Bolívar Distorted: The Effects of Exchange Controls on the ...

shown both in his ability to influence exchange rate regimes and his inability to extract
additional funds from international reserves. His control over how government revenues are
spent is more refined given his monopoly on the National Assembly and other governing bodies.
However, with the exchange set artificially low, Chávez receives fewer bolivars for the dollars
earned from oil revenues and reduces his ability to hand out political favors through government
spending. Through CADIVI, Chávez can ration foreign exchange to preferred importers,
allowing them to buy dollars at a cheap rate; in effect, they are recipients <strong>of</strong> a quota revenue.
This pushes the parallel market rate up as non-preferred importers are excluded from the process.
As importers pay higher prices for goods, those losses are passed on to consumers, who pay
higher prices for all imported goods and preferred importers reap the benefits. In effect, Chávez
distributes quota revenues to preferred importers.
Since inflation began to take <strong>of</strong>f a few years ago, the money stock has been rising at a
rate much slower than the rate that prices have been rising 95 . Such a result is typical in a stagnant
economy where investors are fleeing an inflating currency. Inflation combined with low interest
rates, the result <strong>of</strong> a prohibition on foreign investing, make the bolivar a poor store <strong>of</strong> value and
reduces the demand for money, pushing up the price level. <strong>The</strong> implementation <strong>of</strong> the exchange
controls combined with price controls on some products have reversed the comparison, causing
prices to rise more slowly than the money stock. Reserves have rebounded under the exchange
controls, but prices <strong>of</strong> many goods, mainly imported goods, are still rising. <strong>The</strong> exchange
controls did meet their purported goal <strong>of</strong> halting the fall in reserves, but there are better methods
available for slowing inflation, ones that do not pose the opportunity for the president to
distribute quota revenues to preferred importers and banks. A commitment to keep money
growth in line with GDP growth, for example would be more appropriate.
95 See Appendix IV, Graph 3.
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