More on Venezuela Inflation: Mercal failing?

Yesterday I was noting that the cumulative inflation for 2006 had reached 12.5% with September. Then it was interesting to note that 1) the 12% target of the Chavez administration was busted, and 2) that inflation would be adding at least 1% a month for the rest of the year, bringing the final number at 15% or more.

But today some more details have come. First, and most important, is the inflation on food items. The cumulative number until September 30 is a whipping 19%! It is important to note that if there is an item which is undervalued it is the food prices. Why? Mercal, the state subsidized food system for the poor (and not so poor now) sells goods at controlled prices. In the price control system imposed in Venezuela for the last two years, Mercal is certainly the organization that can follow it the closest. After all Mercal is not run on a profit system, and furthermore the government is not afraid to import food at a given price and resell it at lower prices. The tax payer will pay the difference.

What does this mean in lay language? It means that the BCV uses at least in part the official subsidized prices of Mercal to calculate its inflation figures. So, if the BCV admits that food inflation over the first 9 months of the year is 19%, it means that in the private food distribution sector it is higher, probably significantly higher.

But you might say that this is all an academic talk, that it is OK that the government uses Mercal as another Mision, just to give money away to the poor. I will reply that not only there might be better ways to do so (Look at the past “bolsas de comida” programs where bags of food were targeted for free or with heavy discounts to the very poor that most needed it) but that Mercal fails because people like me could use it if we wanted and because now there is an extensive underground connection between Buhoneros and Mercal. The said buhoneros tend to have always available the items that are frequently missing from Mercal shelves and which they offer at a significant over price. Thus Mercal has become an electoral instrument and a corruption one. Both things usually go together in Venezuela.

But it gets worse. That 19% is an acknowledgment of failed economic policies, EVEN IF we accept 19% as the real figure of food inflation in Venezuela. The claimed objective of any control price system is to cool off a burst of inflation while avoiding the descent of large groups of people into outright poverty as their low wages and savings are eaten fast. I do not know of any long term price control schemes that worked, but one can argue that some short time control measures have worked on occasion.

Furthermore, the government has been mandating this year a total 30% minimum wage increase. First, this measure is highly unjust since it only serves people with a real job, about half the working force. The other half, buhoneros, home makers and unemployed get nothing from it. Second, the sector who must benefit from the mandated wage increases, sees it eaten by the simultaneous increase in food price. Even if they shop all at Mercal (which they cannot as there is not Mercal everywhere and Mercal does not carry may necessary items), the 30% will be gone by December and there will be no mandatory increase until next May.

After now 3 years of price control, it might be time for the government to rethink its policies as the price control is so blatantly flouted. It could do worse than imitate the “fame zero” of Brazil or coming back to the “bolsas de comida” which served low wages and no wages equally. But would be, oh so, 4th republic…