Price controls in Venezuela
The law limiting costs, prices and profits was designed specifically to prevent over-pricing, speculation and other abuses against consumer rights which have been occurring in Venezuela. It was enforced by President Nicolas Maduro apparently to counter growing problems with Venezuela’s currency control system and economic imbalances created by anti-government business sectors that led to high inflation and shortage of some basic products. The objective was to establish a “harmonious and balanced” development of the national economy. Prior to this, the Hugo Chavez government also set price controls in an apparent effort to “counter inflation and protect the poor”. The result : It gave birth to a flourishing currency and commodity black market and ended up hurting the class of citizens that it intended to protect.
There exists a penetrating black market in Venezuela, the roots of which could be traced back to 2003 when the government adopted a fixed dollar exchange rate regime to prevent huge overseas capital flights owing to political uncertainties within the country. Ever since then, the currency has been fixed and adjusted very rarely. This, immediately, gave birth to a black market where the exchange rate for bolivars was 2-3 times the official exchange rate.
An unintended consequence of fixing the exchange rate gave rise to the travel currency fraud. Under this scam, the citizens travel abroad with official-rate dollars, receive their dollars in cash by swiping their card abroad, and instead of spending it, they return to Venezuela to sell the dollars on the black market for over 10 times the money the actually paid for them. Early 2013, the official exchange rate was fixed at 6.3 bolivars per dollar and the black market rate was 18 bolivars per dollar. This created an ever-widening gap and greater incentives to profit from that gap. The black market exchange rate increased exponentially from 100 bolivars per dollar in late 2014 to 800 bolivars in late 2015 while the official exchange rate was pegged at 6.7 bolivars per dollar. This is the currency black market.
During the 2008 global financial crisis, a lot of restrictions were placed on the list of items imported into Venezuela. Thus, fewer goods could be imported at the official exchange rate leading to more and more importers using the black market for imports, which drove up inflation. Inflation spiked from 13.7% from 2006 to 31.4% in 2008 and subsided to 20-21% between 2010-2012.
In the commodities sector, the state established a “fair price” for all products and the state agency, National Superintendency for the Defence of Socioeconomic Rights (Sundde), would monitor importers, producers, suppliers and retailers to ensure they adhere to the limits set for these “fair prices”. The commodities black market also grew at a feverish pace given the “fair price” impositions on essential commodities. Hustlers known as Buhoneros sold their goods at prices more than the government-imposed fair prices. This made it all the more difficult for poor people to purchase essential commodities. It is indeed ironic that essential commodities are not available at fair prices only because of the government-imposed “fair prices” on them.
The price control imposed on gasoline ensured that one can fill up an entire tank of gas in Venezuela just for a few pence. They would then cross the border at Colombia and sell it there for 15 pounds sterling. This gasoline smuggling has been a preferred profession of engineers, lawyers, doctors, architects etc. and their argument is that they can earn in 3-4 days smuggling gasoline what they earn over a month as professionals in Venezuela. The subsidies to gasoline alone cost the government $12 billion.
While the root of these problems was politically motivated, it would have served the government well to have maintained a floating exchange rate regime. This would have devalued the Bolivar, but at least it would not have interfered with market dynamics. It also would not have lead to the fair pricing regime, which turned out to be anything but fair. And the much pronounced black market in currency and commodities would have simply been a shadow of what it is today.
Sources :
http://venezuelanalysis.com/analysis/11716
http://www.marketplace.org/2016/03/23/world/resource-curse/day-out-black-market-venezuela
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