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It was Adam Smith who pointed out that theres a lot of ruin in a nation: supposedly something that should comfort us if the idiots gain political power and then proceed to wreck the economy by enacting their fantasies. But it has to be said that a lot is not actually an indefinite amount, as the poor citizenry of Venezuela are finding out in the greatest economic implosion of a society since Zimbabwe collapsed. The Ukraine isnt doing so well either but at least theyve the excuse that someone is invading the industrial heartland of that country. As Ive remarked here before its not that the government of Venezuela, Chavez and then Maduro, didnt mean well with their Bolivarian socialism. Its just that the actual implementation violated near every economic rule that weve got written down in our little book on how to run a country. Most importantly, they decided that the way to beat inequality and poverty was to mess with market prices which is absolutely the wrong thing to do.

The results of this simply are not good:

Venezuelas minimum wage, which many workers receive, has tripled in local currency in the past three years to about 5,600 bolivars today. That hasnt kept up with a dramatic slump in the bolivars value against the U.S. dollar in the same period. The government has devalued its primary exchange rate once and introduced three weaker alternative rates. Using the weakest legal exchange rate, the minimum wage has tumbled from about $360 a month in 2012 to $31 a month today.

If we value that minimum wage at the more realistic black market exchange rate then its around $20 a month. Which for an oil rich nation is simply ridiculous. Or more importantly perhaps, thats on a par with the minimum wage in Ethiopia. Which at least has the excuse of being a dirt poor country largely reliant upon subsistence peasantry to have an economy at all.

And it really is this idea of setting prices which is at the bottom of all this pain and grief:

As the economist Francisco R. Rodrguez has argued, this simple step would eliminate much of Venezuelas huge budget deficit, because the government would get more local currency for every barrel of oil sold. That would bring down runaway inflation, because the government would no longer have to print the extra bolvars it needs to operate. And it would put an end to the long lines, because importers would no longer have overwhelming incentives to hoard cheap dollars rather than buy imports.

Even economists who often clash with Mr. Rodrguez, like Prof. Ricardo Hausmann of Harvard, agree that unifying the exchange rate would be an important first step in reform. Venezuela has the most ridiculous exchange-rate differential ever in the history of mankind, noted Mr. Hausmann.

Lets think back right to the beginning here. Venezuela has not had a happy economic history, this is absolutely true. Theres oil wealth there but historically this has not been shared widely amongst the population. That oil wealth also, in a small country, led to a high exchange rate (so called Dutch Disease) which means few exports and a high reliance upon imports. Enter Chavez announcing that he was going to make things better by making sure rather more of that oil wealth trickled down to the poor and that this would cut inequality.

See the rest here:
Venezuela's Minimum Wage Is Now $20 A Month. Congratulations To Bolivarian Socialism