same lower social classes that he claims to protect.
A mother saying to her child: “Son; would you go to the store and buy a pack of noodles and a bottle of corn oil so I can fix lunch for us today?” to which she adds: “here, take more money with you just in case the prices went up again today” is, without a doubt, a common household conversation in Venezuela (as a matter of fact, it is a common household conversation in most of the countries with this new food inflation context, but is apparently much more serious in Venezuela).
The worldwide increase in food prices is an issue that concerns us all. To relieve the effect that this has in weaker countries, the IMF is revising a special loan to bring financial aid to the countries that have been affected the most by this increase, as soon as possible.
The seriousness and extent of the situation differs from country to country. Venezuela’s case is one to be concerned about not only because of the foreign pressures on the market prices, but also Chavez’s orders to the government to put even more pressure, a dangerous cocktail and time bomb.
What was Chavez’s idea given the increase on food prices? The answer is simple, price controls, a practice not very different from other neighboring countries. This is the method he used to control prices of a wide variety of other products such as rice and milk, thinking that fixed prices would not affect farm production whatsoever. Does this sound logical to you? What would you have done in farmers’ shoes when the local government decides to fix a price cap on crops as the worldwide prices continue to increase?
The result is written in every basic economy manual; the production has fallen and shortage has taken over the market… Which is something the Chavist’s theory of economics did not contemplate. But that’s not all; this theory also stipulates (most importantly of all) that if producers take back their supply and the market’s demand remains the same, the prices will increase even more.
Local people commonly believe that “Chavez imposes price control to protect the poorer part of the population” However, this situation in price control is what has made the situation worse and has generated greater inflation.
Didn’t Chavez intend to use socialist economical theories to make the distribution of income equal for his people? The answer is yes, but he seems to have forgotten that the greatest threat to the poor is inflation, they are the ones being affected the most by these measures and when the engine hits full speed, their salaries will just not be enough to survive.
Growing inflation is regressive…what does this mean? This can be understood if you compare it to taxes that are used more on those who less have. According to the Central Bank, 45% of the average Venezuelan lower class family’s salary is spent on the purchase of food. So, since the inflationary acceleration is more severe on food products, it is only logical that the poorer families are the most affected.
If inflation in different trades were homogeneous, the lower class would still be the most affected part of the population because they have less coverage capacity compared to higher social classes.
In what situation does Venezuela find itself today? Food prices in the last 12 months have increased in …(take a deep breath)… 41.5% (there is even speculation that this will increase!!). Private estimates show that 15% of Venezuelan families (roughly 4 million people) have an income lower than the basic food basket, and 38% cannot cover the expense of the basic basket.
As inflation soars in Venezuela, Chavez’s popularity is in steep decline, and the situation in this country is unstable day by day. Very few think that Chavez will react in time to turn things around and change his economical policies.
For some it is already too late.
We will meet again tomorrow,
Horacio Pozzo
Please send your comments to paola@latinforme.com
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Tags: Chavez, Cristina Kirchner, Economic Policies, Food Prices, IMF, Inflation Rate, Latin America, market prices, Price Caps, price controls, VenezuelaAbout the Author
Horacio Daniel Pozzo writes the daily report for Latinforme Diario. He worked as an economist at the Argentinean Capital Foundation, where he specialized in inflation, monetary politics and financial systems. He has written several reports on monetary politics and financial systems. In addition, he has worked as a researcher for the Financial Stability Center, research projects for the World Bank and the IDB, among other international organizations, specializing in Corporate Governments and Capital Risk. He gives classes in Macroeconomics at the National University of La Plata in Argentina, where he holds both Bachelor's and Master's degrees in Economics.