How Does Venezuela Compare To The World's Worst Managed Economies?

Outside of Venezuela, around the world, controlling inflation is seen as the primary concern of most central bankers. In the economic crises of the 1970s and 1980s inflation soared in as a series of economic shocks rocked Latin America. During a hyperinflation crisis in Peru in 1990 prices doubled every two weeks after the government embarked on a spending spree. Likewise, in Nicaragua, prices soared in the late eighties as the revolutionary Sandinista government tried to bolster the country’s war-ravaged economy with an aggressive program of expansionary fiscal policy. Looking at the deleterious effects of these periods of hyperinflation, the region’s central bankers have made stamping out inflation and promoting economic stability their number one priority. Latin America, with its longstanding and heavy reliance on natural resource exports, is remarkably vulnerable to boom and bust cycles as commodity prices rise and fall. Today, successful economies in Latin America focus on responsible macroeconomic management and work to promote economic stability. Even revolutionary leaders such as Evo Morales in Bolivia have adopted conservative macroeconomic management policies and eschewed irresponsible, short-term spending binges in favor of programs designed to create sustainable growth. So, looking at the list of the world’s worst performing economies in terms of inflation management a few things stand out.
The fact that Venezuela tops the list should come as no surprise. The South American nation has become a poster child for macroeconomic mismanagement. President Nicolas Maduro, the unfortunate successor to populist icon Hugo Chavez, has inherited a deeply unbalanced economy, and has resorted to desperate PR stunts such as jailing opposition leaders and blaming inflation on business owners rather than working to address the country’s underlying economic problems.

As I explained in a recent article, Venezuela’s economy faces crushing pressure from falling oil prices and the accumulated weight of decades of economic mismanagement. The country’s currency, the bolivar, is preposterously overvalued and yet Venezuela’s economy continues to be shackled under a three-tiered system of arcane and nonsensical currency controls.

According to some estimates, Venezuela’s unofficial exchange rate with the U.S. dollar now tops 700. According to a forecast from FocusEconomics, this year Venezuela’s economy will contract by more than 6%, the worst performance for any major Latin American economy. Multinational companies operating in Venezuela are caught in a squeeze. The currency controls make it challenging to buy materials and run their operations. At the same time, every time Venezuela raised its laughably over-valued exchange rate, companies such as Ford, GM, and Merck have seen their balance sheets hurt.

As I explained in a recent article:

In late 2014 Scotiabank announced a C$129 million write-down on its stake in Banco del Caribe in Venezuela. Ford started 2015 by writing off its entire $800 million investment in Venezuela. PepsiCo followed suit by writing off a $105 million charge after adjusting the value of assets related to its Venezuelan operations. Spanish telecoms giant Telefonica has written off a whopping $3.23 billion charge and Clorox has taken the decision to simply shutter its operations in Venezuela.

Within Latin America, aside from Venezuela, only Argentina stands out for its struggles to control inflation. With double-digit inflation, Argentina is the only other Latin American economy besides Venezuela that sits alongside economies such as North Korea, Sudan, Syria, Ukraine, and the Central African Republic as one of the world’s worst managed economies. In Peru Alan Garcia, who presided over the economic crisis of the early nineties, has been re-elected but he’s put his radical policymaking behind him. Like his counterpart Socialist President Michelle Bachalet in Chile, Garcia’s government now focuses on responsible macroeconomic management and protecting long-term economic stability. Chile has long been celebrated as a model of successful economic management, but policymakers in Argentina and Venezuela may want to look towards Mexico for a model to follow.

While Chile is reporting inflation of 3.6%, inflation in Mexico is at 2.7%.