How Venezuela Has Been Affected by Inflation

Venezuela is not the best place to do business. Inflation is so high that menu costs—ordinarily insignificant—become substantial. The government has severed ties with the International Monetary Fund (IMF) and refuses to adopt a more stable currency to curb further inflation, unlike Zimbabwe, which switched to the US dollar. But what might cause inflation to be more rampant?

The Impact of Inflation on Venezuela

Because inflation occurs when the growth of the money supply outpaces the growth of GDP, assuming velocity is constant (the quantity theory of money), Venezuela must be printing more money than its economy is growing (Fisher, 1911). The government, short on cash due to poor market prices of its main source of tax revenue—oil—is likely printing a significant amount of money in the form of seigniorage. However, due to the same low oil prices, Venezuela’s economy suffers from lower net exports and reduced economic output in general (Krugman, 2009). To maintain Venezuela’s subsidy state, the government simply prints more money, failing to realize that the resulting inflation is causing the very goods they aim to subsidize to be in shortage. This leads to people rushing to buy groceries before their money becomes worthless, and the country likely faces difficulty importing goods with such a constantly-inflating currency. In short, the government is printing much more money than its economy is growing by, and under hyperinflation, with velocity positive, inflation actually grows more than the growth in money supply.

Government's Role in Economic Crisis

This model is one that I largely agree with; Venezuela’s inflation is caused by its own government’s incompetence and pride in economic affairs. The extensive government subsidies require strong tax revenue. However, when tax revenue decreases due to a shrinking economy, instead of gradually transitioning to a more free-market system, the government continues to print money, failing to recognize that printing money, as history has shown in numerous countries, is not the path to success (Reinhart & Rogoff, 2009). This cycle of economic mismanagement only exacerbates the nation's financial woes, leading to increased poverty and social unrest among the Venezuelan populace.

Consequences of Cutting Ties with International Institutions

By cutting ties with potential benefactors such as the IMF, Venezuela is forced to rely on a limited number of credit sources. In a world where the law of the jungle still seemingly reigns, those few creditors could convert financial leverage into political control; Venezuela’s gradual dependence on its creditor countries is its own fault, a relic of its government’s decisions (Stiglitz, 2002). The true victims are the Venezuelan people, who endure an economy plagued by hyperinflation and a lack of basic necessities.

Conclusion

In conclusion, Venezuela's economic turmoil is a complex issue with roots in governmental mismanagement and external factors. The country's reluctance to adopt necessary economic reforms and its strained international relations contribute to an ongoing crisis. Addressing these issues requires a comprehensive approach that considers both domestic policies and international cooperation.

References

• Fisher, I. (1911). The Purchasing Power of Money. Macmillan.
• Krugman, P. (2009). The Return of Depression Economics and the Crisis of 2008. W.W. Norton & Company.
• Reinhart, C. M., & Rogoff, K. S. (2009). This Time is Different: Eight Centuries of Financial Folly. Princeton University Press.
• Stiglitz, J. E. (2002). Globalization and Its Discontents. W.W. Norton & Company.