Venezuela’s failed economic policies

Venezuela’s citizens have suffered under its failed economic polices. The country has witnessed some of the highest levels of inflation over protracted periods. Throughout the 1960s and 1970s inflation was kept low and stable, but as the price of oil declined from a high in the early 1980s, revenues dried up and the government resorted to printing money in order to maintain its welfare spending. This led to a significant rise in inflation. Compared to the period 1961 to 1980 when inflation averaged 4.8 per cent, from 1981 to 1990, the average was 24.9 per cent. Inflation then increased dramatically, peaking at roughly 100 per cent in 1996. Over the period 1990 to 2009, inflation averaged at 34.3 per cent.

When there is high inflation, people cannot make rational economic decisions. They are more concerned with seeking out ways to maintain their wealth before the value of the money in their pockets is eroded. Invariably, people make poor investment decisions when they rush to invest in anything available in an effort to benefit as much as possible before the value of their money is eroded. In a high inflation environment it also becomes impossible to save because inflation benefits borrowers at the expense of savers.

Savings are imperative for any economy. Without savings there is no investment. Without investment, the productivity of the economy and individuals cannot increase. Without increased productivity, wages cannot rise. This all leads to a crash in savings and completes the vicious downward spiral.

Import-substituting policies and high levels of inflation have imposed substantial costs on Venezuela’s consumers and have greatly reduced the well-being of its citizens. But these results are entirely predictable and are the result of an undemocratic society that significantly curtails economic and political freedoms.

Author: Jasson Urbach is an economist with the Free Market Foundation. The above is an excerpt from the chapter, Problems with State Ownership of Enterprises, he wrote for the recently published FMF book, Nationalisation.

FMF Policy Bulletin/ 8 February 2011