Heterodox Friday: Panamanian price controls

 This blog has long taken the position that Hugo Chávez was uniquely incompetent. There was a time, back in 2008, where we gave him political props for building an effective machine. That admiration began to fade with the electricity crisis. Then some of this blog’s old readers (where have you gone?) made good arguments that the Chávez boom wasn’t all that it was cracked up to be, although we remained on the positive side of neutral. Sure, there were some shortages caused by price controls. But other than the insanity in the electricity sector, the controls could be justified as a means of income redistribution in a country that lacked the administrative ability to impose punishing income taxes. (This gets to a question from Randy that I will try to get back to.) 

Unfortunately, the Socialists proceeded to run completely off the rails. Their cardinal sin was keeping the bolívar pegged at 6.3 to the dollar. The resulting capital controls have led to massive shortages of imported goods. Had the exchange rate regime been liberalized after the 2013 elections, living standards would have been hit, but the economy would be in better shape now. As importantly, the Maduro administration would have the space to engineer a mini-boom before the midterm elections. As it stands, however, Venezuelan exchange rate policy stands as an incredible example of economic and political incompetence. 

After all, in a another world the people lined up to buy cheap goods at a state-owned supermarket would be grateful to the government which got it for them. But in this world they are quite angry at the government. Here is a good article by David Smilde of Tulane University that argues that it is too late to effectively reform. The Socialists are going to (a) lose the next election; (b) pull some sort of hat-trick involving Chinese money and a short-election season; or (c) actually turn Venezuela into a dictatorship. (The link goes to an earlier post here that argues that the Polity IV score ranking Venezuela as already dictatorial is bullshit. But we were would agree that it is not far-fetched to imagine Maduro abandoning democracy, possibly via unconstitutionally postponing the midterm elections. That Polity IV ranker may have been prescient.) 

Or maybe Trinidad will come to the rescue? On Wednesday, the Trini prime minister, Kamla Persad-Bissessar, offered to swap tissue paper for bitumen. “The government of Trinidad and Tobago will purchase goods identified by the government of Venezuela from T&T’s manufacturers, such as tissue paper, gasoline, and parts for machinery.” It is part of the Trinidadian charm offensive that just enabled a deal for joint exploration for natural gas in the Gulf of Paria.

But as strange as it is to see T&T riding to the of the Bolivarian Republic, I would argue that it is probably too late for (b). The government certainly has started to throw a lot of opposition leaders in jail. That is more (c) than (b), even if they manage to pull off a win without election fraud. (Stealing elections, we have to add, is hard to do in Venezuela. Some things Chávez did right.)

So what does all this have to do with Panama? Well, mainly a demonstration that I am not an orthodox right-wing buzzword-of-the-day. 

When President Juan Carlos Varela took office on July 1st, 2014, Panama faced an inflationary spiral. (See page 4.)To some extent, the idea of inflation in Panama sounds odd: the country uses the U.S. dollar. There has been no sign of inflation in the United States, so why were prices escalating in Panama? Simple: Panama was in the middle of a huge economic boom. (See page 19.) Incomes were rising fast and pulling up prices.

The traditional diagnosis in such a situation is that supply bottlenecks are the cause of the inflation. In that view, the right answers are (a) wait it out; or (b) slow economic growth via austerity. There were two problems with (a). First, the inflation hit the poor hard. In Panama, unlike the United States, overall turnout tops 75% and most people are still relatively poor ... governments cannot safely ignore them the way they do in North America. Second, prices are sticky. Increases in the price of food will translate into wage increases. In a dollarized economy, that means a loss of competitiveness and a serious adjustment problem ahead. (To some extent, that is what happened to Spain during the early years of the euro.) If you can keep inflation from escalating, you should.

The problem with solution (b), of course, is that austerity is painful. And there is a diagnosis in which austerity is unnecessary. What if the bottlenecks aren’t physical? Rather, what if they are caused by an uncompetitive wholesale sector? In that world, rising demand leads to rising prices not because goods are scarce but because wholesalers and retailers are using the opportunity to take profits. If that view is correct, a big if, then the government can use price controls to break the inflationary spiral. Merchants will have lower profits, but there will be no shortages: it will still pay for them to provide goods. 

My esteemed colleague in what remains of the blogosphere, Fausta, confidently predicted that shortages would result if Panama imposed price controls. (She is correct in pointing out that former-president Martinelli was a supermarket magnate!) Economists were more divided (the headline of the article is misleading) although they did universally insist that the controls should be temporary. 

President Varela went ahead with his campaign promise and imposed controls. The decree with the list of the prices can be found here. The ones I recognize are lower but not that different from the price in D.C.: frex, we buy chicken breasts for about 90¢ a pound. 

So what happened? No shortages. Lots of fines. A dramatic fall in inflation. The Varela administration has decided to extend the controls until July 2015. For more details you can find an August 2014 analysis from the Economics and Finance Ministry here. 

In short, a victory for economic heterodoxy, hooray! (FWIW, President Varela is from the conservative party in Panama.)

Of course, with no independent monetary policy, nobody in Panama has any incentive to take advantage of the controls to, say, print money and engineer an electoral boom. But still.

So there. I am against the Chavistas because they are incompetent and authoritarian, not because they are left-wing or heterodox. May there be an election in Venezuela and may the Socialist Party lose.

Comments

[shah8]

Oooooooh, so many red flags!

1) My primary objection to the stance of the blog is that Venezuela is not uniquely incompetent, as you know. In terms of scale, Nigeria's problems are just as big and fundamental, just differently spread according to the preferences of the elite sectors of society. I am essentially like Michael Pettis when I say that good times makes incompetent policymakers look better than they are, and bad times make incompetent policymakers worse than they are. It is simply not trivial to tease out what the true state of competence is.

2) I believe that there is genuine harm in this stance in the sense that it strongly underestimates both skill and political room available to Venezuelan elites and partners overseas, such that we overlook true best outcomes in favor of unicorn policies or painting adversaries as demons or something. I don't bother with Caracas Chronicles or *sniff* Fausta (after taking a look at what she generally talks about), or any of the usual run of, quite frankly, crazy right wingers. I similarly roll my eyes whenever I see Streetwise Prof approvingly linked to. Sane people like Smilde are quite drowned out by nonsense people. This is just not a good thing.

3) Venezuela was always headed for a dictatorship along either Russia and China's lines, and it's headed for dictatorship primarily because we don't have any expectations that insane right wingers should behave or otherwise be constructive. What can anyone do if these guys can't even make any sort of genuine appeal outside their class, their Caracas (or similar throughout S.A.) such that they can win affirmative mandates for *any* program, let alone something they'd want? Even if they *could* win an election, these guys would be astoundingly isolated among Venezuelan power sectors.

4) Contrast this with the major problems Venezuela has economically, which would not become mitigated with any 'enlightened technocrat' rule. Venezuela has a massive problem with capital flight, with smuggling, with underdeveloped manufactoring and human resources in general, and these problems, as far as I can tell, are not truly related to the confidence in government or business climate, but are related to very strong structural financial arbitrage framework created by a soft dollarization.

5) Sooner or later, enough parts of Venezuelan elite consensus is going to agree that the government needs a free hand. If soft dollarization is the issue, and that no devaluation will create a headwind against dollars being used for arbitrage instead of crucial imports; that free floating gasoline prices will not decrease smuggling, any more than low oil prices decrease fracking, because hard currencies are so much more appealing--well, don't you think that an FDR style ban on personal ownership of foreign currencies may well be in the cards, eventually? For such a ban to work, you'd need a pretty repressive government, eh?

6) As far as Panama is concerned:

a) Panama is small, and has theoretically manageable borders and overall government vision throughout the country. They can implement a reasonably effective price-control initiative without demanding too much out of their government, particularly since they're on the dollar anyways.

b) Panama has a degree of financialization, which the IMF admits to in that paper you link to, but I believe understates the issue. There is a great deal of hanky-panky with dark money in Panama's corporations, and I think much of that money has quietly boosted the Panama economy. If a lot of that inflation is simply from incoming dollar flows as people park money quietly, then price controls might not do much in broad inflation terms, as it's more of an excise tax on the finance industry. However, unwinding this, should money start flowing out of Panama for whatever reason, probably will be messy.

c) I think one shouldn't underestimate the greater leeway conservatives have in setting policy. Would you think that, for example, a President Mondale would have been allowed to do anything like the 1986 tax reforms? In the US, it seems that most fiscal measures are enacted by Republicans, while Democratic presidents usually have a greater impact on the economy through monetary policy, like the Greenspan Put. It really shouldn't be surprising that Varela can do what he did without too much noise, while people like Bachelet and Santos faces sustained warfare on even the most sensible and moderate fiscal policies.
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I guess, in short, I'm pro-Chavista, incompetent as they may be, because I think that in the greater scheme of things, they're not particularly bad, but that at the very least, rhetorically, they have an ambition of a state with a broad view of the populace and an expansive view of what the state can do. There is a comparison right next door, and I find Colombia's governance to be far worse. I also think that Nigeria's situation with Boko Haram echoes much in the way of Fujimori Peru and Shining Path, and both reflect priorities that creates a favorable climate for nasty civil conflict (not that these conflicts were desired, but that a certain flavor of third world neoliberalism fuels bloody grievances).

[Noel Maurer]

You don't follow Pettis's advice. The Chavistas looked bad in very good times.

You're wrong on point (4), young Jedi. None of those problems are exogenous to Chavista policy. The easiest way to think about it is comparatively, but you can also look at how policy has evolved over time.

Even a cursory look at other petrostates will show Venezuela to be in a league of its own. That includes Nigeria; the Chavistas took over a far stronger state than their West African compatriots.

If one believes that the Venezuelan opposition is uniquely authoritarian or incompetent, then one should be even angrier at the Socialist Party for needlessly destroying its own credibility as a governing institution. But I do not understand why you believe that to be the case. You do not have to like the opposition to think that by this point they would be less harmful than the Socialist Party.

As in the past on this topic, you've lost me entirely. Maybe this is the political version of #TheDress? It feels more like discussing global warming with Senator Inhofe, my friend. I keep pointing out how exactly Venezuela has been uniquely badly-governed --- capital controls, free electricity, endemic corruption, surreal crime --- and you keep saying it's not. But how not? The nation is in worse shape than Colombia and Ecuador, despite having been far better than those places in 1999.

It honestly does make me sad. So I will hope that someone else engages you, because I am tired. I can only say that the sky is blue so often.

I don't understand your point about Panama. Specifically, the PRD candidate would have done the same thing as the Panameñista president. My point, however, has nothing to do with that. My point is that there is nothing wrong with heterodox policy per se. When I argue that the Venezuela government has implemented terrible policies, it is not because I think such policies are always and everywhere terrible.

I hope you got my irony about Fausta. By the way, who's Streetwise Prof? (Googles.) Well, whaddaya know? Anyway, Francisco Toro is scary smart and quite moderate. Nagel, I think, sometimes gets a little upset, but I can understand that. It is his country.

[shah8]

Hmmm? Are you *really* sure about point 4? If I understand correctly what I've read before, I think I can make the convincing point that the basic nature of the problems Chavistas have predates them, and were a large factor in getting them power in the first place. You can, obviously, go with that the Chavistas made these problems *worse* than they already were, but I'd think that's a hard argument to make, given the practical outcomes of political conflicts. Every Chavista mentions the oil strike in justifying lack of progress, for example.

Well, when we first got into these arguments, I pretty much went on a bender reading about the other petrostates and other states with comparable HDI, etc, etc. And I was able to say, well, Turkey has a really bad current account deficit, and is likely to have problems before Venezuela. And indeed, the(an) acute phase of currency troubles has plagued Turkey before the acute phase in Venezuela. So long as oil is high, Venezuela's problems were manageable, however piteously. If you want me to concede on better management, throw me a line! How about Algeria? In what way has Algeria managed its economy better than Venezuela.

I do not think the Venezuelan opposition is uniquely bad. I find them typical of S.A. elite right wing tradition. The situation with them being so progressively frozen out of power is atypical--you normally see something like Santos vs Urribe. I don't think that they'd be any better, because I think they are, well, crazy and destructive. I can fully believe the Caracas mayor being involved in a crazy stunt of some sort, because they have a clear history in believing that demonstrations of violent intent can somehow rally the country to their banner, rather than alienating them. Corruption can be tamped down. Incompetence can be ameliorated with education and experience. Burning with fire?

Well, take a look at what's going on in Egypt. Morsi was far more of an idiot and incompetent tool than any Chavista. Did anything improve for the better when Al Sissi came into power? The rich brought back their money, some of it, and the economy started up, fitfully. However, the state is effectively backed by the GCC (as heard in those tapes where Army folks insults their backers as they decide how much money to ask for and how to split it up) and would be bankrupt without their help. None of the crucial reforms (Army enterprise, SOE) are being implemented. It's basically a police society with rapes/murders for all uppity Egyptians, men and women; enforced class occupations (no poor folks can get to be lawyers or judges, for example), civil disorder near the money making tourist spots, and generally few or no civil rights for the average Egyptians. I fully think that the Venezuelan right would be happy with such a situation, bolstered by a sugar-daddy US.

I had no idea that there was a #thedress until this morning, and had deep despair for the common human sense when I read about it. Of course, what we're ultimately talking about is whether there is a proper white balance. Someone who wants to engage me actually has to present some line of arguments directly comparing successful #other.economy with unsuccessful #venezuela.economy. You'd be surprised at how little there is of that sort of work by people who think Chavez did a bad job.

I have no doubts that the PRD would have *tried* to do the same thing as Panamenista. That doesn't mean they'd be *permitted* to do it. The Thai Military, for example, kept many of the subsidy structures that the Yellows decried as corruption, and I can keep citing other examples.

I have never read Toro and not come away with an impression of hyperbolic rhetoric. I don't think he's a moderate, and I don't think he particularly cares abotu engaging with people who might disagree with him. I *have* engaged with him in the comment section of Dartthrowingchimp. I am not impressed with his intellect, and I am quite used to intelligent people being idiots in some intellectual direction or other. I feel free to not be impressed because there are so, so very many people who are willing to lie or mislead about Venezuela out of irrational animosity.

[Noel Maurer]

I am being paid to analyze Ecuador and therefore cannot publish most of what I have to say here. But I will say that it does not rely on classified material and would be super-easy to replicate.

Oh, damn! There goes that new car I was looking at.