Tuesday, January 29, 2008

Food Fight and The Failure of Price Controls

COLOMBIA--More than a thousand additional Venezuelan troops have been sent to the Colombian border to stop food and fuel from going to Colombia. Normally, twice as much stuff (over $3 billion worth) comes FROM Colombia, than goes in the other direction TO Colombia. But Venezuela is suffering from inflation and food shortages, and president Hugo Chavez addressed the problem by putting price controls on food. But he did not put controls on the items farmers have to buy to produce the food. Thus farmers are being forced to sell food at a loss and go bankrupt. To avoid that, farmers are smuggling their products to adjacent countries like Colombia, where they can be sold at market rates.

VENEZUELA--Venezuela's top food company has accused troops of illegally seizing more than 500 tons of food from its trucks as part of President Hugo Chavez's campaign to stem shortages. The campaign has also included government crackdowns on accused smuggling, with the military seizing 1,600 tons of food and sending 1,200 troops to the border with Colombia.

Troops said they halted the transport of 350 tons of food to states along the Colombian border on suspicion of smuggling, he said. Another 165 tons were impounded in an eastern state on accusations of hoarding.

Bottom Line: The lessons from economics and history are very clear: Price controls haven't ever worked, they won't work in Venezuela, and they won't ever work anywhere. Chavez can attempt to ignore or circumvent the laws of economics, but he can't prevent the inevitable shortages that will inevitably result as a direct consequence of his artificial price ceilings (see graph above). "The market be a harsh mistress."

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