Venezuelan price controls, monetary and fiscal policy ... and inflation
<a href=www.vheadline.com>Venezuela's Electronic News Posted: Tuesday, June 03, 2003 By: Jose Gregorio Pineda & Jose Gabriel Angarita
VenAmCham's Jose Gregorio Pineda (chief economist) and Jose Gabriel Angarita (economist) write: May saw an upturn in the Consumer Price Index for the Caracas Metropolitan Area (CPI-CMA) ... its 2.3% increase put the cumulative inflation rate for the first five months of the year at 13.8% and the annualized rate (over the last 12 months) at 35%. The Wholesale Price Index, which measures the value of goods and services at wholesale, rose 3.1% in May, to make for a 62.3% surge in the January-May 2003 period. At the same time, the Workers' Documentation & Analysis Center (CENDA) announced that the cost of its staple food basket rose 8% from April to May.
All this is paradoxically happening at a time when price controls are in force.
The government, for its part, announced this week that it will authorize price increases for some regulated products ... and said that, as it analyzes the situation of each segment of agriculture, it will continue relaxing its price controls.
There is not the slightest doubt that price and exchange controls have provoked serious distortions in the Venezuelan market. Producers find it very difficult to produce because of the lack of foreign exchange to acquire inputs, and price controls cause "formal" merchants to prefer reducing supply of goods as a way to avoid losses or penalties for selling at prices above the regulated levels.
Historically, price controls have proved to be inefficient ways to prevent the generation of inflationary processes; not only do they distort the allocation of resources, but they merely postpone inevitable price adjustments, making things worse in the long run.
The causes of inflation lie in the inconsistencies among monetary, fiscal, and exchange policies ... fiscal pressures generate a monetary financing of budget deficits, which results in an excessive expansion of liquidity and successive devaluations of the currency, which in turn drive up prices.
All this leads us to believe that, if there is no change in these policies, and if additional devaluation, rising budget deficits, and excessive liquidity expansion are not avoided, the price control system will accomplish nothing but repress price adjustments that will have to happen sooner or later. But if there is an improvement on those fronts, the future price deregulation will have a smaller impact, because the incentives for a massive acceleration of price growth will be smaller. Decontrol will then only affect the price level, but not its rate of growth.