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Home Publications Blogs Beat the Press Venezuelans Do Not Pay for Their Goods in Dollars

Venezuelans Do Not Pay for Their Goods in Dollars

Saturday, 01 March 2014 08:56

A NYT article discussing class divisions in Venezuela included a chart showing an implicit rate of inflation calculated by the Cato Institute. The chart shows an annual rate of inflation of more than 300 percent, compared to an official rate of around 50 percent.

The basis for the difference is that the Cato rate effectively assumes that items are paid for in dollars. As the black market price of Venezuela's currency plunges against the dollar, this leads to a very high measure of inflation. This measure is of dubious relevance to the people of Venezuela, since only a tiny portion of their purchases involve payments in dollars.

As a practical matter, because there are shortages of many items the true inflation rate would be higher than the official rate, since many items cannot be purchased at the measured price. However, the dollar conversion methodology used by Cato is not an appropriate way to measure the effect of shortages. In principle, the correct method would assign a price to the items that are subject to shortages based on their black market price and then weigh them in their proportion to consumers' consumption bundle.

Comments (8)Add Comment
written by Dave, March 01, 2014 8:30
OMG! I wonder what their inflation rate would be if we measured it against the Kansas Kochma.

written by Last Mover, March 01, 2014 8:52

Also known as the Koch Inflation Formula, Cato has obviously chosen this objective, unbiased calculation of inflation to prove it has not been influenced whatsover by the Koch Bros.

It's clear that had the Koch Bros never existed, Cato would have nevertheless made the same exact calculation of inflation for Venezuela, proving that no amount money could ever influence Cato and by extension, that for libertarians, money and incentives have nothing to do with each other.
50 is so much better than 300....
written by pete, March 01, 2014 3:35
basically a disaster, no matter how measured
Venezuelan economy
written by Neanderthal Protectionist, March 01, 2014 7:48
I recently had the chance to read the interesting CEPR paper "Did NAFTA Help Mexico? An Assessment After 20 Years?" by Mark Weisbrot, Stephan Lefebvre, and Joseph Sammut. To explain why the answer is "No!" the very first table in the report shows average annual growth per capita in 20 Latin American countries from 1993-2013. Mexico didn't do very well in the rankings, coming in 18th out of the 20 countries. What the authors displayed but didn't mention was that Venezuela clocked in even lower in the growth rankings at 19th, beating out only Guatemala. Hugo Chavez and his party held power for most of the time considered in these comparisons.

High inflation and low growth is usually a terrible combination. By many peoples' definitions, the point of macroeconomic policy, fiscal and monetary, is to achieve a sustainable balance between low inflation and high growth.

If Venezuela's economic performance has been this awful, it makes me wonder how in the world the Bolivarian revolution was so popular. How did Hugo Chavez consistently win elections and referendums? It would be as if Jimmy Carter was re-elected in 1980, the stagflation never improved, the 22nd amendment on term limits was repealed, and he kept winning by landslides. The implausibility of it all makes me wonder if Chavez somehow rigged the elections process!

Bangladesh might be a good example, N.P..
written by Matt, March 02, 2014 3:51
I believe there growth has not been great in the past couple decades, but the poorest have made fairly impressive progress (measured by maternal mortality rates, literacy rates, etc). Maybe it's the same in Venezuela - low GDP growth can mask a more equitable distribution of resources. I'd rather have no growth and a more fair share of the pie than lots of growth that all goes to a tiny elite.
written by watermelonpunch, March 02, 2014 8:03
Neanderthal Protectionist:

I think you would benefit from talking to real ordinary people who live in areas where open corruption is a way of life.

Like you know, a lot of the U.S. heh.

Are we really in a position to criticize or mock the Venezuelans?
written by kharris, March 03, 2014 2:18
Chavez overturned much of the elite structure in Venezuela. The rich were in control, and resented, while the poor suffered. Chavez removed the rich from control, validating the (probably well justified) resentment of the poor. The fact that GDP growth has been slow is important, but distributional issues are important, too. So is fairness.

A common theme among non-mainstream journalists familiar with Venezuela relations is how skewed the reporting on Venezuela is in the mainstream press. Chavez was probably a really bad economic manager and he was not a very nice guy, but life in Venezuela for the majority better than he gets credit for.
GDP vs distribution?
written by JimJ, March 04, 2014 10:36
So in the developED world, the rich (including central bankers) oppose changes that would probably grow the pie, because they would also cut inequality, and reduce the relative value of their pre-existing assets.

But in the developING world, things are so unequal that the poor don't even care about growth -- only about redistribution.

I see a lesson there, but I don't see anyone who looks only at the short term learning that lesson.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.