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FOREIGN TRADE UNIVERSITY HO CHI MINH CITY CAMPUSMID-TERM ASSIGNMENTSUBJECT: MACROECONOMICS 2TOPIC:HYPERINFLATION IN VENEZUELAGroup 3 – ML57:Lecturer:Ho Chi Minh City, March 5th, 2022WORK ASSIGNMENT OF GROUP 4Name Student Code Task Trần Anh Thư (Leader) 2011156099 Prepare content for 3, Powerpoint sl...

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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

WORK ASSIGNMENT OF GROUP 4

Name Trần Anh Thư (Leader)

Student Code 2011156099

Task Prepare content for 3.1,

2011155544

Powerpoint slide Prepare content for 1.2,

2011156094

1.3, 3.1 Prepare content for 2.2,

Đặng Thế Trường

2011155650

presentation Prepare content for 3.3,

Phan Quang Thịnh

2011155571

presentation Prepare content for 4.1,

Nguyễn Khánh Nguyên

2011156098

4.2, 4.3 Prepare content for 3.1,

Thảo Nguyễn Mai Trâm

2011156106

Powerpoint slide Prepare content for 3.1,

2011156107

Powerpoint slide Prepare content for 1.1,

2011156102

2.1, presentation Prepare content for 1.4,

Hoàng Lê Phương Thảo Phạm Đăng Thái

Huỳnh Ngọc Bảo Trân Dương Ngọc Minh Thư

1.5, 1.6, 3.2

TABLE OF CONTENT

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

INTRODUCTION.......................................................................................1

1.1

Rationale of the research..........................................................................1

1.2

Aims and objectives...................................................................................2

1.2.1

Aims....................................................................................................2

1.2.2

Objectives...........................................................................................2

1.3

Scope of the research.................................................................................2

1.4

Research question......................................................................................2

1.5

Research methods......................................................................................3

1.6

Structure of research.................................................................................3

Chapter 2.

2.1

OVERVIEW OF HYPERINFLATION IN VENEZUELA......................4

Definition of inflation and hyperinflation................................................4

2.1.1

What is inflation?................................................................................4

2.1.2

Types of inflation.................................................................................4

2.1.3

What is hyperinflation?.......................................................................6

2.2

The situation of hyperinflation in Venezuela...........................................7

Chapter 3.

3.1

ANALYSIS OF HYPERINFLATION IN VENEZUELA.......................12

The cause of hyperinflation in Venezuela..............................................12

3.1.1

Phase 1: The presidency of Hugo Chavez (1999 – 2013)..................12

3.1.1.1 Overdependence on oil price..........................................................12 3.1.1.2 Bolivarian missions........................................................................13 3.1.1.3 The exchange control.....................................................................14 i

3.1.2 3.2

Phase 2: The presidency of Nicolas Maduro (from 2013).................15

The effect of hyperinflation in Venezuela..............................................16

3.2.1

Economic crisis.................................................................................16

3.2.2

The humanitarian crisis....................................................................17

3.3

The solutions of Venezuela’s government to address the hyperinflation 19

3.3.1

Currency redenomination..................................................................19

3.3.2

Informal dollarization.......................................................................19

3.3.3

Fiscal control....................................................................................20

Chapter 4.

CONCLUSION..........................................................................................22

4.1

Sum up about the hyperinflation in Venezuela.....................................22

4.2

The situation of inflation in Vietnam.....................................................23

4.3

Implications for Vietnam........................................................................25

REFERENCES....................................................................................................................26

ii

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

iii

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.

1

1.2

Aims and objectives Aims

1.2.1

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. Objectives

1.2.2

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

-

Analyzing factors contributing to hyperinflation in Venezuela and its government’s solutions.

-

Suggesting possible lessons for Vietnam to maintain a reasonable inflation rate.

1.3

Scope of the research -

In terms of scape: Venezuela

-

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)

-

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? 2

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

3

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.

4

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.

5

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 6

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. 7

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 10

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 thi...