3 September 2018

Lessons from Venezuela’s devastating price controls

Despite their recent experience of wide-scale food shortages, hyperinflation, and the vilest tyranny, many Venezuelans still believe —mirabile dictu —in the possibility of a good version of state socialism.

A recent example appeared in the Washington Post, where journalist Francisco Toro argued that Venezuela’s collapse cannot be attributed to state socialism alone because other socialist governments in South America did not bring about a similar humanitarian calamity.

Toro mentions presidents Ollanta Humala in Peru (2011-2016) and Evo Morales in Bolivia (in power since 2006) as examples of 21st century state socialists who have overseen economic growth and significant reductions in poverty. They can even handle a country’s finances with prudence, he affirms.

Sadly, Toro, like many of his countrymen, has failed to understand what state socialism actually is despite its destruction of his native land. In Venezuela, 21st Century Socialists, borrowing heavily from their 20th century predecessors, wrecked what was once Latin America’s most prosperous economy by taking what we might call the Seven Steps toward Socialist Ruin. These are:

1. Destroy the price mechanism with price controls

2. Nationalize the economy’s “commanding heights

3. Print money without restraint, destroy the currency

4. Block citizens’ access to foreign currency

5. Heedlessly run up the deficit and the national debt

6. Constantly increase wages by fiat

7. Put the militaryin charge of central economic planning

It would take far too much space to comment on each step in detail, but it is worth dwelling on price controls since Hugo Chávez applied them fairly early on in his presidency.

The marvelous thing about prices, economist Friedrich von Hayek wrote, is that no human being consciously designs them. Much like language or the market itself, a price arises unaided and, with a simple unit of money, it drastically simplifies the interplay between very complex processes, for instance rising transport costs, the shortage of raw materials and consumers’ subjective valuation of a product.

One way to destroy the spontaneous price mechanism is for the government to impose artificially determined prices on producers. As Ludwig von Mises, Hayek’s mentor, explained, prices set by diktat with no real relation to production costs and fixed below market levels create scarcity. In the case of milk, for instance, price controls will motivate producers hoping to avoid losses to stop selling their product. The result is less milk in the market and higher prices (in the black market) for that which is available.

In 2003, Hugo Chávez declared war on “speculators” and imposed price controls not only on Venezuelan milk, but also on sugar, coffee, beef, chicken, pork, grain, and pasta (he also severely restricted access to foreign currency). According to very unreliable official figures, price controls caused shortages of basic goods to increase from 5% at the outset to over 22.2% in ten years.

Chávez, however, refused to learn the lesson about the price mechanism even as he was unleashing mass scarcity. In 2011, he extended price controls to soap, detergent, shampoo, toilet paper, mouthwash, fruit juice and other products. To take one example, toilet paper was already scarce in Venezuela when Chávez died in 2013, as the government imported 50 million rolls and citizens, downtrodden but not without a sense of humour, shared videos on social media with theories on how to get by without it.

In 2016, scarcity of basic goods reached 82.6% in Caracas according to Luis Vicente León, the head of polling firm Datanalisis. Caracas, León added, was Venezuela’s best-supplied city. Scarcity has only worsened since.

Initially, the Venezuelan regime made up for shortages in national food production with imports paid with oil revenue. However, price controls and expropriations (see point # 2) had already destroyed the country’s productive sector once oil prices began to fall sharply in 2014. Last year, 93% of Venezuelans could not afford food. According to a recent survey, 60% of Venezuelans shed at least 11 kilograms in weight during the last year due to malnutrition. Contrary to what certain apologists would claim, this is not due to the fall in oil prices but rather to price controls and hyperinflation (see point # 3).

As Mises wrote, even if totalitarian socialists have good intentions in setting up price controls—namely making food cheap for the poor—the outcome is always the exact opposite. In Venezuela, price controls have brought about hunger and widespread misery.

One of the reasons why Peru and Bolivia have been spared a similar ordeal is because their leaders, regardless of their rhetoric or their political affiliation, have either fully skipped the first of the Seven Steps towards Socialist Ruin or have been far less adamant than Chávez in its use.

Humala, despite his initial affinity with Chavismo, did not govern as a state socialist. Rather, he generally respected and upheld what the Cato Institute’s Ian Vásquez described as Peru’s “increasingly successful market democracy.” In terms of free trade, Humala did not seriously undermine his country’s position in the Index of Economic Freedom, where Peru remained among the world’s top 50 free economies during his term (falling from place 28 in 2011 to 43 in 20015). Crucially, Humala did not interfere with the Peruvian constitution’s mandate that prices be left alone unless there are indications of market failure. This suggests that his concern for the poor was genuine.

Evo Morales, on the other hand, is far more similar to Chávez at first glance since he has made anti-Yankee imperialism a pillar of his government. He has established a vicious autocracy by persecuting the media, rewriting the constitution in order to stay in power, and even ignoring a referendum result that banned him from seeking reelection. His economic measures, however, tell a slightly different story.

In 2008, Morales imposed a maximum price for soy, sugar, sorghum, beef, and alcohol while banning the export of these products from Bolivia. When businesses, facing losses, cut back on production, the country faced shortages and was forced to import these goods. Morales, however, reacted in 2017 by reaching an agreement with producers and liberalizing the market.

Although Morales announced that liberalization was based upon a promise of “fair” internal prices, in fact he was recognizing that the only fair price is the market price. Whereas Chávez doubled down on price controls despite irrefutable evidence of their failure, Morales—at least in this instance—learned from his mistake and allowed market forces to save his country from widespread scarcity.

According to Bolivian economist Mauricio Ríos García, Morales has been very selective with price controls, implementing them when politically convenient but quickly getting rid of them once the inevitable consequences are out of hand. Contrary to what Toro claims, Morales’ example does not prove that socialism works in some instances; it only suggests that the Bolivian strongman, like Che Guevara t-shirt sellers, is skilled at marketing collectivism while yielding, however reluctantly, to the benefits of market forces.

Toro further comments that the Kirchners in Argentina, whom he calls “socialists in-all-but-name,” “ran the economy so poorly they very nearly brought about a Venezuelan-style collapse.” The reason they did so is because they faithfully applied steps 3 to 6 of the socialist program since 2003 (advancing also on point # 2.)

In 2013, Cristina Kirchner, faced with (self-inflicted) uncontrolled inflation, imposed price controls on 500 products in 50 cities, claiming that the initiative came from producers and sellers. Naturally, shortages ensued in stores while power outages increased. The reason for the latter, states Marcelo Duclos of Argentina’s Friedrich Naumann Foundation, was that the Kirchners, in twelve years of government (2003-20015), left in place subsidized prices of utilities services set in 2002.

Add to this the foreign exchange controls, which had caused a dollar scarcity and hence a shortage of materials for production, and you find that Argentina was indeed turning into Venezuela. It could not have been otherwise because they had taken the same measures, one of the most nefarious being price controls.

As a general rule, if you find a Latin American “revolutionary” leader aggressively controlling prices. you will discover a country speeding toward state socialist ruin.

Daniel Raisbeck is a Fellow of IFT, and founder of Movimiento Libertario, Colombia

Daniel Raisbeck

Daniel Raisbeck is Editor of the PanAm Post and Managing Director of the Bastiat Society.