Venezuela: Hyperinflation on Steroids
By Michael Roberts
Every week, thousands of Venezuelans leave the country amid chronic shortages of food and medicines. Indeed, the economic crisis that started in 2014 has seen more than two million citizens leave. The UN’s migration agency has warned that the continent faces a refugee "crisis moment" similar to that seen in the Mediterranean in 2015 and is setting up a special team to co-ordinate the regional response.
Back in Venezuela, the government has announced a currency reform that devalues the country’s currency, the bolivar, by 95%. The currency, the ‘bolivar fuerte’ (ironically meaning "strong"), was first introduced ten years ago. It will now be replaced by a new "sovereign" version at a conversion rate of 100,000 to one sovereign. At the same time, the government's official exchange rate to the US dollar will be bumped from 285,000 bolivars per dollar to six million!
As one commentator described it, this is hyperinflation on steroids, even greater than the hyperinflation in Zimbabwe under Mugabe or the 1920s hyperinflation under the Weimar Republic in Germany. Almost all countries experience some inflation but rarely at a rate higher than low double digits. In today's Venezuela, domestic prices are rising at an annualized rate of 108,000%. The International Monetary Fund estimates that by the end of this year the inflation rate could top 1 million % — imagine the price of milk tripling every minute!
The aim of the reform is devaluation of the currency. A devaluation simultaneously lowers the foreign price of exports and raises the domestic price of imports, supposedly expanding demand for exports and import substitutes. But 98% of Venezuela’s of export revenues are derived from oil, whose price is set in world markets in dollars, not locally in bolivars. Devaluation of the bolivar will not change the price paid for Venezuelan crude. That price has fallen sharply from the heights it reached back in 2014. Venezuela has become so specialized in terms of what it produces, there's little domestic capacity to manufacture goods that can substitute easily for imports, regardless of their price. Venezuelans cannot suddenly start producing the vehicles or medical equipment or heavy machinery that in recent decades have been purchased abroad.
Previous devaluations have exacerbated inflation. The more an economy relies on imports—as Venezuela does—the more the rising prices of imports will add to the cost of living, thus reinforcing the expectation among citizens that inflation will continue to accelerate, driving up wages and prices even more.
How has Venezuela, the country of the ‘Bolivarian socialist revolution’ under (the now deceased) Hugo Chavez come to this sorry state? The capitalist media and experts will tell us that it shows (once again, like the Soviet Union or Cuba) that ‘socialism does not work’. Actually, hyperinflation has always been a product of capitalist economies out of control – it never happened in the Soviets or Cuba or China.
In my view, the failure of the Chavista revolution is because it stopped at less than halfway in 2014, leaving the economy still predominantly in the control of capital. The Chavista and Maduro governments relied on high oil prices and huge oil reserves to reduce poverty, while failing to transform the economy through productive investment. There was no plan or any attempt to take over the big foreign and national capitalist combines. Venezuelan capitalism remained and was allowed to get on with it – or not in this case. Indeed, the share of industry in GDP fell from 18% of GDP in 1998 to 14% in 2012.
As the US continues to conspire with the pro-business opposition forces to find ways of overthrowing the government, Maduro is now relying increasingly not on the support of the working class but on the armed forces. And the government looks after the army well. They can buy in exclusive markets (for example, on military bases), have privileged access to loans and purchases of cars and apartments, and have received substantial salary increases to protect them from the hyperinflation. The military have also won lucrative contracts, exploiting exchange controls and subsidies; for example, selling cheap gasoline to neighbouring countries at huge profits.
Hyperinflation does not mean the end of the Maduro regime, as it did not for Mugabe. But many Venezuelans are ‘voting’ with their feet. If the Maduro regime does collapse, then the pro-capitalist politicians will take over; the left and working class forces will be scourged and imprisoned; foreign investment will flood in as state assets like the oil industry are privatised; and the (remaining) gains for the poor from the Chavez period will be reversed with interest. That will confirm the tragedy of the Bolivarian revolution.
Michael Roberts blogs at: https://thenextrecession.wordpress.com/