The Wall Street Journal-20080204-Americas- Desperado
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Americas: Desperado
Full Text (985 words)In 1981, Argentine inflation topped 130%, and by the early months of 1982 the situation was rapidly deteriorating. A web of price controls designed to compensate for monetary mischief at the central bank only made things worse. Confidence had collapsed and civil unrest was growing.
The military government's decision to lay claim to Britain's South Georgia Island on March 19, 1982, and later the Falklands, was dictator Leopoldo Galtieri's last-ditch effort to boost the nation's sense of strength, and to distract it from the reality that it was caught in an economic maelstrom.
Fast forward to 2008 and Venezuela, where the parallels cannot be ignored. The military government of President Hugo Chavez is engaging in provocations against a foreign power that would seem to have little purpose other than getting news of the crumbling economy off the front pages and ginning up nationalism.
In a speech before the national assembly last month, Mr. Chavez dropped a bombshell, proclaiming that Venezuela now recognizes the Colombian rebel group known as the FARC as a legitimate political actor. He went on to ask that European and South American governments remove the group from their terrorist lists. A day earlier his special envoy for FARC relations went public with his own fondness for the Colombian rebels, and with the news that the Venezuelan government stands ready to help them.
This was more than Mr. Chavez playing footsie with the FARC, which he has long been doing. This was a statement of official support for a band of outlaws who seek the destruction of the Colombian democracy. The news shook both nations. It suggested that Colombia is not only at war with the rebels, but also with a neighboring state.
Mr. Chavez probably doesn't really want war with the militarily superior Colombia anymore than Galtieri wanted to battle it out with Britain. But by poking his neighbor in the eye, he was undoubtedly hoping for some kind of a reaction, to which Venezuela naturally would be obliged to respond. Amid an escalation of tensions between the two countries, a nationalist outcry to defend Venezuelan honor might dwarf the many troubles at home.
Colombia's president didn't take the bait. Instead of getting in a spitting match with Venezuela, Alavaro Uribe went to Europe shortly after Mr. Chavez's FARC speech to shore up support for his anti- terrorist agenda. He came home with backing from E.U. foreign policy chief Javier Solana, French President Nicolas Sarkozy, and even Spanish Prime Minister Jose Luis Zapatero, who is notorious for his admiration of Latin American leftists. Mr. Chavez thus suffered yet another humiliation, only six weeks after he lost his bid to rewrite the country's constitution.
Hubris aside, Mr. Chavez had to know that his defense of the FARC was a long shot. But desperate times call for desperate measures. As the deterioration of the Venezuelan economy accelerates, Mr. Chavez is fast becoming a desperado with no better idea of how to get out of his jam than did Galtieri.
Central to his troubling circumstances is inflation. With Venezuelan crude oil around $80 per barrel, the local currency known as the bolivar ought to be strong. But the central bank has lost its independence and now acts as an arm of the Chavez government. As such it has shown little interest in defending the value of the currency.
Instead, it uses the gusher of oil dollars coming into the country as a reason to print up new bolivars to be put into circulation through government spending. This has pushed up demand and sent prices skyrocketing.
Just what Venezuelan inflation is now is anybody's guess. The government figure for 2007 is 22.5% but that number is derived from a basket of goods that includes price-controlled items, which are difficult to actually buy. In real life, when Venezuelans go shopping they have to pay market prices if they want to come home with the goods. This means that the cost of living is higher than the official rate.
Price controls haven't held down inflation but they have produced shortages of the goods they cover. Milk, rice, cooking oil, chicken, beef, pork, sugar, black beans and eggs are all hard to find and Venezuelans say that grocery shopping now requires stops at five or six stores. The most reliable sources of price-controlled items are street vendors, who charge two and three times the legal limit but tend to have stock.
Even Mr. Chavez recognizes that the shortages are real and not about to go away. And despite what appears to be a primitive understanding of economics, he may even have figured out the connection between prices and supply. This would explain why, as dire milk shortages became undeniable in recent months, he finally decreed an increase in the regulated price.
But don't hold your breath for further signs of enlightenment. Control of the oil industry has been the main reason Mr. Chavez has been able to squelch democracy. His own warped logic suggests that he needs to control other key sectors if he wants to keep his grip on power. If he can strangle the private sector, he can starve his adversaries.
This is why he is promoting government-owned food processors and has put a full-court press on private-sector agribusiness. Price controls now apply not only to the retail market but also to business transactions. This is designed to stop, for example, dairy farms from diverting raw milk to the production of cheese and yogurt, which have no price controls. Anyone caught violating price controls or selling products across the border in Colombia risks expropriation.
All of this is being policed by the army. With its monopoly on the use of force, the government can indeed destroy the private sector. But as Galtieri found out, it cannot decree that supply meets demand. As shortages become more acute, don't be surprised to see the Venezuelan desperado picking more fights.
