Venezuela’s economic

crisis
has made headlines all over the world for the past few years.
Hunger is widespread there.
Unable to afford the small amount of food available in supermarkets, many Venezuelans
have resorted to eating garbage to survive.
Even zoo animals in Venezuela are starving according to a report by the Daily Mail, and
people have been breaking into zoos to eat them.
A recent survey found that the “food crisis has also created an education crisis, as more
than 1 million children no longer attend school, mostly due to hunger and a lack of public
services.”
Moises Rendon and Mark L. Schneider of the Center for Strategic & International Studies
provide a bleak assessment of Venezuela’s current situation, saying the country is suffering
“an unprecedented man-made humanitarian crisis.”
They say Venezuela resembles “a country at war” and notes some of its major social
problems, including “extreme food and medicine shortages,” “rampant crimes in every city,”
“constant electric blackouts,” and “looting and repression.”
When you see and hear these stories, you can’t help but wonder what went wrong.
How could a country that was once one of the most affluent countries in South America reach
such a sorry state?
One source of the misery in Venezuela is its out-of-control inflation, which we will examine
in this episode of The Infographics Show, “Venezuelan Hyperinflation Explained.”
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 is significantly more than the rate cited by Salemi.
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 in Venezuela less than two years
ago.
Earlier this year, it cost a shocking 2.5 million bolivars.
But wildly high prices 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.”
Following in the footsteps of Zimbabwe, Venezuela turned to increasing its money supply because
it had no other means to pay its debts as we shall see later.
But ultimately Venezuela ended up in its current hyperinflation situation due to a combination
of several factors:
Number 3: High Government Spending
President Hugo Chavez ran Venezuela from 1999 until his death in 2013.
Chavez and his administration implemented social programs called the Bolivarian Missions
that were 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 for 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 percent in 1999 to 7.8 percent in 2011.
The poverty rate also dropped from 50 percent in 1999 to 31.9 percent in 2011, while extreme
poverty dropped from 19.9 to 8.6 percent 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 percent 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.
According to one source, Chavez had been warned about the growing fiscal deficit as early
as 2002, but he didn’t pay attention to the warnings.
For Chavez, these social programs were a way to win over the people.
Maintaining his popularity with the people was important to him because it was a way
for him to maintain his power.
An article in The Economist states that through the Bolivarian Missions and the “flood of
oil money” he was able to “rebuff a referendum in 2004 that would have removed him from office.”
To make matters worse, Chavez and his administration failed to save money for future economic crises,
which quickly emerged due to an event that happened in 2014.
Number 2: Low Oil Prices
Venezuela’s economy is mainly based on selling only one commodity: oil.
Venezuela has the largest oil reserves in the world.
The World Atlas states that it has 300,878 billion barrels of proven reserves.
According to Oil Sands Magazine, “most of Venezuela’s proved oil reserves are located
in the Orinoco Petroleum Belt,” which is located on the eastern Orinoco River Basin.
The Orinoco Belt is approximately 370 miles (600 km) in length and has an area of about
21,357 sq. mi. (55,314 sq. km.).
It is estimated that the area contains about 1.2 trillion barrels of oil.
Another oil-rich area in the country is the area near Lake Maracaibo, which is actually
a brackish tidal bay that is located near the Caribbean Sea.
One source estimates that the “lake’s basin supplies about two-thirds of the total
Venezuelan output.”
With the discovery of oil in Venezuela in the early 1900s, the country relied more and
more on it as a revenue source.
Today, Venezuela “derives over 50% of its GDP from petroleum exports which represents
about 95% of total exports” according to a Forbes article.
This meant that when oil prices were high, life was good.
For instance, Venezuelans enjoyed a high standard of living when oil prices spiked in the 1960s
and 1970s.
An online magazine called Foreignpolicy.com describes how “Venezuela was considered
rich in the early 1960s: It produced more than 10 percent of the world’s crude and
had a per capita GDP many times bigger than that of its neighbors Brazil and Colombia
— and not far behind that of the United States.”
Conversely, when oil prices went low, life was bad, and this is what happened to Venezuela
starting in 2014.
That year, the price of oil dropped sharply from $100 to about $70 a barrel, and the price
decline continued “to a low of around $33 dollars a barrel in early 2016” according
to the American Institute for Economic Research (AIER).
The slump in oil prices sent Venezuela into an economic downward spiral.
Lower oil prices brought with it a reduction of Venezuela’s foreign reserves, and AIER
states that this in turn reduced the government’s ability to “subsidize basic goods and services
for its people.”
Number 1: Continuing Economic Mismanagement
The Venezuelan government, now under the control of Chavez’s successor Nicolas Maduro, dealt
with the budget gap the way other countries in a similar situation did in the past when
they had no other way 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 comment made by a nurse named Maigualida Oronoz helps you understand what living with
hyperinflation is like for the average citizen living in Venezuela.
In an interview with the Guardian, she says, “We are millionaires, but we are poor . . . We
can just about eat, but if some health emergency happens we’ll die because the prices of
medicines are sky-high and rise every day.”
According to economist Theodore Cangero, hyperinflation continues under Maduro because “he is continuing
the disastrous economic policies of the late President Chávez.”
Earlier this year, Reuters reported that Maduro seemed to be in denial about Venezuela’s
hyperinflation.
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.”
Now it seems that he has come up with course of action.
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 bolívares would now cost 1 bolívar—and give the currency
a different name, the “sovereign bolívar”; (2) devalue the currency by 95 percent; and
(3) peg the bolívar to the petro, Venezuela’s digital currency backed by oil introduced
in February 2018.”
He then plans to combine these monetary reforms with yet another round of questionable government
interventions.
CNBC reports that he will “hike the minimum wage by over 3,000 percent, boost the corporate
tax rate, and increase highly-subsidized gas prices in coming weeks.”
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.
A large number of Venezuelans have decided that they no longer want to live in this world
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 are fleeing from Venezuela in droves.
According to the Guardian, “nearly two million people have fled Venezuela’s economic and
political crisis since 2015.”
The exodus will continue unless some drastic monetary and political changes are made.