Discuss about the Venezuelas Economic Performance.
The economic performance of Venezuela economy is currently very poor. This performance is measured in terms of many economic indicators such as the Gross Domestic Production (GDP) level, the inflation rate, unemployment rate and the rate of GDP growth. This study will be concerned on the changes on this indicators on the Venezuela economy. The performance of the economy may be influenced by natural factors or by the policies implemented by the government. The paper shall consider the various factors underlying the low economic growth. It will determine whether the government has an influence on such factors and whether it can gain control over the same and achieve the economic recovery. The trend of the current economic situation will be used in prediction of the future and the possible solutions to the problem will be noted. The change in factors that can result in the recovery will also be identified. The analysis of this paper will therefore be very useful in defining the best action the policy makers should take.
There are many issues that are explained in the article “Venezuela inflation hits 800 %”. This article is all about the rising inflation rate. The change in inflation rate in Australia is very high and this change is referred to as hyperinflation by many economics. The recorded change in Venezuela’s inflation rate in 2016 was 800 % (Financial Tribune, 2017). McCauley (2017) noted that the change in inflation rate for December 2016 was more than 50 %. This has resulted in Venezuelans experiencing a period of economic hard times. High inflation rate has lowered the ability of the economy to service its foreign obligations (debts). The inflation figure reports stopped being published since it was expected to be more alarming; it has not been printed for more than a year now (Gupta and Pons, 2017). Various issue has be related to causing the high inflation rate. One issue discussed in this article is the government’s policy of minimum wages. The government’s aim when setting the minimum wage is to make the workers better off. This is one of the factors claimed to contribute to the hiking inflation rate. The government has greatly increase the level of its minimum wages. The article noted that the Venezuela’s president Nicolas Maduro noted that government raised the minimum wage five times in 2016; this was by 454 %. Gupta and Pons (2017) noted that this increase was meant to offset the inflation rate. This has greatly affected the production costs and thus contributed to the shrinking of the economy’s production level. Poor policy by the government could in this case be concluded to contribute to causing the inflation rate to hike.
The second issue is the low oil prices; the prices of oil hit the lowest level in 2016 and has caused a great loss to the Venezuela economy which mostly rely on the oil revenue to raise almost all it hard currency (Financial Tribune, 2017). Oil producing companies are selling their oil at a price that is lower than the costs of producing it. This has impacted their profit margins increasing the possibility of closure. Lastly is the speculative price-gouging. Suppliers have raised the price of outputs to very high levels taking advantage of the reduction in output as the economy contracts. Price –gouging is a strategy that results in exploitation of consumers. This overcharging is mostly present on basic products. For instance, the article has noted that there is a shortage of food in Venezuela; price-gouging on food is therefore experienced.
Hyperinflation is an economic condition when the inflation rate rises above 50 % in a month (Barbosa, 2017). This means that Venezuela’s currency has greatly lost its value over time (Moosa, 2014). At very high inflation rate, the welfare of the citizens is reduced as the cost of living goes up. The high inflation rate is resulting in the contraction of the economy. Why? At very high inflation rate, the price of inputs are also very high. Thus, the producers are discouraged from producing more since the profit margins are low even if the price of output increase. McCauley (2017) quoted that the Venezuela’s inflation rate is projected to clock at 2000 % owing to the alarming shortage of goods, food and medicines.
Graph: Changes in Venezuela’s inflation rate.
Source: Holodny (2017)
According to Holodny, the inflation rate skyrocketing was as a result of the economic, social and political crisis facing Venezuela. The graph show that Venezuela inflation rate has been lower in the past but rose abruptly to very high level in 2016. He noted that the average change for the years shown on the graph is 32.47 %. This is very high compared to the US all-time highest level of 23.70 % in 1920.
The price of oil has greatly undermined the economic performance of Venezuela (Lopez, 2017). Oil accounts for 96 % of Venezuela’s export and nearly half its fiscal revenue (Desjardins, 2016). Thus is was the most impacted by the slump. The price of oil is determined by the demand and supply forces. Currently, the supply of oil has increased to very high level and thus has exceeded its demand. The competition for a market share by the oil oligopoly producers has been the factor behind the low price (Becerra, 2017). Thirteen oil producing economies (the OPEC) control the world oil price. These economies production level is very high such that they have power over the world’s oil price. Their collusion has greatly resulted in a fall in the oil price. Under oligopoly market, the competition by price is one sided; the game theory is such that, if a single economy raises its oil price and all other producing economies fail to raise theirs, the single economy’s market share will be reduced. On the other hand, if it lowers it price and the other fail to cut theirs, its market share will increase. But if it cuts, and the other cuts, its revenue will be reduced. The prisoner’s dilemma here is that a single economy is not sure whether the other economies would apply a similar or opposite strategy to maximize their payoff. This has reduced the possibility of the oil price being increased. The recovery is on the hands of the OPEC; if they agree to cut production, the oil price goes up. Production in Venezuela is falling as shown below;
Graph: Oil prices driving down Venezuela’s production level
Source: O’Grady (2016)
Minimum wage is a wage level fixed by the government prohibiting the employers from employing at a wage that is below that level. Since this wage is a price floor, it is fixed above the current equilibrium wage. This adds to the production costs and discourages the employers from using additional labor. The employers are also at times forced to cut down the number of employees it takes. The impact of this is increasing the rate of unemployment and contributing to the reduction of the economy’s potentiality for production.
Graph: Minimum wages legislation
Source: Pettinger (2014)
Equilibrium wage is W1 and quantity Q1. Minimum wage NMW increases the supply for labour to Q3 from Q1 since people are attracted by the higher wages. However, demand falls to Q2 from Q1. It is creating a shortage of demand.
Speculative price-gouging is a pricing adopted by suppliers when there is a shortage of supply. There is a shortage of food supply and prices has surged. The government should regulate the price of basic needs to ensure they are available as their increased prices would get the low income group into extreme poverty.
Related Policy Issues
The Venezuela’s government policy makers are not effective on the basis that, even when the economy is contracting, they are still raising the minimum wages. On a situation of contraction on an economy, the government is expected to relieve cost of product on the producers so that they would increase their incentives to produce more. The government is also soaring the level of money supply. The government should seek the best policies to implement on different economic situation. The actions of the government are worsening the situation instead of making it better. The economy should have anti-price gouging laws since basic goods are critical for an economy.
High minimum wages contribute to high costs of production and thus lowers the production level. Also, the minimum wage is not a policy to implement when the economy is being faced by the problem of rising inflation. Cost increase results in cost-push inflation adding to the existing level of inflation. This policy would also make more money available to the households; with a high income level, the households will raise their demand causing a demand-pull inflation which adds to inflation. Since the economy is contracting and the households’ demand has increased, there will be an excess demand and definitely price will go up. The solution to high inflation according to this article is to increase their income so that they can be able to afford the goods at a higher price. This is contrary to how economics prefer the inflation rate to be dealt with. Instead they should lower the money is the economy so as to depress demand, thereby pushing down the prices.
References
Barbosa, F. (2017). Exploring the Mechanics of Chronic Inflation and Hyperinflation. 1st ed. Cham: Springer International Publishing.
Becerra, C. (2017). Venezuela 2016 inflation skyrockets 800%, GDP shrinks 19%. [Online] CNBC. Available at: https://www.cnbc.com/2017/01/20/venezuela-2016-inflation-hits-800-percent-gdp-shrinks-19-percent-document.html [Accessed 24 Apr. 2017].
Desjardins, J. (2016). Chart: Which Countries Are Damaged Most by Low Oil Prices? [Online] Visual Capitalist. Available at: https://www.visualcapitalist.com/chart-countries-damaged-most-low-oil-prices/ [Accessed 24 Apr. 2017].
Financial Tribune. (2017). Venezuela Inflation Hits 800%. [Online] Available at: [Accessed 23 Apr. 2017]. https://financialtribune.com/articles/world-economy/57999/venezuela-inflation-hits-800.
Gupta, G. and Pons, C. (2017). Venezuela says inflation 274 percent last year, economists say far higher. [Online] Reuters. Available at: https://www.reuters.com/article/us-venezuela-economy-idUSKBN17M27K [Accessed 23 Apr. 2017].
Holodny, E. (2017). Finance: This chart shows the insanity of Venezuela’s hyperinflation. [Online] Plive.co.ke. Available at: https://www.plive.co.ke/bi/finance/finance-this-chart-shows-the-insanity-of-venezuelas-hyperinflation-id6564550.html [Accessed 23 Apr. 2017].
Lopez, V. (2017). Venezuela’s economic crisis worsens as oil prices fall. [Online] Aljazeera.com. Available at: https://www.aljazeera.com/news/2016/01/venezuela-economic-crisis-worsens-oil-prices-fall-160108105010345.html [Accessed 23 Apr. 2017].
McCauley, D. (2017). Venezuela in crisis as inflation spirals out of control. [Online] NewsComAu. Available at: https://www.news.com.au/finance/money/costs/venezuela-in-crisis-as-inflation-spirals-out-of-control/news-story/27638560847eaa8531985e40eaa36901 [Accessed 23 Apr. 2017].
Moosa, A. (2014). Quantitative easing as a highway to hyperinflation. Singapore, World Scientific Pub.
O’Grady, B. (2016). The Tragedy Of Venezuela – How Did We Get Here? [Online] ValueWalk. Available at: https://www.valuewalk.com/2016/06/venezuela-economy-collapse-2/ [Accessed 24 Apr. 2017].
Pettinger, T. (2017). Effect of minimum wage on AD/AS. [Online] Economicshelp.org. Available at: https://www.economicshelp.org/blog/11503/labour-markets/effect-of-minimum-wage-on-adas/ [Accessed 23 Apr. 2017].
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