Friday, May 23, 2008

Chavez Price Controls Mean Record Oil Fails to Prevent Shortage

Good intentions, bad results.

President Hugo Chavez ... the avowed socialist is trying to redistribute the country's wealth, blunt U.S. influence and rid capitalism of what he calls its “anti-values.” Socialism is Christ; capitalism is Judas, Chavez says.

Chavez ... has defined socialism as “attending to all of the needs of everyone.” On this day, the Super Mercal isn't delivering on that promise. In a country blessed with enough crude to make it OPEC's sixth-largest producer, the store has no milk, no chicken, no cooking oil and no flour.

It doesn't work; that has been proven time and again.

Surging prices have more than doubled the value of oil in the past year. That hasn't put food on the table. Price-controlled staples are often in short supply. Beef production declined last year even as consumer demand surged. Venezuelans are buying new cars as investments. A currency black market is thriving. Inflation hit an annualized 29 percent in April.

Buying cars as investments; warped.

Smoked salmon and French wines show up on store shelves, yet Chavez found it necessary to order Petroleos de Venezuela SA, the state-owned oil company, to form a unit to distribute beans and rice.

Who suffers most?

“It's a dangerous thing when a mother can't get milk for her children,” he says. [Edwin Gutierrez, who manages about $5.5 billion in emerging-market debt at Aberdeen Asset Management Plc in London.]

It's cynical, really. Witness: Sterilized milk started reappearing on shelves more regularly after Chavez eliminated price controls and gave importers priority for the dollars they need. Such moves contribute to inflation, though. In Caracas, the capital, food prices soared 42 percent in April from a year earlier. Chavez removed controls on eggs and raised the regulated price on chicken in April to ease shortages.

He's micromanaging the national economy; absurd. Still, some accomplishments are undeniable.

Behind the swaggering rhetoric, Chavez has achieved some of his goals. In foreign affairs, he has forged an anti-U.S. coalition composed of Bolivia, Cuba, Ecuador, Nicaragua and, to some extent, Argentina. At home, the government is spending oil wealth by the billions, focusing on health care and education. Thousands of Cuban doctors have been flown in. In April, Chavez raised the minimum wage 30 percent to the equivalent of $372 a month, the highest in Latin America. That followed a 20 percent rise in 2007.

“There's no incentive to invest in new production now in Venezuela,” says Jose Guerra, the central bank's former director of economic policy. “There's been a massive increase in demand, but on the other side, there's a problem, because Venezuela is a country that produces almost nothing.”

Key words are no incentive.

“There are some products you just can't find,” insurance broker Diego Ramirez, 30, says. “Rice, cooking oil, beef – everything that's a basic necessity.”

Key words are basic necessity.

Chavez's fix consists of more social spending and a series of pricing changes on regulated goods. He's poured cash into the economy from PDVSA revenue, which has boosted overall economic growth. The oil company's so-called social contribution to the nation was just $34 million in 2001. By 2007, the floodgates were open. The $13.9 billion contribution last year represents a more than 400-fold increase from six years earlier.

One result: Venezuela's $182 billion economy has expanded an average of more than 12 percent in the past four years – the highest growth rate among Latin America's biggest economies.

$34 million seems absurdly low.

This I agree with: Chavez often criticizes the diversion of cropland to ethanol production, saying the shift is partly to blame for global food-supply imbalances – and rising prices at home.

Corn for fuel? And subsidized with price supports in the US.

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