As structural inflation hardens, Chavez shuffles Cabinet looking for loyalty rather than expertise

January 3, 2008

This is a very good graph by Santander Investments which shows the problem that structural inflation has become in Venezuela. The gray curve shows the 12 month or annualized inflation in prices at each point in time since 2005 for items in the CPI which are not controlled.  The red curve on the other hand shows the same CPI annualized, but for items under control. As you can see, the items under control have never been able to yield an annualized inflation level of less than 10%. Moreover, you have to remember that it is precisely these controlled items that are seldom available at stores, so the “true” level of inflation is much higher. Given this, in the absence of new and effective economic policies to fight inflation, the current reconversion of the currency will become a useless exercize.

Note that for the last year the prices of items not under control have diverged from those controlled and that recently the difference is close to 20%, a huge number and while there is a suggestion that it is tapering off, the difference has only increased in the last few months.

Clearly, President Hugo Chavez needs new and more capable faces in the Cabinet to tackle these problems. One of the difficulties is that he personally pays little attention to coordinating economic policy and had left this on the hands of the Vice-President for at least the last year and a half. Rumor had it that Chavez was ready to bring new faces into the Cabinet, maybe move Tax Superintendent Vielma Mora into the Vice Presidency (He has been an effective manager, even if fairly ignorant o economic matters). Instead, Chavez has named Minister Of Housing Carrizales as the new Vice President. Carrizales managed to build less than 40,000 new housing units in 2007, while this is an improvement, in the bad old days of the IVth. Republic, 60,000 units was the norm not the exception. Thus, Carrizales has not been that effective in his position and now gets promoted to VP!

Chavez also moved Jesse Chacon to the Ministry of the Secretary of the Presidency, while moving the President of CANTV, Socorro Hernandez, to the Ministry of Telecommunications. Hernandez was thought to be way above her level of competence in CANTV and six months later she gets a promotion to Minister.

Clearly, Chavez is still shuffling people around, rather than looking for experts. He wants loyalty more than effectiveness and management capability. This bodes badly for him (and us!) in the near future, as there are significant problems that need to be resolved and tackled with true expertise. The most important positions that needed to be filled were the Vice Presidency and the Ministry of Finance, we shall see what the latter brings.

Politically, Chavez needs a good economist as Minister of Finance, who may (tough job!) be able to remove the strains in the economy slowly and stop inflation. From the looks of it, he will go for another crony in this all important position.


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