Venezuela's Economic Stability Questionable as Inflation Figures Remain Sky-High

| Sept. 8, 2011 |

Published by Minyanville

Venezuela’s consumer price index rose 2.2% in August, compared to the previous month, pushing the figure for the 12 months to August up to 25.8%. The country’s Central Bank is keen to point out that inflation is much lower than the 12-month figure posted this time last year, 29.7%.

The figures are some of the highest in the world and so slight dips will not convince anyone of stability in Venezuela’s economy. The first eight months of 2011 alone saw an 18.6% rise in consumer prices with the country’s capital Caracas the worst hit. For the 12-month period ending in August there, the figure is higher than the national average at 26.5%.

It is food that has stimulated the country’s staggering price rises. With elections coming up next year, Hugo Chávez is keen to curb the figures. Increasing food production is one tactic that will lower the country’s dependence on imports. However, the government’s price controls are becoming much stricter, drawing criticism from many who expect inflation to only increase with the measures.

José R. Cárdenas, who spent five years working for George W. Bush on Latin America, points out in Foreign Policy that Venezuela ranks 129 out of 129 countries in the 2011 International Property Rights Index and 172 out of 183 in the World Bank’s 2011 Doing Business Report. However, Chávez’s supporters—who are mostly working and lower class—won’t be troubled by these statistics and are likely to continue to lap up his populist rhetoric and social programs which are being injected with new life as elections loom.

Cárdenas cites a new study, Gestión en Rojo (Management in the Red) which attempts to explain Venezuela’s economy. It claims the blame lies primarily with the government’s excessive confiscation and nationalization of the private sector.

Some 1,000 companies have been seized since 2002. Even as he languishes in the hospital, recovering from chemotherapy, it seems Chávez is still very much able to continue. “We have to take the last square meter of land from Smurfit,” he said, referring to Irish firm Smurfit Kappa. “Let's move more quickly, that's an order.”

The study tracks 16 nationalized companies for two years. “The results are hardly surprising,” writes Cárdenas. “Most of the enterprises are running at only a fraction of their capacity and depend on direct government subsidies to maintain operations, if they are operating at all.”

With price controls in force and only becoming more stringent, companies are selling products at a cost that competes with production costs. This coupled with political directives runs them into the ground.

Support Still Steady

However, support for Chávez appears steady, with approval ratings around 50%—perhaps highlighting the incredibly polarized view of the president in Venezuela. Caracas-based polling firm Datanalisis has said that support was around 49% in July, just down from 50% in June. With a three-point margin of error, it seems support is stable, though key issues such as crime, corruption and the economy are facing increased disapproval for the first time, according to the polling company.

President of Datanalisis Luis Viicente Leon, thinks this may be to do with Chávez’s recent lack of airtime, compared to his ubiquity on Venezuelan television sets over the last decade. “Chávez isn’t as present as he was before, and so people may perceive that the country is a bit paralyzed,” he told the Associated Press. The president completed his third session of chemotherapy towards the end of last week, saying he “couldn’t feel better.”

Chávez’s latest drive is a socialist car project for Venezuela. Alongside Chinese automaker Chery, the Venezuelan government is looking to bring cheap cars to the masses. “This is the revolution advancing,” Chávez said on Monday. “These quality, good-looking and cheap cars are coming to Venezuela. Only under socialism is this possible.”

Cars will be sold at “half the price of the capitalist market,” according to Science, Technology and Industry Minister Ricardo Menéndez. Two cars are likely to be produced. A small hatchback is expected to cost around $20,000 while a larger, sedan-type vehicle will cost $28,000.

However, criticism is rife. "What Chávez fails to mention is that taxes are a big reason why cars are so expensive here,” Raúl Alvarez, director of industry magazine La Guia del Motor, told Reuters. Major car companies, including Ford (F), Chrysler and General Motors (GM) manufacture parts abroad before assembling them in Venezuela.

“Venezuela imposes a 40% tariff on imported cars, so the factory will now clear that bottleneck and boost sales,” said Chery’s Vice President Zhou Biren, clearly pleased to be on the right side of the tariff.