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Commentary: Price Controls Boost Inflation

Price controls in Argentina and Venezuela lead to more, not less, inflation while hurting the soundness of the economy.


The governments of Argentina and Venezuela have several things in common: They are both facing growing inflation rates, unlike the rest of Latin America. They can boast of having the highest rates in the region. Finally, they also share another quality: they are making the problem worse by misguided policies, which include price controls.

In Venezuela, the government of Hugo Chavez is running newspaper ads denouncing "criminal speculators" that hoard goods and spike prices. It is also threatening to force the distribution of some 400 basic goods in response to the fact that supermarkets increasingly have no meat, milk or sugar. 

However, the shortages are not driven by criminal speculators, but fully legal import and distribution companies that are trying to avert selling at a loss after the government imposed price controls based on artificial - rather than market - prices on goods.

And rather than keep inflation down, the price controls are driving it up, as Pedro Palma, a well-respected Venezuelan economist who heads up MetroEconomica consultancy in Caracas, points out in our special report on the Venezuelan economy ( Venezuela: State Grows, But At Huge Cost). Venezuela will likely reach an inflation rate of 19.6 percent this year, which is worse than the 17.0 percent registered last year and one of the four highest rates in the world, according to a Latin Business Chronicle analysis of IMF forecasts.

The price controls in Venezuela follow similar policies in Argentina the past few years, which have also failed to reduce inflation there.  Thanks to the policies of President Nestor Kirchner, Argentina is set to reach 12.0 percent this year, the third year in a row of rising inflation. Kirchner has blamed everybody but his own policies for the rising prices - from foreign supermarkets and gasoline chains to local meat producers.

Argentina and Venezuela are among the only three countries in Latin America (Costa Rica is the third) set for double-digit inflation this year. By comparison, the regional average is set to be 5.2 percent, a slight decline form the 5.3 percent registered last year and a new record low. So, while Latin America as a whole is making impressive progress, Argentina and Venezuela are falling behind.

What does that mean? It means that everybody gets hurt. From the big multinational company that can't plan properly ahead (not knowing what its revenues or costs are expected to be) to the common citizen who will have to struggle with rising prices and declining purchasing power.

According to the latest pay increase survey by Mercer Human Resource Consulting, Argentine workers were expected to see the lowest increase this year thanks to the gap between their nominal pay hikes and the real inflation rates. Since the survey was released in September, both Argentina's and Venezuela's inflation forecasts for 2007 have been revised up. The new data shows that Argentine and Venezuelan workers will have a net loss despite salary increases of 11.8 percent and 17.4 percent, respectively.

The real cause of inflation is expansionary public budgets. So rather than attack private supermarkets and importers for rising prices, Kirchner and Chavez need to clean their own house first by reigning in ever-growing state expenses. And lifting any and all price controls, so consumers rather than bureaucrats decide the true value of goods.

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