Venezuela’s economy was once the envy of South America as the country is blessed with the largest oil reserves in the world. The country also had steady stream of USD revenue and immense per-capita wealth. In fact, Venezuela had a relatively stable economy for awhile. However, daily life in Venezuela is a struggle nowadays due to the skyrocketing inflation rate. The economic collapse in Venezuela is attributed to several reasons such as corruption, social unrest, self-serving politics, capital controls, price-fixing and a global commodity bust.
Venezuela is a country that is rife with political and economic instability. The region is struggling with exodus of over three million people who fled from hunger, repression and the socialist dystopia created by the late Hugo Chavez. In 1999, Chavez was elected as the President of Venezuelan. He promised that he would end corruption and alleviate the economy from the throes of poverty. The socialist policies promoted by Hugo Chavez were mainly redistributive in nature in order to mitigate inequalities in the economy. The socialist regime under him increased both spending and borrowing. However, their agenda was interrupted by a 2003 labour strike at a state owned oil company and this strike severely impacted the oil production and crippled the economy along with a major fall in the GDP rate. Chavez instituted a series of measures to stop the slide in the Bolivar, the Venezuelan currency, and introduced a currency peg along with installation of import controls, nationalisation of other industries and the establishment of subsidies for food and consumer goods. These actions sowed the seeds for future inflation crisis.
To briefly summarise, Hugo Chavez’s policies did not achieve any of its intended goals. After Chavez’s death, Nicolas Maduro was elected as the President and he continued this oppressive regime. Under Maduro’s rule, the GDP rates have fallen, the inflation rate has crossed 1.7 million percent, savings have gone done and a loaf of bread is now unaffordable to most Venezuelans. The collapse of the Venezuelan economy has been attributed to several factors; however, the key reason for the country’s fall is its extreme dependency on oil.
Before the collapse, despite the Government imposing reform schemes to expand access to housing, education and other such facilities, the dependency of the Venezuelan economy on oil left it vulnerable to market fluctuation, especially when the oil prices started to decline in 2014. Ever since then, the inflation rates have been on the rise and it has completely ravaged the economy. This caused the private sector to fail. Due to the heavy price controls imposed by the Centre, the inflation in the economy which started at 7% quickly shot to over 700% and then a million percent in a span of a few years.
Hyperinflation is one of the main reasons that caused the fall of the Venezuelan economy. To define hyperinflation; it is an accelerated form of inflation that erodes the real value of local currency as the prices of all goods increase. Others define it as an inflation rate that exceeds 50% in a month. Hyperinflation inevitably causes people to minimise their holdings in that currency as they usually switch to a more stable foreign currency, usually the US Dollar. Hyperinflation has several factors causing it. It is therefore important to identify the causes that lead to such high rates of inflation, expanding on the reforms that were undertaken to curb such high rates of inflation by drawing comparisons from other countries which have successfully circumvented the aforementioned problem.
Analysing the qualitative characteristics of inflation and how Venezuela could have avoided its rates from getting higher and the possible solutions for it to curb down the inflation rates or possibly revert to its normal stage can prove to be beneficial for the Venezuelan economy. However, it is difficult to identify a specific set of solutions to solve Venezuela’s problems as it is not just hyperinflation but also corruption and politics and several other factors that are wrecking havoc in the economy. Even if the process of recovery starts now in the economy, it might take decades to restore it back to its once stable state. Hence, the economic collapse in the nation is mostly due to the Government’s mismanagement.
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