Saturday, February 17, 2007

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Things begin to fall apart in Venezuela

Simon Romero report in the New York Times about what happens when you combine price controls and the Dutch disease in Hugo Chavez-land:

Faced with an accelerating inflation rate and shortages of basic foods like beef, chicken and milk, President Hugo Chávez has threatened to jail grocery store owners and nationalize their businesses if they violate the country’s expanding price controls.

Food producers and economists say the measures announced late Thursday night, which include removing three zeroes from the denomination of Venezuela’s currency, are likely to backfire and generate even more acute shortages and higher prices for consumers. Inflation climbed to an annual rate of 18.4 percent a year in January, the highest in Latin America and far above the official target of 10 to 12 percent.

Mr. Chávez, whose leftist populism remains highly popular among Venezuela’s poor and working classes, seemed unfazed by criticism of his policies. Appearing live on national television, he called for the creation of “committees of social control,” essentially groups of his political supporters whose purpose would be to report on farmers, ranchers, supermarket owners and street vendors who circumvent the state’s effort to control food prices.

“It is surreal that we’ve arrived at a point where we are in danger of squandering a major oil boom,” said José Guerra, a former chief of economic research at Venezuela’s central bank, who left Mr. Chavez’s government in 2004. “If the government insists on sticking to policies that are clearly failing, we may be headed down the road of Zimbabwe.”....

In an indicator of concern with Mr. Chávez’s economic policies, which included nationalizing companies in the telephone and electricity industries, foreign direct investment was negative in the first nine months of 2006. The last year Venezuela had a net investment outflow was in 1986.

Shortages of basic foods have been sporadic since the government strengthened price controls in 2003 after a debilitating strike by oil workers. But in recent weeks, the scarcity of items like meat and chicken have led to a panicked reaction by federal authorities as they try to understand how such shortages could develop in a seemingly flourishing economy.

Entering a supermarket here is a bizarre experience. Shelves are fully stocked with Scotch whiskey, Argentine wines and imported cheeses like brie and Camembert, but basic staples like black beans and desirable cuts of beef like sirloin are often absent. Customers, even those in the government’s own Mercal chain of subsidized grocery stores, are left with choices like pork neck bones, rabbit and unusual cuts of lamb.

With shoppers limited to just two large packages of sugar, a black market in sugar has developed among street vendors in parts of Caracas. “This country is going to turn into Cuba, or Chávez will have to give in,” said Cándida de Gómez, 54, a shopper at a private supermarket in Los Palos Grandes, a district in the capital....

Fears that more private companies could be nationalized have put further pressure on the currency as rich Venezuelans try to take money out of the country. Concern over capital flight has made the government jittery, with vague threats issued to newspapers that publish unofficial currency rates (officially the bolívar is quoted at about 2,150 to the dollar)....

But recent expropriations of farms and ranches, part of Mr. Chávez’s effort to empower state-financed cooperatives, have also weighed on domestic food production as the new managers retool operations. So has the flood of petrodollars into the economy, easing food imports and making some domestic producers uncompetitive, an affliction common to oil economies.

“There seems to be a basic misunderstanding in Chávez’s government of what is driving scarcity and inflation,” said Francisco Rodríguez, a former chief economist at Venezuela’s National Assembly who teaches at Wesleyan University.

“There are competent people in the government who know that Chávez needs to lower spending if he wants to defeat these problems,” Mr. Rodríguez said. “But there are few people in positions of power who are willing to risk telling him what he needs to hear.”

It will be interesting to see whether Chavez will reverse course. His supporters repeatedly point to Chavez's apparent successes in poverty reduction as the hallmark of his administration (though those "successes" are more illusory than real). Inflation above 20%, however, is a guaranteed recipe for increasing economic inequality -- because only the rich can move their capital abroad or otherwise hedge against inflation.


UPDATE: Chavez is now on a goodwill tour in the Caribbean trying to buy more international support. According to the AP, "The crowd, however, did not respond with applause to the Venezuelan leader's vitriolic statements."

posted by Dan on 02.17.07 at 08:55 AM


This Venezuela thing was a great story when I first read it in Animal Farm.

posted by: Howard on 02.17.07 at 08:55 AM [permalink]

Your last sentence can be put more boldly: if necessary, the rich can survive on Camembert, Argentine wine, and other such imports.

posted by: Dr. Weevil on 02.17.07 at 08:55 AM [permalink]

Is this a surprise to anyone? We all know what happens next:

1) More shortages and more repression
2) Chavez elects himself "President for Life"
3) People start fleeing the country
4) More shortages and repression
5) Chavez starts winning elections with 99.98% of the vote
5) Miami adds to its cultural diversity
6) More shortages and repression
7) Liberals express surprise/denial at these developments

How many more times does this have to happen?

posted by: JayC on 02.17.07 at 08:55 AM [permalink]

Somwhere, Milton Friedman is sighing and shaking his head.

I can't decide whether Chavez is actually this stupid, or really WANTS the economy to enter a death spiral so he can declare an emergency, seize the few powers he doesn't already have, and crush the last vestiges of republican democracy. All hail King Hugo I?

posted by: TallDave on 02.17.07 at 08:55 AM [permalink]

Once the economy fails, the next step in the socialist script is the search for the traitors who are sabotaging true socialism. Chavez will start rounding up these "saboteurs of socialism" and shooting them. Once the reign of terror begins, it's a matter of time before the revolution consumes itself.

In the end, the ignorant Venezuelans will blame America.

posted by: Tantor on 02.17.07 at 08:55 AM [permalink]

Quien es John Galt?

posted by: Bill Dalasio on 02.17.07 at 08:55 AM [permalink]

Yes, indeed. So, the only thing to do now is start taking bets on how long it will take before it becomes necessary for Chavez to blame the economic problems on "American saboteurs, Bush and the CIA!!" At which point he will have carte blanche to begin the purges, and fire up the gulags.

And then, when a Democrat gets elected in '08, Chavez will announce that Venezuela needs nuclear power plants for "peaceful, domestic energy!!" sources. Then, President Hillary will achieve a huge victory for diplomacy when she convinces Chavez to "abandon" (wink, wink) nuclear weapons research in exchange for billions of dollars of US foreign aid (like, maybe, chicken and black beans? Thank you very much.)

History may not repeat itself, but it sure rhymes.

posted by: Michael Sweeney on 02.17.07 at 08:55 AM [permalink]

I smell sulfur!

posted by: Jim O'Sullivan on 02.17.07 at 08:55 AM [permalink]

A "tribune-of-the-poor" dictator needs an awful economy so he can have a large constituency. People who can make money without him in the loop are a threat to his power. This is Rule 1 of my Ten Step Guide to being a Dictator.

posted by: Foobarista on 02.17.07 at 08:55 AM [permalink]

I didn't know we slapped an embargo on Venezuela. When did that happen? Because these conditions sound very much like those in Cuba. And we all know that the embargo created the economic hardship and oppression in that country. Or so I've been told....

posted by: Randy on 02.17.07 at 08:55 AM [permalink]

The strangest rumor I've heard about Chavez - and I have not been able to verify it - is that he obsessively paints pictures of Winnie the Pooh. One Venezuelan told me that local TV down there did a "Cribs" style program of El Presidente's mansion, and his wife (playing at Jackie Kennedy) showed the TV crew Chavez's painting studio. It was filled with canvas after canvas of Winnie the Pooh.

posted by: Rob Sterling on 02.17.07 at 08:55 AM [permalink]

When Chavez eventually gets bounced--Venezuela is not an island, I do hope that he will immigrate, say to Massachusetts, New York or Illinois, where he would fit in nicely with much of the Democratic Party. Just ask the Wal-Mart opposition in Chicago, for example.

posted by: John Hetman on 02.17.07 at 08:55 AM [permalink]

Daniel, did you link to the wrong article?

It clearly states
"the decrease in poverty rates, from 42.8 percent when he took office in 1999 to 33.9 percent in 2006"

It then sets up a context in which he thinks it will be reversed, and thus not important, but the author doesn't say the progress is illusionary.

And regarding economic issues, it would be better to link to independent ecomic research, rather than a foreign policy article from a defected Venezuelan government employee.

posted by: Dutch on 02.17.07 at 08:55 AM [permalink]

The article is all the more reason for the Bush adminstartion to keep their mouths shut on both this and Iran as all their talk does is strengthen Chavez and Ahmadinejad.

posted by: Randy Paul on 02.17.07 at 08:55 AM [permalink]

Oh goodie. Does this mean we get to prop-up another boneheaded, decades-long embargo/war of words driven primarily by ex-pat lobbyists? Followed then by an equally idiotic covert military operation or outright military invasion that simultaneously undermines our foreign policy goals, makes us more ridiculed/despised in the world and does nothing more than line the pockets of contractors?

Given that its oil and not cane sugar this time, I would bet on it.

The "chorus of outrage" has that familiar manufactured look to it already.

posted by: Babar on 02.17.07 at 08:55 AM [permalink]

You guys are hilarious - Chavez would make a great Democrat, liberals have no foresight, a nuclear bomb is the obvious consequence of a 3rd world leader and rabble-rouser with authoritarian instincts ...

Donde esta Pinochet?

posted by: Matt on 02.17.07 at 08:55 AM [permalink]

I have to agree with all the Pro-Chavez guys who have posted here already.

You naysayers are totally naive and don't get the progress that is being made in Venezuela.

There was a problem: inflation was getting out of control. Then, Chavez solved the problem: the currency was made 1000 times less valuable. What don't you get?

All you Americans imperialists are just afraid that a successful socialist system will prove the illusory successes of capitalism over the past 90 years to be the fluke that they are.

posted by: Adam on 02.17.07 at 08:55 AM [permalink]

Donde esta Pinochet?

En el inferno, su hogar.

posted by: Randy Paul on 02.17.07 at 08:55 AM [permalink]

What? Half-baked, unverifiable predictions with a side of snark and gratuitous mudslinging? On a blog? What have the intarwubs come to?

posted by: Adrian on 02.17.07 at 08:55 AM [permalink]

One of the saddest things about subjects like Chavez is the utter, navel gazing idiocy of the commentary dialogue. The Left obsessing about evil US interventionism, the Right engaging in truly childish and pin-headed claims that the Left dictator would fit with their domestic opposition (who anyone rational knows is not terribly left at all, if perhaps somewhat dimwitted nevertheless).

Navel gazing.

However, it does strike me that the US banging away in certain ways at people like Chavez and Ahmedinjad is indeed often counter-productive. Above all in the current political climate. Not that US objectives are per se wrong, but the optics are all wrong. But then, this goes back to be self-absorbed rather than knowing your market (other than domestic) and working it to your advantage.

posted by: The Lounsbury on 02.17.07 at 08:55 AM [permalink]

What? Half-baked, unverifiable predictions with a side of snark and gratuitous mudslinging? On a blog? What have the intarwubs come to?

Call it by it's real name- UseNet 2.0.

posted by: rosignol on 02.17.07 at 08:55 AM [permalink]

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