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Opinion and Analysis: Economy

Demystifying Venezuela’s Inflation: The Opposition’s Red Herring

My communal council had organised a Mercal (government sale of subsidised foods) for our community for Saturday to start at 9am. I got there at 9.05, and already there were about a hundred people in the queue. Then it started to rain, but despite the fact that few people had umbrellas, no one budged. The queue moved slowly, people chatted to each other and got wet, and by the time I reached the food tables, a lot of the food had run out.

Still, I got 3 kilos of pasta, at 2bs/kilo (normal price, 6-12Bs/kilo), milk for 12bs (normal price 20bs, when you can find it), hot chocolate for 6bs (normal price about 25-35Bs), margarine for 2bs (normal price 6bs) and a few other things. When you consider that the vast majority of Venezuelans spend 50-90% of their income on food (depending on if they rent - the other big expense), you can understand why we bared the rain, and why food prices and inflation are hot topics of conversation here.

“Chocolate is 22bs now, can you believe it? It was 12bs in January!”

“I don’t buy tuna anymore, it’s 35bs for a large can now.”

“X shop is selling noodles, but they’re 9bs now, they used to be 5”. And so on. Not to mention the mass rushes to the supermarkets when, after six months without it, they suddenly have a supply of cooking oil or powdered milk.

In local opposition and international mass media, inflation is the buzzword, and if it has increased, the country is clearly a mess, life is hopeless, and the government has got to go. Yet is inflation really the big evil it’s made out to be? How much does it impact on the lives of Venezuelans? How much worse is it, really, under Chavez, and what is the government trying to do about it and the food situation?

Before Chavez, “sardines were our meat”.

“Before [the Chavez government] there was a greater variety of food on the shelves, but few could afford it. Now we can afford the food we need, but there’s a little less variety,” my partner, Luis Diaz, told me.

Things got worse when President Carlos Andres Perez implemented an IMF promoted “economic package” which caused massive increases in food and petrol prices and transport costs, leading to the popular revolt known as the Caracazo, in 1989. At that time, inflation also spiralled, causing a reluctance to invest.

“There has always been milk scarcity, and it was bought on the black market. Most of it came from New Zealand [where as today, most milk is locally produced], and there was often meat and egg scarcity, a lot of contraband food from Colombia and Ecuador. It was very expensive and the prices in the supermarkets were so high, we were pretty screwed,” Diaz continued.

“Those who could, the upper classes, solved the scarcity problems buying on the black market, meanwhile babies in poor families were fed on spaghetti water,” he remembered.

“There was this publicity campaign [by a Sardine company] in the nineties that was ‘Eat sardiiiiines’ because being able to buy meat was like playing the lottery,” he said. “It’s not like that at all now.”

Diaz’s mum said the “Adecos” (opposition party Democratic Action, or AD) used to run food “operatives”, selling food in plazas and community centres in a similar way that the Mercal does now, “but it was much less regular then, and only those who had an AD membership card could buy the food,” she said, adding that those operatives were “shit”, as she reminisced about how expensive contraband milk used to be.

Now, there is still some corruption, and some people working for Mercal manage to sell its cooking oil to shops at above the regulated price, but among a range of other government policies, the existence of Mercal, of regulated prices for some goods, of school food programs and government dining halls, means that basic food needs are now met. According to Venezuela’s Nutrition Institute average daily consumption increased from 2,200 calories in 1998 to over 2,700 calories in 2008, exceeding than the United Nations Food and Agriculture Organization recommendation of 2,300 calories per day, and malnutrition dropped from 21% in 1998 to 6% in 2007.

The real inflation situation

Nevertheless, inflation still means that the prices for other consumer goods and services, such as non basic food goods, clothes, toiletries, monthly rent, taxi prices, toys, books, stationary, and so on, go up on a monthly to six monthly basis.

Inflation rates in Venezuela have been steadily increasing since the 1950s, where, under dictator Marcos Perez Jimenez, they sat at around 0.75%, under Romulo Betancourt they rose to 1.5%, then to 3.63% the first time Rafael Caldera was president, then an average of 9.86% under Carlos Andres Perez his first time, 16.7% under the next president, then 34.1% under the next, until it spiralled at 104.5% and then 194.3% under the second terms of Carlos Andres Perez and Rafael Caldera. These figures are based on accumulated inflation - where each year’s inflation affects the previous, but nevertheless the overall trend, of increasing inflation, is clear.

Only Chavez has managed to turn this trend around. While under Caldera, yearly inflation was 70.8 % in 1994, 56.6% in 1995, 103.2% in 1996, 37.6% in 1997 and 30% in 1998, under Chavez, it was 13.4% in 2000 and 12.3% in 2001. Then came the coup d’état and the opposition sabotage of the petroleum industry, when they also hoarded a lot of food so that it was either unavailable or sold at highly inflated prices, bought massive amounts of dollars, and launched an international campaign to discourage foreign investment. That year, inflation was 31.2%, and 27% the next year, and has tended to average around 25% per year since then, with a record low in May 2006 at 10.4%.

Apart from the charming contributions by the opposition to inflation (hoarding continues), inflation in Venezuela is, to some extent, inevitable, because of the large money supply as a result of its large oil income, and its high government spending.

Also, among a range of other causes, adjusting for inflation has become part of Venezuelan culture and habits. While state owned communications company Movilnet hasn’t increased its phone rates in four years, private small and large businesses regularly increase prices in the lead up to the Christmas, Easter, and mid-year holidays (when spending naturally increases). Everyone else who buys from them such as landlords, restaurants, and hotels, follow suit in order to cope.

One of the most serious consequences of the high inflation rates in Venezuela, in terms of their impact on Venezuelan people, is that the devaluing of the bolivar over the years combined with fixed exchange rates means that imports are artificially cheap and non oil exports are too expensive, making it difficult for Venezuela to diversify its production. 

People are also more likely to consume than save, since the value of their savings decreases at the rate of inflation. Also, hoarding is both a cause and an effect of inflation, as people are likely to buy more than they need of a product to avoid the higher price later.

Another issue that has come up is budgeting. The government decided that the allowance per student per day in the school eating program was 5.7bs, but because it didn’t update this for a few years, food providers eventually found it hard to cater the food at that price, and stopped providing it. Or, the government might assign a certain amount of funding to a communal council for it to solve a local problem, but by the time the financing actually arrives, the costs have gone up. However, problems like these would be easily overcome if inflation were more often factored into the budgeting, and adjustments made more frequently.

Inflation isn’t the big deal it’s made out to be

However, one area where inflation is less important, in terms of actual impact on people’s lives, is food and other product prices. This is because the government regularly (once or twice a year) increases the minimum wage to match inflation levels, or higher than them, and the informal sector increases its prices to match inflation as well. 

People’s purchasing power has actually increased significantly under the current government.

Venezuela’s GDP based on Purchasing Power Parity (PPP), according to IMF statistics, went from 82.8 in 1980 and 136.7 in 1990 to 204.2 in 1998 just before Chavez came into office, to 346.9 last year. If you look at the graph in the previous link, you can see a significantly bigger slope over the last ten years (with, as usual, a small dip during the coup and petroleum strike of 2002-2003).

Also, according to the Venezuelan National Statistic Institute, purchasing power increased by 18% between 1999 and 2009, and the head of the institute, Elias Eljuri, said that in the decade preceding Chavez there was a 49% decrease in worker remunerations. Venezuelans now have the highest minimum wage in Latin America, not including other benefits such as food tickets and free health and education.

Further, some economists (coming from a capitalist perspective) argue that inflation is in fact a good thing as it keeps wages down, and therefore unemployment down. While I can’t agree that keeping wages down is ever good, the point is it’s a misguided belief that high inflation equals tragedy. The Austrian School simply defines inflation as an increase in the money supply - a definition with less negative connotations.

Moderate inflation better than IMF “economic packages” any day

While private media here and outside of Venezuela create the impression that inflation (and the government) is to blame for apparently high goods prices in Venezuela, there are actually much more serious and significant factors to take into account, most of which the opposition here would rather we didn’t focus on - namely, capitalism. Or, more specifically, demand (which has increased dramatically over the last ten years to match the increased purchasing power), production (private companies which under produce and over charge), the private industry’s prioritisation of profits over satisfying need, land use, or lack thereof by wealthy large land owners, and the global context that Venezuela exists in, such as global warming provoked droughts and floods, the global food crisis in 2008, and the maintained increase in food prices since then which have disproportionately affected ‘third world’ countries.

Whereas in Venezuela in 2008, and since then, there has been the occasional sugar, oil, milk, or coffee shortage, and imported foods like peanut butter and salmon are extremely expensive, in 2008 in Thailand, the price of rice increased from US$100 per tonne to US$780 in a matter of months, and food riots spread across Africa. A leaflet in Egypt said “we are dying while queuing up for bread”, and it’s no secret that food prices were one of the catalysts of the Arab Spring revolution late last year and early this year, when many of the rioters and protestors in those countries blamed the IMF “structural adjustment policies” for continuous exorbitant price increases.

Currently, the United Nations reports that 37 countries face a food crisis and world prices for basic food commodities such as corn, sugar and beef have all spiked in the past 12 months.

The UN warned this month that 750,000 people could die from the famine in Somalia (while on the African continent as a whole, only 4% of agricultural land is irrigated- not due to water shortages, but because World Bank and IMF policies support big agro-business and prevent nationwide investments of the kind the Venezuelan government is attempting with its agriculture mission) and many Haitians, even before the earthquake, are eating mud pies, largely because the US and other international financial bodies destroyed Haitian rice production to pave the way for subsidised US rice.

The current Venezuelan government would never allow such a thing (while the opposition here would likely be completely in favour, as they demonstrated in 1989). The Venezuelan ambassador to the UN Food and Agriculture Organisation (FAO), Gladys Urbaneja, pointed out in 2008 the role that “free trade” treaties and the flooding of markets by US produce have had in the rise in food prices, as well as the principal problem, that food has “been turned into yet another object of market speculation”.

The government is fighting for accessibility to goods and services on a number of fronts

In terms of guaranteeing a good supply of essential foods, the current Venezuelan government has implemented a number of important measures, such as nationalising food producers who hoarded or speculated including the supermarket chain Exito, creating government food distributors PDVAL and Mercal, significant land reform to, among other things, activate unused land in order increase production of goods such as rice, soya, and meat, and has created the Mission Agro Venezuela to encourage and support farmers and cooperative farms. The government also regularly distributes other products at subsidised prices, such as through its “Mi casa bien equipada” – my well equipped house - with subsidised household appliances, or its “school fairs” with stationary and other school products at roughly half the commercial prices.

Trying to break away from the damage and insecurity caused by “free” trade it has also pushed for a Bank of the South, for a regional currency, the Sucre, in order to not depend on the US dollar, and for regional cooperation through organisations such as ALBA, UNASUR, and CELAC.

These measures are the most significant in terms of tackling the access-to-basic-products problem at its roots, but the government also considers combating inflation important. In March 2007, after a record low inflation of 0.7%, mainly because of a reduction in the Value-Added Tax, Chavez said it was a “triumph for everyone” since “inflation is a problem for everyone, for those of us in the government, and also for the communities and for the private sector.”

Most likely inflation is an important issue to the government because of the media coverage the issue gets and therefore the general opinion of the population that it’s important, because of the real effect it has in terms of “faith” in the economy and business investment, and because the government’s analysis of the economy is often an interesting mixture of socialist and capitalist or reformist. It recognises the importance of worker or state control of production, for example, but also refers to GDP - a more capitalist measure of economic well-being.

Nevertheless, in 2008 the government said its plan to fight inflation should be fought by stimulating production and moderating consumption (basically - decreasing prices with higher availability and less demand). At the time, the finance minister explained that the food sector is where the “gap between national consumption and production in general” has been the largest, because “consumption has been very stimulated by a progressive distribution of oil revenue.” This approach is reasonable, and the government at the time rejected the “neo-liberal” approach, which advocates reducing demand through “harsh impoverishment”, that is, reducing government spending to reduce the money supply, something the Venezuelan government has refused to do, even during the world economic crisis, while other countries have embraced it.

A fixed exchange rate is another traditional measure for combating inflation, something the government has applied since 2003, but with mixed results. Real currency value continues to be reflected in the black market rate, which, despite trying, the government has not been able to curb. When the government adjusts the fixed rate to closer to the more realistic value of the bolivar, as it did in January 2010, working people’s savings were halved in value. The adjustment also meant oil dollars were worth more, and there was more money supply, and therefore more inflation, if the government spent it. To somewhat curb the money supply the government does sell oil bonds, but ultimately, to spend less without affecting social needs, the government would have to buy overseas, which would lower inflation but not help with local job creation. In many ways, one could argue the inflation is worth it.

The opposition and international mainstream press use inflation as a political red herring

No doubt big business, with the opposition as its spokespeople, is one of the main causes of food problems and of inflation, by hoarding, underpaying, importing at the fixed exchange rate but pricing as if they had imported on the more expensive parallel rate, currency speculation, encouraging consumerism, supporting privatisation, and so on. It’s therefore in the interest of the opposition (local, and international) to use Venezuela’s moderately high inflation as a red herring from the real causes of economic stress to the people, and to create a climate of uncertainty and discontent with the Bolivarian government.

Not only does the private media here and overseas focus more on inflation than other economic issues, but by repeatedly harping on about the issue, the private media affects Venezuelans’ perception of how inflation actually affects them. Most Venezuelans equate price increases exclusively with inflation, and see inflation as one of the country’s largest problems (along with crime, another real, but exaggerated problem by the opposition). And the cause of inflation? Chavez. Just like Chavez causes droughts and climate change, not to mention police corruption in states controlled by opposition governors, inflation is also clearly his fault.

Venezuelans struggle to cope with soaring food prices, inflation tops Latin America,” headlined the Washington post, accompanying its article with photos of ranchos and bowls of chicken feet. In this article, one Venezuelan said she felt “strangled by the prices”.

“Venezuela among the countries with the highest inflation in the world” headlined Noticias24, a Venezuelan internet news site, quoting an IMF report. And in this article, titled “Who Generates Inflation” Tal Cual, also Venezuelan, blamed the government for “provoking” inflation with its “undisciplined fiscal policy”.

The opposition press ignores context and cause, and creates the impression that if coco pops were on the shelf all the time, everything would be okay, playing into the capitalist belief that defines happiness and wel-being along consumerist lines. Opposition press, and overseas mass media like Fox, CNN, and the BBC, never mention the subsidised goods, nor Venezuela’s healthcare and education programs, whose prices experience 0% inflation because they are free.

Health and education are more important than nutella and Mars bars

The Venezuelan finance minister Ali Rodriguez, speaking in 2008, was right when he said, “As state capitalism [enters] a process of transition, we have to change the mentality of the Venezuelan from a profit-driven culture to a productive culture. This implies generating a new ethic.”

When wage increases match (or surpass) inflation, inflation isn’t necessarily a bad thing for working people or the majority of Venezuelans. What is important is the overall context and structure of the economy, and who (which classes) it’s ultimately geared towards serving. That is, it is better to have high inflation (remember, it’s not hyperinflation, which is different) and universal healthcare (as is the case in Venezuela), than privatised health care, but low inflation - as is the case in many other countries.

In the long term, the real solution to food insecurity and unreliable access to goods and services is democratically organised production done according to need, with prices set jointly by the state, organised communities and workers. There are isolated examples here and there in Venezuela of parts of that process – communal councils expressing what they need, worker controlled factories, etc, but we’re a long way from there. In the mean time, we need to be clear about what real quality of life is, and it’s not low priced Nutella.