‘Fair’ Profits in Venezuela

Venezuelan President Nicolás Maduro recently published a whopper of a decree: the "Organic Law of Fair Prices." Written without the consent of the legislature thanks to the extensive executive powers recently granted to him under dubious circumstances, the bill makes clear that doing business in Venezuela is a hazardous endeavor — and not just because of the country’s soaring crime rates.

After a bland introduction in which it claims to seek "greater political efficacy and revolutionary quality in the construction of socialism," (sic) the bill quickly gets to the point. The first thing that jumps out is its claim to protect the incomes of all citizens … by setting maximum profits for everything.

Everyone the bill applies to (people or corporations, foreign or domestic, who do business in Venezuela) must submit all relevant information (costs, prices, production processes, etc.) that the government requires in order to set prices and margins.

The main regulatory arm of this mammoth law is the "National Superintendence for the Defense of Socio-Economic Rights," known by its Spanish acronym of SUNDDE. Putting aside the fact that its enormous task will require tens of thousands of employees, the very name spells out just how the government views private businesses: as something people need to be "defended" from.

The gist of the law is precisely what it says: everyone must submit their costs so that the government can set their margins and their prices. Everyone can be audited at any point in time. The maximum margin allowed is 30 percent of costs.

How will the government determine what counts as costs? The law is purposefully vague about this.

For example, suppose you are an international airline operating in Venezuela. What’s your cost of production? Should you bill the cost of the plane? How do you account for depreciation? What about currency risk? Or say you’re a novelist. What’s the cost of writing your book? Suppose you’re doing research on a new anti-malarial drug: how could you account for your costs under the current law?

It doesn’t matter. The government will decide what your costs are, and only allow you to set prices up to a maximum of 30 percent above that. End of story.

What is the penalty for not submitting to this bill? The bill explicitly threatens everyone with expropriation without compensation. In fact, it raises the specter of expropriation in the very first pages of the bill, even before it’s outlined what the bill requires people to do. But that’s not all.

Most menacingly, the bill threatens companies or people who are found to be non-compliant with all sorts of sanctions, including a ban on engaging in economic activities for up to ten years. People selling at prices higher than the ones set by the government face jail sentences of eight to ten years. If you are found to be "hoarding," you also face stiff jail sentences. Indeed, the government has already begun jailing businessmen, even though the law just came into force.

The bill is full of non-sequiturs. For example, after outlining an enormous regulatory burden for companies, the bill says it is guided by a principle of administrative "simplicity," and that all paperwork must be kept to a minimum. It also claims to be regulating prices, margins, and costs, all without acknowledging that if you control costs and margins, you are automatically setting the price.

The effect of the bill is clear: entrepreneurship in Venezuela is now an illegal activity. Thanks to this bill, the basic freedoms that should guide any society — freedom to innovate, private property, even the right to a fair trial — have essentially been taken away. Everyone, from lowly street vendors to the executives of multinational corporations, runs the danger of landing in a Venezuelan jail if a government bureaucrat thinks they are charging too much.

Of course, the probable outcome is that the law is only selectively applied, and that the bureaucrats let businesses off the hook in exchange for paybacks. But this hardly seems like an enticing environment in which to do business.

In a country teetering on the brink of recession and social chaos, the government has essentially told businesspeople that it doesn’t really respect their right to exist. This bill could well be the final nail in the coffin of Venezuela’s private businesses.

Juan Nagel is the Venezuela blogger for Transitions, co-editor of Caracas Chronicles, and author of Blogging the Revolution. Read the rest of his posts here.