Venezuela’s Monetary Policy is Hurting the Poor

When societies experience inflation in their economy, the main victims are citizens, from poorest to wealthiest.

Economic policy that leads to inflation must stop. Even though well-known economists such as John Maynard Keynes and Paul Krugman argue that there are many benefits to public spending policies such as wealth, the experience of countries like Nigeria and Venezuela show very different results.

Inflationary pressure is a response to any expansion in monetary policy, a policy that has become predictable in Venezuelan´s economy as a political tool to win elections. The situation worsens as the Central Bank has no real independence from the executive branch and other branches don´t act independently either. In other words, the process of check and balances, a fundamental democratic process, is virtually nonexistent.

A cost/benefit analysis would clearly tell us who wins and who loses with these kind of policies. While those closest to the ex-president Hugo Chávez rotate from one ministry to another, receiving salaries that are clearly above the median salary, the common citizens have to deal with relative static salaries and rising inflation.

This is known as the inflation tax, a low cost form of taxation that destroys the currency of Venezuela. When the government creates money without any increased economic activity, such as production, it generates inflation. If we treat this as a trade-off, the government decides to trade the purchase power of the currency for further revenue. This affects the society as a whole, but it specially affects the poorest.

According to research written by the FAO in 2011, “Poor people spend a large majority of their income on food.” This means that inflation, forces the poor to use an even bigger share of their relatively static salaries on food. This means that they have less income to use on education, transport, recreation or for their savings. It also means that their opportunity for upward social mobility are diminished, as many options become unreachable with rising inflation.

When we talk about property rights, we should start talking about the property we have to spend and accumulate income. That property is violated when inflation is used by government to generate fiscal income. In fact, this violation happens without consensus but discretionary. Once again, inflation as policy must stop, because of its undemocratic and destructive characteristics.

*Gerardo Núñez is Coordinador de la Unidad de Investigación at CEDICE