MID TERM ASSIGNMENT SUBJECT MACROECONOMICS 2 TOPIC HYPERINFLATION IN VENEZUELA

FOREIGN TRADE UNIVERSITY
HO CHI MINH CITY CAMPUS

MID-TERM ASSIGNMENT
SUBJECT: MACROECONOMICS 2
TOPIC:

HYPERINFLATION IN VENEZUELA
Group 3 – ML57:

Lecturer:
Ho Chi Minh City, March 5th, 2022

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WORK ASSIGNMENT OF GROUP 4
Name
Trần Anh Thư (Leader)
Hoàng Lê Phương Thảo
Phạm Đăng Thái
Đặng Thế Trường
Phan Quang Thịnh
Nguyễn Khánh Nguyên
Thảo
Nguyễn Mai Trâm
Huỳnh Ngọc Bảo Trân
Dương Ngọc Minh Thư

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TABLE OF CONTENT

TABLE OF CONTENT.........................................................................................................
LIST OF FIGURES.............................................................................................................
Chapter 1.

1.1Rationale of the research...............................

1.2Aims and objectives........................................

1.3Scope of the research......................................

1.4Research question...........................................

1.5Research methods...........................................

1.6Structure of research......................................
Chapter 2. OVERVIEW OF HYPERINFLATION IN VENEZUELA......................

2.1Definition of inflation and hyperinflation....

2.2The situation of hyperinflation in Venezuela
Chapter 3. ANALYSIS OF HYPERINFLATION IN VENEZUELA.......................

3.1The cause of hyperinflation in Venezuela.....

3.1.1.1 Overdependence on oil price...............

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3.2 The effect of hyperinflation in Vene

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3.3 The solutions of Venezuela’s govern

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4.1 Sum up about the hyperinflation in

4.2 The situation of inflation in Vietnam

4.3 Implications for Vietnam..................
REFERENCES....................................................................................................................

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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

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Chapter 1.

INTRODUCTION

Rationale of the research

1.1

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 the
amount of galloping escalation will take an entire economy down.
Hyperinflation is to blame for the majority of global economic crises, including
Venezuela's. Hyperinflation in this country has far-reaching effects, including political,
social, and humanitarian difficulties. Venezuela has been in a severe recession for more
than ten years, dating back to President Hugo Chavez's presidency in 2010 and continuing
under 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 its
currency to the worth of “a toilet paper roll”. Everyone is a "billionaire" because they have
too 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, and
social 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 by
Covid-19 in 2019-2020. Although the government has taken significant attempts to
promote and restore the economy of the richest city in Latin America, it has been futile as
long 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 of
the devastating effects of inflation on the economy.

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1.2

Aims and objectives
1.2.1 Aims

This study was first conducted to give a more detailed view of Venezuela’s
hyperinflation, which tries to figure out this issue’s causes, effects and government's
solutions. 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 into
the hyperinflation in Venezuela, this research suggests some lessons for Vietnam to avoid
this serious issue in future.
1.2.2 Objectives

To achieve the above research goals, we aim to establish the theoretical basis with
detailed data evidence so that readers can have a thorough understanding of the situation in
Venezuela. The following are the precise objectives of the research:
- Understanding what is inflation, hyperinflation and the root of these
problems
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Analyzing factors contributing to hyperinflation in Venezuela and its

government’s solutions.
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Suggesting possible lessons for Vietnam to maintain a reasonable inflation

rate.
1.3

Scope of the research
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In terms of scape: Venezuela

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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)
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1.4

In terms of content: Hyperinflation in Venezuela and lessons for Vietnam

Research question
The research provides answers to those questions:
1. What are inflation and hyperinflation?
2. How has hyperinflation affected Venezuela?
3. What are the causes of hyperinflation in Venezuela?
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4. What measures have Venezuela’s Government taken to tackle this
hyperinflation?
5. How has been the inflation situation in Vietnam and what lessons can be
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 indicators
and data of the economy such as GDP analysis, foreign debt index,... Moreover, the thesis
will also include data collected and analyzed on the inflation situation of Venezuela to
present 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 of
these 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

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Chapter 2.

OVERVIEW OF HYPERINFLATION IN VENEZUELA

2.1 Definition of inflation and hyperinflation
2.1.1 What is inflation?
Inflation is defined as an increase in the price of goods and services. With the overall

price level rising, each unit of currency can only buy less products and services compared
to the previous period. As a result, inflation leads to a decline in the real purchasing power
of a given currency.
2.1.2 Types of inflation
Demand-pull inflation
When aggregate demand grows at an unsustainable rate, it puts increased pressure on
limited resources. Because of the extra demand, producers can raise prices to increase their
profit margins. One of the main reasons leading to demand-pull inflation is money stimulus
to the economy, which is the increase in money supply. According to the theory of liquidity
preference, the growth of money supply will cause interest rates to fall. Lower interest
rates will encourage spending, which will increase the aggregate demand and shift the AD
curve to the right. As a result, the overall price level will increase, as can be seen from the
graph below.

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Figure 2-1: Demand-pull inflation graph

Cost-push inflation
Cost-push inflation happens when firms raise prices to maintain their profit margins
from rising input costs. Increases in component costs and labor costs, increased indirect
taxes, and inflation expectations can be considered the leading causes for this inflation. For
instance, Figure 2-2 illustrates that if individuals expect higher future inflation, they will
demand 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.

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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 of
Economic Research, hyperinflation is considered a rapidly rising inflation, typically
measuring more than 50% per month. For example, an item that costs one dollar on
January 1st will therefore cost: 1*(1+50%)^12=130 dollars on January 1st of the following
year. Hyperinflation is considered to stop when the monthly inflation rate drops below 50%
for at least 12 consecutive months.
Hyperinflation occurs when the money supply increases excessively while the rate of
production 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 run
does not change unless production methods are updated while the rapid growth of money
supply causes the AD curve to shift to the right in a big gap. This is why creating
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excessive money causes hyperinflation, which has such a dramatic influence on prices. The
more money the government creates, the less valuable the money becomes because the
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 South
America, Venezuela has been severely affected by persistent inflation that has persisted for
many years since the presidency of Hugo Chávez. Inflation has been high in Venezuela
ever since. Even in 1980, prices rose faster than during the years of the Bolivarian
government, except in 2018. Venezuela had officially entered a state of hyperinflation in
November 2017, when the monthly inflation was recorded to reach 56.7% and this year’s
inflation rate was 862.6%. However, this was just the beginning of this country's economic
recession. 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,
leading to other painful problems internally and externally.
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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 worst
crises 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 of
shortages of basic foods and other essential consumer goods such as toilet paper, personal
hygiene 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 them
could 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

1 Venezuela: All you need to know about the crisis in nine charts

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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 cheap
cup of coffee in February, the price hit 600,000 Bolivars in June and then reached
2,000,000 in July 2018. According to BBC Visual Journalism Team 2019, the prices of a
cup of coffee were doubling every 19 days on average, which showcased the noticeably
alarming inflation in Venezuela.
In addition to the internal crisis, in January 2019, the situation got worse when the
Donald Trump administration imposed sanctions on Venezuela in the petroleum, gold,
mining industries. The United States used to be the country with the largest oil reserves
globally, with 41% of oil exports there. 2 As figure 6 shows, however, the oil outputs have
fallen dramatically since the sanctions, which decimated the country's already-struggling
oil-dependent economy.
2 Venezuela: All you need to know about the crisis in nine charts

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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 monthly
inflation rate exceeded 50% was December of 2020, at 77.5%. Since then, there has been a
good sign for Venezuela's economy.
The Central Bank of Venezuela (CBV) announced that the country's inflation rate
was 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 was
below 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 inflation
cycle that this South American country had suffered since 2017. Despite that, it is just the
first step of escaping from hyperinflation. Venezuela’s current inflation is still considered
the highest in the world when 684.6% recorded in the year 2021 is an enormous and
unimaginable rate for many countries. Luis Oliveros, an economic expert,

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

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Chapter 3.

ANALYSIS OF HYPERINFLATION IN VENEZUELA

3.1 The cause of hyperinflation in Venezuela
Although hyperinflation in Venezuela started under the presidency of Nicolas
Maduro, the main source of the problem originated from the mismanagement of the
predecessor 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 the
gigantic value that oil could bring to the country’s economy. Chávez undertook to reform
refineries 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 economy
dependent 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 billion
barrels, which doubled that of Iran and tripled that of Russia.
Additionally, the fact that the country became increasingly dependent on oil was also
because the residents could earn money easily from oil. This was because there was
tremendous 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 global
recession, 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 to
fund its budget and gain political power.

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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 Venezuela
could take advantage of the enormous value oil brought to it. The nation could easily earn
high revenue as a result of a competitive advantage in oil and significant growth in the
price of this commodity. This is the reason that interprets the overdependence of the
country 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 not
have 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 missions
were 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 extreme
forms 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 was
subsidized, and small manufacturing cooperatives were created.
Data from the Center for Economic and Policy Research (CEPR) indicates that
Chavez achieved a high degree of success with these programs. Thanks to his policy, from
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1999 to 2001, the unemployment rate decreased from 14.5% to 7.8%, the poverty rate
dropped from 50% to 31.9%, while extreme poverty dropped from 19.9% to 8.6%. About
healthcare, the program drew praise from the World Health Organization and UNICEF. The

infant mortality rate also went down 5.9% between 1999 and 2013.
However, the Bolivarian mission was considered as a double-edged sword as Chavez
spent more money on these social programs than his country could really afford. Up to
2012, the public spending had accounted for more than 50% of this country's GDP, forcing
the government to borrow from other countries to pay for these expenditures. At that time,
it was not a big problem because the revenue gained from oil was significantly high.
However, President Chavez did not create a stabilization fund because he expected oil
prices to rise instead of falling. Because Charvez failed to save money for economic crises,
this made a huge consequence that will be mentioned later in the next phase.

3.1.1.3 The exchange control
In February 2003, under the Charvez period, Venezuela implemented a restriction on
free currency convertibility, which prohibited the selling and purchase of foreign currency
by private individuals. The government fixed the Venezuelan Bolivar to the U.S. Dollar at
Bs.1,600/US$1 to buy and Bs.1,596/US$1 to sell and imposed a set of requirements for the
right of exchanging dollars. Therefore, only those with a valid reason to buy dollars, such
as authorities and companies importing necessary goods, are permitted to exchange Bolivar
at a fixed rate set by the government. The purpose of this system in the first place is to
ensure that the government has enough foreign reserves to invest and import necessities
such as food or medicine.
However, currency control with the fixed exchange rate has a negative impact as with
many Venezuelans unable to freely buy and sell dollars, the black market thrived.
Therefore, this ban created corruption in the Venezuelan government when a large number
of authorities, who can have access to foreign currency, smuggled foreign currency into the
black market to make a profit. That is, they buy the U.S. dollar at a lower price
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(official exchange rate) and then sell it in the black market for private individuals at a
higher price (unofficial exchange rate), making the Bolivar depreciate over the period.
This after that led to a tremendous impact on the economy under the control of Nicolas
Maduro.

3.1.2 Phase 2: The presidency of Nicolas Maduro (from 2013)
Nicolas Maduro became President of Venezuela in March 2013 after Hugo Chávez
named him to be his successor. In 2014-2019, oil prices witnessed a dramatic decrease,
tremendously affecting exportation. The price of oil dropped from $100 in 2013 to $70 a
barrel in 2014, then kept plummeting to $33 in 2016, leading to the fact that the
government did not have any funds to deal with the foreign debt due to overspending on
Bolivarian missions. The only solution is printing more money to pay off the debt, which is
easy to predict the later occurrence of hyperinflation.
In fact, this solution could be beneficial to an economy that is struggling with shortterm price shock. However, the opposite was the case for Venezuela, where oil prices
decreased gradually over time. Inflation became more and more severe as the government
continued to print more money and raise the basic wage. Especially with international
creditors no longer daring to risk lending money to Venezuela, printing money seems like a
last resort to finance government spending. Additionally, because the country depended too
much on the oil industry, they didn’t have enough ability to produce other products and
enough reserves to import them in the context of oil price decrease and a large amount of
foreign debt. Therefore, the actual outputs in the economy couldn’t meet the citizens’
needs. As a result, there was too much money in circulation to chase for
very few items, pushing the overall price to increase uncontrollably.
Moreover, having awareness that the currency was showing signs of inflation, the
government still decided to maintain Charvez’s exchange control with a fixed exchange
rate policy with the hope to stabilize the Bolivar currency. With this policy, illicit market
transactions continued to surge, more individuals tried to find ways to convert Bolivar
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into USD, making the supply curve of the Bolivar currency shift to the right and therefore
the exchange rate decreased significantly. Lacking foreign currency in the government’s
reserve, importers have had trouble buying dollars through the government at an official
rate, so they turned to an illicit market with an unofficial rate to have USD to import
necessities. This led to higher importation costs, and the prices in the domestic
market rose excessively, contributing to a surge in the inflation rate.
With all the reasons above, Venezuela’s economy transferred into hyperinflation at
the end of 2017.
The situation mentioned derives a formula for hyperinflation:
Foreign debt + Continuous Mismanagement of Government + Money printing
= Hyperinflation
In conclusion, when the decade-long oil price boom ended in 2014, Venezuela not
only lost income from its oil fields but it also lost access to credit markets abroad, pushing
the country to an end of printing more and more money, in addition to the thriving black
market and so, hyperinflation happened.
3.2 The effect of hyperinflation in Venezuela
3.2.1 Economic crisis
With the causes analyzed above, inflation in Venezuela occurred and the currency in
this country depreciated rapidly. From an economic point of view, inflation has increased
tremendously in Venezuela, causing the country's economy to face great challenges. The
first effect that can easily be pointed out is the fluctuations in the GDP of Venezuela.

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Figure 3-8: GDP of Venezuela

(Source: Statista)
As we can see from the chart, Venezuela's GDP has fluctuated dramatically.
Specifically, from 1985 to 2021, GDP peaked in 2011 with 352.54 billion US dollars.
However, it suddenly dropped to 2015 with a GDP of 203.82 billion US dollars. The peak
of this decrease was when the explosive inflation in 2017 caused GDP in this country to
slide very quickly and there is no sign of stopping when in 2021, GDP is recorded at 47.26
billion US dollars. The most obvious cause that can be seen in this situation is the sudden
drop in the price of oil from $100 to $50/barrel in just six months (2015), GDP started to
decrease. With inflation rising rapidly, according to a report by the International Monetary
Fund (IMF), within five years, more than 50% of Venezuela's GDP has gone up in smoke,
businesses run out of capital and cannot operate.

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3.2.2

The humanitarian crisis
Not only in economic terms, but the terrible inflation in Venezuela has also made the

Bolivar currency depreciate sharply, causing commodity prices to rise and wages gradually
become worthless. That has made the people in this country fall into a very miserable
situation and severe shortage. It can be seen from the famine. With President Chávez's
price control policy, food shortages were widespread. After that, under the control of the
next president, Mr. Maduro, the situation was still not better. At the beginning of 2016, the
scarcity rate of staples was estimated to range from 50 to 80 percent. Many essential food
items such as milk, meat, coffee, rice, etc...have become very scarce and Venezuelans are

always in a situation where they have nothing to eat or have to wait in vain queues at the
stores and supermarkets. The poorer class of citizens has to eat wild fruits on the road or
even eat garbage to survive.
Not only the food crisis, according to a report from the Finance Committee of the
National Assembly of Venezuela, basic living services such as transportation, electricity,
and water have also collapsed. Moreover, the housing shortage in Venezuela was also
remarkable. In 2012, building materials became scarce, making it difficult to build a house.
By the end of President Chavez's term in 2013, the number of housing shortages had
increased to 3 million, causing many people to live in slums.
Perhaps because of these difficulties and shortages, the majority of the population
decided to leave their country to immigrate to another country, especially to neighboring
countries like Colombia, making it the biggest migration crisis in history with more than 5
million people.
Severe deprivation also makes people's lives insecure. Along with that is the
unemployment rate, the crime rate has increased. According to a report by the Venezuelan
Violence Observatory, in every 100,000 people, there will be about 90 murderers (2015),
which was a very alarming number. By early 2020, 9 out of 10 Venezuelans lived in
poverty, infant mortality rates had increased by more than 40% since 2008, one-third of
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the population was classified as food-insecure by the World Food Program, and nearly
three-quarters of the population had lost weight due to lack of food.

3.3 The solutions of Venezuela’s government to address the hyperinflation
3.3.1 Currency redenomination
The Maduro administration introduced a new currency called bolivar soberano
(Bs.S) to substitute for bolivar fuerte (Bs.F) on August 20, 2018, with 1 Bs.S equivalent to

100,000 Bs.F. New banknotes in denominations of 2, 5, 10, 20, 50, 100, 200, and 500 Bs.S,
as well as new coins in values of 50 céntimos and 1 Bs.S, were issued. The new currency
has appreciated by nearly 95% relative to the previous bolivar fuerte under the country's
official fixed exchange rate to the US dollar. During the transition phase, the bolivar
soberano was supposed to operate alongside the bolivar fuerte. This helps to prevent large
amounts of old currency (bolivar soberano) from circulating in the market, making
transactions more difficult.
However, the attempt at currency reform seemed to have no effect because it couldn't
solve the root of the existing economic problems in this South American country. The
reason is that the new currency must be trustworthy with the public, but Maduro
announced a new one that didn’t prove the stability, which reduced the trustworthiness of
its citizens. This made people still try to convert the currency into US dollars. Therefore,
the new currency kept depreciating and it became more costly for companies to import
goods. Venezuela’s government needed to find other ways to mitigate hyperinflation
instead of “cutting down some 0 in the currency”.

3.3.2 Informal dollarization

Dollarization in Venezuela had a noticeable impact on the emergence of Venezuela’s
economy. Although this dollarization process is not from an official policy of Venezuela’s
government, the country implicitly allowed its citizens to trade with the USD, making a
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