Venezuela's accumulated inflation hits 528% in nine years

Venezuela's President Hugo Chávez recently said that price controls, which have been in force for the last nine years in order to curb inflation, "are necessary, and are part of a strategy based on state's intervention in the economy. They are one of the elements of the transition from capitalism to socialism."

The Venezuelan government has unsuccessfully tried to put an end to "profiteering" by setting the prices of hundreds of food items, medicines, diapers, toothpaste and other basic products. Between February 2003 (when price controls were first implemented) and December 2011, Venezuela's accumulated inflation has skyrocketed 528%. This has hit the worker's purchasing power, as they can buy 15% less than in 1998.

The government's failure to control inflation comes as no surprise. During the administration of President Jaime Lusinchi (1984-1989), the annual inflation rate rose from 15.7% in 1984 to 40.3% in 1987. His government implemented a price control policy and imposed an aggressive plan of fines and closures of stores and businesses viewed as profiteers.

In their book "Forty Centuries of Wage an Price Controls: How not fight inflation," economists Robert Schuettinger and Eamon Butler examined 100 cases occurred since 2,000 BC until 1978, in which the rulers of 30 countries unsuccessfully tried to halt inflation by implementing price controls.

The conclusion of this award-winning book is that although some price controls have had a positive impact for a short period, these policies have failed in the long term, because they do not fight the real cause of inflation: the fact that liquidity exceeds productivity by far.

Price controls have ignited a cycle where the government must choose between shortage of products and price increases.

Along with price controls, Hugo Chávez's administration established tight foreign exchange controls in order to reduce the overwhelming demand of foreign currency and, theoretically, to stabilize the Venezuelan bolivar.

However, in the past nine years the US dollar price has increased by 169%, from VEB 1.6 per US dollar to VEB 4.30 per US dollar. In fact, investment banks such as Credit Suisse believe that a devaluation of the Venezuelan bolivar will be inevitable in 2013.

Translated by Gerardo Cárdenas