The decline of Venezuela’s economy and its currency is resulting in parabolic inflation. The empty shelves are bad enough, but Venezuela is now struggling with massive blackouts.
Venezuela’s downward economic spiral began in earnest when Hugo Chavez imposed his “unique” brand of socialism on Venezuela. For years, the country has sustained a massive social spending programs, combined with costly price and labor-market controls, as well as an aggressive foreign aid strategy. This fiscal house of cards has been kept afloat barely by oil revenues.
But, as the price tag of the regime has grown, the country has dipped more and more into the coffers of its state-owned oil company, PDVSA, and relied on the country’s central bank to fill the fiscal gap. This has resulted in a steady decline in the bolivar’s value – a decline that only accelerated as news of Chavez’s failing health began to emerge.
The black market exchange rate between the bolivar (VEF) and the US dollar tells the tale. Indeed, the bolivar has lost 64.5 per cent of its value on the black market since Chavez’s death.
This, in turn, has brought about very high inflation. At present, the implied annual inflation rate is actually in the triple digits, coming in at a whopping 297 per cent.
This rate is over five times higher than the most recent official annual inflation rate of 54 per cent reported by the government and echoed by the international financial press. Indeed, as I read December 9’s Financial Times, the figure “54 per cent” stares me in the face. Why? The answer is straightforward: the Venezuelan censors are effective.
The government has responded to its economic woes by imposing ever-tougher price controls to artificially suppress inflation. But, these policies are nothing new. For years, the government has set the price for a number of goods. For example, premium gasoline is fixed at only 5.8 US cents per gallon – that’s cheaper than a gallon of potable water in Caracas.
While these controls ostensibly keep prices on official markets low, they have ultimately led to empty shelves. Indeed, approximately 22.4 per cent of goods are simply not available in Venezuelan stores.
In addition to scarcity, price controls can lead to unintended political consequences down the road. For example, once price controls are implemented, it is very difficult to remove them without generating popular unrest — just consider the 1989 riots in Venezuela when President Carlos Perez attempted to remove price controls.
A Feb. 18 cellphone image from the Venezuelan city of Valencia—of a young man carrying the limp body of 22-year-old Genesis Carmona after she was shot in the head by Maduro enforcers—has gone viral as an emblem of the repression.
Mr. Maduro seems confident that he can keep blaming entrepreneurs for Venezuelan suffering. That would explain why, though store shelves are already empty, the government is implementing the “law of just prices.” It threatens companies that don’t obey price controls with penalties that include expropriation, corruption charges and jail. This will asphyxiate business, creating more shortages and leaving the government as the only supplier of food and other necessities.