The Take

Venezuela follows Zimbabwe’s Lead26/07/18

QUTEFS’ Publications Officer Heath Gabbett considers where it all went wrong for the Venezuelan economy, in this edition of The Take:

Venezuela has long been criticised for its economic mismanagement. Venezuela’s economic crisis has taken another turn for the worse as inflation for 2018 is now predicted at 1,000,000 percent. No that’s not a typo – Venezuelan goods and services are expected to increase in price by one million percent in 2018. Venezuela’s inflation is so bad that the country has stopped releasing official figures, instead allowing independent experts to measure the rate. To frame the crisis one step further, an Australian ten dollar note will now buy you just short of 900,000 Venezuelan Bolivars.

A crisis like this may seem hard to believe from a first world perspective, but it’s far from the first time it has happened. Remarkably, Venezuela’s inflation is far from the worst recorded inflation rate. In November of 2009, Zimbabwe’s inflation peaked at an unfathomable 79,600,000,000%. Germany also infamously experienced hyperinflation following World War I. But there’s a reason countries avoid hyperinflation. When inflation occurs too quickly, money is no longer a reliable store of value. It becomes harder to make economic decisions as prices rapidly increase. Sellers too become more reluctant to accept the currency as payment for goods and services, worried about the currency losing more value.

Unfortunately, hyperinflation isn’t the only symptom of Venezuela’s underlying economic concerns. Oil production has fallen to a thirty-year low and the Venezuelan economy is set to contract by almost 20% this year.

Venezuela’s story is a tale of chronic economic mismanagement. The country used to be a relatively rich country, driven by beautiful tourist destinations, fertile farming land, a well-educated workforce and, most importantly, an abundance of oil. But now Venezuela’s grocery stores have insufficient food, the hospitals lack supplies, child mortality is rising and businesses are shutting down.

It wasn’t a single bad decision that led to Venezuela’s downfall, but a series of bad decisions predicated on one mistake – a failure to invest. About 95% of Venezuela’s export revenues come from oil. As the oil industry boomed, Venezuela was prosperous, and the country enjoyed lavish social security programs. Rather than save their oil money, the country subsidized goods and services across the country and gave away around two million homes to the poor. When the oil price fell, as it inevitably was going to, Venezuela found itself without its export revenue slashed and little saved from the boom.

The government went on to set price controls on many of its products. While capping the prices of many goods had good intentions, it had the effect of driving companies out of business. Paired with tight restrictions on imports, and it’s clear how Venezuelans soon found themselves lacking the basic goods. The Venezuelan government’s final solution was to print more money – a strategy which inevitably caused the hyperinflationary spiral we now see.

Venezuela serves as a cautionary tale against governments overreaching. It teaches that sometimes less government intervention can be far better for the people. And perhaps most importantly, it reminds us that if it seems too good to be true, it probably is.