There’s a fascinating read on the mess that is Venezuela here. Highlights follow.
(1) Government currency price controls exposed as futile by the coolest black-market exchange scheme I’ve heard about. The situation is this. The government imposes tight restrictions on currency exchange, including operating a fixed official exchange rate. However, it allows people to spend $5000 a year on their credit cards abroad. So Venezuelans take cheap flights to nearby Curacao, in a territory of the Netherlands and max out their credit cards on casino chips. Yup - casino chips - which they buy at the official exchange rate, turn around and cash in for dollars, and then cart the dollars home to sell at a profit (probably a whopping 63%, and possibly twice that last year) on the black market currency exchange.
(2) Killing the goose that lays the golden egg. That would, of course, be the state-owned petroleum concern PDVSA, which accounts for 90% of Venezuela’s export income. Chavez soaks it for $13.9billion a year to pay for his social programs (officially the company “contributes” this money), with the result that both production and income are down in this time of record oil prices. There is no money for the company to invest in future exploration and productivity increases. And indeed, it’s started demanding that customers pay within 8 days, as opposed to the normal 30 days - a sure sign that it is cash-strapped.
(3) Cars are good investments. Yeah - you know how you always hear that a new car is the worst investment you can make - that it loses value as soon as you drive it off the lot? Not in the craziness that is Venezuela, apparently.
And there’s an incentive to take out a car loan. The average interest rate on car loans in late April was about 27 percent, a couple of points below inflation.
“With cars, you never lose,” says Eduardo Pacheco, a pilot who says he bought a 2007 Toyota pickup truck in December 2006 that he sold this year for a 67 percent gain. “I wouldn’t leave any of my money in the bank.”
The government, of course, is only “helping” this situation:
The government imposed new import restrictions on cars this year, limiting the types of vehicles that can be brought into the country so that food importers can be given priority for dollars. That’s created even bigger shortages of popular models, says Silvestre Tovar, vice president of Iveco Venezuela, a unit of Fiat SpA’s truck-making division.
So who knows what Pacheco would’ve gotten if he’d waited a year. Double?
And of course the general truism about Venezuela - that price controls are killing everything - remains as true as ever. Imports surged 40% last year, while exports only rose 6.1%. That’s because most of what Venezuela produces besides oil is agricultural goods that are now subject to heavy price controls. Beef production, for example, is down 22%. So Chavez steals money from the oil company, hands it out to people who can’t spend it in local supermarkets (because there isn’t anything to buy), and so they spend it on imports instead. He’s turned Venezuela’s petroleum cash cow into a wealth transfer business for foreigners. Socialism works. Really.
Polls show it may all be coming to an end. Thanks to the shortages any credible economist could’ve told him would result from price controls (when has a serious price control ever FAILED to result in a shortage? Is there even a single example?), Chavez’ formerly rock-solid support is hovering at parity. It may just drop below 50% in time for an election. One can hope…