Venezuela: Media hysteria over army role belies facts

Wednesday, November 27, 2013

Lurid articles about Venezuela have peppered the Western press in recent days and weeks. The latest event that has been widely reported is the use of the military to occupy stores, including the national electronics chain Daka, with a mandate to sell products at “just prices”.

This is viewed by most media outlets as further evidence of the chaotic mismanagement of the economy by the government. However, while there are serious economic problems in Venezuela, this one-sided portrayal prevents an informed debate.

As the prevailing narrative runs, the enforced sale of goods at low prices is a populist, and ultimately counter-productive bid to arrest the accelerating inflation of consumer prices.

However, the high prices in the stores in question are not due to high domestic inflation or the rising costs of production; these goods are imports and their prices should reflect the cost of importation. Except they don't.

To understand what is taking place, you must step back and look at the country’s exchange rate regime. Since 2003, Venezuela has operated a multiple exchange rate regime, with a limited supply of US dollars at a cheap rate and a slightly higher legal rate and an even higher black market rate.

This can have legitimate purposes (it effectively subsidises imports for poorer Venezuelans), but it also creates quite large incentives to profiteer by exploiting the difference between the various prices.

Agents with access to dollars, such as importers, can take advantage of the difference in the rates to create substantial profits. They can buy dollars at the low official rate and sell them at the higher black market rate, instead of spending them on imports.

Or they can buy imports with dollars purchased cheaply but sell them as if they were paid for with expensive black market dollars.

This is exactly the opportunity that the recently occupied electronics stores were exploiting.

There are claims from some private companies that they find it difficult to obtain dollars and thus have to source dollars on the black market for imports. But this is not the case for Daka, which receives one of the biggest allocations of dollars at the lowest rate.

However, Daka was selling goods at vastly inflated prices. For instance, washer-dryers imported at 4200 bolivares (US$668 at the cheap rate) were being sold at B47,000($7470).

Thus dollars earned through oil sales at PDVSA, the state oil company, were sold to importers at a low rate as an effective subsidy on imports. But rather than passing this saving on to the consumer, the importers were raking in giant rents.

It is in this light that the use of the army to occupy stores and force the sale of goods at their correct price should be viewed. It is a bid to remove incentives to abuse the exchange rates system and ensure the public subsidy of imports is passed onto the consumer.

This had an immediate effect and influenced similarly profiteering companies. In fear of being subjected to the same controls, Aldo, the international chain that has a network of shoe and accessories stores across Venezuela, announced it was cutting all of its prices by 50%-60%.

Unethical price rises such as this would be viewed with equal contempt in any Western country, and interventions in the market to correct this would be equally popular. See, for instance, the British Labour Party’s surge in the polls after its pledge to enforce an energy price freeze in response to the price rises for consumers in spite of falling wholesale energy prices.

The use of the army to intervene in the economy is, however, something far removed from what Labour would consider ― it prefers to use the army to occupy Middle Eastern countries, not electrical goods stores. It is also something that fits into Western outlets’ narrative of Venezuelan reckless and populist “caudillismo”.

There are more restrained explanations for its use, however. Its use can in part be explained by the Venezuela’s much more limited state capacity and weaker institutions, with the exception of the army, in comparison to developed states.

This is something shared by many developing states, which tend to have less infrastructural power―the power of the state to enforce its decisions through its penetration of civil society―in comparison to Western countries.

The army is, however, sometimes used to regulate the economy, even in developed countries, but with much less outrage from the press. Economic interventions to enforce consumer price controls are anathema to Western politicians, but it is not as politically taboo to use the army to regulate (downwards) the price of labour.

For instance, the British government has openly threatened unionised workers planning to strike with military strike breakers and has allegedly drawn up similar plans in the event of widespread public sector strikes.

Similarly, the army has been deployed to break strikes in many countries, including Spain and Greece in 2010.

In the US it was repeatedly raised as an option under Bush’s presidency, and has even been used ― breaking a 40 year absence ― under President Barack Obama.

This does spark anger from the labour movement, but it is not regarded with the same hostility, nor is it normally regarded as newsworthy by the mainstream press.

The only discernible difference between these cases is that, in Venezuela, the military is being used to intervene to protect consumers, while in these other countries the military is being used to strengthen the hand of bosses against workers.

In any case, this is not the only measure that the Venezuelan government is taking to reduce exploitation of the exchange rate regime. In particular, it is concentrating on greater monitoring of transactions through strengthening regulatory institutions.

It has also reformed the secondary legal rate: in the new system, it is transferred directly to external suppliers, bypassing the bank accounts of the importers and thus reducing the opportunity for black market leakage. Further regulatory reforms are also in the pipeline.

There is a legitimate debate on how best to reform the exchange rate system in Venezuela, a debate occurring within the country. The effective subsidy of imports ― implicit in the overvalued cheaper rate ― can be justified for food, and even white goods and industrial inputs. But it is harder to justify for luxuries.

However, the selective presentation of facts, without context, by the international media hinders any real discussion in the West.

[Slightly abridged from Venezuela Analysis.]


From GLW issue 990