Busting the myth of the Law of Fair Prices

Young and empowered

Young and empowered

FACT: on January 20, 2014, during an interview televised by Venevisión, Andreína Tarazón –National Superintendent for the Defense of Socio-Economic Rights- said that the Law of Fair Prices is a byproduct of President Maduro’s strategy to establish new, efficient, effective, and swift Government methods.

She claimed that the Law of Fair Prices “doesn’t seek to limit the private initiative, but aims to boost national production and secure the worker’s access to goods and services.” And about the penalties foreseen by the new piece of regulation, Tarazón said that they would be implemented progressively under the “principles of justice” and that “the Judicial System would play an important part in setting them.”

CONTEXT: the Law of Fair Prices was published on January 23, 2014 (G.O. Nº 40.340), after being decreed by Nicolás Maduro through the Enabling Law. On November 2013, right after the Dakazo, the Central Government started the so-called “economic offensive” through the inspection and audit of businesses that were supposedly speculating with their prices. The Law of Fair Prices constitutes a new phase of said strategy, seeking to “stabilize” the economy and specially the prices and the supply of goods and services: inflation reached 56.2% in 2013 –the world’s highest rate, and Venezuela´s highest level since 1996- and scarcity averaged 20.8% -the worst result in the range of public data available.

The Law of Fair Prices sets a maximum profit rate of 30% for any producer or trader, and established all goods and services required to produce or sell as being of “public use,” which simplifies any possible expropriation. The Law of Fair Prices also created Sundde, a Superintendency that assumes the duties of Indepabis and Sundecop, and is led by the also Minister for Women and Gender Equality, Andreína Tarazón. In particular, Sundde will determine prices and profit margins, and will be able to penalize any illicit behavior foreseen by the new Law.

DEBUNKING THE ARGUMENT:

  1. A novel policy. The goals and the tools found in the Law of Fair Prices are anything but new. The Central Government is known for its interventionist economic policies: (1) Current price regulations and foreign exchange control were first implemented in February 2003. (2) The Organic Law of Food Security and Sovereignty, approved by Chávez in 2008 through an Enabling Law, established that all goods required to guarantee food supply were deemed of “public utility.” (3) The Law of Fair Costs and Prices, approved by Chávez in 2011 through an Enabling Law, created Sundecop –a Superintendence- to audit and control production costs, to guaranty fair profit levels and to avoid price speculation. As for inspections go: (1) Indepabis, which replaced Indecu in 2008, has been inspecting producers and traders for years and applies sanctions that go from fines to temporary take-overs, without ever having been curtailed by any other branch of the government or the judiciary. (2) Sundecop has been inspecting, auditing and sanctioning producers since its creation. Expropriations –or threats of- are nothing new either: the Observatory of Venezuelan Property registered 915 expropriations in the trade and industry sectors between 2005 and 2011. And when it comes to criminal sanctions, 57 people have been detained for alleged price speculation.
  2. Efficiency, effectiveness and swiftness. Venezuela is among the countries that requiere the most time and money to do business: it takes 17 administrative procedures and 144 days to start a business, and the country is the 3rd economy with the most difficulties to fulfill tax obligations. The Law of Fair Prices adds even more bureaucratic obstacles: (1) It creates a Single Register of Economic Agents, only two months after the Single Register for SMEs was implemented and a couple of years after the Law of Fair Costs and Prices established a National Registry of Prices of Goods and Services which proved to be a rather complicated practice. (2) To request dollars –offered at the official exchange rate-, companies must request a “Certificate of Fair Prices” from Sundde. (3) To have access to dollars, companies must sign a letter of faithful compliance with the proper use of the foreign currency, a prerequisite set already by the Law of Cencoex (November 2013). (4) Goods produced or bought with legal dollars must be identified with a label. But even more so, it’s practically impossible to monitor real-time changes in prices in all stages of the production and distribution chains of any economy, which means: (1) Regulations are partially enforced, starting with a few priority sectors. In 2011, Sundecop started by regulating only 19 cleaning agents and personal care products, and Tarazón already said that the Law of Fair Prices would be enforced progressively. (2) Even with a short amount of regulated items, the bureaucratic system fails to identify the real costs of production and to implement the necessary adjustments. In determining “reasonable” profit margins, common costs and investment requirements were usually left out. And even though fixed prices were quickly left behind due to high levels of inflation, the regulatory body chose to keep artificially low prices for as long as possible, even if it affected the sustainability of the production process. This is why the fixed prices of the 19 items regulated by Sundecop were never adjusted. (3) Not all the companies can be inspected and audited. On the one hand, it results in a few “exemplary” sanctions to encourage other companies to self-regulate their prices –at least until the burden of the rising costs become unbearable-. On the other hand, targeted sanctions create incentives for corruption among the inspection officers, including extortion and the illegal sale of seized goods.
  3. Boosting the private sector and domestic production. Venezuela is the 9th  least attractive economy to do business in, the 8th least protective of its investors, and holds the highest country risk of any country in the world. Under these conditions, the number of employers dropped by little over 190 thousand between the 2nd semesters of 2011 and 2013, and Consecomercio stated that over 4.000 companies closed their doors over the past 10 years. Furthermore, Venezuela keeps attracting less and less foreign direct investments (FDI): by 1998, Venezuela pulled in 7.24% of regional FDI, but by 2012 the number dropped to 1.46%. Direct control policies, like the Law of Fair Prices, increase administrative and bureaucratic costs, heighten the risks for producers and traders, and undermine the trust needed to encourage the creation of formal companies and to attract potential investors. The situation takes a turn for the worst when, after Fedecámaras announced that they would request the annulment of the Law of Fair Prices before the Supreme Court, Tarazón said that their position was “laughable” and that they “shouldn’t be taken into account: it’s like a thief, a rapist or a scammer asking for the annulment of the Criminal Code.” Under these circumstances, it’s impossible for the private initiatives to trust in a Government that presumes that any producer or trader is a felon.
  4. Protecting the access to goods and services. The policies that have been implemented to guarantee the access of Venezuelans to goods and services have been anything but successful, degenerating into inflation and scarcity. Cumulative inflation between February 2003 –when the first price regulations were applied- and December 2013 was 1,047%, while the average cumulative inflation of Latin America and The Caribbean in the same period was 97.8%. More disturbing is the fact that Venezuela’s food and non-alcoholic beverages inflation accumulated 2,069%. At the same time, by December 2013 46 products reached scarcity levels of over 40% and 21 products exceeded 70%. Regarding the 19 items regulated by Sundecop, after an initial drop of prices –two months, to be exact-, inflation started to rise and averaged 20% in 2013. And while their scarcity levels averaged 3% in 2011, by December 2013 the scarcity of –for example- dishwashers (liquid, gel or cream) was over 35%, of floor waxes was over 70% and that of toilet paper exceeded 80%. It should be noted that the already traditional policy of “expropriate to produce” has also been ineffective, because the companies absorbed by the public sector show red numbers – as chronicled in our book “Gestión en Rojo”– and by mid-2013 Conindustria stated that 1.190 companies that were intervened over the past four years were “paralyzed” and that there were more problems in the sectors with the most interventions.
  5. Under the principles of justice. The vagueness of some key elements of the Law of Fair Prices puts serious doubts over its right and “fair” enforcement. There’s no clear accounting rules for calculating profit margins, and the definition of economic crimes leaves plenty of room for interpretation. For example, the Law of Fair Prices talks of “reasonable costs” and defines usury as “notoriously disproportionate advantage”. It also defines hoarding, boycott, “fraudulent alteration of prices” and “destabilization of the economy” as crimes of intent, without specific parameters to identify them. Moreover, the companies are subject to the –fair or unfair- decisions made by Sundde. The fact that Tarazón said that the Judicial System would play an important part in setting the sanctions is a cause for concern. Venezuela is the 3rd country with less rule of law, mostly due to the lack of separation of Powers.

***

The Law of Fair Prices offers more hurdles and sanctions for private companies, reducing the incentives to produce in Venezuela. This Law might help shift the blame for the current economic crisis from the Central Government to the private sector, but it won’t stop the rise in prices or guarantee low scarcity. Tarazón’s statement is false.

8 thoughts on “Busting the myth of the Law of Fair Prices

  1. quite an elaborate rebuttal for such a non-argument from government monkeys that can barely spell. It looks to me just as insane as someone that tries to train the dog to do the deed in the newspaper by giving the dog a speech on hygiene… in latin

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  2. Well-written, but does anyone other than the Chavista faithful and complete economic ignoramuses with totalitarian tendencies believe in this myth?

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  3. @CatharSeamus @Rory

    Back in December, when analyzing the results, there was a wide consensus around Cadakazo and related economic measures having benefitted the government with a last minute approval uptick.

    So, there ARE people buying the government’s argument, who aren’t in the hardcore Chavista demographic. Most importantly, they’re the ones who decide which way the election goes. Nothing good can come from considering ourselves “the common sense people” and everyone else as the “complete economic ignoramuses” while also refraining to educate them in any way.

    Let’s climb down from the Ivory Towers.

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    • Cadakaso was a home run for Chavismo/Madurismo. Tells you how left-rooted Venezuelans are in general. So no reason to believe this law nor its effects will harm the government’s popularity in the short run. Not that Venezuelans benchmark against other countries either! Once our comrades begin to starve and eat their worthless Bolivares for some calorie intake then and just then might they react.

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      • The problem is most Venezuelans aren’t aware of the root of the problem. All they know is that their salary is not enough to cover the monthly food basket, there’s not enough items in the supermarket, and they have to queue for everything.

        When everything feels expensive, people instinctively yearn for someone or something to lower prices, and the government is taking up that “hero” mantle. What we need to explain to people is that things AREN’T more expensive, we’re all just getting poorer; a good way is to tell them that the minimum wage in Latinamerica varies from USD 200 – USD 400 monthly, inform them the daily VEF-USD exchage rate, and then asking them to convert their monthly salary to USD.

        We need to find ways to counteract the government narrative

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  4. Venezuela, like many or most countries of the region, do not have capitalism but a colonial trade system in which local consumption is penalized with constantly increasing prices.
    Prices in LatAm do not obey rules of capitalism. But the rules of the monopoly who has the political control.in societies that have inherited the political control since colonial times.
    Therefore, this article may have been written with a good intention, but describes a situation that only exists…in the article …like a fable.
    Example: How the illegal dollar is calculated?
    Citing words of Mr Roig from Fedecamaras: The value of the BigMac…an average of the trade value taken form the colombian smuggling and exchange mafias that trade on decrepit wooden or plastic tables at the side of the road at Cucuta..or even worse dividing liquidity over reserves ! only valid in a capitalistic economy firmly driven with monetarist criteria. Non applicable! because most of the commerce sells with margins averaging 800%.. Venezuelan businessmen are the main responsible of having deteriorated the currency with this colonial trade practices and of course direct responsible of inflation as well.
    Do I need to explain the smuggling business ravaging all kinds of food and gasoline to Colombia?
    Do I need to expose the links between San Cristobal Mayor with colombian paramilitary benefiting from this ferocious smuggling?
    Would Mr Maduro and its democratic elected government be able to extirpate this ominous deformity off the Venezuelan economy?
    If the Venezuelan people does not bite the bait of engaging in a civil war, then…we are home free.. yes freer than many other people including american people.

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    • Prices in LatAm do not obey rules of capitalism. But the rules of the monopoly who has the political control.in societies that have inherited the political control since colonial times

      I’m curious. If this reasoning is correct, why are the countries around Venezuela seeming to operate under normal capitlistic markets with minimal inflation when compared to a normative set by emerging markets in general? Why is Venezuela (and Argentina for that matter) suffering from massive inflation relative to their economies? Could it be that those two countries have the most interventionist policies within their own domestic markets? Could it actually be that the polities of the governments are creating their own inflation through textbook standard poor decision making?

      Please refer to this little document regarding inflation in LatAm in the past 10 years. Particularly, pay attention to page 12. http://www.gbm.scotiabank.com/English/bns_econ/latin.pdf

      Notice the ridiculous shift in macroeconomic infidcators for the two countries compared to the other 11 in South America?

      Venezuelan businessmen are the main responsible of having deteriorated the currency with this colonial trade practices and of course direct responsible of inflation as well.

      If you want to point the finger at monetarist behaviours, it isn’t in the smugglers,nor the businessmen, but rather the government who is simply printing, printing, printing like there is no tomorrow. Look at the amount of money in circulation and how it has exploded. Its almost like BizarroGreenspan is running the casa de moneta in Venezuela.

      Incidentally, the Big Mac Index is great for looking at relative levels of expenditure for a single item across multiple countries and is not, nor has ever been, intended for determining currency values. You want to calculate the real daily rate of the bolivar? Pick 10 goods of any kind that are commonly used, such as gasoline, milk, fertilizer, or whatever you want. Then see what the market price in Cucuta in bolos and pesos and compare/contrast.

      The government is wholly at fault on this one with fixing prices below market prices anywhere else in the world. The Colombians, GNB, PoliZulia, Venezuelans or Martians didn’t create arbitrage; they are simply taking advantage of it. You want it to stop and retain the goods for consumption within Venezuela? Seal the border…but then, that would cut out the GNB and the other security and governmental forces out of their most lucrative financial opportunity.

      Give me numbers for explanations, not ideology tainted by romanticized revisionist history.

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