I Got A Strong Back / Steel Toes

This week I plan to do a mini-series of posts on the biggest issues facing Venezuela, at least according to the sources I have talked to and the observations I have made. These are issues on a micro-scale faced by the population at-large. Thus I will not address declining oil production or a lack of competent political leadership, which are important but do not affect people's daily lives to a large degree. I will, however, try to explain what the problems are, how they affect daily life, and if they have any obvious sources or solutions.

Five issues are consistently mentioned by nearly everyone I ask, and it would be convenient and tidy to write an entry per day about each of them. However one of the five is the poor quality of the education system and frankly that is not my area of expertise. Instead I will focus on the other four, beginning today with one of most noticeable and at times insidious ones - inflation and the high cost of living.

Ronnie Dunn would be a big hit in Venezuela if he could sing in Spanish. His populist croon against the high cost of living would certainly strike a chord here, especially in Caracas. In fact, I would say that the cost of living, along with the related scourge of inflation, is the most discussed issue in the country after insecurity and unemployment.

Interestingly, a minority of goods here are actually quite affordable, some astonishingly so. I have already mentioned how unbelievably cheap gasoline is - about .10 bolivares/liter (once again, 4.3 bolivares to the dollar at the official rate, about twice that on the black market), thanks to a generous government subsidy. Because of this, almost all forms of travel are also extremely affordable. A municipal bus ticket is usually about one bolivar while metro passes go for 1.50. Bus tickets to other cities follow a basic rule of thumb of 10 bolivares for every 30 miles or so.

Government subsidies also ensure low prices, though not a reliable supply, of basic food items. President Chávez has directed PDVSA, the state oil company and only reasonably effective public institution, to manage a nationwide chain of supermarkets that provide basic foodstuffs at subsidized prices. For example, a carton of milk that costs around 23 bolivares at a private market will set you back just eight at a PDVAL. As a quick aside, unfortunately this has suppressed domestic supply as farmers stop producing these items since they are forced to sell them at a loss. As a result over 90% of many food items are now imported, leading to more inflation, huge opportunities for corruption, and regular shortages of the items supposedly for sale at PDVAL. This week the store I shopped at did not have any eggs or certain kinds of meat. But someone can certainly get by with shopping only at PDVAL and pay a low price for doing so.

Of course this post is supposed to address the opposite concern - inflation and rising costs. Inflation in 2011 in Venezuela was officially 27.6%. Unofficially the figure was certainly above 30%. At the same time the annual interest rate for a savings account at a Venezuelan bank was 12.5%, with a fixed-term account yielding up to 14.5%. This means that anyone who tried to save any money last year lost 15% of its true value, and it is estimated that Venezuelans lost more than 11.3 billion bolivares doing so. Investing money is also not really an option - good luck trying to find a stock or bond that consistently delivers returns greater than 30%. So what do people do? They spend all of their money, especially on items that will have a resale value in the future, which leads to greater demand, higher prices, and more inflation. For example, people might purchase a television when they have enough money to do so, or even a car. For the first year or so they will often struggle to make their payments. But as time passes and inflation takes its toll, by the end of the payment cycle the monthly bill is often laughably low (prices, at least for cars, are often not adjusted for inflation). Then when it comes time to resell the vehicle or other used good, people will actually receive more money than they paid for it, though of course its real value will have declined.

In the past one of the ways that people combated inflation was through the purchase of dollars, which held their value. But Chávez has instituted currency controls which ban the import of dollars except through the issue of limited bonds by PDVSA and the Ministry of Finance. Venezuelans who travel abroad are allowed to exchange a fixed amount of bolivares depending on their destination and how many family members are traveling. (I believe the maximum amount allowed for travel to the U.S. is $2500, regardless of how many people go or for how long.) This creates a thriving black market for greenbacks, which suffers even greater inflation than the licit economy. The bolivar was re-pegged to the dollar for the second time in less than a year (from 2.15) on January 1, 2010 at a rate close to that resembling the black market. Today I can get anywhere from eight to ten bolivares for my American cash. The bolivar itself was revalued on January 1, 2008. Today's bolivar fuerte is worth 1,000 of the old bolivares, and undoubtedly another revaluation will have to take place in the not-too-distant future if policies do not change soon. Each time there is a devaluation people scramble to purchase as many items as they can, knowing that their currency will quickly lose value.

Prices for many goods will remain high for some time to come regardless of inflation. That is because domestic industry has shrunk dramatically under Chávez to the point where today Venezuela produces oil and little else. This decline in domestic production derives from nationalization, which has led to dramatically less efficient practices, expropriations against political opponents both current and potential, and price controls such as those outlined in the food industry above that have led many firms to cease production rather than face continuing losses. As a result most goods are imported, and therefore use a more expensive supply chain (including hefty markups caused by corruption) without benefiting from the weak bolivar that should help to drive down input costs.

All of this has multiple repercussions on daily life. First and foremost, many items are simply out of the price range of most people. The less fortunate cannot possibly make ends meet even on a minimum salary's wage (see below), if they are lucky enough to have a job. This is one of the biggest factors behind the crime and insecurity that plagues the country. Even many middle class citizens do not dream of buying much beyond the essentials. More superficially but noticeable nonetheless, very few people go out on a Saturday night or throw a birthday party for their kids because they cannot afford to. Children live with their parents until they turn 30 or later because they cannot afford (or find) housing. Black markets open up for all sorts of goods. Stores that do offer affordable goods have lines that can last for hours. Financial planning for the future becomes all but impossible because prices are so unstable and saving is so difficult.

With all of that said, sometimes the easiest way to demonstrate the high cost of living is simply to list the prices of some common purchases. So here is how much I might expect to pay for the following items, all expressed in bolivares. Remember, I have access to dollars, which means that I can think of these prices in terms of the black market rate, but most Venezuelans cannot.

Empanada sold by a street vendor: 7-8

Ice cream cone: 10-15

One kilogram of fruit sold by a street vendor: 10-20

Movie ticket: 50

Men's haircut: 50
Combo at McDonald's: 42-60

Bleacher ticket to round-robin baseball game: 50

Mixed drink at an upscale bar or discoteca: 80

Reserved seat to round-robin baseball game: 70-110 

Entree at a nice, but not fancy, restaurant: 80-140

Monthly electrical bill for a two-bedroom apartment: 100

Monthly gas bill for a two-bedroom apartment: 150

Monthly cell phone bill not including internet (240-740 minutes included): 95-225

Pair of jeans (so important to me now): 80-200

Nightly rate at a Holiday Inn-quality hotel: 250-300

CD/cassette/radio that satisfies Patricia: 560

Smartphone: 900-5,000

Minimum Wage: 1223.89/month

Hopefully this gives some sense of what it is like to live in Venezuela and the financial pressure that exists on so many people here. The logical first step toward solving this problem is undoubtedly stimulating domestic production by respecting private property and ending expropriations. In the long term currency and price controls must be eased if not outright banished, though in the short term that could fuel inflation and higher prices even further. Ultimately the best outcome for Venezuelans would be the creation of more jobs with better salaries that would allow more people to afford the prices that are sure to remain high for years to come.