Market forces can be very powerful indeed. As acknowledged by
president Chávez a few nights ago in an interview, his Government has
been using trial and error, looking for solutions to problems in the
last eight years and while errors and mistakes have been made, he
thinks that his Government now has the “bull by the horns”. Or so he
The problem is that the Government seems to ignore market forces and
creates distortions on top of distortions, which ignore the basic
principles of economics and how human beings react to opportunities.
When the Government created its supermarket network Mercal, it was
supposed to be a way of delivering cheaper goods to the poor. Mercal
could obviously sell goods cheaper than anyone. It paid no custom duty,
it received all of the currency it wanted at the official rate of
exchange, it was handled by military at all levels so it only had to
pay labor for a reduced non-military workforce. Finally, it was not for
profit and thus would pay no taxes.
Later, the Government established price controls for certain
foodstuffs and they applied to a large fraction of the products sold by
Mercal. As inflation drove prices up, the Government allowed controlled
prices to increase only slowly or not at all, creating a huge
discrepancy between controlled prices and free market prices. Thus, the
Government had to start subsidizing many of these products in order to
keep prices down. For many products, it was or is impossible for local
producers to even compete with Mercal subsidized prices. This has
basically become a trap; foodstuff prices are up 19.9% since May so
that in the face of the election, the Government does not want to
approve any increase of controlled prices and has to spend more money
on subsidizing these products.
But market forces have now intervened in the form of the huge work
force of street vendors, estimated to be 300,000 in Caracas alone. They
simply go to Mercal, buy as much as they are allowed to and go and sell
the products in the streets at market prices, thus creating what we can
call “Street Vendor Arbitrage”. The differences are huge and so are the
profits of the street vendors. A kilo of powdered milk, for example,
that sells at Mercal for Bs. 4,700 (US$2.18 at the official rate of
exchange) goes for Bs. 15,000 (US$ 6.97) from the street vendors, wheat
flower, Bs. 1000 at Mercal goes for Bs. 2,500 in the streets, sugar Bs.
740 at Mercal, Bs. 3,000 in the streets and so on. Of course, you can’t
always find all the products at either Mercal or informal markets, with
sugar, milk and some vegetables being in short supply regularly.
The Government’s solution to this problem is typical: Next week a
decree will be issued prohibiting the sale of Mercal products by anyone
but Mercal vendors and the National Guard will receive instructions to
begin inspecting street vendors and allowing the guards to confiscate
the goods from anyone trying to sell Mercal products. Of course, all
this will just give more work to the National Guard, which in turn is
likely to charge a fee not to bother street vendors directly from the
vendors or the street vendors will create an early warning
communications system that will allow them to run or hide their
products anytime the National Guards comes nearby.
What’s next? Undercover cops to supervise the corruption of the National Guard? Who will supervise them?