Venezuela: Maduro's Gamble to Fight Inflation

4 MINS READNov 15, 2013 | 16:56 GMT
Venezuela: Maduro's Gamble to Fight Inflation
(LEO RAMIREZ/AFP/Getty Images)
Venezuelan President Nicolas Maduro during a rally in Caracas on Nov. 12.

At a time of furious rhetoric surrounding the "economic war" in Venezuela, the government has demonstrated its willingness to upset the public order. According to reports, Venezuelan officials arrested dozens of people accused of economic speculation in an economic crackdown targeting retail stores across the country. Security officials have inspected 1,400 stores over the past week, and Venezuelan President Nicolas Maduro said Nov. 14 that 100 people have been arrested in the process. Reports are conflicting and suggest that some of those in custody may be accused of looting. At least 50 in custody are accused of speculation and usury, according to Miguel Rodriguez Torres, the minister of interior relations, justice and peace. Maduro recognizes the dangers of the current course but has decided to forge ahead to show that he is in control.

The Venezuelan government has tried before to rein in prices, but this is by far the most invasive effort, particularly if the reports of arrests are true. Former President Hugo Chavez implemented a system of indexation to control prices on a range of goods early in his administration. More recently, in 2011 Chavez established the Superintendency of Costs and Prices in an attempt to control prices all along the supply chain. Despite these efforts, prices have continued to rise and scarcities of basic goods are a constant reality for Venezuelans. On its current trajectory, inflation will reach 50-60 percent by the end of the year, up from an average annual rate of 30 percent in previous years.

Security forces have been used periodically to enforce price controls, but the ongoing crackdown is unprecedented. Some storeowners have refused to open their stores, according to local news reports, and others are lowering prices pre-emptively to avoid government sanctions. In at least one case, an entire electronics store was looted under the supervision of the National Guard. According to one local nongovernmental organization, there were 39 attempted lootings between Nov. 9 and Nov. 12, nine of which were successful.

Maduro's long-term goal in this process is to force retailers to adhere to a new policy of establishing profit margins of 15-30 percent. The government-proposed formula will take into account a range of factors, including whether retailers are importing goods based on the official exchange rate of 6.3 bolivars to the dollar or whether they are using the black market, which has reached more than 60 bolivars to the dollar. The new calculations would theoretically also take into account other costs, including taxes and overhead, to try to ensure a fair profit margin while reining in inflation.

However, it is very unlikely that the government will be able to implement an effective system of price controls in every retail sector in the country. If nothing else, the new system will create a range of opportunities for graft and speculation and will push goods onto the black market.

At the same time that the government is cracking down on retailers, the National Commission on Telecommunications has opened investigations into Internet service providers hosting websites providing information on the black market currency trading rate. The government is accusing the websites — which include Dolar Today, TuCadivi and Lechuga Verde, among others — of disrupting the peace and tranquility of the Venezuelan public.

Controlling information about the black market could help control the plummeting exchange, but it, too, is highly unlikely to succeed. Despite Venezuela's large volume of oil exports, the country is experiencing a serious cash crunch, and central bank reserves have fallen to $21 billion. Independent estimates put just over $1 billion of that in cash and the rest in gold.

There is no question that Venezuela has seen many instances of price speculation and corruption that have affected prices of goods or exploited the distorted currency markets for profit. However, the government's ability to determine which retailers are exploiting the system and which are scraping by is suspect, and there is a real danger that this crackdown will put many out of business, potentially worsening the country's scarcity problems. Even more concerning is the precedent of government-supported looting of stores that are thought to be gouging prices. The situation could spin out of control quickly.

Maduro realizes the risks of the current approach. The crackdown, as well as efforts to pass the enabling law, seems to be his attempt to prove that he is in control. Maduro faces a divided political base and is struggling to gain the respect and standing of his predecessor. He and his allies appear to have chosen to push forward with the economic policies of Chavez's Bolivarian Revolution.

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