Monday, October 12, 2009

The bogeyman that keeps on giving... 

Both followers of the Venezuelan economic scene and habitual readers of this blog know there is one all purpose excuse for the Venezuelan government avoiding any economic measure it doesn't want to take - INFLATION.

That is, whenever a necessary and probably very helpful measure was suggested that the Venezuelan government found inconvenient (read - it would hurt Chavez's poll numbers) it was always said: "No, we can't do that, it would create inflation".

When it was pointed out that Venezuela already had high inflation without taking those measures the retort would be - "Yes, but doing that would lead to hyper inflation, we can't do that until inflation is under control".

And so on and so forth. The Venezuelan government and its sycophants found in inflation a great all purpose excuse for allowing all sorts of non-sensical and harmful distortions build up in the economy, inflation.

Funny thing is, no matter how much the Venezuelan government was careful to avoid carrying out any of the supposedly inflationary measure inflation in Venezuela just kept chugging along. It has consistently been the highest in Latin America for years now and with an annualized rate of 27% in August it doesn't show any sign of being tamed soon.

What is particularly interesting is how persist ant the inflation has been in SPITE of the fact that the biggest excuses the Venezuelan government and sycophants gave have disappeared.

For example, inflation was attributed to the economies high growth, "bottle necks" , and "overheating". Given that no one can accuse the Venezuelan economy of over heating these days inflation should be just a memory. Unfortunately, it is still a current reality.

Also, inflation was said to be "imported inflation" - that is that prices in Venezuela went up because world wide prices of key commodities increased so much, particularly the price of foodstuffs. Thing is, the price of global commodities crashed yet Venezuelan inflation persists. In fact, one of the highest rates of inflation in Venezuela is with food - this in spite of the price for food imports decreasing and food production supposedly increasing!!!

So by all rights, inflation should have decreased significantly in Venezuela. Yet it persists, causing further distortions and effectively robbing Venezuela workers of any real wage increase over the course of this huge oil boom.

Just as bizarrely Venezuelan inflation remains high even though the government did NOT do the things that were supposed to cause it.

For example, the Venezuelan government has steadfastly refused to devalue its overvalued currency even though not doing so brought growth in Venezuelan industry to a standstill. So clearly devaluation didn't cause inflation as Venezuela didn't devalue and inflation has just continued. Of course this is because it was a bogus excuse all along. Exchange rates go up an down all the time without feeding inflation. The U.S. has seen its currency lose lots of value and it has no inflation to speak of. Colombia last year saw its currency go from a high of 1,600 Pesos to a dollar to a low of 2,300 pesos to a dollar (a devaluation of almost 50%) and it too has no inflation to speak of. Obviously a bogus excuse is just that, a bogus excuse.

Another example is the price of gasoline which if it were adjusted to anything approaching a reasonable price would bring in billions of extra dollars which could be used to fund social programs and invest in industry. The government has steadfastly refused to change gasoline prices citing "inflation" and a need to educate the general population (notice that while they say the population has to be "educated" on the issue of fuel prices before anything can be done, which is probably true, the government never undertakes any such educational effort).

The funny thing here is that if you travel to Venezuela's western neighbor you will see that Colombia has ABOVE market rate gasoline prices (the government actually pegs the gas prices above market prices) and a) has no inflation and b) bus tickets are the same price they are in Venezuela. Colombians do though drive more fuel efficient automobiles. Imagine the horror - if the Venezuelan government raised gas prices the sales of gas guzzlers might go down!!!

In the end, one thing is obvious. All the hot air on inflation wasn't based on sound economic analysis. It was just non-sensical and silly excuse making for the myopic policies pursued by the Venezuelan government.

Sadly, while needed economic measures are forever being put on hold Venezuela's chief economic excuse will just keep chugging along.


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