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Opinion and Analysis: Economy | Politics

Venezuela Tightens State Control Over Its Economy (Video) founder Greg Wilpert examines Venezuela’s current difficult economic situation, and the government’s response to deal with this.

GREGORY WILPERT, FOUNDER, VENEZUELANALYSIS.COM: To many Venezuelans, it seemed as if Christmas came early this year, when President Nicolás Maduro announced on November 9 that prices in major electronic stores should be slashed by at least half. The reason for the announcement and the subsequent price cuts and corresponding long lines was that importers were selling products at five to ten times the cost that these products were apparently purchased at.

This order to cut prices closely follows another announcement that Maduro had made just a few days earlier, in which the government would take greater control over all imports and institute stricter controls to prevent price speculation and hoarding in Venezuela. According to Maduro, these new measures are necessary to combat the economic warfare that is currently being waged against Venezuela, which is finding expression in an unusually high inflation rate and shortages of many basic consumer goods.

NICOLÁS MADURO, VENEZUELAN PRESIDENT (SUBTITLED TRANSL.): We are going to initiate a major national operation in the entire territory of the republic of struggle against speculation and hoarding, a major civil-military operation, which will cover the entire homeland. We will go into the last level of the chain of production, distribution, and commercialization of the country.

WILPERT: Ever since late last year, following President Chávez's reelection in October 2012, and especially since his death in March of this year, inflation in Venezuela has been rising steeply. According to some economists, such as Mark Weisbrot, the codirector of the Washington, D.C., based Center for Economic and Policy Research, the reason for the rise in inflation is that the government began to slow down its sale of dollars at the official exchange rate, which then caused many importers to import goods using the black market dollars, which makes the imported goods much more expensive. Inflation thus rose in December to an unusually high rate of 3.5 percent and stayed this high on average every month since then. The year-on-year inflation rate has thus been 54.3 percent. The situation is even worse for food products, whose annualized inflation rate for 2013 has reached 74.3 percent.

Since inflation is so high, Venezuelans try to protect their income and their savings by spending their money quickly on things that they need, and by investing in real estate, the stock market, in automobiles, or by changing the Venezuelan currency, the bolívar, into dollars on the black market. This last strategy of buying dollars has recently contributed to an explosion in the black market exchange rate, so that the cost of $1 rose from 20 bolívars in January to 40 in August. And now $1 costs over 60 bolívars. If importers use the black market to import goods or to price them on the Venezuelan market, this raises inflation. In effect, there is a danger that a vicious cycle has begun between high inflation and the devaluation of the bolívar on the black market.

Mark Weisbrot argues that the heart of the problem now lies with the black market for dollars.

MARK WEISBROT, CODIRECTOR, CEPR: I think the main problem is in the exchange rate system. You can see, for example, that the inflation, the big burst of inflation that you have in Venezuela since last fall, it came as a result of a shortage of foreign exchange. And there was a lack of foreign exchange provided to the market, beginning last fall. And so that, of course, causes the scarcities as well. And the black market rate has shot up, and that's driving the inflation, because the producers that go to or importers that go to the black market when they can't get dollars at one of the official rates, they're paying higher prices. And that's determining the price in a lot of markets.

WILPERT: On Wednesday, November 6, during a nationally broadcast address to the nation, Maduro announced a whole series of new measures to confront what the government is calling an economic war, which is being waged by sectors of Venezuela's business class, the opposition, Colombia's right wing, including former president Álvaro Uribe, and the U.S. Agency for International Development, USAID. This economic war, according to Maduro, is being waged via strategies such as speculation, hoarding, shortages, and boosting of the black market for dollars.

MADURO: This planning event was financed by USAID. The financing arm of the CIA, and the U.S. government to influence and control social movements and governments, and to destabilize them.

WILPERT: In order to counter these activities, Maduro says his government will, among other things, crack down on hoarding by investigating all warehouses to make sure that the goods stored there are being brought to market and not being hoarded.

A second measure is to centralize all imports in a single governmental institution, so as to make sure that the dollars provided by the government at the official exchange rate are actually being used for imports. Through it, the government will subsidize key sectors that are strategic for the country, such as certain food or manufacturing inputs, in order to help keep prices down.

One of the first concrete actions in the wake of the announcement were inspections of home appliance and electronic stores, where the Consumer Protection Office, directed by Eduardo Samán, said stores were charging usurious prices, inflating them by as much as five to ten times the price that they had been imported for. Maduro promptly decreed that importers who had imported goods at the official exchange rate must sell the products at a fraction of what the had been charging previously.

EDUARDO SAMÁN, DIRECTOR, CONSUMER PROTECTION OFFICE (SUBTITLED TRANSL.): Here we have the example of a dryer of 15 kilograms. The price for October of this year was 39,990 noticias [bolivárs]. And it was increased, the same dryer, to 76,590 noticias. We have found out that as of this date they sold it for 39,990. We annulled, canceled the price increase for being unjustified.

WILPERT: According to Weisbrot, these new economic measures might help, but the government needs to do more.

WEISBROT: I think they're going to have to do other things. I think they're going to have to do something which will stabilize the exchange rate. And that means doing something about the black market, pushing the black market down towards the official rate or closing that gap. I mean, the black market is truly speculative. It's like a bubble. I mean, you know, if you're people who are buying dollars now at 15.5 or 15.9 bolívars, they're not getting a store of value. They think they're getting an asset that is going to be a store of value for them. They're going to turn out to be wrog, because, you know, whenever the government does fix the exchange rate system, there's no way that the currency's ever going to sell at that level. In other words, it's way too expensive dollar. And so a lot of people are gong to be surprised. I think they're going to be like [incompr.] the NASDAQ, you know, at its peak back in 2000.

WILPERT: Government critics from both the left and the right attacked Maduro's economic measures right away. Jorge Roig, the president of the main chamber of commerce, Fedecámeras, who Maduro had personally accused of being part of the economic war, said that it was the government's economic policies that are leading to shortages and an inflationary spiral.

JORGE ROIG, PRESIDENT, FEDECÁMERAS (SUBTITLED TRANSL.): What are they accusing us of? Of shortages, hoarding, inflation. But who manages the economic policies is the government, the one who manages every gram that is moved in the country. Every gram--it is important that you know this--needs a permission from the government in order to move food. The government controls a very high percentage of food imports. The government has production plants for rice, flour, sugar, milk, precisely the products that are in shortage--sugar, milk. Ten percent of milk is managed by the public sector, and 90 percent of powdered milk imports is managed by the public sector. You cannot find milk in a state store. It's not the private sector.

WILPERT: Now that prices have been slashed, Venezuelans are busy standing in long lines trying to buy up as many electronics and appliances as they can as long as the discounts last. This actually is no doubt going to give the government a popularity boost, since people were getting frustrated at the steadily inflating prices that they were being charged. This popularity boost will probably be reflected in the upcoming December 8 municipal elections for mayors and city councils.

Unforeseen consequences, though, loom on the horizon, with opposition predictions rife that importers will close their stores. Also, in some isolated cases, citizens have vented their anger at stores by looting them instead of waiting for the discounts to take effect.

The big open question for now is whether the government will continue to try to deal with the black market via greater state control over economic activity or whether it might relent a little and devalue the currency, so as to undermine the black market's seemingly inexorable rise.

Either way, Venezuela is currently facing a difficult and uncertain future.

Gregory Wilpert a German-American sociologist who earned a Ph.D. in sociology from Brandeis University in 1994. Between 2000 and 2008 he lived in Venezuela, where he taught at the Central University of Venezuela and then worked as a freelance journalist, writing on Venezuelan politics for a wide range of publications and also founded, an english-langugage website about Venezuela. In 2007 he published the book Changing Venezuela by Taking Power: The History and Policies of the Chavez Government (Verso Books). He moved back to the U.S. in 2008 because his wife was named Consul General of Venezuela in New York. Since returning to the U.S. he has been working as an Adjunct Professor of Political Science at Brooklyn College.