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Caracas: more expensive than London?

How can a city in a developing country be the world's 15th most expensive — and how do the poor get by?

A view of poor neighborhoods where residents live in ramshackle homes crowded onto hillsides surrounding the capital Caracas, Venezuela, Nov. 15, 2005. (Stringer/Reuters)

CARACAS — A two-minute taxi fare is $9.30, a can of Campbell’s mushroom soup will set you back $9.04, a McDonald’s Big Mac costs a whopping $9.76 and a 55-meter square, one-bedroom, downtown apartment fetches $1,395 a month.

Caracas, it would appear, is an expensive city.

A recent survey ranked it the world's 15th most expensive city, sandwiched between Oslo and London, and several places above U.S. cities such as Los Angeles, San Francisco and Chicago.

So how can a city in the developing world be so costly? It all results from the two different exchange rates in use at any point.

Foreigners can change their currency on the black market, so Caracas is not as expensive a vacation destination as the survey ranking would suggest. But for the middle class and the poor, who have little to no access to foreign currencies, their pockets are hurt each time they step in a supermarket or clothes store. The annual Worldwide Cost of Living survey by Mercer’s, which is conducted to help companies and governments determine the compensation package of their expatriates workers, was calculated using Venezuela’s official exchange rate, which has been fixed at 2.15 bolivars to the dollar since 2005.

But in reality Venezuela operates on two exchange rates. Ask a Venezuelan what the day’s exchange rate is and he will invariably quote the value of what’s known as the "dolar permuta," a black market exchange rate whose value the government forbids the local press from publishing and yet openly talks about controlling.

Here’s how it works: The Commission of Currency Administration controls how much foreign currency businesses receive to import foreign goods and administers how much Venezuelan travelers can get for foreign travel. The system strengthens the value of Venezuela's foreign reserves and increases buying power abroad, which is important for a country that relies heavily on imports. Controlling foreign currency allowances also prevents capital flight.

But plunging oil prices have severely limited the commission's funds, so more people are forced to purchase their dollars on this alternative market, where they're valued at more than three times the official rate.

Foreigners and Venezuelans with access to foreign currencies can use the parallel dollar market to change money at a far more favorable rate, which makes living more affordable. Therefore the Mercer’s report is not entirely reflective of real prices, said Asdrubal Oliveros, director of Econanalitica, a Caracas-based financial consulting firm.

But for middle class and poor Venezuelans the parallel rate is double-edged sword — and it is here where Mercer’s report rings true, said Oliveros. Many companies who import their products index their prices according to the black market rate.

Venezuelans who can earn in foreign currencies are “not even 5 percent of the population,” he explained. “Only 5 percent of the population has very high acquisition power, dollar accounts and can protect itself from devaluation. The rest of us mortals are subject to these conditions. Caracas is expensive for 95 percent of those who live in it.”

According to the National Institute of Statistics, the average income for a Venezuelan household is 2,342 bolivars a month which makes it the highest in Latin America, but only if calculated at the official rate. It is significantly lower when calculated at the black market rate, or when inflation is taken into account.

To counter spiraling prices, the government has introduced regulated prices on essentials such as food, medicines and utilities. About 50 percent of Venezuelans use government-regulated food markets known as "Mercal" and many claim it and other social projects have improved their ability to subsist. “Thanks to God we have a president who gave us so many misiones (social projects) to help the poor,” said Carmen Liendo, 39, outside a Mercal in the Caracas barrio of San Agustin. “Here those who have less economically can buy their food.”

But others complain that Mercal offers poor food quality, frequent shortages of basic staples and long lines. “I don't like it much,” said Victor Gonzalez, a 50-year-old construction worker from Petare, Caracas’ biggest barrio. “The meat is really bad, the flour, the milk. To queue for three or four hours to buy chicken I prefer to spend 10 Bs more and go somewhere where there are no queues.”

Nicolas Toledo, from the Caracas-based market research analysts Consultores 21, said many of Caracas’ poor survive by living in "invasiones" or squats high above Caracas in its many barrios with no running water and electricity siphoned off the main circuit. A poll conducted by his company found that almost all lower middle class young still live with their parents and spend most of their salary on rent, food and utilities. Almost all members of the lower middle class do not have bank accounts.

“If you are young and want to be independent your options are to rent a room in a rancho or set up your own invasion,” said Toledo. “You can’t even dream of living in the city.”

http://www.globalpost.com/dispatch/venezuela/090828/cost-living-caracas