The Inauguration Isn’t the Only Thing on Hold in Venezuela

January 9, 2013

by Juan Nagel

As Venezuela deals with a constitutional crisis, ordinary Venezuelans may be excused for not keeping up with the developments. They are too busy trying to find basic staples.

It has become increasingly difficult in Venezuela to find essential commodities such as sugar, cooking oil and milk. Corn flour, used to make traditional arepas, is easier to find in Miami than in Caracas.  Even certain medicines are becoming hard to find.

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The government has responded in typical fashion. It has blamed hoarders, and promised swift action to deal with them. At the same time, it denies scarcity exists, while it promises to continue “looking into the issue.”

The cause of scarcity lies with the government. After turning on the public spending spigot last year to ensure Hugo Chávez’ re-election, the fiscal deficit reached an astonishing 15 percent of GDP. With all that fresh money in the economy, imports soared, causing severe problems in the nation’s ports. In Venezuela, where even gasoline is imported, this is a huge deal.

Venezuelans know their government is bankrupt. Although they continue promising to get fresh money, the government spends much more than it takes in, even with oil at record-high prices.

One way Venezuelan governments have traditionally financed spending booms is through devaluation. In a country where government is the sole supplier of dollars, a depreciation amounts to an instant tax that can be used to cover fiscal holes.

Many businesses are expecting a devaluation soon, and they expect the prices of their staples—many of which are tightly controlled—to increase after that. In the meantime, they would rather hold on to their existing stock than be forced to sell at fictitiously low prices.

Venezuelans have seen this movie before, and they know what will happen: the currency will be depreciated, prices will be adjusted, and their products will appear on the shelves. It’s too bad this process will leave them poorer.

*Juan Nagel is Professor of Economics at the Universidad de los Andes in Santiago, Chile, and co-author of Blogging the Revolution. Follow Juan on Twitter: @juannagel.

Tags: Hugo Chavez

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