Tuesday, February 20, 2007

Venezuela and Iran

Venezuela and Iran are providing a real world economics lesson to their citizens. Both these countries are command economies run by decree from on high rather than responding to market signals. And the results are just what economics predicts.

From the Miami Herald
CARACAS, Venezuela -- Meat cuts vanished from Venezuelan supermarkets this week, leaving only unsavory bits like chicken feet, while costly artificial sweeteners have increasingly replaced sugar, and many staples sell far above government-fixed prices.

President Hugo Chavez's administration blames the food supply problems on unscrupulous speculators, but industry officials say government price controls that strangle profits are responsible. Authorities on Wednesday raided a warehouse in Caracas and seized seven tons of sugar hoarded by vendors unwilling to market the inventory at the official price.

Hugo Chavez seems to believe that the laws of economics do not apply to him and his backwater of a country. But price controls always have the same effect - shortages. Chavez imposed price controls in an attempt to control inflation that is now officially pushing 17%. Unofficially, it is most likely a lot higher than that. That is an example of treating the symptom rather than the disease. The disease is excess money (bolivar) creation which when combined with controls to prevent capital flight causes people to react to protect their meager savings. If you can't convert bolivars to dollars (or some other currency) and your bolivars are worth less every day, the only thing to do is spend the money. And that feeds the inflation. With price controls pricing many goods at less than production cost, producers are unwilling to produce to fulfill the rising demand created by the capital controls. Thus shortages appear. Call it socialism or communism or whatever you want, but this is economic idiocy writ large.

Iran is also experiencing some shortages these days. Not suprisingly, the cause is the same. Iranians, sitting on top of some of the largest oil reserves in the world, have a shortage of fuel. There are two simple reasons for this. First, the actions of the mullahs over the last 28 years means that most multinational oil firms don't or can't do business in Iran. That wouldn't be a great problem if the Iranian economy were allowed to operate in a more market oriented fashion. But the need to maintain political control means the government must maintain economic control as well.

Second, the Iranian government subsidizes the price of gasoline. A subsidy has a similar effect to price controls. If you maintain the price lower than the market, demand will create shortages. It also creates smugglers:

From the Wall Street Journal
But an even bigger problem is the consumers themselves. That's because subsidies make energy practically free in Iran, discouraging any serious energy conservation. Gasoline, for example, costs about 40 cents a gallon at the pump. That's encouraged an explosion of use, as Iranians add new cars while continuing to use fuel-guzzling old models. It has also encouraged a brisk smuggling trade as Iranians buy millions of gallons of fuel at the subsidized price and truck them into neighboring Pakistan, Turkey, Afghanistan and Iraq for sale at market rates.

It is also interesting to note that oil production in Iran today is only about two thirds what it was when the mullahs took over. And they have to import gasoline to meet the demand they've created by subsidizing the price. They claim they need nuclear power to provide for future energy needs. What they need is an Amazon account so they can purchase a few copies of The Road to Serfdom or maybe Wealth of Nations.

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