Venezuela's inflation rate last year was at a stunning 56%, qualifying for hyperinflation. The bad thing is that it's predicted to increase substantially over the next year to over 60-65%. The article states that Venezuela should decrease public spending to get control of the deficit they face. The bolivar (Venezuelan currency) will soon be nearly valueless at this rate, meaning purchasing power substantially decreases, causing prices of goods to have to decrease, causing lower net income for businesses, ultimately hurting the Venezuelan economy overall. Now, Venezuela is nowhere near Argentina 's annual inflation of 12,000% in 1990, but hyperinflation is no laughing matter.
President Nicolás Maduro says he is fighting against a "parasitic bourgeoisie" who is hoarding goods to destabilize the government. However, Maduro has put in place very strict price controls and foreign trade policies that literally cause businesses to sell their goods at a loss. Maduro has also proposed to put into plan even stricter policies for this, causing business owners to become very anxious. Because of this, many Venezuelans have bought US dollars in order to get rid of their hyper inflated, worthless currency.
Maduro thinks that the entire Caribbean economy will grow this year by 3%, which is slightly more than it did last year. This is due to their close ties with the US economy, which is also expected to have substantial growth this year. However, with Venezuela's case, Maduro said their economy will suffer an "important deceleration".
This article shows how hyperinflation can destroy an economy. Maduro makes fiery speeches at political opponent, when the US dollar is their actual rival. It seems that it is near impossible for Venezuela to prevent an economic collapse unless they can get control of this hyperinflation.
http://www.miamiherald.com/2014/02/08/3920434/andres-oppenheimer-venezuelas.html
From our lecture in class, it makes perfect sense that Venezuela would have hyperinflation. Since the root of the problem is poor fiscal policy, a corrupt and poorly run government that the country has would very likely have this type of problem. Cool to see such an obvious real-world example (but not good for Venezuela's citizens)
ReplyDeleteAs we learned in class, Venezuela should increase taxes and cut government spending. It should also approach the German hyperinflation method- creation of a new unit of account and stabilization of the bolivar.
ReplyDeleteIt is good that some citizens are adopting American currency, but the country should do that as a whole, along with cutting spending, however painful that may be.
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