Lurid articles about Venezuela have peppered the Western press in recent days and weeks. The latest event that has been widely reported is the use of the military to occupy stores, including the national chain Daka, with a mandate to sell products at “just prices”. Something viewed by most media outlets as further evidence of the chaotic mismanagement of the economy by the government. However, while there are serious economic problems in Venezuela, this one-sided portrayal occludes the ability to have an informed debate.
As the prevailing narrative runs, shown in these recent articles, the enforced sale of goods at low prices is a populist, and ultimately counter-productive and futile attempt to arrest the accelerating inflation of consumer prices. However, the high prices in the stores in question are not due to high domestic inflation or the increasing costs of production; these goods are imports and their price should reflect the cost of importation. Except that it doesn’t.
To understand what is occurring in Venezuela it is necessary to take a step back and look at the country’s exchange rate regime. Since 2003 Venezuela has operated a multiple exchange rate regime, with a limited supply of dollars at a cheap rate (the CADIVI rate) and, a slightly higher legal rate and an even higher black market rate. While this can have legitimate purposes, it effectively subsidizes imports for poorer Venezuelans, it also creates quite large incentives to gain rents by exploiting the difference between the different prices.
Agents with access to dollars, such as importers, can arbitrate the difference in the rates to create substantial rents. They can buy dollars at the low official rate and sell them at the higher black market rate, instead of spending them on imports. Or they can buy imports with dollars purchased cheaply but sell them as if they were paid for with expensive black market dollars.
This is exactly the opportunity that the recently occupied electronics stores were exploiting. While there are claims from some private companies that they find it difficult to obtain dollars and thus have to source dollars on the black market for imports, this is not the case for Daka, which receives one of the biggest allocations of dollars at the CADIVI rate. However, it was selling goods at vastly inflated prices. For instance, washer-dryers imported at 4,200 bolívares (US$668 at the CADIVI rate) were being sold at 47,000 (US$7470). Thus dollars earned through oil sales at PDVSA, the state oil company, were sold to importers at a low rate as an effective subsidy on importation but instead of passing on this saving to the consumer the importers were raking in giant rents.
It is in this light that the use of the army to occupy stores and force the sale of goods at their correct price should be viewed. It is an attempt to disincentivize the abuse of the exchange rates system and ensure that the effective public subsidy of imports is passed onto the consumer. This has had an immediate effect and influenced similarly profiteering companies. In fear of being subjected to the same controls as Daka, Aldo, the international chain which has a network of shoe and accessories stores across Venezuela, announced that it was reducing all of its prices by 50-60 percent.
Army regulation of the market
Unethical price rises such as this would be viewed with equal contempt in any Western country, and interventions in the market to correct this would be equally popular. See, for instance, the British Labour Party’s surge in the polls following their pledge to enforce an energy price freeze in response to the price rises for consumers in spite of falling wholesale energy prices.
The use of the army to intervene in the economy is, however, something far removed from what the British Labour Party would consider – they prefer to use the army to occupy Middle Eastern countries, not electrical goods stores. It is also something that fits into Western outlets’ narrative of Venezuelan reckless and populist “caudillismo”.
There are more restrained explanations for its use, however. Its use can in part be explained by the Venezuela’s much more limited state capacity and weaker institutions, with the exception of the army, in comparison to developed states. This is something shared by many developing states, which tend to have less infrastructural power—the power of the state to enforce its decisions through its penetration of civil society—in comparison to Western countries.
The army is, however, sometimes used to regulate the economy, even in developed countries, but with much less outrage from the press. While economic interventions to enforce consumer price controls are anathema to Western politicians, it is not as politically taboo to use the army to regulate (downwards) the price of labour.
For instance, the British government has openly threatened unionized workers planning to strike with military strike breakers and has allegedly drawn up similar plans in the event of widespread public sector strikes. Similarly the army has been deployed to break strikes in numerous countries, including Spain and Greece1 in 2010. In the U.S. it was repeatedly raised as an option under Bush’s presidency, and has even been used—breaking a 40 year absence—[pdf] under President Obama.
While this does spark anger from the labour movement, it is not regarded with the same hostility, nor is it normally regarded as newsworthy by the mainstream press. The only discernible difference between these cases is that in Venezuela the military is being used to intervene to protect consumers, while in these other countries the military is being used to strengthen the hand of employers against labour.
In any case this is not the only measure that the Venezuelan government is taking to reduce the exploitation of the exchange rate regime. In particular they are concentrating on increasing the monitoring of transactions through the strengthening of regulatory institutions. They have also reformed the secondary legal rate: in the new system it is transferred directly to external suppliers, bypassing the bank accounts of the importers and thus reducing the opportunity for black market leakage. Further regulatory reforms of CADIVI are also in the pipeline.
There is a legitimate debate to be had on how best to reform the current exchange rate system in Venezuela, a debate which is occurring within the country. While the effective subsidy of imports—implicit in the overvalued CADIVI rate—can be justified for food, and even white goods and industrial inputs, it is harder to justify for luxuries. However, the decontextualized and selective presentation of facts by external media hinders any real discussion in the West. While the military is not the most desirable tool to regulate prices, it is a response to a legitimate wish to disincentivize importers from exploiting consumers and the Venezuelan state.
1 Greece has now even started using a law from 1974 that allows it to pressgang striking workers into the army, compelling them to return to work or face firing or prison.