Competition? Not in Venezuela

The conventional wisdom on Venezuela has Hugo Chávez’s government locked in a death match with the country’s embattled, shrinking private sector. But even if they aren’t fans of the man, many in Venezuela’s business elite have found ways to make a buck within the system he’s created.

What remains of Venezuela’s  "private sector" — farm, transport, banking, and manufacturing firms that have yet to be expropriated — is heavily regulated. I recently asked a top manager at one of the country’s largest private banks how they cope with this.

His response startled me.

"Yes," he said, "the government sets everything, from the interest we charge to our ATM fees. They decide how we allocate our loan portfolio — a minimum X percent for agricultural loans, Y percent for personal loans, and the like."

"But," he added, "this makes the market more orderly. We don’t have to decide how much we lend to whom. We don’t spend time finding out what other banks are doing. This levels the playing field for everybody. It’s smart."

Finding a silver lining in the government’s heavy hand may help to explain why the private sector is taking Chávez’s latest regulatory push in stride.

Last July, Venezuela’s legislature passed the "Law of Fair Costs and Prices," forcing private businesses to hand over detailed cost and production information. On that basis, the government is empowered to set a price ceiling for any product sold in the nation at any time.

Business may not be pleased with the new law, but since they can’t stop it, many are trying to turn it to their advantage. Their muted response may reflect what economists Frederic Scherer and David Ross call the "focal point" theory of collusion.

In a market economy, they argue, firms have the incentive to form a cartel, but the existence of an infinite number of possible price points makes collusion difficult. When the government steps in and sets a price ceiling that is high enough, this provides a focal point for all firms to coalesce around, stifling competition.

This may help explain the banker’s satisfied approach to Chávez’s economic policies. It could also be the reason why most Venezuelan private businesses, from airlines to insurance companies, have long ago stopped trying to provide quality products and good customer service. They’re simply coasting, focusing their efforts on getting the best possible price ceiling from the government.

In Venezuela, it seems, competition isn’t just rare; it’s actually illegal.