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Venezuela. The path to Hyperinflation

Essay 2019 18 Seiten

VWL - Fallstudien, Länderstudien



List of figures

1. Introduction

2. The Natural Resource Curse

3. Weak corporate governance

4. Road to hell is paved with good intentions

5. Conclusion


Anhang I


Figure 1- Inflation rate

Figure 2- Blackmarket Price Bolivar

1. Introduction

This paper aims to explain the reasons behind the upcoming hyperinflation of Venezuela. A country, which contains one of the biggest oil reserves in the world. The question, which I´m discussing here is, how can it happen that a country with so many opportunities falls in such a big hole of poverty and famines. One of the major challenges the country faces is the strong dependence on their oil reserves. This based on the poorly managed political and social situation within the country in the past.

The Venezuelan economy depends almost completely from the oil revenue is currently in a heavy crisis. Marked by Hyperinflation, which led among other things to supply bottlenecks, famines and a high poverty rate. The poverty rate increased from 2014 above 50% percent and in year 2016 it has reached about 80%.1 The prices for goods rose steadily from year to year, in 2013 the prices increases were about 41%, in 2016 already at 481% and in 2018 it reached 2,880%. Forecasted for 2019 is a price increase of 3,497%.2

The analysis of Venezuela´s development includes the economic, social and political environment, to understand the path the country went to the hyperinflation. The rich oil-based country will reach an inflation rate above one million percent in 2018, according to the International Monetary Fund. They also announced that the low GDP continued to shrink by around 18%. The collapse of the economy, the scarcity of food and public goods like health services and electricity, as well as public transportation caused a huge wave of migration, wherefore other neighboring states also threatened to slide into a crisis. 3 Therefore this paper has the intention to provide a better understanding of the process leading to hyperinflation in Venezuela. It´s the best example to show how a country should not behave. An interplay between many different parameters, which causes grievances, where is everyone has been asking himself, how should a country emerge from this crisis?

What is a hyperinflation?

“Hyperinflation starts when the price of goods and services rise more than 50 percent a month.”4

That means that the prices for goods increases very fast and can vary from hour to hour. The reason behind is a misallocation in the monetary policy, the government brings too much money in circulation.5 (further information provides chapter 3)

The paper is structured as ensuing: section 2 contributes the dependence of Venezuela in relation to the price of oil. In section 3, I have analyzed the domestic market and how it has been failed over the years. Section 4 provides an overview about the social situation in the country and section 5 concludes and points out the faults for other countries to learn from.

I. the strong dependence of Venezuela on the price of oil
II. the lack of domestic competitive markets/sectors
III. role of failed social policies

2. The Natural Resource Curse

This chapter is about the dependence of Venezuela on their oil deposits as a trading commodity, therefore it should be mention that international trade has an important impact for all countries on the world. Without international trade the nations would be restricted to their own produced goods and services.6 Hence I want to present the main oil trade partners of Venezuela.

In the following I want to discuss Venezuela´s trading behavior more in depth. The country symbolizes a great example of an oil dependent economy, which failed with their trade policy. The oil economy of Venezuela has his origin in 1914, where geologist of the Caribbean Oil Company discovered high oil deposits. This means the start for the oil trade country, since then they have been focused on this valuable resource. 7 The oil reserves were estimated at around 382,91 billion barrel (1 barrel =159 liters) based on the status of 2010.Through that the country has the biggest oil reserves in the world. However, questionable is whether the quality of the reserves is good or not. Venezuela has often oil deposits, which are more complex to produce, like for example oil shales8

The main trade partners of Venezuela are the USA, China and Russia. The relationship between Venezuela and the USA are strained. President Maduro accused the USA that they planned him to overthrow him and that they undermined the economy of Venezuela. Based on the many violations of human rights on demonstrations (2014 and 2017) the USA imposed sanctions against Venezuela. However, they are still importing many Venezuelan oil.9 China is the second-largest oil trading partner of Venezuela, they have some agreements in the areas of oil, mining, electricity, finance and infrastructure. At the end of 2001 they had reached an amount of 20 billion dollar through trade.10 So far, China was also the biggest financial supporter with a total amount of 60 billion dollar for prospective oil deliveries.11

Out of the total exports of Venezuela, oil accounts about 96% of these exports, which accounts for approximately 30% of the country´s GDP. Therefore, the country depends so much on the price of oil.

The first fall of the oil price was 1973, the second oil crisis 1980, initiated by the revolution in Iran and the first Gulf war. The Bolivar depreciated heavily, the products within the country became more expensive. The benzene prices went up and alongside the public transportation tickets. Due to this, the people went out to fight on the streets. In 1989, the demonstrations ended with many dead people. As a result, the benzene prices became almost cheaper than water.12 It is not so easy to say, what has been recorded for a GDP and GDP per capita for2017, because the country didn´t publish any official economic data since 2015. According to estimates of the world bank the GDP shrank by 14% year-on-year, in numbers, 210 billion dollars. The GDP per capita was estimated by 6.890 USD, forecasted at 3.300 USD for 2018.13

Trade: other sectors

Because of the high focus on the oil economy, other sectors suffered an excessively drop in 1936. Due to the fact, that the country is based on socialism the food production, were nationalized as well. The socialist government focused their trade strategy obviously on the export of the oil and expected that this will be enough to import required goods. As imports for Venezuela became very cheap, based on the crisis of the US economy and the strong oil exports the Bolivar became a strong currency in the international trade system. As a consequence foreign countries were no longer able to afford the domestic products of Venezuelan and the agriculture within the country fell apart, the basis of life for the most Venezuelan people.14

3. Weak corporate governance

Firstly, it is important to know the essential points of the development of Venezuela to understand, the way into this huge crisis. The beginning was in 1914 where the Venezuelan government explored the big oil reserves. The country has begun to benefit from an especially powerful profit from the oil export. The period of socialism began in 1998, where Hugo Chavez took up his position as the newly elected president. Under his regime the country’s name was changed to Bolivarian republic of Venezuela.15 He stated to the nation in a TV interview that his vision was to grant every citizen a fair contribution of the rich oil deposits. A good intention of Chavez, which is why many people believed in his politics. Chavez has been fortunate in his government period, the oil prices skyrocketed, almost five times greater within his time period than with previous rulers.16 In the beginning of Chavez government period the oil price had its lowest level of 10,53 dollars and at his death (in 2013) the price was almost ten times higher.17 As a result, Chavez received the possibility to live his “socialism dream”, because the national revenue increased exponentially. He was able to invest this money for social programs, like for example the support of the hospitals or the construction of new social housings. It was possible for him to reach the aim to reduce the poverty, inequality and the child mortality, in return the education level went up. Due to the high belief in the oil deposits the government, unfortunately, still did not invest in other economic sectors. The high reliance on the “black gold” remained, because the expectation lay on stable oil prices. Owing to the fact that the gas was subsidized by the government, the gas price was for a long time lower than water. This led to smuggling of gas and the government didn´t take any consequences for that. The consumption within the country amounts to about 500.000 barrels per day, therefore the subsidies reached in a peak phase a value of 10 billion. Hence Chavez lifted the prices for gas within the country a little bit, but the country has still the cheapest prices in the world.

Saving money makes no sense for the Venezuelan people, because of the high inflation rate. Therefore, the value of the Bolivian currency continued to decline. The government tried to keep the currency stable by introducing a fixed dollar exchange rate. But the government cheated themselves, because the Bolivian is much more worthless then they wanted to confess. If someone changed Bolivian money to Dollar and exchanged it back, they received round about ten times more money.18 A further instrument of the socialism is the expropriation of private companies. The nationalization of the oil industry was already in the late 1970s. The corporation were called PDVSA and ran the business with 140.000 employees and very good connections to foreign companies very successful. Through this success Chavez saw his socialism idea threatened and he decided to place (in 2002) some of his political supporters in the management board of the company, to have the whole control on his side. The drawback on this was that most of them had no knowledge within the oil industry. This decision culminated in a two-month-strike of the workers, which stopped the whole oil industry. Chavez’s reaction was to dismiss 18.000 workers. Over the years the nationalization of the firms went further. In 2007 the corporation Exxon were forced to hand over their shares to the state. After that, Chavez has succeeded his goal to increase the profit share of the oil industry in the period from 1998 till 2013 to 90%.

In 2006, 350 further companies were nationalized by the government. In the beginning mainly steel and iron production, afterwards electricity suppliers, the harbor, the food production and so on. Chavez was unstoppable in turning the country into a completely government-controlled state.19 Thus, he took away the basis for a free economy, which is the ability to produce with supply and demand, which for Venezuela meant something different than oil.20 Chavez’s interventions in the market increased continuously. He also massively regulated the job market, where companies were prohibited to dismiss employees in bad times. In addition, he ensured producers of basic goods met low prices, to give everybody access to food. Companies which refused these regulations received threats of imprisonment. The whole focus of Chavez politics lay in the investment of social programs. Firms which didn´t make any profit received subsidies to stay alive. And if he invested something in the industry, his concentration always focused on the oil industry. After the death of Chavez in 2013, the vice president Nicolas Maduro took over the regime. He wasn´t as charismatic as Chavez, but he had the military support and besides the hope of the people that he will continue the vision from Chavez. Maduro accelerated the ongoing nationalization of private companies. As a result, many of them have become bankrupt. In addition, the oil prices declined from 111 Dollar per Barrel (about 159 liter) in 2013 to 57,60 Dollar in 2014, this meant a reduction of 48,11%, almost the half of it. Approximately one year later the price of oil recorded almost by a third to 37,60 Dollar. In 2016 the oil price fluctuated between 27,10 and 57,30 Dollar. The country, which is so extremely dependent on the oil price curse has faced huge problems due to that.


1 See: Venezuela in, 16.02.2019, 22:21

2 See: Hyperinflation, its causes and effects with examples, Amadeo, Kimberly, in:, 16.02.2109, 23:23

3 See: Wenn Banknoten nur noch gewogen werden, Piper, Nikolaus, in:, 16.02.2019, 23:35

4 Hyperinflation, its causes and effects with examples

5 Wenn Banknoten nur noch gewogen werden in, Piper, Nikolaus in, 16.02.2019, 22:40, 16.02.2019, 22:40

6 See: Außenhandel in, 16.02.2019 19.10

7 See: Es war einmal in Amerika, Erb, Sebastian in venezuelas, 16.02.2019, 16:09

8 See: Venezuela hat das meiste Öl, Seiser, Michaela in, 16.02.2019, 21:06

9 See: Venezuela: Außenpolitik: node/-/225026, 16.02.2109, 21:51

10 See: China ist der zweitgrößte Handelspartner Chinas, in: ist-der-zweitgroesste-handelspartner-von-venezuela/, 17.02.2019, 00:39

11 See: Venezuela ächzt unter Hyperinflation, von 1,4 Million Prozent- und will nun fünf Nullen aus der Währung streichen, Busch, Alexander, in: rohstoffe/wirtschaftskrise-venezuela-aechzt-unter-hyperinflation-von-1-4-millionen-prozent-und-will-nun-fuenf-nullen-aus-der-waehrung-streichen/22843974.html?ticket=ST-458629-bpZCLPEENbISRdRfLFAu- ap1, 17.02.19, 00:51

12 See: Es war einmal in Amerika, Erb, Sebastian in venezuelas, 16.02.2019, 21:29

13 See: Venezuela: Überblick node/venezuela/224980, 16.02.2019, 22:09

14 See: Venezuela´s melt down explained by the oil curse, R. Ellen, Wald, in: curse/#75a68e71282b, 17.02.2019, 00:04

15 See: Venezuela droht Mega-Inflation, Zittelmann, Rainer in: zitelmann/13631-venezuela-eine-wirtschaft-im-niedergang, 17.02.2019, 21:30

16 See: Es war einmal in Amerika, Erb, Sebastian in , 17.02.2019, 21:40

17 See: Venezuela droht Mega-Inflation, Zittelmann, Rainer in: zitelmann/13631-venezuela-eine-wirtschaft-im-niedergang, 17.02.2019, 21:45

18 See: Es war einmal in Amerika, Erb, Sebastian in, 18.02.2019, 12:30

19 See: Venezuela droht Mega-Inflation, Zittelmann, Rainer in:, 18.02.2019, 12:35

20 See: Warum Venezuela am Abgrund steht, Steiner, Christian in:, 18.02.2019, 19:50


ISBN (eBook)
ISBN (Buch)
Institution / Hochschule
FOM Hochschule für Oekonomie & Management gemeinnützige GmbH, Berlin früher Fachhochschule
Venezuela hyperinflation crisis Maduro oil crisis oil dependency




Titel: Venezuela. The path to Hyperinflation