Predictably, Venezuelan govt destroys its own coffee industry

Great article in yesterday’s Wall Street Journal by Mary Anastasia O’Grady on how the Hugo Chavez and his government has demolished Venezuela’s coffee industry. O’Grady sets the tone of “Chavez decaffeinates Venezuela” with a quote by famous monetarist economist and libertarian Milton Friedman:

“If you put the federal government in charge of the Sahara Desert, in five years there’d be a shortage of sand.”

If only this also worked when you put the government in charge of running the government, the world would be a better place. Unfortunately the government runs the economy – the economy being the private sector. Growth of the public sector is the inverse of the decline in the private sector. Only problem is that once the government has grown to a certain size, it never shrinks unless there is a dramatic fiscal crisis, as being experienced in Greece. But as the astute observer would have noted, even in the midst of the Acropolis, government employees take to the streets to demand their pensions and retirement age of 53 in tact, fight to keep their 13^th,14^th, and for some even 15^th taxpayer funded pay checks, and chase away the IMF, the only hope of avoiding thousands of public job losses, while the private sector is left to languish. Friedman was also right when he quipped “Nothing is so permanent as a temporary government program.” Once the government has grown, it won’t shrink. Period, Paragraph.

Anyways, this is an article worth reading which explains how the state brings about the demise of a once prosperous industry. If only our leaders could take note.

Chávez Decaffeinates Venezuela

By Mary Anastasia O’Grady, WSJ May 3, 2010

Coffee shortages predictably follow his price controls.

The late Milton Friedman once quipped that “if you put the federal government in charge of the Sahara Desert, in five years there’d be a shortage of sand.”

Friedman was using hyperbole to make a point about central planning. Or so I thought until Hugo Chávez put himself in charge of Venezuela’s coffee sector. Last year, for the first extended period of time in the country’s history, Venezuela did not produce enough of the little red berry to satisfy domestic demand. It has now become a coffee importer and is facing serious shortages.

No wonder Mr. Chávez’s recent expropriation of some warehouses and land belonging to the giant food and beverage conglomerate Polar is unnerving Venezuelans. Mr. Chávez has said that if Polar chief executive officer Lorenzo Mendoza doesn’t keep his mouth shut about those takings, more could follow. Venezuelan consumers know that chavista management of Polar isn’t likely to be any more successful than its adventures in coffee.

The collapse of the coffee industry is emblematic of the wider economic catastrophe brewing in the country. For more than a decade Mr. Chávez has employed price controls, capital controls and hyper-regulation in an attempt to meet his socialist goals. When the predictable shortages have arisen, the government has responded by using the salami approach to nationalization, slicing off a bit of the private sector at a time and taking it for the state.

Now the economy is sinking: The International Monetary Fund forecasts that while GDP growth will pick up in most of Latin America this year, it will contract by 2.6% in Venezuela. Core inflation has been running above 30% for two years.

To understand how things got this bad, look at coffee. It was once plentiful in Venezuela. But in 2003, with consumer-price inflation threatening to damage Mr. Chávez’s popularity, the government imposed price controls. That drove down the incentive to grow coffee while increasing the incentive to export to Colombia whatever was grown. Voila! Less coffee for sale in Venezuela.

Mr. Chávez is smart enough to understand that coffee shortages are bad for poll numbers. But rather than let the price float, he declared coffee a “flagship commodity” and launched a $300 million plan to revive the sector. Coffee-growing areas were to be increased, new trees were to be planted and new roads to coffee farms were to be built.

Four years later, Venezuelans were hit with this shocker: None of the promises had materialized and coffee was still in short supply. Mr. Chávez needed someone to blame and in August 2009 he went after the country’s oldest roasting company, Fama de America. The military invaded Fama’s plants in Caracas and Valencia after Mr. Chávez had declared on television that the company was a key culprit in the shortage crisis. State officials announced a 90-day investigation to determine if Fama had broken the law.

At the end of the 90 days Mr. Chávez confiscated Fama’s roasting facilities. The action was justified using four criteria. First, the government has an obligation to secure food supplies for the population. Second, coffee is a Venezuelan tradition. Third, there were shortages caused in part by smuggling to Colombia. Fourth, Fama had 30% of the Venezuelan market. The government has offered to pay the company 10% of its official appraised value.

Grabbing roasters of course didn’t make coffee farms more productive. In April the Venezuelan daily El Universal reported that the 2009-2010 crop fell 16.6% from a year earlier. The newspaper further reported that Fama and another large roaster, Café Madrid—both now controlled by the state—are operating 30% below capacity due to the bean shortage. It added that the plants only have enough coffee for the next one to two months and without an increase in imports operations could collapse in 30-60 days.

Last week Goldman Sachs analyst Alberto Ramos noted that “the government now commands a large share of economic activity” and that it “is reacting to any conflict in the private sector, real or perceived, with immediate threats of nationalization. This is a major impediment to much-needed domestic and foreign investment.” It is also an impediment to production since chavistas don’t seem very good at running businesses.

For critics of Mr. Chávez it may be comforting that some of his supporters are jumping off the “bolivarian” bandwagon because of all this. But it’s too early to celebrate. As defections mount, he is becoming more militant. His alliance with Iran, provocations toward Colombia, weapons build-up and use of Cuban military personnel all attest to his insecurities but also to his desperation. Recently he announced that children as young as 12 are being recruited to work as propagandists for the state, and he is now locking up more of his political opponents. Property confiscations are increasing.

Mr. Chávez’s revolution is in ruins. That much is certain. But no one should conclude that he will accept defeat peaceably.

Write to O’Grady@wsj.com

UPDATE: Socialist paradise where the black market rules, by Miguel Octavio writing for the Times Online.