By JLP | June 25, 2010
I don’t know if you’ve been keeping up with the situation down in Venezuela or not, but it’s really interesting. We have witnessed Hugo Chavez nationalize various industries over the last few years. Most of this was started back when oil prices were high and could support Chavez’s ambitions.
Fast forward to today…
Now Venezuela is faced with both a recession on rampant inflation. Why? This article in today’s WSJ explains why:
Economists say Mr. Chávez’s populist economic policies are at the root of the problems, and that his attempted solutions are only likely to make matters worse, lengthening a painful recession that began last year.
“Venezuela’s economy is becoming so inefficient that it is having a harder time growing even with higher oil prices,” says Tamara Herrera, an economist at Global Source Partners, a Venezuelan economic forecasting group.
At the root of the current trouble was a huge run-up in public spending under Mr. Chávez’s government during the past few years on the back of high oil prices. To try to limit the resulting inflation, the president’s team resorted to price controls, which led to shortages and other problems.
One of the prices the government has tried to set is the exchange rate. But the system has grown in complexity, with effectively four different exchange rates, three set by the government and one set by the market—the black market.
I swear I could have read those paragraphs in Thomas Sowell’s Basic Economics 3rd Ed: A Common Sense Guide to the Economy*.
So why would Chavez pursue such a strategy as socialism? He claims it’s to help the poor but I think his motivation is much more sinister: total control. Chavez isn’t living with the mistakes of socialism. If he were living like the typical Venezuelan, he might have a different take on his policies.
Regardless, Venezuela deserves its own chapter in future economics books.