Thursday, June 05, 2008

Want to see how out of whack the Venezuelan economy is? Head to Subway's 

This blog has long maintained that the Venezuelan government is causing serious problems for the Venezuelan economy by, among other things, allowing the Venezuelan currency to become very overvalued relative to other currencies.

This overvaluation is very harmful in that it makes Venezuelan exports uncompetitive on world markets, increases incentives for people to import goods rather than produce them locally, and stymies domestic industry (recall from a previous post manufacturing has slowed a measly growth rate of 1.3%).

But how can anyone know if the Venezuelan Bolivar is indeed overvalued relative to say the U.S. dollar and if so by how much? Simple. Head to the nearest Subway sandwich shop and see how their Venezuelan prices compare to their U.S. prices for the same product (The Economist magazine used to do this using McDonalds but I don't normally eat there so Subway's it is).

In the U.S. I normally get simple turkey and cheese sandwich and this costs about 7 US dollars.

So in a walked to a Subway's shop in a Venezuelan mall and ordered the exact same thing - a simple sandwich and a soda.

The price? As you can see from the receipt it was 32 Bolivares Fuertes:

At the exchange rate of 2.15 BsF per US dollar this comes to $14.88 !!!!!!

At first I thought they must have made a mistake ringing up the order. But on reviewing it they did it exactly right - a regular sandwich with extra meat and cheese and a large soda - just as I always get in the U.S. (by the way look carefully at the receipt - the freaking soda alone set me back 3 dollars!). At that point, with no other alternative I just laughed.

So the bottom line is the exact same product produced in what should be a lower cost country (after all, labor, supplies, real-estate, should all cost less in Venezuela than in the U.S.) costs twice as much as it costs in the United States.

This implies that the Venezuelan currency is somewhere around 100% overvalued. Given that a recent economic analysis said the Venezuelan currency was 70% overvalued this probably isn't far off the mark.

Now, you could say that this is a totally frivolous and silly comparison - who cares how much some American fast food chain charges in Venezuela compared to the U.S.?

True. Sandwich costs don't mean that much (although given that all other prices in Venezuela such as food, hotels, clothing, etc are similarly out of whack I doubt many gringos will be getting on planes to go vacation in their).

But this is in fact indicative of prices throughout most all of the Venezuelan economy. An overvalued currency serves to make the prices of all Venezuelan products much higher than those of goods in other countries.

And while sandwiches might not matter as they aren't a trade able good in the next post I will show this exact same phenomena with a Venezuelan produced tradeable good. And that certainly won't be a laughing matter.


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