Wednesday, June 20, 2007

Venezuelan inefficiencies

Some people are excited Venezuela is starting to make their own computers and supply their own food.

Did anyone ever stop to wonder why Venezuela didn't do this before? I can tell you there's a very good reason. It wasn't economically efficient. If making Venezuelan computers and food costs more than importing them, then entering those markets is bad for the Venezuelan economy.

Moreover, if the prices for such goods are being kept artificially low via government subsidies, then it's doubly bad because consumers are paying to have lower prices, whether they buy the goods or not. That means everyone's real income is dropping even more than it normally would with just the inflation due to the increase of currency into the market because of the government making the Venezuelan central bank print more money.

Small wonder there's yet another strike.

Regardless, the price ceilings installed by Chavez are making shortages of many staple goods in Venezuela.


Daniel said...

The element you didn't mention in that equation is the value of Venezuela's currency. The reason it was cheaper to import is because Venezuela has kept its currency overvalued. A better strategy would be a devaluation of the currency to make imports more expensive and exports cheaper, giving domestic producers an advantage. Subsidies could be given instead in the form of food stamps to offset rises in food prices that would inevitably occur.

Jdvn1 said...

Thanks for the comment, Daniel!

Do you mean that Venezuela previously kept its currency overvalued? It's now worth very little, and inflation in Venezuela is high. Imports are already very expensive.