VENEZUELA ECONOMIC CRISIS –

Hyperinflation and Economic Collapse

GROUP-6
Ankush Kakkar – 200301002
B Ravi Sankar - 200301004
Gagandeep Kaur-200301007
Pooja Tyagi – 200301039
Paritosh Kumar-200301015
Simranjeet Singh-200301020
Rahul Choudhary-200301017
-
Introduction

The Bolivarian Republic of Venezuela is a federation made up of twenty-three states , a Capital District and
the Federal Dependencies on the Caribbean Sea

Venezuela, earlier possessed the world’s largest crude oil reserves, was a relatively stable democracy with
one of Latin America’s fastest-rising economies.
 Venezuela economic crisis – The Beginning
Even at one point, it was provided free heating oil for impoverished Americans

But starting in 2014, the South American nation began suffering a startling collapse.

Venezuela’s GDP’S plummeted even more than the United States during the Great Depression.

The decline of oil prices, the massive social spending of the Chavez and Maduro governments, U.S. sanctions, and a
combination of economic mismanagement and corruption at the top have contributed to the economic collapse.”

Venezuela has long been dependent on oil revenues, and the Bolivarian revolution of Hugo Chavez did not
fundamentally alter that situation

Venezuela's crisis has been deepened by U.S. sanctions against the Venezuelan oil industry

Further imposed sanctions against the Central Bank of Venezuela, cutting off that institution's access to U.S. currency
and limiting the ability to conduct international transactions were put even more pressure upon Maduro's regime

The government then starting printing new money to cope, thus prices rose rapidly, unemployment increased,
and GDP collapsed
Even Current president Nicolás Maduro does not seem inclined to steer away from his course of price controls and
economic mismanagement
 Issues & Causes
1) Over Reliance on Oil
 Heavy reliance on oil rents shaped influenced most of the macroeconomic outcomes in Venezuela and shaped its economic and social
policies.
 Growth and development of Venezuela economy completely depend on the volatile economic activity (oil rents) that is subject to
external factors, which are beyond its control, making the whole economy vulnerable (Palma, 2011).
 In late 1970’s, oil revenues started falling that reduced the sources of export and fiscal revenues.
 Reason for the incapability to recover Venezuela from adverse oil shock was lack of alternative export sectors (non-oil exports
accounted for 7 percent of total exports in 1981) and lack of capacity to develop new export industries in response to a fall in oil
revenues
 From 1978 to 2001, Venezuela entered economic decline for a long period with per capita GDP falling by a cumulative 18.6

Oil price reduction (%)

30 25

10

-10 1965 to 1974 1985 to 1994 1995 to 2002

-30 -20

-50 -40

Oil price reduction

 Issues & Causes
2) Dutch disease
 Dutch disease is an economic concept that refer to negative consequence of overall economy of the country. This
occurs when there is a considerable appreciation in value of country’s currency that is associated with rapid
development of one sector of the economy (particularly natural resources) leading to a decline in other sectors of
the country.
Increased Expendit
Househol ure much Loss of
Increase Appreci
Massive d Income more than competit
d ation of
inflow of and economy’ iveness
Expendit
Aggrega s output
the real
Remitta of
ures te and exchang
nces export
Capacitie Demand productiv e rate
sector
s ity

Since 1970s, Venezuela has been going through many symptoms of the Dutch disease. Main factors for the collapse in
economic growth are overreliance on oil exports and failure to develop other export sectors and move resources to alternative
industries
Transfer of
Trade
resources Fall in
Appreciatio barriers,
Fall in GDP and labor Collapse in economy
n in uncondition
growth since from productivity and affects
currency al subsidies,
1970s tradable to levels long term
value price
non- growth
controls
tradable
 Issues & Causes
3) Collapse in private investment
• Since late 1970’s, over-accumulation of capital led to
decline in profitability and thus discouraged investment,
thereby collapsing private investment.
• Low level of investment continued mainly due to the
overvalued real exchange rate – a result of the Dutch
disease.

4) Corruption
• Venezuela was listed as the ninth most corrupt country
in the world by ‘Transparency International’-a German
NGO
• Venezuela’s political and economic situation was
highly risky and considered as difficult place for
business where corporate default was very
likely-’Global EDGE’-an information web portal
• Ministers, armed forces generals, and governors were
involved human rights violation or in drug trafficking-
U.S. government
Issues and Causes
5) ECONOMIC ADJUSTMENTS,CRISIS,EXCHANGE RATE POLICY

Macroeconomic disequilibrium in late 1980s coupled with external debt repayment, no price control, reduced public expenditure led an
adjustment in 1989 with unique exchange rate leading increase in price of goods and services, less investment and hence increased inflation rate to
84%

Multiple Currency devaluation, 40 Bs/$ in 1989,from 170 Bs/$ to 290 Bs/$ in 1995 contributed to higher inflation rate from 72% to 150 % in 1995.
and a significant devaluation was also done in 1996 which further led to crisis.

Starting in the late 1980s the Venezuelan economy, traditionally well regulated, has been experiencing de-industrialization post macroeconomic
adjustment and market liberalization of 1989.

Manufacturing employment and the share of manufacturing in GDP after reaching peak in 1988 has been falling ever since. Although the GDP growth
recovered between 1990 and 1992, the political unrest in 1992-93 prohibited stabilization and further weakened the economy.

With Political crisis coupled with low oil prices, led to more economic problems under new govt. of president Caldera, in 1994.A financial crisis
emerged in January 1994 with the bankruptcy of one of the largest banks, the Banco Latino affecting many financial institutions and there was large
capital flight despite having restrictive monetary policy by central bank.
 IMPACTS & CONSEQUENCES
1) Political Unrest
The socialist PSUV party governed Venezuela for
20 years. During this tenure, the party gained
control over key institutions. The economy
collapsed under President Maduro, which resulted
in a widespread shortage of basic supplies.
As a result, opposition parties won the majority in
the National Assembly. But Maduro created a
National Constituent Assembly consisting of
government supporters and it superseded the
National Assembly
2)The Venezuelan descent into
hyperinflation
Venezuela's economic devastation is
attributable to high government spending,
falling oil prices, and continuing financial
mismanagement by the government. The
government began to print new money to
cope with the expenses and debts, which
caused the rattling rise in prices,
unemployment, and consequent collapse of
GDP..

According to a BBC news article from August 2018, the prices of goods double every 26 days.
3) Mass Migration
 Venezuela's economic catastrophe has
caused direct implications on the
migration patterns in Latin America and
the Caribbean. The repercussions of the
crisis are political and economical as
Venezuelans escape political upheaval
searching for economic opportunities.
The country is also facing severe
concerns of human trafficking as the
vulnerable population falls victim to sex
tourism, smuggling, and forced migration
across borders.

Source: LatinAmericanPost
4) Devaluation of
currency Government Budget

As per the International Monetary 0

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Fund (IMF), "Venezuela's triple-digit

-5
annual inflation rate is set to jump to -5.3

more than 2,300 percent in 2018,” the -10

Government budget
-10.7 -10.8
highest estimate for any country -15
-11.5

tracked by the IMF. Gross domestic -15.6 -15.6

product is expected to diminish 6 -20

percent in 2018, after shrinking an -25

-23

estimated 12 percent in 2017. The -30

unemployment rate is forecast to -29.9 -29.9

upsurge to about 30 percent in 2018, -35

Years
also the highest and followed by South
Africa’s 28 percent and Greece’s 21
percent (IMF).
5) GDP
The gross domestic product (GDP) of Venezuela declined to 63.9 billion U.S. dollars (-20.2%) in
2019, down from a peak in 2013 of 258.99 billion U.S. dollars (+5.5%). The descending trend is
predicted to continue until 2022.

GDP
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
10

4.9 5.5
5
2.6
1
0
GDP GROWTH RATE

-2.6
-5

-7.4
-10

-15

-17.9
-20 -18.9
-20.2

-25

Years
6) Investment
Investment has dramatically
declined in the past decade or so
due to out-of-control inflation,
dwindling oil production,
devaluation of the currency, and
political unrest. It remained in the
negative year on year basis.
7) The Growth rate of the
real gross domestic product
(GDP)
The statistic data reveals the
GDP growth in Venezuela
from 2012 to 2018, with
predictions up to 2022.
THE CONSUMPTION-INCOME
RELATIONSHIP
Consumption-Income
The Consumption-Income Relationship 14000

12336
11991
Years 2012 2013 2014 2015 2016 2017 2018 2019 12000
10890
11662

10223

Y, Income 23598 21203 23067 15237 13490 14749 14996 11739 10000

8441

C, Consumption Spending 10890 11662 12336 11991 10223 8441 6775 5057 8000

Consumption
6775

6000
5057

• Income as well as consumption and spending 4000

both have declined over years

2000
• Not all the points lie exactly on the line, this
indicates variation of consumption depends on 0
0 2 4 6 8 10 12
other factors also apart from income. Income
 IS CURVE
IS CURVE
IS CURVE 35

Years 2012 2013 2014 2015 2016 2017 2018 2019

30
Y, Income 23598 21203 23067 15237 13490 14749 14996 11739
i, Interest 15 14 15 19 21 22 21 32 25 f(x) = − 0 x + 38.29
R² = 0.72

INTEREST RATE
• IS Curve shows the combination of interest rates and 20

level of outputs at which goods market is at equilibrium Linear ()

15
• IS Curve shows the resulting negative relationship
between interest rates and income.
10

• An increase in the interest rate reduces aggregate demand

for a given level of income through decrease in the 5
investment spending
• Thus, at a higher interest rates, the level of income at 0
10000 12000 14000 16000 18000 20000 22000 24000 26000
which the goods market is in equilibrium is lower. The IS
curve slopes downward INCOME,OUTPUT
 REMEDIES
 Make Living Affordable: The economic imbalance needs to be attuned.

 Stabilize The Currency: The degrading currency value is the most dangerous imbalance in
the economy. The solution to this could be unification in the exchange rate and which will, in
turn, put an end to the black market.

 Eliminate Dysfunctional Price Controls : Once the above measures are taken, and people
are protected from price hikes for essential goods, the government can work towards price
controls.

 Adjust To Lower International Oil Prices: Adjusting to lower oil prices will mean
diversifying the economy away from oil. In 2011, Venezuela imported about 24% of its food;
the country shall pursue other import-substitution and diversification strategies, which would
become more feasible with a lower-valued currency.
CONCLUSION
 The service sector represents 51.6% of the GDP and employs 75.4% of the active population, making it
a major source of revenue and jobs. The country can focus more towards this sector.
 The country has diverse set of coast lines and can focus more towards tourism and hospitality rather
than over-relying on the oil industry.
 The population is young, well-qualified, and entrepreneurial. Large quantity of Venezuelan doctors,
around 60 percent, are applying for jobs in Chile. Many countries have relaxed their migration
restrictions.
 Venezuela has signed key agreements with Russia in 20 important areas like financial, energy etc. can
help boost up investment into the country.
 Venezuela should focus on building up the deteriorated institutional capacity so that future programs
and projects can be executed in a transparent and efficient manner.
 The Venezuela crisis may be the first opportunity of the Biden's administration to define its vision for
democracy, security, and good governance in the region
THANK YOU