Question

Essay Question [Venezuela's Hyperinflation Problem]

Suggest 2-3 things that would improve the quality of living for the people of Venezuela.

Answer 1

The economy has major imbalances which will need to be adjusted. The first thing to ensure, therefore, is that the poor and working Venezuelans don't suffer from the adjustment. This means setting up a program to ensure the availability of food, medication and other important products at reasonable rates. There are many governments that have such systems-including the U.S., where food stamps are received by more than 45 million people.

The economy has major imbalances which will need to be adjusted. The first thing to ensure, therefore, is that the poor and working Venezuelans don't suffer from the adjustment. This means setting up a program to ensure the availability of food, medication and other important products at reasonable rates. There are many governments that have such systems-including the U.S., where food stamps are received by more than 45 million people.

Stabilize the currency-The government will unify the exchange rate once this program is in effect. This is the most detrimental economic imbalance. Since Fall 2012, it has caused a spiral of inflation-depreciation. In a continuing vicious cycle, the increasing black market rate raises inflation, which then feeds back into black market dollar rates. By unifying the exchange rate at a realistic level and breaking the inflation-depreciation spiral, the government will also avoid having to lose precious reserves defending an overvalued currency. It will end the chronic payment balance crises, as well as most of the corruption that comes from the overvalued official excahnge rate

Eliminate dysfunctional price controls-Once such steps are taken and consumers are protected from increasing prices for essential products, some of the dysfunctional price controls can begin to be lifted by government. Announcing a petrol price increase this week is step in the right direction, but there are other price controls on food and household items that will need to be relaxed to eliminate shortages. It would save billions of dollars in foreign exchange lost to smuggling, while customers will need to be shielded from price rises as mentioned above.