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  HOME | Venezuela (Click here for more Venezuela news)

VenEconomy: The Remedy for Venezuela’s Economy Cannot be a "Dose of its Own Disease"

From the Editors of VenEconomy

The government of Nicolás Maduro is overwhelmed by the economic crisis caused by its controls policy. Yet, it continues to tighten foreign exchange and price controls further even though the most reasonable thing to do would be to rectify the course and remove all these controls for good.

Two of the latest measures taken by the National Executive regarding controls are: cutting dollar quotas for travels abroad and the centralization of supplies for drugs to treat chronic diseases. Both measures evidence that the ruling elite controlling the economy cannot – or doesn’t want to – understand that this path keeps pushing the country into an abyss of scarcity and corruption.

It can be said, as did local economist Enrique González Porras in his article "A Transitional Control for Pricing Management?," to be released in the April edition of VenEconomy, that "the remedy cannot be a dose of its own disease, or has any normative logic to legislate and act on effects, leaving the causes intact."

González Porras explains in his analysis that he finds the proposal of a "transitional control" that would maintain price controls – among others, those on foreign exchange rates – excessive, because "it is believed that freeing controls before increasing production" would end up being counterproductive.

To the economist, this would suggest a "complete denial or presumption of ineffectiveness of the price system and consumer sovereignty, replaced by bureaucratic-regulatory actions." And that "unless it can be proved with arguments and hard evidence, proposing a continuity in price controls turns out an ad hoc position."

He warns that "such position would derive, first of all, from the prejudice that all companies subject to price controls have a dominant position and incentives in order to exploit it; and, second of all, that price controls do not constitute one of the main sources of economic distortions at present."

González Porras argues that "for constituting restrictions to freedom and economic rights, price controls represent a sanction, which under the law – existence of the Rule of Law and Due Process – requires either an administrative procedure (should the regulatory structure follow the tradition of the continental European administrative law) or a trial (should it follow the tradition of the Common Law.)"

He explained the existence of "inflationary causes such as the inorganic financing of the deficit or an excess of liquidity for the economic activity level and the supply of goods and services; price controls will do little or nothing about this – except stimulating the black, parallel, arbitration and smuggling markets."

In short, as González Porras points out, "price controls are not perfect instruments for protecting equity and much less for the control of inflation. There are fiscal policies as much as for transfers and subsidies for the first case and, for the second one, policies of macroeconomic stability. In fact, inflation constitutes a public evil and not the product of the exercise of a widespread market power, a thesis that lacks micro-foundations."

González Porras recalls that "social inclusion and employability and the safeguarding of the currency’s purchasing power, of wages and salaries, cannot be achieved by means of price controls, but by means of dynamic incentives in favor of creating economic activity and jobs as well as improving productivity as a key social benefit to generate wealth and well-being."

And in conclusion, he makes it clear that "when there is a serious shortages issue, the price controls as bureaucratic rules of distribution of the value of assets, are absolutely and completely innocuous for social welfare, because they do not represent a loss in allocative efficiency or an increase in the satisfied demand." That is to say, they do not promote production increases making the shortages issue worse.

VenEconomy has been a leading provider of consultancy on financial, political and economic data in Venezuela since 1982.

Click here to read this in Spanish



 

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