In their article, “Inflation
Fuels Crisis in Two Latin Nations” authors Turner, Forero, and Lyons explain
the significance of inflation in Argentina and Venezuela. The authors use Carlos Bianchi's
funeral home to show the harm inflation causes small businesses. Mr. Bianchi is
forced to make all of his sales on account, to be paid at a later date at an
unknown price. The lack of certainty is significantly hurting his business.
China’s slowdown, investor’s
recent cynicism about emerging markets, and Argentina and Venezuela’s lofty
inflation will almost certainly lead to recession in the two Latin American
countries. In 2013 Venezuela and Argentina experienced inflation of 56
percent and 28 percent respectively. These figures are expected to be higher in
2014. Combined, economists are forecasting a 3 percent decline in GDP led by
reduced investment and consumption.
Many argue that removing subsidies,
price caps and currency controls would restrain inflation in Argentina and
Venezuela, but sources close to the Presidents of both countries say they have
political reasons for avoiding these types of economic policies. I guess
only time will tell how damaging this round of inflation will be. Hopefully
it will not be as bad as 1989 when inflation in Argentina reached 5,000
percent.
The rapid inflation of the Venezuela and Argentina's currency has consequences for trade with other countries and for foreign investment. A quick drop in the exchange rate will invite foreign consumption. This will be great for Argentina who already has a surplus and relies heavily on exports*. The same can not be said for Venezuela who has a trade deficit and imports much more than it exports..
ReplyDeleteThe threat of hyperinflation looms and will put considerable pressure to correct the inflation problems that both countries are having. While I doubt that inflation will get as bad as in 1989, it does stand to get a lot worse than it already is if things aren't done.
*Argentina: http://www.tradingeconomics.com/argentina/balance-of-trade
Venezuela: http://www.tradingeconomics.com/venezuela/balance-of-trade