Venezuela’s Biggest Economic Problem

Last year, saying that a shortage of toilet paper was the reason, the Venezuelan government announced that troops would temporarily occupy a toilet paper factory and 50 million rolls would be imported “to calm the people.”

Several weeks ago, Clorox said it would no longer produce bleach and other household products in its three Venezuelan factories. With the Venezuelan government mandating rock-bottom prices, they were leaving because of three years of losses.

Meanwhile, Venezuela’s air travel problems are getting worse. In 2003, Hugo Chavez, (President/1999-2013), said airline tickets had to be purchased with Venezuelan money that the government would later exchange for an international carrier’s home currency. The plan though has not quite worked out. Owed approximately $3.5 billion dollars for their increasingly worthless bolivars, most airlines are now clamoring to get their money. Predictably, until then, Air Canada, Alitalia, American, Delta, United, Lufthansa and Iberia have either cut the number of flights or left Venezuela altogether. For Venezuelans, fewer flights mean another shortage and much higher fares. You can imagine also the convoluted itineraries that take people by bus to a neighboring country out of which they can fly.

We could go on and on with tales of Venezuela’s economic woes. The one common thread is the huge cost created by artificially lower prices. There are shortages caused by more quantity demanded as prices drop, shortages from hoarding by sellers who hope the price will rise, and still more shortages because of buyers who then sell their wares on the black market and in nearby countries. Correspondingly, time is wasted as people try to locate goods and stand in line. It all adds up to a massive underutilization of resources and an annual inflation rate that is close to 60%. (It even adds up to a coffin shortage.)

Our Bottom Line: Incentives

Artificial prices create perverse incentives.