David Smilde and Melina Sánchez Montañés*
In the midst of widespread shortages of basic consumer items in Venezuela, the United Nation’s Food and Agriculture Organization (FAO) gave the country special recognition for its achievements in fighting hunger. According to the international organization, Venezuela has reduced the hunger index by more than half since the 1990s. The award provoked criticism from former presidential candidate Henrique Capriles who said the FAO award was “a joke when we see long lines to get basic products, owning to a level of scarcity that has reached 20%.”
This apparent irony is actually reflected quite clearly in the statistics. On the one hand, from milk to corn flour, shortages have dramatically increased in the last year, to the point that the scarcity index reached the 21.3% in April 2013, the highest figure in the history of the index. On the other hand, caloric intake is up by almost 50% since 1998 which is impressive. Protein intake is also up, from 27.1 grams per person per day in 1999 to 47.6 grams in 2011.
In this two part series, we aim to explain the phenomenon of shortages, its causes, and what the government is doing about it.
First, what does it mean that the scarcity index has reached 21%? It does not mean that 21% of needs are unmet, nor that 21% of the people are hungry, nor even that 21 out of 100 basic consumer goods are unavailable in Venezuela (as incorrectly reported here). Rather it means that in any given store, 21 out of 100 basic consumer goods will not be available.
The figures are tabulated in the following way. Investigators visit a sample of stores and look at what products are available there. For example, if milk has an 80% level of scarcity, that means that in 80% of stores it cannot be obtained while in 20% of stores it can. The “general scarcity index,” in turn, is the average of the scarcity levels of all the products in the “basic basket” (canasta basica) of consumer goods.
In theory, this means that scarcity is mainly a nuisance rather than a crisis. It most upsets the routines of members of the middle class who are used to doing periodic, one stop shopping, but who now have to visit supermarkets 5-10 times a week. It has less impact on the routines of those who live with less cash flow and are used to shopping several times a week, if not every day.
However, it gets more complicated than this. While a product that is at an 80% scarcity level should simply mean that on average you need to go to 5 stores before you find it, in reality these probabilities get clumped and there are some regions in which no stores at all will have a given product. Furthermore, these clumped probabilities themselves are not distributed randomly. Urban areas that are more affluent and have greater political voice, tend to suffer fewer scarcities. Poor and rural areas suffer more.
Thus, nuisance can turn into crisis when essential goods simply aren’t available. Going a week without toilet paper can be uncomfortable. Going a week without cooking oil can be alarming. But going a week without milk when you have small children can be heart-wrenching.
Such scarcities quickly lead to a vicious cycle. When rational individuals find a basic consumer product that they could not get for a week or two, they buy as much of it as they can and stockpile. It is very common these days for Venezuelan households to have pantries with weeks or months’ worth of cooking oil, rice, corn flour, milk and toilet paper. In Venezuela this is called “nervous buying” and government officials frequently blame shortages on it. But it should be clear that this household stockpiling is a rational response to shortages and can exacerbate them, but is not their root cause.
So what does explain shortages? The government and its supporters point to economic sabotage, suggesting that the government’s private sector opponents are withholding products from market in order to generate discontent in the population. “The government has to be very careful…we are confronting an economic war,” declared Maduro on June 8.
This can certainly occur. The general strike of 2002-03, for example, was a very public effort at economic sabotage and explains why the government’s accusations resonate with the public. However, there are several reasons why this does not seem like the root cause of the current round of shortages.
First, this type of sabotage is costly for producers who need to make money to keep their enterprises going and is not usually undertaken for long periods (furthermore, it inevitably confronts what social scientists call the problem of collective action). As a strategy it makes most sense to carry out shortly before an electoral event. Producers could take short term losses for the longer term gain of undermining a president whose policies do not favor them. However, in this case shortages sharply increased after the election of Nicolás Maduro, not before. Unless producers are thinking about the municipal elections 6 months away or a potential recall referendum 2 and half years away, it is hard to understand why they would engage in this complex and costly strategy now.
Second, the government controls a significant part of the production and distribution of basic consumer goods, and over the past decade it has steadily increased its fiscal control over the whole supply chain. Thus if there is producer sabotage at play the government should be able to quickly detect it and publicly unmask it with concrete evidence. But it has not done so.
Government opponents, in contrast, tend to focus on price controls. In a highly inflationary economy like Venezuela’s, controlled prices quickly fall behind. And if producers are forced to sell products at prices that are below their costs of production, they will simply not produce or distribute them. This problem is certainly operative, especially with some products such as milk. However, it should be noted that overall profit margins in Venezuela’s private sector are very high and even with recent price adjustments, shortages have not been alleviated.
Price controls do, however, create a significant market for contraband. In Western states, gasoline, rice, beans, milk, corn flour and many other staples get whisked across the border into Colombia and sold for a handsome profit.
The government’s economic policies have limited production in another way. The threat of expropriations of private property in addition to the difficulty of obtaining dollars has meant that many private enterprises are not investing in new technologies, new equipment or expansion of productive capacities. Rather, they prefer to produce at full capacity with their existing infrastructure. However, with ever expanding consumption, this full capacity is woefully inadequate to supply demand.
The base cause of the current round of shortages is the confluence of two related processes: a shortage of dollars and a lack of domestic production. Venezuela imports three-quarters of what it consumes. And much of what is domestically produced in Venezuela uses imported components. For example, toilet paper is made in Venezuela but uses wood pulp from Chile. Thus the main source of shortages is simply the fact that there are not enough dollars to import enough goods for an import-dependent country. There is currently a backlog of dollar requests that the government is sitting on because it does not want to run its reserves critically low. And many of the dollars that are approved do not get used for their intended purpose. Rather than being used for investment or importing goods, they get sold on the parallel market or used for capital flight.
In our next post we will look at what the government is doing about shortages.
*Melina Sánchez Montañés studies Economics and Latin American Studies at Yale University.