Inflation – Impact on the Nation – Case of Venezuela – The Crisis of Hyper Inflation

Inflation – Impact on the Nation – Case of Venezuela – The crisis of Hyper Inflation

Professor Sen was as usual sitting in his armchair, reading intensely the Newspaper and verifying through some texts. Also, time to time he was checking through his computer.

Kumar and his classmates who entered the room then was waiting for him to turn to him and did not disturb him. This is not unusual, that, the Professor whenever he go through the any reading, he gets immersed and in another world not even bothered look into the surroundings.

Professor Sen turned his head and noticed Kumar, Ah, when did you come. Just now sir said Kumar with a smile.

Don’t lie me, I know i must not have noticed you.

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On December, 2016, Venezuela, once Latin America’s richest country, entered the record book of historical events in the economic history of the world to have experienced hyper-inflation. Its central bank reported the highest-on-record inflation of 180 per cent and 240 per cent in 2015 and 2016 respectively. The country was facing the world’s worst ever economic disaster. The citizens were suffering from food shortages, hunger, death due to lack of medicines, and escalating homicide rates, which were turning the nation into the second most violent country in the world outside of open war. There was no sign of improvement in the year 2017 either; in fact, it was worse than 2016. The opposition party in Venezuela claimed that the inflation level had risen further to almost 800% between the end of 2016 and the beginning of the year 2017.

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The Government responded by issuing currency controls. It set a fixed exchange rate, to stop the official value of the bolívar dropping against the US dollar, and made it difficult to actually get permission to exchange bolívares into US dollars. The idea was to stabilise the currency by effectively shutting down all currency transactions. However, US dollars were still available on the black market. As the crisis deepened, more and more Venezuelans looked to switch their bolívares into US dollars. This increasing demand meant the black market price for currency rose, creating a difference between the official exchange rate (set by the Government) and the unofficial going rate. This pushed the price of US dollars up, and that of bolívars down, even more. As the crisis deepened increasing numbers of ordinary Venezuelans began to engage in the unofficial currency market. This also took the form of taking subsidised Venezuelan goods like food across the border to sell. This earned the sellers foreign currency, but it also exacerbated shortages of goods within the country, driving prices up even further.

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Venezuela’s hyperinflation rate increased enormously since 2018. The economic situation remains dire. According to economists, the measures to solve the crisis can include managing subsidies, higher taxes, ending price controls and Government subsidies, lower Government spending to reduce budget deficits, devaluing the currency,boosting foreign investments.

Assignment Questions

I. What are the lessons learnt from the Venezuela Crisis? Do you think the impact of Inflation as serious in Venezuela?

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Exhibits

Exhibit I: The IMF’s 2019 Year-End Inflation Projects for Venezuela

Inflation – Impact on the Nation – Case of Venezuela – The crisis of Hyper Inflation

Synopsys

An issue which has been causing grave concern to monetary authorities both in developed and in developing economies in since ages has been the phenomenon of inflation. Inflation can be described as a situation marked by a continuous increase in price level. The situation begins to cause worry when this increase in price level exceeds a tolerable limit. When prices increase they do not affect all sections of the society uniformly. When prices rise, some sections of society gain while other sections lose. The persistence of inflation also causes permanent damage to society. It diverts investment into channels like acquisition of land and other assets, which yield quick capital gains. When inflation continues over a period of time it also erodes the motivation for saving. However. In controlling inflation the authorities must not only identify the causes but also must evaluate other side effects that may arise as a result of the pursuit of anti- inflationary policies.

Prerequisite Conceptual Understanding before the Classroom Discussion

An understanding of basic concept and impact of Inflation on National Economy is required as a prerequisite before classroom discussion can happen on this case. It has been designed for use in the First year of post-graduation in management or with experienced executives.

Case Positioning and Setting

For post graduates and executive education

For the domain areas of Macroeconomics, International Business

Pedagogical Objectives

To understand the impact of inflation on a Nation like Venezuela.

To understand the concept of Inflation

Teaching Plan

The suggested teaching plan is to divide a ninety minute class into three sections: Discussions of the Hyperinflation case in Venezuela with various concepts of inflation (45 mts) and evaluation of possible paths forward (30 mts). The last fifteen minutes can be used to summarize the main points.

Assignment Questions

I. What are the lessons learnt from the Venezuela Crisis? Do you think the impact of Inflation as serious in Venezuela?

II....................

III...................

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Causes of Inflation

Demand-pull inflation is stated to arise when total demand in an economy outpaces total supply. It involves inflation rising as real gross domestic product rises and unemployment falls, as the economy moves along the Phillips curve. This is commonly described as "too much money chasing too few goods."