Friday, May 09, 2014

Economic Paralysis in Venezuela

Venezuelan President Nicolás Maduro made a fairly startling admission about a problem, followed by a suggestion about how to make the problem worse:

Asimismo, dijo que 20% de las empresas participantes están paralizadas. 
En este sentido, Maduro comentó que "hemos pasado de la ley de la jungla, de cada quien poniendo las reglas económicas y los precios que le da la gana, a un proceso de regularización que debemos consolidar con reglas, con máximos porcentajes de ganancias".

Since I periodically get complaints that I don't translate Spanish (which is due to the fact that I don't want to take the time) here you go:
Also, he said that 20% of the participating companies [in a large conference held by the government] were paralyzed. 
On this point, Maduro commented that "we've gotten past the law of the jungle, with anyone imposing economic rules and prices that they feel like, to a process of regularization that we should consolidate with rules, with maximum profit percentages."

20% of businesses are paralyzed?!? That alone is a crisis.

But how to solve it? One way to make the crisis worse is with government rules to impose certain imaginary profit margins. The more the government dictates exact prices and exact profits, the more companies will find themselves paralyzed and you will generate a thriving black market.

Maduro and others in the government have complained long and hard about speculators, and I can understand their frustration. Unfortunately creating more rules to end speculation actually creates more speculation in the absence of broader reforms. If prices on basic goods in Venezuela are kept artificially low, people will definitely take those goods to the Colombian border and resell them at higher prices. At least the Venezuelan government seems to have finally recognized that and started raising prices. Interestingly, that solution goes completely against what Maduro just said.

But that's not the only problem. Venezuela's terrible handling of its currency has led to a shortage of dollars, which in turn makes it very difficult for firms to get the imports they need to keep going (thus paralyzing them). Company after company has been announcing it is halting activity because they can't get dollars for the imported goods they need and/or cannot get their dollar revenues.

This isn't really a debate about more or fewer rules, but rather about smarter rules that create incentives for people to follow the law and produce. And at a certain point, yes, prices will go where prices will go. If you are going to subsidize parts of the population, then just be intelligent about implementation so that you don't end up making the problem worse, which is what's happening now.

On the other hand, if you advocate simply opening up markets as the solution, you're just as clueless. Moisés Naím believed that would work as well, then helped create the economic mess that brought Hugo Chávez to power. Oddly, he talks about what a success those policies were. The logic escapes me.


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