In the 1970s, Venezuela was a South American success story. It has the largest oil reserves in the world and wealthy Venezuelans flew to Europe on shopping sprees; indeed, Concorde, as well as flying businessmen and women between Europe and the USA, also flew to Venezuela. For twenty years, it had the highest growth rate and the least income inequality in South America and remained the richest country in South America until 2001.
Today, GDP is predicted to fall 26% by the end of 2019 and inflation is 1.7 million per cent with the IMF estimating it will reach 10 million per cent by the end of 2019. Historically, this makes it comparable to the hyperinflation in Germany in the 1920s, Hungary after the Second World War and, more recently, Zimbabwe. (The worst example of hyperinflation is, currently, still Hungary in 1946, when, at inflation’s peak, prices doubled every 15 hours, compared to Zimbabwe where prices doubled every 24.7 hours.)
It is hard to imagine the effects of hyperinflation. Prices in shops are no longer displayed – customers find out when they come to pay. Everyday items are scarce, even if they could be afforded with farmers hoarding food because they can get more from selling their produce tomorrow rather than today. Hospitals have run out of medicines, with operations postponed because of a shortage of anaesthetics. Infant mortality rose 30% last year and in 2017, the average adult weight fell 24lb. Savings and pensions have become worthless and 10% of the population have left, including half the doctors. Crime has increased and the suicide rate has risen. Barter has returned to the economy and some people have taken to using eggs as a substitute currency.
So how did it get to this state? At the end of the 1990s, it elected Hugo Chavez, a socialist president, who embarked on a programme of public spending involving free healthcare, improved education and subsidised housing, all of which were financed by the country’s vast oil revenues. His government took over the steel, agriculture and mining industries and installed new managers who lacked the experience and skills of their predecessors. As a result, real GDP has fallen by 46% since the start of 2014. The state-owned oil industry was used as a source of finance and starved of investment by the government. However, the fall in oil prices reduced government revenues, with the government having to replace lost revenues by printing more money. This created the classic conditions for hyperinflation. In economic terms, we can explain this by looking at the Fisher equation MV = PQ (money supply x the velocity of circulation equals the average price level x the quantity of goods and services produced). M is rising rapidly as the government prints more and V, which is how fast money is being used, is also rising rapidly since people are trying to spend it as fast as possible. Therefore the left hand side of Fisher’s equation is rising rapidly. On the right hand side, which, by definition, must equal the left hand side, the quantity of goods produced is falling because of poor economic management, therefore the price level increases – a classic case of inflation “caused by too much money chasing too few goods”.