The Venezuelan government is in the process of implementing the Law of Fair Costs and Prices passed by the National Assembly in July. The law orders the government to establish an agency within the next three months that will regulate prices throughout the Venezuelan economy. The goal of the agency is to bring inflation — which has hovered around 30 percent per year over the past several years — under control, without having to adjust monetary or fiscal policies. Although the exact method of implementation and enforcement has not yet been decided, the changes will further distort the economy and drive companies in Venezuela out of business. According to Venezuelan Vice President Elias Jaua, the law focuses on a limited number of basic goods and services that are fundamental to Venezuela's standard of living, including medications, food and school supplies. The rationale behind the law, according to the government, is that "speculators" are making 200 percent to 300 percent in profits on basic goods at the expense of consumers. Given that basic food goods like sugar, pasta and bread are already controlled, the new agency is likely to have broad powers to control prices beyond the basic goods that are already regulated, though the list of products has not yet been determined. The superintendent of national costs and prices will be appointed by, serve at the pleasure of and report directly to the president. Businesses will be required to report the prices they charge for consumer goods and services to the newly formed agency, which will collect and analyze the data and establish pricing bands within which all goods of a certain type must conform. According to the government, the exact method for establishing the prices is not yet known, but it will likely depend in part on the location of production facilities, presumably in an effort to adjust prices to take transportation costs into account. Companies found in violation of pricing regulations will be subject to fines, temporary closure or permanent closure. Nominally designed to bring down inflation by restricting the ability of importers and producers to overcharge a captive market, the law is the latest in a series of efforts to tackle the inflation problem stemming from high fiscal expenditures and the reliance on imports. Previous efforts have included the recently terminated dual exchange regime designed to offer a higher-valued exchange rate for a limited number of basic goods while devaluing the bolivar for the majority of economic activity. The policy resulted in a spate of corrupt officials and organized criminal groups gaming the dual exchange system for their own profit. Though the agency may be able to achieve its price-control goals in the short term, the strategy will cause further market distortions throughout the country. There are several potential dangers associated with the plan. First, prices could be set too low and producers may be unable to cover costs. This is already a problem in the Venezuelan economic system, as producers of goods ranging from pasta and bread to milk struggle to cover costs under the existing pricing regime. As the new controls are implemented, this will cause a further hollowing out of Venezuela's already-suffering economy. This is particularly risky in an economy where many of the goods consumed are imported and thus subject to international, not local, cost pressures. A recent example of this dynamic can be seen with the pasta and bread producers. In March, the price of wheat Venezuelans imported from the international market rose 58 percent. The government responded by increasing prices of products that rely on imported wheat, but it only increased the price of pasta by 33 percent and bread by 24 percent. The increased import cost is therefore only partially accommodated by a change of the sale price on the domestic market, and producers are forced to absorb the additional cost. This process has previously been seen in Argentina, with basic goods providers forced to temporarily or persistently operate at a loss. Like Argentina, Venezuela may be forced to increase subsidies in order to keep businesses operating at a basic level. There is also a real danger that the law will be explicitly used as a political tool to take over companies. Nationalizations are common in Venezuela, and regulating prices could be another reason for the government to decide to increase control over parts of the private sector. The effects of nationalizations vary, but they almost always cause problems up and down the supply chain for various goods as the government struggles to grasp the full scope of producers under its control. With the threat of bankruptcy and government takeover, the new agency will create numerous opportunities for bribery and corruption throughout the Venezuelan economy. The measures themselves may actually have the opposite of the intended effect on inflation. Government controls on the retail industry — particularly in cases where companies are being driven out of business and goods become scarcer — generally tend to stimulate the black market. Shortages in the legal market result in high-priced goods being sold on the black market, which could lead to an overall increase in inflation. All of this comes at a time of growing instability throughout Venezuelan society. Protests are on the rise across the country, and if the current trend continues, 2011 could see more social unrest than any other year of Venezuelan President Hugo Chavez's presidency. A botched attempt to regulate prices for consumers that sends companies out of business will cause hardship for Venezuelans on a daily basis. This has the potential to increase the already prevalent protests, jeopardizing political stability as Chavez's hold on power is dependent on his questionable health.