Venezuela’s Minimum Wage Hike Is No Match for Inflation

Venezuela’s Minimum Wage Hike Is No Match for Inflation

Venezuelan President Nicolas Maduro raised his country’s minimum wage by a whopping 30 percent last week, following a 10 percent increase in January.

During a workers’ rally commemorating May Day, Maduro told the crowd the raises were fresh evidence of the success of the country’s socialist revolution. “In the 15 years of the Revolution, we have given, in accordance with our socialist program and constitutional mandate, 25 salary hikes and 25 pension increases,” Maduro said during a nationally televised address.bandera de venezuela - photobucket

What Maduro neglected to say was that the increases are necessary to keep pace with the country’s inflation rate, which at 56 percent last year was the highest in the world.

Minerva Soares knows this too well. A hair stylist and mother of three, the 42-year-old says that the increase wasn’t enough and will do nothing to help her feed her family. “Many people raised prices of goods and services as soon as the wage increase was declared,” she says. “We raised prices 35 percent at the salon. The wage increase was nothing; it’s not going to improve my situation at all.”

Soares’s salon wasn’t exceptional in raising prices. Days before the minimum wage hike went into effect, Maduro raised prices on sugar, rice, and poultry, whose prices are set by the government. The cost of rice and sugar nearly doubled; that of poultry more than doubled. Further increases are forecast, including a hike in the electricity rate, which has been frozen since 2003, and a possible rise in domestic gasoline prices. The latter haven’t been raised since the late 1990s, enabling Venezuelans to fill their tanks today for less than a U.S. dime.

Maduro and his economic team point out that Venezuela now has one of the region’s highest minimum wages at 4,250 bolivars. That comes to $675 if the official exchange rate of 6.3 bolivars to the dollar is used. But that’s a misleading figure because few prices are set using the official rate.

Most use the SICAD2 exchange rate, which is determined by an auction of dollars. That rate is now around 50 bolivars to the dollar. At that rate, Venezuela’s minimum wage is $85 a month, or about $3 a day. Maduro said the government may raise the minimum wage yet again in the fourth quarter as the country faces its worst economic crisis since the late President Hugo Chavez was sworn in as president in 1999. The government has a fiscal deficit of 15 percent of gross domestic product. Oil production is falling, an important factor because crude sales account for 95 percent of the country’s hard currency.

“The raises are going to increase inflation,” says Ruben Liscano, a Caracas-based financial analyst. “We’re going to see inflation just as high as last year, if not up to 70 percent.” Trailing 12-month inflation through March was 59 percent, while food prices rose nearly 80 percent.

The government has tried to combat inflation by controlling prices and mandating that merchants charge “just prices” for their goods. Last weekend thousands of government agents visited stores to make sure that the new price law was being enforced. “The fair price law will help to brake price increases a bit, but it will also cause more shortages,’’ says Liscano.

Maduro has repeatedly said that the country’s food shortages and inflation are the results of an “economic war” being waged against it by the country’s business elite, which is opposed to the socialist revolution. Ironically, the country’s largest business group, Fedecamaras, was one of the few non-government organizations to voice support for the 30 percent hike.

Analysts say Venezuela’s economic woes are the result of the government’s policies, including foreign exchange controls, which have caused a shortage of dollars and slashed imports. That is an important consideration in a country that buys 70 percent of the goods it consumes from abroad.

Local producers also are having trouble importing raw materials needed for goods. Many owe overseas suppliers hundreds of millions of dollars because the government hasn’t provided dollars to pay their bills. Credit lines have been frozen.

Alimentos Polar, the country’s largest privately owned food processor, said last week that it would have to shut down pasta production because its stores of wheat are exhausted. The company said it can’t import wheat because its suppliers still await payment, and it squarely blamed the government for not making further foreign currency available to the private sector.

Not surprisingly, consumers rushed to stock up on pasta following the news. Rising prices and shortages have contributed to a wave of protests that have swept the country since early February, claiming 41 lives and pushing Maduro into talks with the opposition. As part of the dialogue, businessmen have been meeting with the government to discuss how to boost the economy and break the cycle of rising prices.

Maduro seems to realize that the shortages have cut into his popularity, and he is seeking to shore up flagging support. According to the latest survey by Caracas-based polling agency Datanalisis, 79.5 percent of those polled said that Venezuela’s situation is “bad.” Nearly 60 percent of the 1,300 polled said that Maduro is doing a poor job as president, and a similar percentage said he shouldn’t serve the rest of his term.

“Before, most of my clientele was supporting the government,” says Soares, whose salon is in a working class neighborhood. “Now, most of my clients are against the government. They are tired of the shortages, tired of soaring prices, and tired of having to wait in line for almost everything. People finally seem to have woken up about this revolution.”

source : businessweek


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