Causes, Effects, and Remedies for Venezuela’s Hyperinflation

By Peter Veldkamp

A laborer earning minimum wage in Venezuela receives about 18,000 bolivars every month.[1] If that same laborer finds himself craving a glass of milk after a long day’s work, a mere liter of that dairy beverage could cost him up to a quarter of his monthly income.[2] Similar stories capture the egregious nature of Venezuela’s hyperinflation – a term reserved for “a series of rapid, excessive, out-of-control price increases” that require an inflationary rate of more than 1,000 percent a year.[3] Although hyperinflation is historically rare among developed countries, it continues to plague Venezuela today.[4]

Causes of this rampant inflation were largely caused by exogenous factors and poor economic policy.[5] One of the driving exogenous causes was the combination of a drop in global demand for oil and Venezuela’s heavy reliance on oil exports.[6] While the price of oil remained high, Venezuela was able to fund robust social welfare programs.[7] However, when the price of oil plummeted, demand from other countries to purchase Venezuelan oil with bolivar similarly tumbled.[8] The dramatic fall in currency value made it more difficult to afford the country’s import and service its foreign debts.[9] In an attempt to head off the downward spiral, the Venezuelan government printed money in order to have the necessary funds on hand to afford the rapidly increasing prices.[10] Unfortunately, this maneuver only increased the supply of bolivar in circulation, further devaluing the currency and ostracizing foreign investors.[11]

As costs exploded, severe shortages in necessities such as food and medicine quickly arose.[12] Retail outlets were unable to afford goods from their vendors, leading to empty-shelved grocery stores and stories of foraging for food at garbage dumps.[13] Likewise, hospitals halted the stocking of ordinary sanitary equipment such as soap and protective gloves for cost reasons.[14] Protests and riots soon broke out, necessitating the presence of the National Guard in major cities.[15] Crime and incarceration rates have both hit twenty-year highs.[16] With additional inflation, violence, and death anticipated, hordes of citizens are fleeing the country into Columbia at a rate of 3,000 per day.[17]  

Compounding the problem is the fact that there have only been approximately 15 cases of hyperinflation since 1900.[18] The lack of historical precedent makes it difficult for Venezuela to glean insights from similarly situated countries.[19] Nevertheless, two possible solutions emerge.[20] The first, known as dollarization, involves adoption of the US dollar – a relatively stable currency – as the country’s domestic currency.[21] This can be advantageous in situations like Venezuela where a country’s primary trade partner is the United States.[22] However, it can also hamstring a country by eliminating any control over monetary policy; indeed, any adjustments to the supply of dollars in circulation after dollarization would be controlled by the United States Federal Reserve, who would structure policy in favor of the United States rather than Venezuela.[23]

A second, multi-step option could also be helpful. Successfully used in Brazil, this approach first eliminated deficits in the budget and reduced government spending, usually through a reduction in social welfare plans.[24] The second step involves the creation of a “real unit of value,” in which the country’s currency is converted at a fixed rate.[25] By frequently adjusting the exchange rate between bolivar and the new “real unit of value,” Venezuela would be able to establish a seemingly stable unit of value, even if the bolivar continued to devalue.[26] Ideally, the new unit of value would create an illusion of stability to the citizens of the country experiencing hyperinflation.[27] The final step would then eliminate the underlying bolivar and adopt the new “real unit of value” as the official currency after consumer confidence reaches adequate levels.[28] Unfortunately, Venezuela’s centralized institutions may require substantial repair before such an approach can ever be successful.[29]

Actual remedial steps taken by Venezuela’s president have been largely ineffective, if not further damaging.[30] Policies such as dramatically increasing the minimum wage, providing government assistance for gas purchases, and additional taxes on corporations have all hampered an already struggling economy.[31] Perhaps most damaging of all was the government mandated devaluation performed by simply “removing five zeros” from the current bolivar value.[32] Furthermore, many attempts to broker a solution with the United States have failed due to the United States being viewed as a “political enemy.”[33]

In conclusion, the hyperinflation issue troubling Venezuela has no simple solution due to its varying causes, and it likely will only worsen in the upcoming years.[34] A refusal to engage in any meaningful change or cooperate with the United States contribute to the likely continuation of this problem.[35] Regardless of whichever remedy is selected, it is clear that immediate action is necessary given the rate at which inflation continues to increase.

[1] Seana Davis, Venezuela: 1 Litre of Milk Could Cost a Third of Your Wage, euronews (July 26, 2019), https://www.euronews.com/2019/02/15/venezuela-all-my-life-s-savings-were-destroyed-by-hyperinflation-thecube.

[2] Id.

[3] Jim Probasco, Are We Headed for Hyperinflation?, Investopedia (Mar. 3, 2021), https://www.investopedia.com/are-we-in-for-a-hyperinflation-5093627.

[4] Id; Davis supra note 1.

[5] Ana Santacreu, How Can Venezuela Address its Hyperinflation?, Federal Reserve Bank of St. Louis (Jan. 18, 2018), https://www.stlouisfed.org/on-the-economy/2018/january/venezuela-address-hyperinflation.

[6] Michelle Carmody, What Caused Hyperinflation in Venezuela: A Rare Blend of Public Ineptitude and Private Enterprise, The Conversation (Feb. 5, 2019), https://theconversation.com/what-caused-hyperinflation-in-venezuela-a-rare-blend-of-public-ineptitude-and-private-enterprise-102483.

[7] Id.

[8] Id.

[9] Santacreu, supra note 5.

[10] Id.

[11] Carmody, supra note 6.

[12] Petra Cahill and Laura Saravia, Venezuela Protests and Economic Crisis: What’s Going On?, NBC News (May 6, 2017), https://www.nbcnews.com/storyline/venezuela-crisis/venezuela-protests-economic-crisis-what-going-n755306

[13] Id.

[14] Id.

[15] Id.

[16] Rahima Nasa, Timeline: How the Crisis in Venezuela Unfolded, Frontline (Feb. 22, 2019), https://www.pbs.org/wgbh/frontline/article/timeline-how-the-crisis-in-venezuela-unfolded/.

[17] Venezuelan Migrant Exodus Hits 3 Million: U.N., REUTERS (Nov. 8, 2018), https://www.reuters.com/article/us-venezuela-migration-un/venezuelan-migrant-exodus-hits-3-million-un-idUSKBN1ND25M.

[18] Monica de Bolle, How to Stop Venezuela’s Hyperinflation? Brazil Offers an Idea., Americas Quarterly (Apr. 2, 2019), https://www.americasquarterly.org/article/how-to-stop-venezuelas-hyperinflation-brazil-offers-an-idea/.

[19] Id.

[20] Id.

[21] Dollarization, Investopedia (Dec. 26, 2020), https://www.investopedia.com/terms/d/dollarization.asp.

[22] Id; see also Venezuela Trade, World Integrated Trade Solution, https://wits.worldbank.org/countrysnapshot/en/VEN (citing United States as comprising 23.33% of Venezuelan’s trade share).

[23] Dollarization, supra note 21.

[24] De Bolle, supra note 18.

[25] Id.

[26] Id.

[27] Id.

[28] Id.

[29] Id.

[30] Mallory Perillo, Maduro’s New ‘Solution’ to Hyperinflation to Venezuela, Panoramas (Aug. 29, 2018), https://www.panoramas.pitt.edu/economy-and-development/maduro%E2%80%99s-new-solution-hyperinflation-venezuela.

[31] Id.

[32] Id.

[33] Id.

[34] Carmody, supra note 6.

[35] Id.