A Case Study on Venezuela's Shortage

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To explain what is really happening, let’s first recap how any normal economics market works and project it over our case. In general the price of a certain good is the equilibrium point where both supply and demand curve intersects. If the country produces more than it demands, than we face a surplus condition and the latest exports the good, but on the other hand, if the country demands more than its produces, the latest will import to cover its needs. Before 2013, Venezuela had no trouble importing as much as it needs from basic merchandise such as Shampoo, toilet paper or milk, but imports have fallen due to restrictive currency control and the depreciation of the Bolivar value against hard currencies making the government interference a necessitate.

Price restrictions, meant to stem the effects of inflation, which now hovers near 50% in the country, have backfired; lower prices have forced local producers to cut back on supply, leading more shortages and further fueling inflation. Many factories operate at half capacity because the currency controls make it hard for them to pay for the imported parts and materials. Business leaders say some companies verge on bankruptcy because they cannot lines of credit with foreign suppliers. Venezuela’s government had met the US dollar request of some 1500 small and medium sized companies facing supply problems, and was reviewing requests from a similar number of larger companies. (Venezuela hopes to wipe out toilet paper shortage by importing 50m rolls, 2014)

In addition, the government reacted rapidly by supplying large quantities of the limited merchandises with affordable prices such as 50 million rolls of toilet paper, 760,000 tons of food, nevertheless the problem presumed, yet more people are standing in line every day. As of February 2015, there was a 80-90% shortage rate of milk, margarine, butter, sugar, beef, chicken, pasta, cheese, corn flour, wheat flour, rice, coffee, toilet paper, diapers, laundry detergent, bar soap, bleach, dish, shampoo and soap toilet. (La Patilla, 2015)

Digging deeper into this phenomena, we can analyze some extremely important facts. Waiting in line means there is what you need inside the store, regardless of what it is, moreover, a person waiting in line indicates that he or she has enough purchasing power to buy the good otherwise they would not be standing there; thus the real question pops up: What is really going on ? What is the real cause?

In 2011, former President Hugo Chavez tried to fight the law of supply and demand which says that free markets set the price, the higher the demand the higher the price; and every producer who is willing to sell at the equilibrium price would do so and every consumer willing to pay for that price could afford the product. Chavez along with his political regime believed that the latest law robbed the poor by giving advantages for the rich and unjustly profited the producers. In 2011 he forced the law on fair costs and prices, a new price mechanism to ensure greater social justice and poor-rich equality. New “fair” costs and prices was empowered to establish fairness, 500,000 price edicts were issued. Companies that violate these prices were subject to fines, seizures and expropriation. The real problem is that in all cases, the prices set by the government have been below market, sometimes far below! This has caused production cutbacks, market shortages, massive government subsidies, runaway inflation and extraordinary government intervention. The most flagrant subsidy is for gasoline, the price of a gallon is 4 to 6 cents, the cheapest price of gasoline in the world! It costs the Petroleum company of Venezuela 2$ a gallon to extract, refine and distribute it. With domestic consumption of 600,000 barrels a day, the financial loss on subsidized oil is roughly 20$ billion a year! As of coffee for example, its price was fixed in 2003, causing a rise in production costs eventually made farming unprofitable, growers cut back on planting. Chavez responded by expropriating the largest Venezuelan coffee producer and taking a 50% stake in another. The government now controls nearly 80% of coffee production, with small farms supplying the rest. Despite the intervention, Venezuela does not produce enough coffee to meet domestic demand. The nation has been transformed from a coffee exporter to a coffee importer. In 2012 the government had to import more than 80 million pounds of coffee to help filling the gap between quantity demanded and the quantity supplied. Even at that, consumers line up early at government run stores when coffee deliveries are anticipated. The same kind of acute shortage bedevils the corn flour market. Bread prices are set artificially low to ensure that everyone can afford it. So is the price of corn flour. When bakeries can get some corn flour, however, they want to use it to produce higher-priced products such as specialty breads, not low-priced shelf bread. Shortages of both corn flour and bread result. In the black market, corn flour prices have been 50% above government price ceilings. The government has responded by accusing flour distributores of hoarding and bt seizing their inventories for distribution to the people. (Schiller, 2013)

The government did not stop on products; they extended the fait costs and prices to rental housing. Previous rent controls and limits on private investment had reduced the stock of rental housing by as much as 70% in only a few years. The acute shortage of rental housing led to skyrocketing rents in the black market and a lot of social unrest. Chavez decided that tougher rent control was needed. In November the government decreed that rents could not exceed a specified percentage of a property's market value. In response response to the growing housing shortage, the government decided to help increase the housing stock. Its goal is to build 3 million homes by 2019. But rent controls make new construction unprofitable and conventional financing unlikely. So the governmnet enacted a mandatory loan program that fixes mortgage rates at very low levels: : 4.33% for low-income borrowers and 10.66% for high-income borrowers. In an economy with inflation running at nearly 25% a year and rising, this is the epitome of free money. Naturally, no private bank would want to make such loans. But the new law requires banks to devote a significant portion of their loan portfolio to these mandatory mortgage loans. (Schiller, 2013)

Furthermore, this Latin American country shares up to 2,050 km its geographical borders with Columbia thus the impossibility to close borders between the neighbors. In fact, officials blame Columbia’s smugglers and businesspeople of hoarding and smuggling goods across these borders. Due to the price dynamics, the incentive to move goods and food