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Hyperinflation in Venezuela PDF
Hyperinflation in Venezuela PDF
~ Titiksha kumar
6556 BMS 1st year
Venezuela was once the richest country in Latin America. It has the largest known oil
reserves in the world and its democratic government was once praised worldwide. But
in 2018, Venezuela’s democratic institutions and its economy were in shambles. The
country had the highest inflation in the world, making food and medicine inaccessible to
most Venezuelans. Over the last five years, its GDP had fallen 35%, which is a sharper
drop than the one seen during the Great Depression in the US. The country’s murder rate
had surpassed that of the most dangerous cities in the world. These conditions have
sparked months of protests against the president, Nicolas Maduro. And it’s easy to see
why: the country has become measurably worse since his election in 2013.
Before we discuss Venezuelan hyperinflation, let’s begin with a discussion of what
hyperinflation is in general. Simply put, hyperinflation is very high, rapid, and
continuous inflation. In a hyperinflation situation, the prices of goods and services in an
economy quickly rise to a level so high that they become difficult to afford for most
people. While experts cannot agree what that exact level is, economist Michael K.
Salemi states that hyperinflation is generally used to “describe episodes when the
monthly inflation rate is greater than 50 percent.” He gives the example that “at a
monthly rate of 50 percent, an item that cost $1 on January 1 would cost $130 on January
1 of the following year.”
The hyperinflation in Venezuela was significantly higher than the rate cited by salami.
According to an august 2018 BBC article, prices of goods have been doubling every 26
days on average and the annual inflation rate reached 83,000% in July
One source reported that a cup of coffee cost 450 bolivars less than 2 years ago but then
it costed a shocking 2.5 million bolivars.
But wildly high priced are not the only serious effect of hyperinflation. As a Guardian
article notes, the “problem comes when the supply of paper money in an economy
outstrips demand for goods and services, causing the value of the currency to fall.”
Venezuela turned to increasing its money supply because it had no other means to pay
its debts.
Venezuela ended up in its hyperinflation situation due to a combination of several
factors:
President Hugo Chavez ran Venezuela from 1999 until his death in 2013.
In 2004 when oil prices surged Venezuela’s petroleum dependent economy
started booming and Hugo Chavez went on to spend billions from the profits on
the social welfare programs for the poor
Chavez and his administration implemented social programs called the
Bolivarian missions that was supposed to improve living conditions for the poor
by redistributing wealth and reforming the way land was used. There was also an
attempt to promote economic democratization through the establishment of
worker-owned cooperatives. Data from the center of economic and policy
research (CEPR) indicates that Chavez achieved a high degree of success with
these programs. He was able to reduce unemployment from 14.5% in 1999 to 7.8%
in 2011. The poverty rate also dropped from 50% in 1999 to 31.9% in 2011, while
extreme poverty dropped from 19.9% to 8.6% in 2011. Unfortunately, this
prosperity came at a high financial cost. The social programs were good for the
people but bad for the economy. Chavez spent more money on these social
programs than the country could really afford. According to CNBC, public
spending accounted for more than 50% of Venezuela’s GDP in 2012. He also
borrowed money from other countries to keep the programs going. By 2013,
Venezuela’s foreign debt climbed to a little over $106 billion. To make matters
worse, Chavez and his administration failed to save money for future economic
crises, which quickly emerged in 2014.
The Venezuelan government under the control of Nicolas Maduro, dealt with the
budget gap the way other countries in a similar situation did in the past when
they had no other ways to pay their debts – print money. AIER notes that printing
money set the wheels in motion for hyperinflation: “the budget shortfall was
closed by printing money. Hyperinflation took hold, destroying the savings of
individuals and making productive business investment nearly impossible.”
A large number of Venezuelans decided that they no longer want to live in the country
where all of the social gains of low poverty and low unemployment recklessly bought by
Hugo Chavez have been wiped out by incompetent leadership, poor financial planning,
and widespread corruption. They fled from Venezuela in droves. According to the
Guardian, “nearly two million people have fled Venezuela’s economic and political crisis
since 2015.
In an interview with Reuters, Rodrigo Cabeza, Hugo Chavez’s former finance minister,
said that “Venezuelan President Nicolas Maduro has refused to recognize the country’s
hyperinflationary problem and has no plan to address it.”
President Maduro has decided to play games with the value of Venezuela’s dying bolivar
currency in a desperate effort to give the appearance that hyperinflation is
disappearing from his country.
The Peterson Institute for International Economics (PIIE) outlines his current plans for
the bolivar. His proposed monetary reform has three pillars:
(1) slash five zeros from prices—so a product that costs 100,000 bolivars would now
cost 1 bolivar—and give the currency a different name, the “sovereign bolivar”
(3) Peg the bolivar to the petro, Venezuela’s digital currency backed by oil
introduced in February 2018.”
He then planned to combine these monetary reforms with yet another round of
questionable government interventions.
CNBC reports that he “hiked the minimum wage by over 3,000 percent, boosted the
corporate tax rate, and increased highly-subsidized gas prices.”
PIIE and other economic experts are skeptical that these measures will work to reduce
hyperinflation because they don’t address the underlying problems that are causing the
hyperinflation in the first place.
PIIE argues that “there is no substantial fiscal reform in the works, no attempt to rebuild
dismantled institutions, and no announced shifts in economic policymaking.”
PIIE even forecasts that Venezuela “looks set to beat Zimbabwe, a country that managed
to have an annualized inflation rate of 79 billion percent in November 2008.”
The economists interviewed by CNBC also have a dire outlook for Maduro’s monetary
plan. They think it will make the hyperinflation in Venezuela even worse:
“Amid this aggressive devaluation and monetary expansions due to salaries and
bonuses, we are expecting a much more aggressive stage of hyperinflation.
All the more so in a context where the elimination of excessive money printing is not
credible.”
The worst of all worlds, said Venezuelan economist Asdrubal Oliveros of consultancy
Ecoanalitica. As Venezuela is still in crises.