Venezuela's Government Grasps Greater Economic Control

4 MINS READDec 5, 2011 | 12:19 GMT
A Venezuelan soldier monitors French-owned supermarket Exito in Caracas after Venezuela nationalized the chain in 2010

Venezuela officially unveiled the Law of Costs and Prices, legislation meant to regulate the price of basic goods, on Nov. 23. The law established the National Superintendency of Costs and Prices, which will use a process that is not entirely clear to establish a new price structure designed to address Venezuela's inflation problem. The law gives Caracas more power to threaten companies with fines, seizures and expropriations and is an attempt to gain control over larger portions of Venezuela's economy.

The Venezuelan government Nov. 23 officially unveiled a law designed to regulate the price of basic goods: the Law of Costs and Prices. The law, which has been highly anticipated since its announcement in August, created the National Superintendency of Costs and Prices (Sundecop), which has begun implementing a new price structure designed to address Venezuela's 25-30 percent annual inflation and its challenges with food shortages. Sundecop will set a band of prices for each product, and companies found violating price restrictions will face punishments ranging from fines to expropriation. As Stratfor has previously discussed, the law is likely to worsen shortages and inflation in Venezuela and to create more opportunities for corruption. It is becoming clear that the law is key to the government's efforts to place greater swaths of Venezuela's economy under state control.

The first phase of implementation involves a state audit of companies' accounting procedures, meant to establish a maximum sale price for food, hygiene and cleaning products, and is expected to take 90 days. Sundecop will set the prices of these goods Dec. 15 through a process that is not entirely clear. The companies will have until Jan. 15 to implement the pricing. Meanwhile, the government has frozen the prices of 19 products, including fruit juice, disposable diapers and soap. Starting in January, Sundecop will begin auditing a wider range of products, including pharmaceuticals.

Sundecop's head, National Superintendent of Costs Karlin Granadillo, was appointed by President Hugo Chavez and reports to him directly. Chavez clearly intends to heavily influence the superintendency. On the day the new law was implemented, Chavez made a statement to the press explicitly singling out products from a number of foreign companies — including Pepsi Cola, Heinz Foods, Nestle, Manpa, Alimentos Polar, Coca Cola, Biopapel, Agrofruit, Unilever Andina, Johnson & Johnson, Knorr and GlaxoSmithKline — and warning the companies against corruption.

The Law of Costs and Prices was enacted to address inflation, which the Venezuelan government is blaming on so-called speculators — a loosely defined term that can apply to individuals and organizations that actively attempt to create shortages in order to drive up prices, as well as to companies that happen to have reserves of basic goods they have not yet shipped to local markets. The broad interpretation of the term "speculators" and the government's proclivity for expropriation mean that the government will most likely use the law to seize control of the production and distribution of basic goods.

In fact, immediately following the implementation of the law, the Venezuelan National Guard seized 210 metric tons of powdered milk after an inspection of the facilities of Italian firm Parmalat, which Caracas had accused of hoarding. Parmalat contested the seizure, alleging that the Venezuelan Ministry of Food and the Agricultural Supply and Services Corp. had already designated the milk for distribution, but Chavez rejected Parmalat's claim and threatened to expropriate the firm. Parmalat backed down almost immediately, releasing a public statement apologizing personally to the president, saying, "We regret the discomfort created by our statement ... and offer our sincere apologies to you and the government you lead." Milk has become a strategic good in Venezuela amid persistent and worsening shortages and 25-30 percent inflation on basic goods. Milk is not the only product deemed strategic, however, and Parmalat is not the only company that has been affected by state seizures. Chavez said the Venezuelan National Guard has seized smaller but still notable amounts of rice, cornmeal, vegetable oil, sugar and coffee under the auspices of Sundecop's new rules.

One of the uncertainties surrounding the Law of Costs and Prices is that Article 16 of the law states that Sundecop's price regulations do not necessarily cancel existing price regulations. This means there will be multiple price control mechanisms at work, with inconsistent reporting requirements and compliance mechanisms. According to Central Bank of Venezuela Director Armando Leon, there are approximately 500,000 existing price regulations; Sundecop's efforts will raise that number to 1.5 million. Unless the price regimes are rationalized with one another, these parallel systems are likely to lead to greater confusion for businesses, more irregularities, and more government action against private producers and retailers.

The law is a clear attempt by the government to secure greater control over the already highly government-influenced basic goods market. Having failed in earlier attempts to control goods distribution through subsidiaries of Venezuelan state-owned oil company Petroleos de Venezuela, the government is using the direct threats of expropriation and force to control distribution. Increased seizures of basic goods by government authorities can be expected as the law is implemented, and affected companies may go out of business.

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