Living Economics

In Puerto Cabello, Venezuela, prostitutes catering to foreign customers paying with US dollars are among the few types of workers who have seen their income in bolivars keeping pace with the domestic inflation rate of over 60% per year (BW). This high inflation rate has been fueled by excessive budget deficit to the tune of 12% of GDP to subsidize dirt-cheap gasoline (premium gas sold for 1.5 cents per gallon) and imported price-controlled essentials (WSJ 4/12/2013). As a result, the value of the bolivar currency has lost over 80% of its value vs the US dollar in the black market.

As the exchange rate of the bolivar keeps falling to reflect the domestic inflation, those who earn their income in bolivar will see the purchasing power of their paychecks shrinking. But those whose income is paid in dollar will enjoy an inflation hedge as their dollar income can be converted into more bolivars as its exchange value falls. Prostitutes, taxi drivers, and other Venezuelans who interact with dollar-paying foreigners are among these fortunate few who can trade their dollars for ever more bolivars. So a prostitute charging $60 for just one hour’s service makes an income equal to the minimum monthly wage in Venezuela.

The exchange rate that makes this inflation hedge possible is of course not the official exchange rate for the bolivar which is at least 88% higher than the black-market exchange rate. The official exchange rate is only applicable for approved imports (Bloomberg.com).

The only way to forestall further devaluation of the bolivar is to reduce the budget deficit. But the budget deficit cannot be reduced if the government insists on subsidizing gasoline and discouraging domestic production of all essential goods by imposing price control.

Keeping prices artificially low is ultimately self-defeating because the underground economy has its own way of raising prices to clear the market. For example, low subsidized gas and price-controlled goods have been siphoned off to neighboring Colombia for higher prices. And by discouraging domestic production, price control simply reduces supply further necessitating more imports. Venezuela imported three-quarters of what it consumes but lost one third of its goods to illegal cross-border trade through smuggling (WSJ. 6/9/2014).