Can Hugo Destroy Venezuela in Record Time?

Hugo Chavez is on a mission. A mission to destroy the country of Venezuela and crush the spirit of the people. Here we have an emerging socialist country, doing it’s best to emulate the failure of Castro’s Cuba, and Chavez may just be able to pull it off in record time.

In 2003, price controls on food staples were introduced in Venezuela to try to fight rising consumer prices. The list included all the basics: sugar, eggs, milk, beans, eggs, chicken, beef and more. Chavez has also demanded (it’s now the law) that banks provide loans to agriculture-related businesses at 15 percent, and extend the loan periods from an average three years, out to 20 years.

Since the current inflation rate in the country is upwards of 22 percent, and it’s becoming difficult to locate price-controlled food, the plan is not working out for Hugo. People are pissed off. The results have been disastrous.

These government decisions to, in effect, crush the Venezuelan economy, offer our readers an opportunity for another economics lesson.

Let’s say you’re a farmer in Kentucky. It costs you a certain amount of money to run the farm including planting, harvesting, employee costs, water, other utilities and maintenance of equipment. You grow corn, and the Commonwealth of Kentucky has instituted price controls that require you sell the corn for no more than $10 per bushel. The government feels that corn has gotten too expensive for the people. It’s just not fair, they had to do something.

As you review your costs, you calculate that it costs you $12 to produce a bushel of corn. Since the government has dictated the price of $10, you have to make some decisions. If you follow the new law, you’re going to loose your farm. Your choices are to stop farming, change your crop from corn to something else, or ship your corn out of state where you can make a profit. (The going rate in Virgina for corn is $13.50.)

This is exactly what’s happening in Venezuela, and is a clear example of what happens when a government institutes price controls on a product.

From CNNMoney.com (emphasis added):

Government officials have attributed the shortages to greed among retailers, accusing them of hoarding products for months to later sell them at inflated prices.

During Saturday’s meeting, Chavez said that “contraband” – illegal exports to neighboring countries – was partly to blame for the shortages.

Many foods fetch much higher prices in neighboring Colombia and the Caribbean, which has driven some businesses to sidestep customs requirements and smuggle goods over the border, Chavez said.

“This is a problem that we must remedy,” he said. “If the National Guard isn’t enough to patrol our border, I’ll have to deploy the entire army along the highways and byways to stop the contraband.”

What’s wrong with this picture? The farmers in Venezuela have a choice and they are making good decisions. If the farmers just stop producing anything, will Chavez deploy the entire army to all of the farms to demand that crops are planted, harvested and taken away? I’d call that slavery, pure and simple.

He’s also demanded that banks provide loans at rates lower than the inflation rate. From the same story as above:

“The law must be applied,” he [Chavez] said at a televised meeting with farmers on the weekend. Any bank that didn’t comply “should be seized”.

Mr Chavez also announced his Government had approved legislation establishing a maximum 15 percent interest rate on agriculture-related loans and extending payment deadlines from three to 20 years.

The same economics theory applies here. Since the banks are private entities – as they should be – they must be able to make a profit. We can discuss what a reasonable profit is at another time, but they still need to make a profit or they (bank shareholders) will simply close down the bank and find something better to do with their investments. Of course, Chavez has threatened to seize the banks that do not comply, so they better close the branches and accounts quickly and quietly.

But hey, with gas prices in Venezuela under a quarter per gallon – that’s right under 25 cents per gallon – who needs chicken?