Venezuela: how have other countries solved their inflation crises?

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In history there have been many cases of countries with hyperinflation in their economy, both in Latin America and elsewhere, how did they deal with this problem?

In the daily life of Latin American citizens, it is common for the prices of goods and services to increase, it is a reality. Year after year, citizens see their favorite products cost a little more, there is a short adjustment in their salaries and, in general, life becomes a little more expensive. This phenomenon, that of inflation, is a process that could be considered "normal", due to the dynamics of the international market, where currencies fluctuate, the powerful arise or fall, while new alternatives are consolidated every day.

Leer en español: Venezuela: ¿cómo han solucionado otros países sus crisis de inflación?

However, there have been particular historical moments in which some countries found themselves buried in a hole of debt and excessive growth of prices, which leads to a devaluation of the currency and a progressive loss of economic confidence. In other words, things are getting more expensive and money is buying less.

The current situation in Venezuela is distressing in this regard. The inflation that has been registered in recent years has made that, without any doubt, the experts classify the situation in Venezuela as hyperinflation according to the standards proposed by the International Financial Reporting Standards, where they have inflation of more than 100% in the last three years.

By the end of 2018, the International Monetary Fund (IMF) projected Venezuela's inflation at 1,000,000%. In January 2018, according to the statistics offered by Trading Economics, inflation reached its worst figure with 2,688,670%. The current circumstances exceed all the expected limits.

Read also: Sanctions force Venezuela to import crude for the first time in 5 years

However, despite how difficult it can be to imagine, this is not the worst case of hyperinflation recorded in history. In fact, there are several worse. Hungary and Zimbabwe take the first two places, with totally alarming figures. In Hungary, the daily inflation rate was 207%, while in Zimbabwe it reached 98%, which meant, in practical terms, that in Hungary prices doubled every 15 hours and in Zimbabwe every 24.7.

In Latin America, examples of hyperinflation were not lacking during the 1980s and 1990s. Bolivia, Peru, Argentina, and Brazil were strongly affected by inflation that, although the dangerous current levels of Venezuelan inflation never reached, they did represent a deep problem in the continent's economy.

What was the solution of each country to get out of its crisis?

Of course, each crisis starts from some localized and particular causes, so it is not possible to talk about exactly the same cases. However, state policies have followed more or less similar guidelines that can be reduced to two fundamental points: policies for future change and the introduction of a new currency that generates confidence.

From the first cases of inflation in the twentieth century that occurred in Europe, measures to counteract this phenomenon were quite orthodox: release restrictions on companies, minimize the regulatory role of the State in the economy and encourage the production of new capital. However, as the years passed and these phenomena moved to countries such as Latin Americans or Africans, the tactics did not work in the same way, especially because of their economic environment.

The possibilities of a resurgence of a Latin American country in crisis, based on new public policies, is very complicated if the economic context in which it operates is of countries that are also submerged in crisis. This is what happened at the time with Peru, Brazil, and Argentina, for example. These policies must also set out their objectives in the future much farther than the current government may last, so in reality, the measures end up being insufficient and temporarily shutting down the crises.

Another new currency?

The introduction of a new currency is, perhaps, the policy that is repeated more frequently in this type of phenomenon, since the exchange currency that is handled in a current way is so devalued and with such low confidence that it is practically useless.

Hungary did it in 1946 introducing the florin; Zimbabwe did it in 2009, banishing the Zimbabwean dollar and adopting the US dollar and the South African rand; Argentina did it in 1992, introducing the convertible peso and discarding the austral; and Brazil did it when, in 1993, the distribution of Cruzeiro as an official currency ceased and the Real was adopted.

But Venezuela has already adopted measures, already introduced a new currency (the strong Bolivar in 2008 and the sovereign Bolivar in 2018) and the crisis does not seem to diminish, why? According to the BBC, inflation in Venezuela had a slight relief, but for the wrong reasons, since the crisis, which is constantly growing and was accentuated by the loss of power for several days in the region, led the State Venezuelan to restrict the ability of banks to offer loans, both to companies and natural, and this led, irremediably, to the shops drastically lower the price of their products.

That is, inflation goes down because citizens have less money to spend, but the crisis continues. The bad news for this crisis is that looking to the past, towards those who have managed to overcome this type of inflation, the measures take a lot of time and a lot of political will.

LatinAmerican Post | Jorge Ovalle

Translated from "Venezuela: ¿cómo han solucionado otros países su crisis de inflación?"