Hyperinflation, Industry, Cash and Salaries in Venezuela

Economist Manuel Sutherland takes a critical look at government economic policy over the past decade, claiming that the country is nearing a period of “de-industrialisation” due to a “drastically accelerated downward phase of the capitalist economic cycle.”

By Manuel Sutherland – Aporrea
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Inflationmeter. (Pulse)
Inflationmeter. (Pulse)

This article was published August 1 2018, shortly before the announced economic measures by President Maduro, which included a 3000 percent minimum wage increase.

Few people can deny that Venezuela is going through the deepest crisis in its history. For the fifth year running, the country will have had the world’s highest inflation (estimated at 25,471% for the period between May 2017 and May 2018). In May 2018, monthly inflation reached 110% and the inflation accumulated in 2018 is around 1,995%. Therefore the country has had seven straight months of hyperinflation and looks on in shock as prices go up on a daily basis.

Furthermore, Venezuela is running a double-digit fiscal deficit (for at least the sixth year running), while having the highest country-risk in the world, the lowest international reserves of the past 20 years (less than 8,600 million dollars) and a tremendous shortage of essential goods and services (food and medicine).

The parallel dollar, which is used to set almost every price in the economy, has increased by more than 3,500% so far in 2018, which has completely disintegrated the purchasing power of the wage-earning population (Sutherland, 2018).

In this article, we want to argue that the Bolivarian economic policy is far from being “socialist,” far even from being “pro-development.” What is before us a process of severe de-industrialization in favor of a financial-importing caste which, with a heated discourse and a vigorous popular clientelism, has drastically accelerated the downward phase of the capitalist economic cycle of a national process of accumulation of capital based on the appropriation of the oil rent. These state policies have completely demolished workers’ wages and generated a vigorous process of “lumpenization” which drives millions of people to a situation of unusual extreme misery. We will look to explain how we got to this point, the consequences of having done so and the more immediate economic perspectives.

The economic cycle and the rise in prices of raw materials

The economic cycle in Venezuela can be observed in its more immediate and simple manifestation: year by year fluctuations of GDP. This indicator reflects strong changes in the growth rate of the economy, with periods of steep rise and fall which determine the extreme volatility of the accumulation of capital, which in turn does not do more than reflect the high variance of oil prices. “Black gold” constituted about 95% of exports in the heyday of prices (2012) and around 65% in the years when oil prices were very “low” (1998) (Banco Central de Venezuela); in other words, when the rent is meager and hydrocarbons offer similar profit rates to normal industrial production.

The ever growing government spending and the hypertrophy of imports makes it so that oil prices that are 5 or 6 times higher than those seen in the early 2000s now appear to be “low.” In recent years, the results of a process of de-industrialization are becoming visible. A process which, to favor an importing fervor, went as far as subsidizing (through an overvalued exchange rate) 99.9% of imports of products such as milk, cement or gasoline, as well as (Chinese) workers to build housing projects.

De-industrialization in sight

The rent-based expansion lasted an exceptionally large time, during which the evils that come alongside the sudden bursts in the oil rent became deeper. Industry and agriculture shrank thanks to an inconveniently overvalued exchange rate (Kornblihtt, 2016). Imported goods became extremely cheap and discouraged any kind of productive effort, industrial or agricultural. Initially the industrial GDP showed a remarkable increase (2004-2008), only to later fall to levels lower than those in 1997, a situation which would seem inconsistent at first sight, since during the years of rapid growth (2004-2008) the imports of machinery and industrial equipment (gross fixed capital formation) increased five-fold (BCV).

If we look at recent data concerning car production, we see how severe the reversal has been. Between 2007 and 2015, this kind of production has reduced by an impressive 89%; the figure in 2015 is almost as low as the one in 1962, when the auto industry was formally created and 10,000 vehicles were assembled. Since 2007, when 172,418 cars were assembled, the car industry has fallen off a cliff: in 2015 it shrunk to the lowest level in 53 years and only 18,300 cars were assembled (Deniz, 2016). According to data from the Cámara Automotriz de Venezuela and the Federación Venezolana de Autopartes, the number in 2016 has fallen further to 2,694 cars, 83% lower than in 2015 (FAVEMPA, 2016).

Car sales, be they assembled in Venezuela or imported, is a credible indicator of the near-complete disappearance of the auto industry, the beating heart of the national industry. Graphic 1 depicts this alarming situation.

Graphic 1: Car sales in Venezuela

The decrease in imports, which, as previously explained, resulted in a sharp contraction in the supply of goods and services, came alongside a drastic de-industrialization which contributed decisively to the reduction of goods available. This resulted in excessive inorganic money getting ever less goods and having an even more explosive effect in overall prices.

Venezuela: The highest annual inflation in the history of Latin America

“The Maduro government has not adopted a single measure to contain hyperinflation. Quite the opposite. It continues to finance the public deficit with inorganic money issued by the Venezuelan Central Bank.” (Pietro, 2018)

Everyone knows that the 24,571% of annual inflation, according to the marker kept by the National Assembly’s Finance Commission, has been the highest in the history of Latin America, surpassing the annual inflation registered in the worst year of hyperinflation in Nicaragua (23,710%). Moreover, May 2018 was the seventh month running of hyperinflation in Venezuela, thus reaching the less-than-honorable fourth place in the history of hyperinflations in Latin America, measured by their duration. Although the threshold of 63 consecutive months of hyperinflation in Nicaragua seems far away, the destruction brought by this process has been much heavier than in processes of hyperinflation that lasted longer (Argentina: 11 months; Bolivia: 18 months) (ProEconomía, 2018).

While hyperinflations in general take place without drastic falls in production, Venezuela’s hyperinflation has seen a strong fall in the supply of goods as the economy has drastically contracted every year since 2014. According to the IMF, in 2016 alone economic production fell by 16.5% (Looney, 2018). According to our calculations, the GDP contraction between 2013 and 2018 may be as high as 45%. No recent hyperinflation has brought a similar destruction of wealth. Table 1 shows a selection of data associated to hyperinflation in Venezuela:

Table 1: Hyperinflation in numbers

The increasing rate of inflation during 2017 is noticeable. From 18.7% in January 2017 until reaching the hyperinflation threshold in November 2017. From December to March there was an important fall in monthly inflation which might have predicted something smoother for the middle of the year. However, the presidential elections brought forward to May 20 required an enormous squandering of the already small public purse, meant to expand the amount of money in the economy for proselytizing purposes. This political boost required an additional “effort” in the digital issuing of money, which resulted in the May inflation rate jumping to 110%. This meant that the inflation accumulated up to May surpassed 1,995.2%. If the May inflation repeated itself for the upcoming 11 months, we would be talking about an annual inflation of 735,583%. If the first hyperinflationary mark of November 2017 (56,7%) was the monthly average, annual inflation would be 21,919%, a scenario that the government might deem as “desirable”.

According to Steve Hanke, expert in hyperinflationary processes around the world, the annual hyperinflation (June 2017 to June 2018) reached the horrifying total of 38,169% (Hanke, 2018). This inflation was measured through the variations of the parallel markers, in particular the Air TM rate. This inflation estimate seems very high, but in these cases the price variations are very hard to measure, more so after the information blackout that has gripped government institutions that refuse to publish statistics.

Excessive issuing of money (without even printing it)

In recent paragraphs we have explained that the fall in the supply of goods, for the aforementioned causes, is an important factor in the meteoric price rises. It is important to point out that the excessive issuing of inorganic money is not the sole reason for hyperinflation, as some here like to say, although it is indispensable for it to develop. We could say it is the gasoline that fuels the fire of the inflationary spiral.

Having said that, we can look at very concrete data on the money issuing path in Venezuela, by the hand of the ineffable Venezuelan Central Bank (BCV). According to its own data, the BCV has increased the monetary base (MB) (1999-2018) by an inestimable 18 million percent. In 2017, the BCV increased the BM by 1,737%, in a full-fledge economic contraction, which manifests itself in correlated price rises. Annual inflation (2017) reached 2,616%, according to the National Assembly, a higher number than the MB growth.

If we perform this comparison of the MB between 2016 and June 2018, we can see it was increased by 16,347%, a swelling that little by little has become reflected clearly in our hyperinflationary destiny. This irrational tendency to issue money would sink any economy. The monetization of the deficit that looks to fill budget and fiscal gaps, is at the heart of this unrivaled economic destruction.

Graphic 2: Expansion of the monetary base in Venezuela

Until 2017, it is feasible to find the number corresponding to the so-called M2 monetary base in almost all the Latin American economies. M2 is known as the total amount of cash and current account balances (M1), plus the savings accounts, money market funds and other deposits. Broadly speaking, M2 is a concept that includes all that is not fully liquid, but that can be converted to cash in an expeditious manner. In Figure 5 compares the growth of the M2 in some Latin American economies. We can see that in Venezuela the growth of this variable is very high, something that the majority of representatives of the Venezuelan government seek to ignore.

Figure 3: Evolution of the M2 in some countries of Latin America (logarithmic scale)

An interesting novelty of hyperinflation in Venezuela is that it will be the first in history to combine a drastic fall in production and a severe shortage of cash. For those who suffer every day in Venezuela, it is a common gripe to not have the smallest amounts of cash to pay even the most trivial services such as that of a taxi. For a change, it has occurred to the Government to pretend that the shortage of money is "induced,” that cash is "kidnapped" by Brazilians and Colombians on the border; according to the government, they do it as a conspiratorial plan to harm the national economy (economic war). A look at the official issuance of banknotes and coins seems to indicate otherwise.

Figure 4: Coins and banknotes in circulation in relation to the BM (2008-2018)

What can be seen clearly is that the amount of banknotes and coins in circulation is about nine times lower than in 2009, second year of the currency redenomination. This is evidence that the amount of cash is openly insufficient. When a dollar on the parallel market can be sold at BsF. 3,500,000; We have 40% of printed bills corresponding to very low denominations of BsF. 100; This is evidence of an unprecedented monetary imbalance.

Wages: Absolute impoverishment

In summary, it can be seen that it is not the failure of economic measures emanating from the texts of Marx or of actions undertaken in the Russian revolution. The Bolivarian process has rather been a variant of economic policies that are derived from the so-called “oil rentierism,” which had already been seen in the first social democratic government of Carlos Andrés Pérez (1974-1979). The ideological component and some anti-imperialist and anti-business speeches confuse most of the analysts who studied the speeches of presidents and not their specific policies.

Figure 5 reveals the direct result of the policy of pilfering the oil income through overvaluation of the currency and the inflationary issuance of inorganic money as a useful policy to sustain public spending which is used in a clientelistic and anarchic way. The graph shows a 85% fall, between 2016 and 2018 (June), of the legal minimum income (salary plus bonus) that the working class in the country receives. A destruction so deep and inexorable of wages has never before been experienced. Salaries are so low that in many cases they fail to pay the transportation required to get to the office. The resignations are massive, the exodus of Venezuelans to seek work in other parts of the world is already close to 3 million. The only hope for many is to receive a remittance from abroad.

Figure 5: Real wage (plus bonus power:) CT) until June 2018

On June 20, President Nicolas Maduro declared the fourth increase in minimum wage of the year, placing it in BsF. 3,000,000. He also increased the amount of the food bonus, taking it to Bs. 2.196.000. Altogether, the so-called "legal minimum income" amounts to Bs. 5.196.000, which represents an increase of 103% (2018 Onuva). If we compare the last existing legal minimum income with 2015, we notice that the government has increased the nominal wage by more than 31 thousand percent, enjoying a gala of political monetary illusions. This way the government makes the people believe that constant wage rises "protect it" from the economic war, despite the wage not representing any real purchasing power.

If we measure the IML in US$ by collecting data relating to the parallel dollar (Dolar Today), we see some interesting things, such as that in 2001 (with free currency exchange) wages in foreign currency in Venezuela were among the highest in Latin America, getting close to $400 per month. In the period of full currency controls (2004) the legal minimum income reached US $315; in 2011 it exceeded $250 [1] Currently in June 2018, we need to point out that this same indicator reflects just $1.53 a month, this is nothing more than a fall of 97% with respect to 2013, first year of the Presidency of Nicolas Maduro. Figure 9 shows that painful and regrettable involution.

Figure 6: The legal minimum income in USD quoted on the parallel market

The legal minimum income measured by the implicit dollar

Many supporters of the government at national and international levels say that the parallel dollar wage indicator is incorrect and biased. Some rightly argue that this figure lacks scientific rigor and collection methodology is precarious.

An indicator made with official data is called "implicit dollar,” which measures the ratio of the monetary liquidity (M2) between international reserves (gold and currency). This relationship was usually employed to measure the unofficial exchange rate, until many websites opted for other more informal measurements. This indicator presents the evolution of the support for the Venezuelan bolívar in foreign currency (US $) and in this case it will serve to measure progress (to put it in some way) from the legal minimum income (IML) in Venezuela in recent years. We believe that this indicator reflects the painful wage loss of Venezuelans and behaves very similar to that which shows the real wage. Figure 5 shows evidence of a 90% fall in the IML (salary plus bonus power) that the Venezuelan working class has suffered in the period 2000-2018.

Figure 7: The legal minimum income in Venezuela in implied US $

It is not a minor detail that the downward trend of the IML begins prior to the advent of President Maduro. The decline in the IML measured by the implied $ for the period 2000-2012 is 62%, even if in this period the oil price had multiplied by 10 and oil exports had increased fourfold (Central Bank of Venezuela).


The international left does not have to silence their criticisms or force on outlandish defences in the interests of “not blending in with the right” in the course of undertaking a rigorous analysis of the national process of accumulation of capital in Venezuela. The left must criticize the “false progressiveness” with the same sagacity and sharpness that applies to regimes that are openly right-wing and anti-worker.

The international left has no reason to ignore the centrality of the problems that occur in these countries; they should cooperate with agile proposals to facilitate possible solutions to these scourges; their labour should not be to cover up the gruesome economic performance of the governments with ideological propaganda ("economic war", "imperial conspiracy" etc.).

The real commitment of the left must be with the truth, with the facts and concrete results which exist; loyalty is not cronyism with governments which summon them to join a circus of adulation and sleaze.

The commitment should be with the working class of countries suffering from brutal scourges that should have an immediate solution. The obligation cannot be defense of the bureaucrat of the day who swindles millions of dollars, evades responsibility in the heartless and bloody destruction of several generations of workers who don't feel that they can even biologically reproduce anymore.

There are alternatives to the crisis; soon the Center for Workers Research and Training will submit them to the broader constructive debate. It is necessary for everyone to fight to stop this runaway locomotive of the crisis.

Manuel Sutherland is the Research Director of the Center for Workers Research and Training (CIFO) and author of the book “What is the Socialist Revolution.


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Translated for Venezuelanalysis by Paul Dobson.

The views expressed in this article are the author's own and do not necessarily reflect those of the Venezuelanalysis editorial staff.