MID TERM ASSIGNMENT SUBJECT MACROECONOMICS 2 TOPIC HYPERINFLATION IN VENEZUELA

The following are the precise objectives of the research: - Understanding what is inflation, hyperinflation and the root of these problems - Analyzing factors contributing to hyperinflat

FOREIGN TRADE UNIVERSITY

HO CHI MINH CITY CAMPUS

MID-TERM ASSIGNMENTSUBJECT: MACROECONOMICS 2

WORK ASSIGNMENT OF GROUP 4

TABLE OF CONTENT

TABLE OF CONTENT i

LIST OF FIGURES iii

Chapter 1 INTRODUCTION 1

1.1 Rationale of the research 1

1.2 Aims and objectives 2

1.2.1 Aims 2

1.2.2 Objectives 2

1.3 Scope of the research 2

1.4 Research question 2

1.5 Research methods 3

1.6 Structure of research 3

Chapter 2 OVERVIEW OF HYPERINFLATION IN VENEZUELA 4

2.1 Definition of inflation and hyperinflation 4

2.1.1 What is inflation? 4

2.1.2 Types of inflation 4

2.1.3 What is hyperinflation? 6

2.2 The situation of hyperinflation in Venezuela 7

Chapter 3 ANALYSIS OF HYPERINFLATION IN VENEZUELA 12

3.1 The cause of hyperinflation in Venezuela 12

3.1.1 Phase 1: The presidency of Hugo Chavez (1999 – 2013) 12

3.1.1.1 Overdependence on oil price 12

3.1.1.2 Bolivarian missions 13

3.1.2 Phase 2: The presidency of Nicolas Maduro (from 2013) 15

3.2 The effect of hyperinflation in Venezuela 16

3.2.1 Economic crisis 16

3.2.2 The humanitarian crisis 17

3.3 The solutions of Venezuela’s government to address the hyperinflation 19 3.3.1 Currency redenomination 19

3.3.2 Informal dollarization 19

3.3.3 Fiscal control 20

Chapter 4 CONCLUSION 22

4.1 Sum up about the hyperinflation in Venezuela 22

4.2 The situation of inflation in Vietnam 23

4.3 Implications for Vietnam 25

REFERENCES 26

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LIST OF FIGURES

Figure 2-1: Demand-pull inflation graph 5

Figure 2-2: Cost-push inflation graph 6

Figure 2-3: Hyperinflation due to printing money 7

Figure 2-4: Inflation rate in Venezuela (2010 - 2021) 8

Figure 2-5: Price of a cup of coffee in Bolivars 9

Figure 2-6: Oil production in Venezuela 10

Figure 3-1: Price of crude oil per barrel (West Texas Intermediate) 12

Figure 3-2: GDP of Venezuela 16

Figure 4-1: Inflation rate of Vietnam (1980 - 2020) 21

Chapter 1 INTRODUCTION

1.1 Rationale of the research

Inflation is an unavoidable part of any market economy It is a sign of growth.However, it turns out to be a bad sign when the level of inflation goes too high because theamount of galloping escalation will take an entire economy down

Hyperinflation is to blame for the majority of global economic crises, includingVenezuela's Hyperinflation in this country has far-reaching effects, including political,social, and humanitarian difficulties Venezuela has been in a severe recession for morethan ten years, dating back to President Hugo Chavez's presidency in 2010 and continuingunder Nicolas Maduro's government This is the country's worst crisis in its history

This country has fallen into an economic abyss; hyperinflation has reduced itscurrency to the worth of “a toilet paper roll” Everyone is a "billionaire" because they havetoo much money; yet, those notes are priceless; and they are obliged to leave their home,their country GDP plunges year by year, unemployment is rampant, wages are falling, andsocial benefits deteriorate

Venezuela's economic situation will be severely impacted by the Covid-19 pandemic

in 2021, and it is expected to plunge more when the oil price is brought to the bottom byCovid-19 in 2019-2020 Although the government has taken significant attempts topromote and restore the economy of the richest city in Latin America, it has been futile aslong as hyperinflation persists

Therefore, the inflation situation of Venezuela and the government's solution needs to

be synthesized, observed, and generalized Then, we will have a greater understanding ofthe devastating effects of inflation on the economy

1.2 Aims and objectives

1.2.1 Aims

This study was first conducted to give a more detailed view of Venezuela’shyperinflation, which tries to figure out this issue’s causes, effects and government'ssolutions Thereby, through this research paper, our team will have a deeper understanding

of what has been happening in Venezuela In addition, thanks to having a clear insight intothe hyperinflation in Venezuela, this research suggests some lessons for Vietnam to avoidthis serious issue in future

1.2.2 Objectives

To achieve the above research goals, we aim to establish the theoretical basis withdetailed data evidence so that readers can have a thorough understanding of the situation inVenezuela The following are the precise objectives of the research:

- Understanding what is inflation, hyperinflation and the root of these problems

- Analyzing factors contributing to hyperinflation in Venezuela and its

government’s solutions

- Suggesting possible lessons for Vietnam to maintain a reasonable inflation rate

1.3 Scope of the research

- In terms of time: from 1999 to 2021 In detail, we split this period into 2

phases: 1999 - 2013 (Charvez Hugo presidency) and 2013 - 2021 (Nicholas Maduro presidency)

1.4 Research question

The research provides answers to those questions:

4 What measures have Venezuela’s Government taken to tackle this

hyperinflation?

conducted from the hyperinflation in Venezuela?

1.5 Research methods

We approached the study using quantitative techniques For analyzing hyperinflation

in Venezuela, the article will be researched and analyzed based on the observed indicatorsand data of the economy such as GDP analysis, foreign debt index, Moreover, the thesiswill also include data collected and analyzed on the inflation situation of Venezuela topresent a comprehensive picture of this country's inflation, as well as its impacts In terms

of the government's approach, we also provide indicators to clarify the effectiveness ofthese policies

1.6 Structure of research

Apart from the preface and references, the research will comprise 4 chapters as follow:Chapter 1: Introduction

Chapter 2: Overview about hyperinflation in Venezuela

Chapter 3: Analysis on hyperinflation in Venezuela

Chapter 4: Conclusion

Chapter 2 OVERVIEW OF HYPERINFLATION IN VENEZUELA

2.1 Definition of inflation and hyperinflation

to the economy, which is the increase in money supply According to the theory ofliquidity preference, the growth of money supply will cause interest rates to fall Lowerinterest rates will encourage spending, which will increase the aggregate demand and shiftthe AD curve to the right As a result, the overall price level will increase, as can be seenfrom the graph below

Figure 2-1: Demand-pull inflation graph

Cost-push inflation

Cost-push inflation happens when firms raise prices to maintain their profit marginsfrom rising input costs Increases in component costs and labor costs, increased indirecttaxes, and inflation expectations can be considered the leading causes for this inflation Forinstance, Figure 2-2 illustrates that if individuals expect higher future inflation, they willdemand a higher salary in order to protect their living standards Therefore, the labor costs(input costs) will rise, which will decrease the aggregate supply and shift the SRAS curve

to the left As a result, the overall price level will increase

Figure 2-2: Cost-push inflation graph

2.1.3 What is hyperinflation?

According to Phillip Cagan, an economist working at America's National Bureau ofEconomic Research, hyperinflation is considered a rapidly rising inflation, typicallymeasuring more than 50% per month For example, an item that costs one dollar onJanuary 1st will therefore cost: 1*(1+50%)^12=130 dollars on January 1st of the followingyear Hyperinflation is considered to stop when the monthly inflation rate drops below50% for at least 12 consecutive months

Hyperinflation occurs when the money supply increases excessively while the rate ofproduction is constant or grows slowly This is often known as demand-pull inflation, as

we have discussed above In Figure 3 below, the aggregate supply curve in the long rundoes not change unless production methods are updated while the rapid growth of moneysupply causes the AD curve to shift to the right in a big gap This is why creating

excessive money causes hyperinflation, which has such a dramatic influence on prices.The more money the government creates, the less valuable the money becomes becausethe price continues to grow.

Figure 2-3: Hyperinflation due to printing money

2.2 The situation of hyperinflation in Venezuela

Once known as one of the wealthiest and most prosperous countries in SouthAmerica, Venezuela has been severely affected by persistent inflation that has persisted formany years since the presidency of Hugo Chávez Inflation has been high in Venezuelaever since Even in 1980, prices rose faster than during the years of the Bolivariangovernment, except in 2018 Venezuela had officially entered a state of hyperinflation inNovember 2017, when the monthly inflation was recorded to reach 56.7% and this year’sinflation rate was 862.6% However, this was just the beginning of this country's economicrecession As can be seen from the figure below, the inflation rate in 2018 reached a peak

of 130,060%, the highest of all time Since then, the economy has been in a severe crisis,

Figure 2-4: Inflation rate in Venezuela (2010 - 2021)

Source: tradingeconomics com

The crisis is considered the worst crisis in Venezuelan history and one of the worstcrises in the Americas Not only seriously affecting the economy, but in all other fields,Venezuela also suffered highly damaging results Venezuelans have faced the anguish ofshortages of basic foods and other essential consumer goods such as toilet paper, personalhygiene products, and medicine A survey, published by three universities in Venezuela,reported that in 2017, Venezuelans lost on average 24 lbs in body weight, 90% of themcould not afford their daily food and 8.2 million people had two meals a day or fewer.Their meals also lacked sources of iron, vitamins and other nutrients.1

Figure 2-5: Price of a cup of coffee in Bolivars

(Source: BBC)

Figure 2-5 demonstrates the price of a cup of coffee in Bolivars from February 2018

to July 2018, the kick-start duration of the hyperinflation in Venezuela From a real cheapcup of coffee in February, the price hit 600,000 Bolivars in June and then reached2,000,000 in July 2018 According to BBC Visual Journalism Team 2019, the prices of acup of coffee were doubling every 19 days on average, which showcased the noticeablyalarming inflation in Venezuela

In addition to the internal crisis, in January 2019, the situation got worse when theDonald Trump administration imposed sanctions on Venezuela in the petroleum, gold,mining industries The United States used to be the country with the largest oil reservesglobally, with 41% of oil exports there.2 As figure 6 shows, however, the oil outputs havefallen dramatically since the sanctions, which decimated the country's already-strugglingoil-dependent economy

Figure 2-6: Oil production in Venezuela

Source: OPEC

Venezuela had been suffering from a severe inflation crisis until 2020 when the trend

of galloping inflation started to gradually decrease The last time this country’s monthlyinflation rate exceeded 50% was December of 2020, at 77.5% Since then, there has been agood sign for Venezuela's economy

The Central Bank of Venezuela (CBV) announced that the country's inflation ratewas at 7.6% for December 2021, in which the inflation per month has stood below 50% for

12 consecutive months.3 It was also the fourth consecutive month that the inflation wasbelow 10% when the inflation in September, October and November of 2021 was 7.1%,6.8%, and 8.4% respectively This is seen by experts as the end of the galloping inflationcycle that this South American country had suffered since 2017 Despite that, it is just thefirst step of escaping from hyperinflation Venezuela’s current inflation is still consideredthe highest in the world when 684.6% recorded in the year 2021 is an enormous andunimaginable rate for many countries Luis Oliveros, an economic expert,

3 Venezuela's inflation hit 686.4% in 2021, says central bank

states that the average inflation rate of 7% per month, though can be considered low with Venezuela, is still very high compared to the average rate of the region and the world.

Chapter 3 ANALYSIS OF HYPERINFLATION IN VENEZUELA

3.1 The cause of hyperinflation in Venezuela

Although hyperinflation in Venezuela started under the presidency of NicolasMaduro, the main source of the problem originated from the mismanagement of thepredecessor government, Hugo Chavez, which will be discussed in detail below

3.1.1 Phase 1: The presidency of Hugo Chavez (1999 – 2013)

3.1.1.1 Overdependence on oil price

When President Hugo Chávez officially went to power in 1999, he recognized thegigantic value that oil could bring to the country’s economy Chávez undertook to reformrefineries in order to raise the amount of oil that Venezuela extracted This action seemed

to have a good impact on Venezuela, but it unintentionally made the nation’s economydependent on oil At that time, the oil extraction industry made up a significant percentage

of export goods, at 95% Moreover, Venezuela’s oil reserves were greater than 300 billionbarrels, which doubled that of Iran and tripled that of Russia

Additionally, the fact that the country became increasingly dependent on oil was alsobecause the residents could earn money easily from oil This was because there wastremendous growth in the oil price, from $19.35 per barrel in 1999 to $100 per barrel in

2008 Furthermore, from 2006 to 2014, save for a brief decrease in late 2008 after a globalrecession, witnessed oil prices mostly fluctuating between $100 and $125 per barrel.During this period, the country utilized its turnover from high oil prices with an aim tofund its budget and gain political power

Figure 3-7: Price of crude oil per barrel (West Texas Intermediate)

Source: Federal Reserve Bank of St Louis; U.S Energy Information Administration

Therefore, during the period of President Hugo Chavez, it can be seen that Venezuelacould take advantage of the enormous value oil brought to it The nation could easily earnhigh revenue as a result of a competitive advantage in oil and significant growth in theprice of this commodity This is the reason that interprets the overdependence of thecountry on the oil industry

However, as a result, Venezuela failed to concentrate on creating and enhancing other industries and mainly relied on importation to have a wide range of products.

This after led to a serious economic crisis, particularly hyperinflation, as the nation did nothave any preparation when the economy experienced a downward trend in oil prices

3.1.1.2 Bolivarian missions

During the administration of former President Hugo Chavez, the Bolivarian missionswere implemented It is a series of over 30 social programs focusing on social justice,welfare, anti-poverty, education, etc The impact of the Bolivarian missions on poverty,education, and health has been lauded, and was described as "ways to combat extremeforms of exclusion" and "the mainstay of progress in the fight against poverty." Spending

on social programs initially increased, free health care clinics were established, food wassubsidized, and small manufacturing cooperatives were created

Data from the Center for Economic and Policy Research (CEPR) indicates that