I mentioned in a previous article: Neither "Dutch disease" nor "abnormal trade" can explain Venezuela's current economic recession and hyperinflation.
Not communism: The real cause of hyperinflation in VenezuelaThe root of Venezuela’s economic problems lies in the failure of domestic economic policies and the resulting inflation, which is embodied in Venezuela’s deteriorating domestic inflation, which eventually evolves into super inflation.
Deteriorating inflation is the root cause of a series of domestic economic problems in Venezuela and further leading to economic recession.
Deteriorating inflation has a huge impact on Venezuela's economic growth.
Venezuela’s GDP growth rate reached a high point of 5.6% in 2012, and has since turned into a continuous decline. At the same time, 2013 was the year when Venezuela’s CPI turned to a rapid rise, reaching 40.6% that year, breaking the previous average (2002). －The average CPI of Venezuela in 2012 was 23.3%).In the five years from 2012 to 2016, there was a sharp contrast between the decline in GDP growth and the rise in CPI. We can even think that during this period of Venezuelan economy, for every 10% increase in CPI, the GDP growth rate will drop by 1%.
It can be considered that the rapidly rising inflation has brought three significant effects to Venezuela's economy and government fiscal system.
- 1.Through the Olivera-Tanzi effect, the government's fiscal revenues and expenditures have deteriorated.
Oliveira-Tanz effect refers to the fact that due to the significant time lag between government revenue (nominal currency revenue) between the time of collection and the time of expenditure, rapid inflation can lead to a significant decrease in the actual purchasing power of fiscal revenue, which in turn causes fiscal revenue and expenditure facts The deficit or expansion of the deficit. For example, if prices rise by 50% within half a year, if fiscal revenue in the first half of the year is arranged for expenditure in the second half of the year, its actual purchasing power will drop by 25%. In this way, the government will have to increase nominal fiscal expenditure in order to maintain the actual effect of fiscal expenditure.
- 2.Promote the shift of output and employment to the underground economy, further eroding the government's tax base.
With the slowdown and decline of export revenue and fiscal revenue, the Venezuelan government has continuously strengthened its artificial control of the foreign exchange market and prices, and price distortions abound in the domestic economy. Rising inflation has further stimulated people to engage in speculative activities.
Tax evasion and irregular employment have become regular behaviors of ordinary people in Venezuela. In this economic environment, government taxation and fiscal pressure will inevitably increase day by day.
The Venezuelan currency, the Bolivar, has been depreciating continuously on the foreign exchange black market since 2003, but the depreciation of the official exchange rate has been seriously lagging behind the market exchange rate. The rise in domestic inflation has caused a real appreciation of the domestic currency on the one hand, and a shortage of foreign exchange on the other. Faced with the shortage of foreign exchange, the Venezuelan government has continuously strengthened the control and rationing of foreign exchange resources, which objectively led to the further deterioration of expectations of devaluation and domestic inflation.
The economic history of many Latin American countries since the 1970s has repeatedly shown that high inflation is the main manifestation of macroeconomic instability and the most important factor hindering economic growth and recovery.
The high inflation rate in Venezuela after 2013 is the root cause of the country’s economic disaster.
Opinion Source:
International Economic Review/2017/No. 6
