Sunday, February 11, 2007

Venezuelan Price Caps Called into Question

Sources: International Herald Tribune, Venezuelan Decree Would Allow Government to Take Over Food Suppliers; Financial Times, Venezuela’s Price Caps on Food Staples Fail; Inter Press Service News Agency, Shortages, Speculation Amid Rising Consumption; Bloomberg News, Venezuela to Eliminate Value-Added Tax on Meat.

President Hugo Chavez announced on February 11 that soon a decree will take affect that would allow the government to take control of food-distribution chains (including supermarkets) if services continue to be interrupted. The announcement stems from the recent shortages of food staples, including meat, milk, sugar, certain cereals, and flour, which have caused people to flock to the black market where they purchase products at three times the normal rate. The government touts the decree as a mechanism to put “food commercialization in the hands of the people and the revolutionary government.”

The reason for the shortages is disputed. Critics of the government believe that the shortages can be traced to Venezuela’s high inflation rate and the low price caps that are in place to combat such inflation. Venezuela has the fastest inflation rate in Latin America. Consequently, in order to protect low-income groups from rapid price increases, four years ago Chavez set price ceilings on approximately four hundred food staples. After those prices were set, it became illegal to sell a product below the official government rate, and the consumer protection bureau recently shut down a market for selling meat above the official price.

However, many complain that the official prices are too low, believing there to be a “30 percent lag between the costs of production and marketing and the approved sales price.” In fact, even the government-subsidized supermarkets have sold above the official price. Due to the inability to make money because of the low official price caps, sellers have begun to refuse to sell at the regulated price and, therefore, at all.

The government, however, claims that the shortages are the result of speculation. They believe that business owners are hoarding the food supply and boosting prices. Venezuela’s Information Ministry published an advertisement this past week that showed a fake mug shot with a caption that stated “The Hoarder is the Criminal,” pleading with consumers to refuse to buy products for a higher-than-official rate. In an emergency meeting with the government, slaughterhouses have agreed to resume selling meat to supermarkets at the official government rate while the government prepares a package of anti-inflationary measures.

(1) What are the dangers of price controls? What might happen if the gap between the real market prices and the price caps continues to widen?
(2) What are some types of anti-inflationary measures on which the government should focus? What role do price controls play when there is no emergency-based need?

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