Things begin to fall apart in Venezuela

Simon Romero report in the New York Times about what happens when you combine price controls and the Dutch disease in Hugo Chavez-land: Faced with an accelerating inflation rate and shortages of basic foods like beef, chicken and milk, President Hugo Ch?vez has threatened to jail grocery store owners and nationalize their businesses if they violate the country?s expanding price controls. Food producers and economists say the measures announced late Thursday night, which include removing three zeroes from the denomination of Venezuela?s currency, are likely to backfire and generate even more acute shortages and higher prices for consumers. Inflation climbed to an annual rate of 18.4 percent a year in January, the highest in Latin America and far above the official target of 10 to 12 percent. Mr. Ch?vez, whose leftist populism remains highly popular among Venezuela?s poor and working classes, seemed unfazed by criticism of his policies. Appearing live on national television, he called for the creation of ?committees of social control,? essentially groups of his political supporters whose purpose would be to report on farmers, ranchers, supermarket owners and street vendors who circumvent the state?s effort to control food prices. ?It is surreal that we?ve arrived at a point where we are in danger of squandering a major oil boom,? said Jos? Guerra, a former chief of economic research at Venezuela?s central bank, who left Mr. Chavez?s government in 2004. ?If the government insists on sticking to policies that are clearly failing, we may be headed down the road of Zimbabwe.?.... In an indicator of concern with Mr. Ch?vez?s economic policies, which included nationalizing companies in the telephone and electricity industries, foreign direct investment was negative in the first nine months of 2006. The last year Venezuela had a net investment outflow was in 1986. Shortages of basic foods have been sporadic since the government strengthened price controls in 2003 after a debilitating strike by oil workers. But in recent weeks, the scarcity of items like meat and chicken have led to a panicked reaction by federal authorities as they try to understand how such shortages could develop in a seemingly flourishing economy. Entering a supermarket here is a bizarre experience. Shelves are fully stocked with Scotch whiskey, Argentine wines and imported cheeses like brie and Camembert, but basic staples like black beans and desirable cuts of beef like sirloin are often absent. Customers, even those in the government?s own Mercal chain of subsidized grocery stores, are left with choices like pork neck bones, rabbit and unusual cuts of lamb. With shoppers limited to just two large packages of sugar, a black market in sugar has developed among street vendors in parts of Caracas. ?This country is going to turn into Cuba, or Ch?vez will have to give in,? said C?ndida de G?mez, 54, a shopper at a private supermarket in Los Palos Grandes, a district in the capital.... Fears that more private companies could be nationalized have put further pressure on the currency as rich Venezuelans try to take money out of the country. Concern over capital flight has made the government jittery, with vague threats issued to newspapers that publish unofficial currency rates (officially the bol?var is quoted at about 2,150 to the dollar).... But recent expropriations of farms and ranches, part of Mr. Ch?vez?s effort to empower state-financed cooperatives, have also weighed on domestic food production as the new managers retool operations. So has the flood of petrodollars into the economy, easing food imports and making some domestic producers uncompetitive, an affliction common to oil economies. ?There seems to be a basic misunderstanding in Ch?vez?s government of what is driving scarcity and inflation,? said Francisco Rodr?guez, a former chief economist at Venezuela?s National Assembly who teaches at Wesleyan University. ?There are competent people in the government who know that Ch?vez needs to lower spending if he wants to defeat these problems,? Mr. Rodr?guez said. ?But there are few people in positions of power who are willing to risk telling him what he needs to hear.? It will be interesting to see whether Chavez will reverse course. His supporters repeatedly point to Chavez's apparent successes in poverty reduction as the hallmark of his administration (though those "successes" are more illusory than real). Inflation above 20%, however, is a guaranteed recipe for increasing economic inequality -- because only the rich can move their capital abroad or otherwise hedge against inflation. Developing.... UPDATE: Chavez is now on a goodwill tour in the Caribbean trying to buy more international support. According to the AP, "The crowd, however, did not respond with applause to the Venezuelan leader's vitriolic statements."