Inside Story Americas

Gauging South America's biggest economies

What does a devalued currency in Venezuela and a supermarket price freeze in Argentina mean for the two nations?
Last Modified: 13 Feb 2013 10:22

Venezuela and Argentina are two South American countries that exemplify the continent's shift away from US influence.

But in the last week, actions by both governments have been pounced on by critics as signs of weakness in their economies.

From Wednesday, Venezuela's currency - the bolivar - will lose almost one-third of its value on international markets, the fifth time it has been devalued since President Hugo Chavez came to power.

"I believe in both cases, the populist economic models that they have been following are literally running out of gas. And we are going to see more and more problems and indeed at some point later this year or next year, I think in both cases, we will have to have some fairly strong shift in economic policies towards something much more reasonable, much more viable."

- Arturo Porzecanski, an international finance and Latin American economic analyst

The country is devaluing its currency by 32 percent - which means a US dollar will be worth 6.3 bolivars now compared to 4.3 earlier. 

Supporters welcome the decision, saying that oil exports will generate more in domestic currency, giving the government more funds for social spending. Under Chavez, poverty levels have already dropped significantly.

Supporters also say domestic products will be cheaper and better placed to compete with imports. The government is also hoping to reduce the role of the black market, where obtaining a dollar is nearly four times as expensive, compared to the official exchange rate.

But there are also fears that with the currency devaluation move, prices for some crucial imports will rise, which could push up inflation.

There have been sporadic shortages of food items, and the government's currency control system makes it difficult to obtain dollars to buy goods not produced locally.

Argentina has also struggled with inflation over recent years. Private estimates of the inflation rate differ by up to 15 percent from official figures. And at the beginning of the month, the International Monetary Fund (IMF) formally censured the government for what it had long been accused of - under reporting the inflation rate.

"If you look at Venezuela for example, they have had only two recessions in the 14 years of Chavez's office. One was caused by an oil strike by the opposition, which obviously is going to cause a recession, and the other was when you had the world financial crisis and recession. So there is no obvious reason for either of these countries to run into serious trouble."

- Mark Weisbrot, the co-director of the Center for Economic and Policy Research

In an attempt to tame rising costs, last week President Cristina Kirchner's administration came to an agreement with supermarkets to temporarily freeze prices.

Two-thirds of supermarkets have agreed to keep prices frozen until April 1. The freeze will clearly have an impact on the inflation rate. But critics say the policy may also lead to shortages and more black market activity.

Imports could also be more difficult to obtain. Strict currency controls already make it tough to get dollars to buy imports.

The freeze comes as the government also faces tough negotiations with labour unions - who say their wages are not rising in line with actual inflation.

And unlike in 2011, when the economy expanded by nearly nine percent, growth has slowed sharply. The IMF estimates growth was at 2.6 percent for 2012, which is below the government's estimate of 3.4 percent.

So, with a devalued currency in Venezuela and a supermarket price freeze in Argentina, what is the state of two of South America's biggest economies?

To discuss this, Inside Story Americas with presenter Shihab Rattansi is joined by guests: Mark Weisbrot, the co-director of the Center for Economic and Policy Research in Washington; and Arturo Porzecanski, an international finance and Latin American economic analyst from the American University.


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