- By Juan Cristóbal NagelJuan Cristóbal Nagel is a professor of economics at the Universidad de los Andes in Santiago, Chile, editor of Caracas Chronicles, and co-author of the book Blogging the Revolution.
Every day, Venezuelans wake up to find many basic staples missing from store shelves. The scarcity of toilet paper, for example, made headlines worldwide after the government announced it would import 50 million rolls to meet demand. Venezuelans are so desperate to find what they need, there is now a new iPhone app that helps you locate many products based on information shared by consumers themselves.
The app is a creative stop-gap solution for what looks to be an endemic problem, one that the government is either unable or unwilling to solve. This became clear when the president of the government’s statistical agency downplayed the toilet paper crisis by saying the short supply was a result of Venezuelans eating more food than ever before, providing valuable fodder for local comedians.
Putting the punch lines aside, the scarcity crisis is profound. It’s not just toilet paper that is missing. Soap, tooth paste, mouth wash, wheat flour, corn flour, sugar, rice, canned tuna, milk, margarine, chicken, certain medicines, and even the wine used in Roman Catholic Masses have all been absent from the shelves in the last few weeks.
The reason why Venezuela, one of the world’s largest oil producers, suffers even as the price of oil hovers at more than $100 per barrel seems counterintuitive. Somehow, the government has concocted a system where despite fairly stable access to oil revenues billed in U.S. dollars, they don’t have enough foreign currency to purchase basic staples. For a country that produces hardly anything itself, this is highly problematic.
The problems of the local toilet paper industry are illustrative. Typical of the global supply chain, many inputs that manufacturers need to produce toilet paper are also imported. But since Venezuela has extensive currency exchange controls to regulate the flow of foreign currency (which can either be bought/sold or obtained through trade), the government must approve all imports — and the red tape involved is legendary.
In theory, the way the Venezuelan system should work is the following: The government authorizes imports by selling dollars that businesses buy to make international purchases at a heavily-subsidized price — discounted at a much lower price than what the black market sells it for. After the imports have arrived and have cleared customs (lines at ill-equipped Venezuelan ports can last weeks), local manufacturers produce their goods, and then sell their products at tightly-controlled prices.
But the government likes to meddle for political gain. It also dictates labor policy by making tightly controlled salaries and labor movements. The result is very anti-business and in effect typically sets profit margins at very low levels. The drive to regulate everything by way of clueless bureaucrats also means that warning signs are routinely missed. For example, Venezuela’s "Cost and Price" regulator famously declared last January that the government could guarantee toilet paper supply was adequate, and that the "supposed" scarcity was simply not true.
In reality, the government’s ineffective regulation not only discourages investment, but creates incentives for people in the chain of production to take advantage of access to cheap dollars and sell them in the highly profitable black market. With "import dollars" reallocated to currency arbitrage, there is little money left to import the raw materials needed to make things that Venezuelans need.
Meanwhile, another profitable market has emerged in the border region. Many subsidized consumer goods that are still available end up in Colombia, where they are sold at market prices. It’s a hugely lucrative business, which has prompted rationing initiatives as a form of deterrence.
For example, a few weeks ago the governor of Zulia — a large border state — announced an electronic rationing scheme through which consumers would be prevented from buying large quantities of consumer goods by registering their purchases with their fingerprints. The outrage in public opinion was so severe, the government was forced to backtrack on the scheme, but offered no alternative solution.
According to David Cahen, CEO of the local branch of paper manufacturer Kimberly-Clark, delays in imports were the root cause of the problem in his sector, but production should start kicking in now that the government is showing some flexibility. Backlogged requests for currency have apparently been approved, but it may take weeks for production to jump start. In the meantime, they will rely on imports to meet demand.
It’s all well and good that the government is finally addressing its own distortions, but scarcity will persist as long as acquiring currency remains an issue. This brings us to why currency has become so hard to find, in spite of the high price of oil. Even last year, in the midst of an oil boom, the late Hugo Chávez had to resort to foreign lending to keep scarcity from appearing in the middle of a presidential campaign.
The problem, quite simply, is that though oil exports are extensive, they don’t bring in enough to support Venezuela’s large population and socialist state. Compare Venezuela to other petrostates: Kuwait, for examp
le, exports roughly 2 million barrels of oil per day, and this helps support a population of roughly 2.6 million. Each Kuwaiti citizen ends up then "exporting" about three quarters of a barrel per day. Venezuela exports 2.6 million barrels of oil per day, but the rents are divided amongst roughly 28 million Venezuelans, which translates into about one tenth of a barrel of oil per person.
Venezuela actually can’t afford to lavish benefits on its citizens like other petrostates, but it tries to anyway. There isn’t enough oil revenue to finance both political subsidies and a functioning economy, and now that there is nobody left to borrow from, the problems are coming home to roost.
In almost cyclical fashion, strengthening local manufacturing could be a solution to this, but then again there are the heavy regulations and lack of adequate investment. So now, without being able to purchase goods from abroad, the few local manufacturers that exist are left to pick up whatever slack they can. But even while performing at full capacity, it isn’t enough to meet demand.
The Venezuelan economic model of excessive meddling is creating a mess. By keeping prices artificially low and imposing price controls on everything, they’re completely undermining the domestic economy to gain short lived political payoffs. Black markets occur when the formal economy isn’t functioning — and it hasn’t been for a while. Just between April and May, prices shot up an astonishing 6.1 percent.
In theory, importing things isn’t necessarily bad, as long as you have the currency to pay for it. The chavista economic model — export oil, import everything else at subsidized prices, regulate every step of the productive process, and forget about local manufacturing — works as long as you have an enormous flow of petrodollars. But even though the price of oil is high, it’s not enough to finance the needs of 28 million Venezuelans.
In the end, the toilet paper crisis will subside as measures kick in. But it won’t be long before some other scarcity crisis pops up. Unless something dramatic changes in the way Venezuelans conduct economic policy, they will continue relying on apps and hearsay to find the things they need.