Chavez decaffeinates Venezuela

After Hugo Chavez put himself in charge of the country's coffee sector last year, for the first extended period of time in the country's history, Venezuela did not produce enough of the little red berry to satisfy domestic demand. It has now become a coffee importer and is facing serious shortages, says columnist Mary Anastasia O'Grady.

The collapse of the coffee industry is emblematic of the wider economic catastrophe brewing in the country, says O'Grady:

For more than a decade, Chavez has employed price controls, capital controls and hyper-regulation in an attempt to meet his socialist goals.

When the predictable shortages have arisen, the government has responded by using the salami approach to nationalisation, slicing off a bit of the private sector at a time and taking it for the state.

Now the economy is sinking, says O'Grady:

The International Monetary Fund forecasts that while gross domestic product growth will pick up in most of Latin America this year, it will contract by 2.6 per cent in Venezuela.

Core inflation has been running above 30 per cent for two years.

To understand how things got this bad, look at coffee, says O'Grady. It was once plentiful in Venezuela. However, in 2003, with consumer-price inflation threatening to damage Chavez's popularity, the government imposed price controls. That drove down the incentive to grow coffee while increasing the incentive to export to Colombia whatever was grown, leading to less coffee for sale in Venezuela.

Last week Goldman Sachs analyst Alberto Ramos noted that the government now commands a large share of economic activity and it is reacting to any conflict in the private sector, real or perceived, with immediate threats of nationalisation. This is a major impediment to much-needed domestic and foreign investment.

Source: Mary Anastasia O'Grady, Chavez Decaffeinates Venezuela, Wall Street Journal, May 3, 2010.

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First published by the National Center for Policy Analysis, Dallas and Washington, USA

FMF Policy Bulletin/ 11 May 2010

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