February 15, 2006

Price Caps Ail Venezuelan Economy

Moves to Curb Inflation Hurt
Profits for Some Businesses,
Spur Shortages, Black Market
February 15, 2006; Page A6

CARACAS, VENEZUELA -- After 21 years in the milk business, Ismael Cárdenas Gil is throwing in the towel.

Mr. Cárdenas, who heads Alimentaria Internacional, can no longer make a profit selling imported powdered milk under government-imposed price controls. As a result, he has cut back his imports to "practically zero."

"The controls have been very harsh. The numbers don't work out to import milk and sell it here," Mr. Cárdenas says.

His plight is becoming more common in Venezuela, with President Hugo Chávez meddling in the economy to advance his populist-leftist agenda as companies selling price-regulated products watch their profits disappear. While government controls have slowed the growth of inflation, Venezuela's rate is still the highest in Latin America. The controls also have led to frequent product shortages and the emergence of a thriving black market. Some farmers and retailers are skirting the rules or have stopped selling certain goods altogether rather than sell them at a loss.

The problems facing Venezuelan businesses and consumers serve as a cautionary tale for the growing ranks of Latin American populists pushing for a heavy government hand in the economy. The administration of Argentine President Néstor Kirchner, whom Mr. Chávez has helped by buying more than a billion dollars of the country's debt, has taken to strong-arming businesses into price-cap agreements on sundry goods to slow galloping inflation, which doubled to 12% last year.

Bolivia's recently elected president, Evo Morales, has made no mention of price controls but is clearly pursuing a state-centered economic model. In Costa Rica's recent presidential elections, voters punished the leading pro-trade candidate in what appears to be a backlash against Central America's free-trade pact with the U.S.; the rival candidate wants to renegotiate the deal. Costa Rica's electoral board is in the midst of a recount.

In Venezuela, Mr. Chávez is taking advantage of the country's massive oil-revenue windfall to fund a governing philosophy he has dubbed "socialism for the 21st century." His goal is to increase social spending and curb inflation through a mix of price caps, a fixed exchange rate and fixed interest rates.

But some Venezuelan businesses hurt by the price controls are beginning to balk. Last week, corn growers marched outside the presidential palace, protesting government controls they say have dried up demand for their corn. While the farmers are getting a decent price, processors are refusing to buy the corn because they can't sell it at what they consider an acceptable markup. The country's largest food company, Alimentos Polar, has warned it may have to halt production of corn flour for such reasons. In early December, coffee producers challenged the new price ceilings, paralyzing deliveries and causing an acute coffee shortage for weeks.

As the world's fifth-largest oil exporter -- the state-run oil company supplies about 15% of U.S. petroleum imports -- Venezuela has amassed a hoard of cash that has allowed it to import goods and sell them at a loss through the state-run Mercal supermarket chain, subsidizing Mr. Chávez's pricing policies. Enforcement of price controls is being stepped up as Mr. Chávez readies a December re-election bid.

The predominance of the state, Mr. Chávez says, aims to protect the poor majority from "greedy capitalists" and "speculators." He has threatened to expropriate plants of those who shut down operations, while government troops have seized stockpiled grain to stop shortages.

Mr. Cárdenas, the milk importer, has responded to the regulations by cutting his staff to a dozen employees, from 280 in 2001. He is using his office space to start a construction company and is looking to produce agricultural goods not included in the long list of price regulations. "We're not idle," he says.

Mr. Chávez turned to price and capital controls after a two-month nationwide strike in 2003 that ravaged the economy. While his populist agenda was warmly received, some Venezuelans more recently have shown misgivings. In late 2005, highly publicized state expropriations led to a drop in Mr. Chávez's poll ratings, with approval numbers dropping to less than 50%.

Economists warn that the government is defying conventional economics and using a discredited tool -- price controls -- to curb inflation, rather than implementing tighter monetary and fiscal policies. Last year, inflation ran at just more than 14%, while the economy grew 9.4%.

The recent closure of the main highway connecting Caracas to its principal airports and seaports because of a problem with a bridge is threatening to push up prices further, making it harder for businesses to stay within price limits. Efraín Velazquez, head of the National Economic Council, expects inflation to rise this year as increased transport costs are passed on to consumers.

Venezuela has a checkered history with government intervention. Mr. Chávez's predecessor, Rafael Caldera, imposed price and foreign-currency controls in 1993 following a domestic banking collapse that crushed the economy. The controls caused supply shortages and company closures while artificially containing inflation. When Mr. Caldera was forced to scrap the controls in 1996 to meet conditions for an International Monetary Fund loan, inflation shot up to 103%. The economic fallout hurt Mr. Caldera's legacy -- no one from his Convergence party challenged Mr. Chávez in the 1998 presidential campaign -- and the party slipped into obscurity.

The coffee strike in December has been the most vocal so far. Roasters shut their plants after the government raised the price of green coffee that farmers sell to roasters by 100% while leaving processed-coffee prices unchanged. After weeks of protests, the government agreed to raise retail coffee prices by 60%. But Pedro Obediente, a retired university professor living in Caracas's hilly suburbs, says he is still looking for his favorite brand. "I haven't found Café El Peñón, which is what I like," he says, referring to one of the country's largest roasting companies.

Businesses increasingly are finding ways to get around the price caps, and some stores violate the price controls outright. Top cuts of beef can sell for 30% more than the government-set price in Caracas supermarkets. Some businesses have turned to selling more-expensive imported meat instead of the regulated local cuts; others refocus their efforts on producing goods that fall outside the regulations. Milk producers, for instance, have boosted their output of unregulated goods, such as yogurts and cheeses.

Others simply bite the bullet. "Sometimes," says Juan Luis Bustamante, vice president for the Unicasa supermarket chain, "we just sell meat at a loss so we can keep people coming through the door."

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