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Venezuela: Inflation and price control quirks in an artificial economy

By Miguel Octavio

The Venezuelan economy is truly full of surprises. The effect of the oil income is remarkable, introducing a number of artificialities that make the country a laboratory for economic concepts like no other one. I understand that the Japanese Government even has a full time economist just studying and attempting to understand the Venezuelan economy.

This year was no different in having the economy exhibit quirks. The country exhibited what may be the largest percentage difference between wholesale and retail inflation ever anywhere. According to the Venezuelan Central Bank, wholesale inflation was 48.9% while consumer inflation was 27.1% a whopping difference over 80%! I have certainly never heard of such a huge difference anywhere. The explanation is apparently quite simple, with the economy shrinking by 11% for the year, the contraction in demand has been so strong that price increases can simply not be transferred to the consumer. This is the second year in a row that this happens. In 2002, wholesale inflation was 37.9% while the CPI went up by a smaller 31.2%. This would appear to indicate that there is a dangerous potential for inflation to increase as price increases are passed on to consumers as the economy recovers a little in 2004.

A second phenomenon worth mentioning is the fact that most months, regulated and unregulated prices went up by similar amounts. This is simply a reflection of the fact that the Government has been quite lax about enforcing price controls as it was clear that they would result in shortages. While I am strongly opposed to price controls, it seems like the lax enforcement is somewhat ridiculous. As examples, pork is being sold at Bs. 7,000 per kilogram, but is regulated at Bs. 4,000. Meat is being sold at Bs. 7,000 per kilogram, but regulated at Bs. 5,000. Chicken is being sold at Bs. 3,500 per kilo, while it is regulated at Bs. 2,000 per kilo. Eggs are regulated at 4,200, sold at Bs. 6,000 per dozen. The products where controls are being followed are exactly those that exhibit shortages regularly. Even with the artificialities, all this proves is that the laws of economics work no matter how artificial the environment.

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