Inflation and Corruption on the Horizon

Inflation and Corruption on the Horizon as an Endangered Chávez Gambles to Retain Popularity

On January 8th, Venezuelan President Hugo Rafael Chávez Frías announced the devaluation of the Bolivarian Republic’s currency, the bolivar. In his address, Chávez distinguished between two classes of products, establishing separate exchange rates for “essential” and “non-essential” goods. This news prompted concern for inflation among Venezuelan citizens and followed other signs of trouble that have been afflicting the country, such as severe drought, rolling blackouts in order to ration electricity, and aggressive rhetoric accusing the United States of violating Venezuelan airspace. Although the currency devaluation could yield positive results for the long-term development of the Venezuelan economy, immediate political factors seem to have provided the primary motivation for the government’s decision-making at this time. The dual exchange rates expose the interrelated economic and political motives that led to the currency’s devaluation. As one exchange rate will shield the poorest sections of Venezuelan society from the worst effects of the devaluation, the exchange rate is designed to adjust the economy to allow for long-term growth. While inflation has grabbed the recent news headlines, corruption in the political sphere is a side effect of the economic crisis that no longer can be ignored.

A Rapid Devaluation

Chávez announced a weak devaluation of the bolivar from 2.15 per dollar to 2.6, when allocated to purchase “essential” items, such as food, health and education-related supplies, as well as remittances. “Non-essential” goods, including everything from oil to manufactured goods, however, will qualify for second tier treatment, where goods will be valued at 4.3 bolivars per dollar, double the previous rate. In a strategically timed national address (it took place during a popular baseball game), the Venezuelan president explained that the goal of this adjustment was to provide diversification in the economy and allow for long-term growth—both being reasonable goals that coincide with the new policy, but are perhaps too optimistic, when one considers who will have to bear the brunt of the policy.

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This analysis was prepared by COHA Research Associate Matthew Lackey

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