Posts

Hyperinflation

When it comes to global poverty, an important factor of a country’s economy is its inflation rate. Inflation occurs when the value of a nation’s currency decreases, but the prices for goods increase. Inflation affects many facets of everyday life, such as nationwide poverty rates, food and medical supplies.

Hyperinflation occurs when inflation rates rise quickly and uncontrollably. Hyperinflation is reached when an economy’s inflation rate is at least fifty percent for a thirty day period. However, high inflation rates consistent over a prolonged period of time also qualify as hyperinflation.  Here are three countries in hyperinflation today.

Venezuela

In the 1970s world energy crisis, Venezuela was a highly profitable oil producer. After oil prices dropped once the energy crisis ended in the 1980s, Venezuela’s chief export greatly declined in revenue and its economy began to suffer. Despite the decline in exports, Venezuela still needed to spend large sums of funding on the importation of basic goods for its people. This led to inflation, as the country dug itself into deficit spending. To pay for imported goods, Venezuelan banks then printed out paper notes not backed by actual wealth.

Now, inflation in Venezuela has reached monumental levels of devastation. Venezuela has been in hyperinflation since November 2016, when the inflation rate exceeded 50 percent. The International Monetary Fund estimates that inflation in Venezuela will exceed ten million percent by the end of 2019.

Because of this economic crisis, poverty is widespread. In 2017, the poverty rate across Venezuelan households reached 87 percent. On top of widespread poverty, food and medical supply shortages are rampant across Venezuela. The health of its people has deteriorated as weight loss and the spread of disease inflict the nation.

Currently, the Venezuelan government rejects the International Monetary Fund’s option to default on its debt. Venezuelan U.N. representatives have commented that in order for the nation to progress, it needs internal structural changes, not foreign aid.

South Sudan

South Sudan’s economy is also almost entirely oil-based. Of the countries in hyperinflation, South Sudan is the newest, gaining independence from British rule in 2011. However, South Sudan was quickly caught in a civil war from 2013 to 2018, soon after its founding. Damage to oil fields and other resources due to warfare severely affected the revenue of South Sudan’s exports. Inflation began as the struggle for resources and funding inflicted this budding nation.

South Sudan’s current economic crisis has caused mass poverty and food insecurity for its civilians. According to recent reports from the U.N., 43 percent of South Sudanese households are food insecure. At its peak, inflated food prices reached about 513 percent in December 2016. By the end of December 2018, the inflation on food prices dropped to 51 percent but is still hyperinflammatory by definition.

Unfortunately, South Sudan is currently not focusing on any poverty-reduction programs. According to the World Bank Organization, South Sudan’s overall inflation rate was an estimated 130.9 percent by the end of 2018; by the end of 2019, it is expected to drop to 49.3 percent, just under the hyperinflation threshold. However, given the financial instability of the nation, South Sudan will remain under close observation of the International Monetary Fund and similar entities for the foreseeable future.

Zimbabwe

Zimbabwe’s economy thrived in the 1980s and early 1990s, after declaring its independence from British control and creating its own domestic dollar currency in celebration. In the 1990s, however, Zimbabwe’s agricultural-based economy took a major hit after a series of crop failures. Compounded by the high costs of imports and funding for the war, Zimbabwe’s economy began to falter. In a panic to pay for goods, Zimbabwean banks rushed to print excess bills, leading the nation into hyperinflation.

Zimbabwe’s economy reached hyperinflation in March 2007, just passing the 50 percent threshold. For the next year, the nation’s inflation was a tumultuous series of highs and lows, eventually reaching a staggering 79.6 billion percent in November 2008. Eventually, Zimbabwe was forced to abandon its domestic currency, as its own population boycotted using the drastically inflated Zimbabwean dollar.

Despite the nation’s inflation rate lowering back down to 59.4 percent as of February 2019, Zimbabwe is still struggling to limit its cost of imports and boost its revenue from exports.

Potential Solutions

While there are numerous potential ways to address hyperinflation, a common solution for this phenomenon is dollarization — the abandonment of a failing domestic currency in favor of a stable foreign currency. A notable success story of dollarization is Montenegro, where the considerably weak Yugoslavic dinar was replaced with the euro, a more stable currency used widespread across the European Union. Before total dollarization, the inflation in Montenegro peaked at 26.5 percent in 2001. After adopting the euro, the country’s inflation is under one percent, as of 2019.

Of the three countries in hyperinflation today, Zimbabwe did utilize this method of dollarization; however, as of 2019, it abandoned dollarization, triggering the start of nationwide economic problems yet again. Overall, for these three countries in hyperinflation today, maintaining dollarization may be their best chance in regaining economic stability.

– Suzette Shultz
Photo: Wikimedia

Top 10 Facts About Poverty in VenezuelaVenezuela is in crisis. On the verge of economic collapse, riots proliferate in the streets along with demands for an end to the populist, authoritarian government. Much of this anger is directed at President Nicolas Maduro — since his arrival to office in 2013, poverty rates in Venezuela have increased dramatically. Many struggle to provide for their families as food and medicine become scarce. Below are the top 10 facts about poverty in Venezuela that are essential to know.

Top 10 Facts About Poverty in Venezuela

  1. Poverty in Venezuela is an epidemic. Nearly 90 percent of Venezuelans live in poverty. According to estimates by the United Nations Economic Commission for Latin America and the Caribbean, this is a dramatic increase from 2014 when 48 percent of Venezuelans lived in poverty. Maria Ponce is an investigator with the local universities researching the food shortage, and she stated that “this disparity between the rise in prices and the population’s salaries is so generalized that there is practically not a single Venezuelan who is not poor.”
  2. Economic statistics are disappearing. In an attempt to stifle economic outrage, the Venezuelan government ceased publication of poverty statistics in 2015. It is now the responsibility of universities and sociologists to report on the current state of Venezuela and provide alternative sources of information. Luis Pedro España, a sociologist at the Universidad Católica Andrés Bello in Caracas, estimates that up to 70 percent of households in Venezuela could fall below the poverty line this year. It would be the highest rate of poverty since statistic tracking began in 1980.
  3. Venezuela is experiencing ‘hyperinflation.’ Venezuela is experiencing one of the worst inflation rates in history. According to Robert Renhack, deputy director of the IMF’s Western Hemisphere Department, Venezuela “is one of the most severe hyperinflation situations that we’ve known about since the beginning of the 20th century.” And the nation shows no sign of stopping. Currently, Venezuela’s inflation rate sits at 27,364 percent, dooming those without savings or foreign aid to poverty.
  4. Oil industries in Venezuela are crumbling. Many economists blame Venezuela’s heavy reliance on oil exports for the poor economy. One of the world’s largest exporters for oil, Venezuela was reported to possess 20 percent of the world’s oil reserves in 2012. Since then, production of crude oil in Venezuela has dropped heavily. Global Data, a digital media company, has predicted that by the end of 2018, Venezuelan crude oil production would drop by one million barrels a day.
  5. Government corruption is deeply rooted. Other economists blame deep political corruption and government mismanagement for Venezuela’s poverty crisis. Despite months of protests, Maduro has recently cemented his power by replacing an opposition-controlled legislative branch of the government with loyalists. Since then, thousands of Venezuelans responsible for running the large oil exports have been fired or arrested in an act of power consolidation for Maduro. The White House has issued a statement reporting that President Trump refuses to speak to Maduro until “democracy is restored in that country.”
  6. Minimum wage in Venezuela is $6.13. In an attempt to control inflation, the minimum wage in Venezuela was recently raised 58 percent. Based on current exchange rates, this values at about $6.13. Yaimy Flores, a Caracas housewife, struggles to provide basic necessities for her family. Her household income, provided by her husband’s minimum wage job as a janitor, is 5,196,000 bolivares a month. That is approximately $20. Much of the food they eat is dispersed from government programs and hygiene products are rationed. Despite working long hours in dire conditions, Venezuelans are barely scraping by on the minimum wage under heavy economic inflation.
  7. Food crisis leads to “Maduro diet.” Malnutrition is spreading. According to a recent survey, over two-thirds of Venezuelans report losing an average of 25 pounds in the last year and 61.2 percent of Venezuelans report going to bed hungry. Doctor Marianella Herrera states that “people are developing strategies to survive but not to feed themselves.” Iron-rich foods, such as maize and vegetables, have been nearly eliminated from the Venezuelan diet while government food programs fail to end the hunger.
  8. Medicine is running out. Due to the poor economy, Venezuela is experiencing a severe medicine shortage and hospitals are struggling to stay open. The Pharmaceutical Federation of Venezuela estimates the country is experiencing an 85 percent shortage of medicine. This has forced many Venezuelans to seek medication, often expired or unaffordable, on the black market. Meanwhile, President Maduro continues to refuse foreign humanitarian aid, blocking pharmaceutical shipments from entering the country.
  9. Government food subsidies aren’t enough. Iron-rich foods, such as maize and vegetables, have been nearly eliminated from the Venezuelan diet, and programs like CLAP — a government subsidized food box platform — fail to end the hunger. Initially, these packages included products like eggs, chicken and pasta and were distributed in poverty-stricken neighborhoods. Originally a ‘temporary measure,’ these boxes have become a method to generate government dependency and supply nearly half of Venezuela’s food requirements.
  10. Venezuelans are fleeing the country. In the past two years, nearly one million Venezuelans have fled the struggling nation, one of the biggest migration crises in Latin American history after the mass exodus following Fidel Castro’s 1959 revolution. Many Venezuelans report they no longer feel safe in their home country and have lost hope in government officials.

A Fork in the Road

Poverty has encapsulated the nation with seemingly no end in sight. These top 10 facts about poverty in Venezuela aim to provide a comprehensive understanding of the crisis in Venezuela and how it affects everything from inflation, to food and medicine.

Although the Venezuelan government still refuses to accept foreign aid, supporting local organizations in Venezuela allows for humanitarian aid to be distributed in poverty-stricken areas. As for the future, many Venezuelans envision only two possible directions: either Maduro leaves, or they do.

– Brooke Fowler

Photo: Flickr

Financial Crises in Developing Nations
Financial crises in developing nations have been an uncomfortably common occurrence. This presence has necessitated a guide for avoiding such debilitating economic events. Corruption and the impact of exchange rates are often the culprits of fiscal destabilization, and poor monetary choices, and often result in hyperinflation and tremendous harm. There are some practical antidotes, though, for addressing concerns to assist low-income nations in averting financial ruin.

The Cost of Corruption

There is an important relationship between corruption, foreign direct investment and domestic lending. The impact is pretty simple: corruption makes a nation’s potential FDI benefactors run for the hills, and leaves the riskier practice of bank lending as the primary mechanism for new capital. This occurs because foreign investors have few assurances that they could successfully operate in an opaque environment with weak property rights (as an example).

Corruption does more to dissuade FDI than exorbitant tax rates and other poor conditions, according to some analyses. State-owned banks accentuate the issues caused by relying on lending for capital investment because many engage in dubious lending practices like “connected lending” – a convenient euphemism for nepotistic banking. As a result, banks often disregard the imperative to issue economically sound loans.

To remedy these concerns, one suggestion is the foreign ownership of banks, as they mimic the effects of FDI by pairing capital with better technology and managerial experience, along with a better regulatory apparatus.

Rates of Exchange

Another pertinent issue regarding financial crises in developing nations is exchange rates. Fixed but adjustable exchange rates have historically exacerbated financial turmoil because they were seen as more stable than they actually were. Additionally, in the case of large foreign currency debts during a recession, lowering interests rates to stimulate the economy would force out FDI and further hurt the currency.

Instead, managed-floating currencies help stability because they afford greater awareness of the volatility of exchange rates, thereby promoting more prudent investments.

Printing Problems

Many financial crises in developing nations are triggered by hyperinflation, which is typically defined as sustained inflation rates of over 50 percent. When governments get into trouble with debtors, they often are forced to print money to afford their loans. This increases prices dramatically, making ordinary products unaffordable.

Many countries dependent on oil revenues have fallen victim to the affliction of hyperinflation. When oil prices surge, they increase their budgets accordingly; but, when the price of oil craters, they are often left with bloated budgets and cannot pay back their debts without resorting to a printing spree.

To insulate them from this, experts suggest establishing an independent central bank which would not print excess money to bail out imprudent spending. Although poor nations have historically been susceptible to financial crisis, there are practical solutions they can adopt to guard against them and usher in greater financial stability.

– Brendan Wade

Photo: Flickr

Venezuela's Oil-Backed CryptocurrencyVenezuela is a region rich in oil and minerals, yet it suffers from poverty and political turmoil. Venezuelan president Nicolas Maduro is launching a new blockchain currency called Petro, an oil-backed cryptocurrency. The U.S. believes this to be an attempt to circumvent sanctions against the Venezuelan government, and is cracking down on Venezuela’s oil-backed cryptocurrency.

Venezuela suffers from the “resource curse,” a phenomenon whereby its large reserves of oil negatively impact its economic growth and stability. Rather than a blessing, these energy reserves lead to fraud, corruption, wasteful spending, military adventurism and the authoritarianism of the Maduro regime. This curse exacerbates global poverty through destabilization of the oil industry, dulling the effect of foreign assistance and creating a breeding ground for terrorism and instability.

Although in the country has a vast supply of oil money, instead of going to Venezuela’s poor, the money ends up in the pockets of the rich. U.S. Senator Marco Rubio tweeted on February 9, 2018, regarding the Maduro regime, “Soldiers eat out of garbage cans & their families go hungry in #Venezuela while Maduro & friends live like kings & block humanitarian aid.”

Venezuelans are deprived of human rights guarantees and press freedoms, facing political persecution and public corruption by the Maduro regime. The U.S. regards the Maduro regime as a dictatorship, whose power has overridden the democratic will of Venezuelans. The nation’s population is greatly subjected to sex trafficking and forced labor, sexual exploitation and domestic servitude. People from other nations are trafficked for sex and labor in Venezuela. Cuba trafficks thousands of Cuban citizens and doctors into forced labor in Venezuelan social programs, in exchange for the provision of resources to the Cuban government.

The most recent U.S. sanctions were imposed in August 2017 against Venezuela’s dictatorship, blocking U.S. citizens from buying new debt, bonds, dividends or other distributions or profits from Venezuelan government-controlled entities and its state oil company, Petroleos de Venezuela (PDVSA). This followed December 2014 sanctions imposed by the U.S., aimed at preventing U.S. entry by persons involved in the erosion of human rights guarantees, political persecution and public corruption. These sanctions do not target the people or the economy of Venezuela; they are aimed at protecting the will of Venezuelans, and preventing U.S. involvement with the corruption of the Maduro regime.

Maduro responded to these sanctions by implementing strategies to free the oil-centered economy from the U.S. dollar, despite its universality in global trade. In September 2017, Maduro ceased publishing Venezuelan crude oil market prices in U.S. dollars, instead publishing prices in Chinese yuan. His December 2017 announcement to implement the oil-backed cryptocurrency was in direct response to the August 2017 sanctions, stating that Petro could “help defeat the financial blockade.”

Cryptocurrency is decentralized, uncontrolled by banks or governments. It can benefit those living in politically unstable regions, because the government can neither control its value nor transfer it from state to state. In Venezuela’s case, the cryptocurrency will be backed by oil, an industry largely controlled by dictators. Because Petro is a cryptocurrency, it is difficult for the U.S. government to regulate, threatening the U.S. sanctions that prohibit investing in PDVSA.

Petro is one of many foreign exchange (FX) mechanisms introduced by Venezuela. Most of the FX failed to meet market demand for dollars, resulting in Venezuela’s robust black market. Although FX is prohibited on the black market, it is the driving force of hyperinflation. Continuously on the rise, one U.S. dollar is now equivalent to 9.9875 Venezuelan bolívar.

The U.S. addressed Venezuela’s oil-backed cryptocurrency in a letter by senators Marco Rubio and Bob Menendez to the U.S. Department of the Treasury, stating “we are concerned that a cryptocurrency could provide Maduro a mechanism by which to make payments to foreign lenders and bondholders in the United States, actions that would clearly thwart the intent of U.S.-imposed sanctions.”

In early February 2018, U.S. Secretary of State Rex Tillerson toured Latin America and the Caribbean. Afterward, Tillerson alluded to U.S. considerations of restricting oil sales from Venezuela due to its worsening political situation. Developments in trade sanctions are imminent as the U.S. cracks down on Venezuela’s oil-backed cryptocurrency.

In opposition to the Maduro regime, the Venezuelan Parliament stated that Petro’s creation only serves to “evade financial sanctions, [and is] openly violating the Constitution and legitimizing illicit transactions.”

As the U.S. cracks down on Venezuela’s oil-backed cryptocurrency, the government aims to combat the use of Petro to circumvent U.S. sanctions, prohibiting investors on U.S. soil from profiting or investing in the PDVSA, the driving source of Venezuela’s poverty and humanity crisis. These policies and sanctions will be heavily enforced in the face of Petro’s introduction to the market, and will serve to reject the political corruption and economic failure to its people of the Maduro regime.

– Alex Galante

Photo: Flickr