Venezuela’s president Nicolas Maduro has a new economic plan which he calls “a really impressive magic formula.”[i] Hyperinflation has hit the country hard, and the solutions Maduro proposes include a 3,000% increase in the minimum wage, a new commodity-based cryptocurrency,[ii] cutting any number of zeros from off of the currency,[iii] and magical political rhetoric. The plan has to this point failed as the situation worsens by the day. Inflation has sped up rather than slowing down, and Maduro’s popularity falls by the day. As the nation’s educated middle-class citizens leave by the thousands the economic outlook is worsening, not improving.[iv]
Hyperinflation is a cruel master. History shows that it is often easier to change currencies completely even replacing native currencies with the Dollar than it is to try and rescue a struggling national note. Venezuela’s only hope lies in classic economic reforms, cuts to government spending, and ultimately a completely different—probably dollarized—currency.[v] The benefit of a new, foreign currency is price stability. The prices and overall economy cannot fluctuate when the currency is globally traded and demanded, but there are also costs. Without a governing bank of a national currency the banking sector loses international credibility and overall investment in the economy diminishes.[vi]
Venezuela is long down the road of economic collapse. The turnaround will not be easy. Mr. Maduro, if he hopes to keep his nation and his regime afloat, must apply the classic, bitter medicine. Major cuts to overall spending, a printing freeze on the Bolivar, economic restructuring plans, and either pegging a new currency to assets—such as oil—or the Dollar should be the first steps. Trade missions and seeking help from other OPEC nations, the IMF, or even China[vii] then can rebuild the credibility of investing in Venezuela. He claims thousands of Venezuelans want to return to their country.[viii] They, like foreign trust and investment will only come if he turns on the economic irresponsibility that destroyed Venezuela’s economy.
[i] The Economist (US). 2018. “Nicolas Maduro’s Magical Thinking,” August 25.
[ii] Rosati, Andrew, and Fabiola Zerpa. 2018. “Venezuelans Grapple With Maduro’s Baffling New Economic Plan.” Bloomberg.com. Bloomberg. August 20. https://www.bloomberg.com/news/articles/2018-08-20/venezuela-ready-for-confusion-or-chaos-as-devaluation-takes-hold.
[iii] Krygier, Rachelle, and Anthony Faiola. 2018. “Venezuela Is Swept by Economic Chaos as New Currency Plan Takes Effect.” The Washington Post. WP Company. August 21. https://www.washingtonpost.com/world/the_americas/venezuela-swept-by-economic-chaos-as-new-currency-plan-takes-effect/2018/08/21/7628c4f2-a4ac-11e8-ad6f-080770dcddc2_story.html?utm_term=.31e18d7bdbb7.
[iv] Hanke, Steve. 2018. “Venezuela’s Retrogressing Economy — Exhibit 1, PDVSA.” Forbes. Forbes Magazine. September 19. https://www.forbes.com/sites/stevehanke/2018/09/19/venezuelas-retrogressing-economy-exhibit-1-pdvsa/#36e7b79e10c4.
[v] Hanke, Steve. 2017. “How To Stop Venezuela’s Fatal Inflation.” Forbes. Forbes Magazine. April 3. https://www.forbes.com/sites/stevehanke/2017/04/03/how-to-stop-venezuelas-fatal-inflation/#4d3172a15d0d.
[vi] The Economist. 2018. “The Roots of Hyperinflation.” The Economist. The Economist Newspaper. February 12. https://www.economist.com/the-economist-explains/2018/02/12/the-roots-of-hyperinflation.
[vii] Pons, Corina. 2018. “Venezuela’s Maduro Travels to China in Search of Fresh Funds.” Reuters. Thomson Reuters. September 14. https://www.reuters.com/article/us-venezuela-china/venezuelas-maduro-travels-to-china-in-search-of-fresh-funds-idUSKCN1LS2UL.
[viii] Deutsche Welle. 2018. “Venezuelan Government: ‘Thousands’ of Migrants Want to Come Back | DW | 30.08.2018.” DW.COM. August 30. https://www.dw.com/en/venezuelan-government-thousands-of-migrants-want-to-come-back/a-45285540.