Why Venezuela has a black market for toilet paper?

toilet-paper-dollar-roll
Reuters/Umit Bektas

I was checking twitter yesterday and read what Tomi Lahren (@TomiLahren), host of “Tomi” on TheBlaze, said about Venezuela.

Tomi is right with this tweet:

So, as a Venezuelan, I want to give -a kind of For Dummies- explanation about the most important causes of this ridiculous situation: Venezuela’s price and currency controls.

Foreign Currency Exchange Control

It is all about crony capitalism at its worst. With this corrupt and ineffective system, the government provides its “socialist” friends billions of dollars -literally- to import a wide variety of products, including toilet paper and other basic goods.

Instead, most of these guys use the money for different purposes, like selling dollars in the black market -economists call it arbitrage– or purchasing properties in the United States.

Why they would prefer arbitrage?

Because it is more profitable. As of today the bid price for $1 can reach 3,000 bolívares (the local currency). So, the government gives them dollars at a cheaper rate (for example Bs. 600 per $1 and they sell at Bs. 3,000). This huge gap along with high impunity rates (they would not end up in a Venezuelan jail) make arbitrage easier and less risky than imports.

Why Venezuela must import toilet paper and other basic goods?

The socialist government of President Hugo Chavez, continued by his disciple President Maduro, carried out all kind of expropriations and confiscations you can imagine. This led to the collapse of local industries, including the agriculture and the manufacturing sectors.

Thanks to the oil boom ($100+ per barrel) the government was able to do this (and hit the private sector) through export substitution  (replacing domestic production with foreign imports).

Why  toilet paper shortage? 

Since oil prices plummeted in 2014, the government has had troubles finding enough petrodollars to buy stuff abroad and meet demand.

Why the government is running out of cash and can’t get enough from other sources?

Venezuela’s oil revenues represent some 95 per cent of export earnings.

Price Control

On the top of that, the government imposed a regulated price for toilet paper to “guarantee” anyone could buy the basic good. As expected, the product vanished from store shelves and suddenly became a hot black market item, with a much higher price.

How can this mess be fixed?

Venezuela must get rid of both controls. This is so basic and unanimous that even Mark Weisbrot, a pro-government economist, said that

The fastest and best way to break this cycle is to allow the currency to float.

… the government can begin to lift some of the dysfunctional price controls.

 Why the government insist on those controls?

The two main reasons are corruption and political cost. First, the so-called Bolibuguesía (a group of oligarchs from both public and private sectors) is getting richer and richer with that system.

BTW, the government has a sophisticated audit platform to know which firms receive cheap dollars at the official rate and whether they import goods or swindle the money. However, the government protects those officials and businessmen doing dirty deals through the exchange control.

Second, the government is extremely unpopular (as Hannah Dreier reported “80 percent of voters want Maduro gone this year“). The elimination of the control regime could be their last decision in power, since the initial market imbalance (with price increases) will put them out of their comfort zone and could even unleash a social upheaval. It is natural they are afraid of lifting controls.

 

Venezuela This Week – SAT 26, 2016

* My selection of  some important news about Venezuela