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The cost of recovery

Global Economy
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A carton of eggs sits on an empty shelf at a supermarket in the Chacao district of Caracas, Venezuela, on Aug. 24, 2017
Fabiola Ferrero/Bloomberg via Getty Images
A carton of eggs sits on an empty shelf at a supermarket in the Chacao district of Caracas, Venezuela, on Aug. 24, 2017
High inflation is plaguing Argentina, Mexico and Venezuela. How do rapidly rising prices affect their citizens, and why is inflation still a problem after all these years?
A fter years of economic instability, in January 2018 the International Monetary Fund declared Latin America’s economy to be “accelerating”, “strengthening”, “stabilising” and “gaining momentum”. Brazil and Argentina emerged from long recessions, regional GDP has increased by 1.7% over the last year, and overall inflation has fallen, allowing interest rates to be relaxed, thus encouraging economic growth.
Despite this positive trend, high inflation rates in Argentina, Venezuela and Mexico threaten livelihoods. In December 2017, Argentina’s central bank was forced to revise its inflation target for 2018 from 8-12% to 15%, Mexico’s inflation rate was the highest it has been since 2001 at 6.77%, and Venezuela is heading deeper into economic and humanitarian crisis, with FocusEconomics’ a network of global economic analysts, forecasting inflation ending 2018 at 2,687%.
All three have struggled with high inflation rates since the 1980s. Citizens have paid a price.
Higher inflation usually means higher wages. However, “wages go up two or three times a year”, explains Daniel Sticco, chief economics editor for Infobae, an Argentine news outlet, and director of the Institute for Labour and Social Studies for Argentina, “but the average price goes up every month”, leaving families with a difficult gap between income and expenditure each month. “The items that rise most at this stage affect the consumption of low-income families most - they are public services like water, electricity, gas and transport.”
Statistics released in December of 2017 by Argentina’s National Institute of Statistics and Consensus (INDEC) revealed that the cost of utilities rose by 55% in 2017, food by 20%, and transport by 20%.

 The human cost 

In Mexico, the hikes in food and fuel prices have had devastating effects. When gasoline prices went up by 20% overnight on New Year’s Eve 2016, it led to major social protests, highlighting the widening fissure between the political class and the rest of the population.
From early January 2017, there followed a month of marches, roadblocks, closure of service stations and riots. “The repression of riots and the looting of stores caused at least six deaths and thousands of arrests,” Froylán Enciso, senior analyst for Mexico at Crisis Group, told The World Weekly.
The rise in gasoline prices, locally known as the gasolinazo, also led to increased prices for basic foods such as corn tortillas. With maize - a once affordable staple of the Mexican kitchen - becoming increasingly unaffordable, many households have struggled to put food on the table, and rioting and looting have became more and more commonplace.
On January 5, Mr. Enciso continues, the Secretary of Government confirmed that 113 people were detained because they vandalised 13 stores, looted four stores and attempted robbery in another 33.
“We have to choose between food and medicine,” one Mexican citizen told The New York Times in December 2017.
Meanwhile in Venezuela, once the richest country in South America, the food and healthcare crisis is equally severe. In the last year, infant mortality rose by 30%, and maternal mortality by 65%.
But high prices are only half of the problem. “The government is no longer ‘printing’ inorganic money, but rather, emitting it electronically,” David Smilde, a senior fellow at WOLA, an NGO which advocates for human rights across Latin America, told TWW. “That means that in addition to the indignities of hyperinflation, Venezuelans are suffering from a cash crunch that makes normally simple things, such as paying a bus fare, into daunting tasks.”

 A long history 

Political turmoil is historically seen as the root cause of this kind of inflation. Erratic monetary policy and political unrest tend to destabilise the value of a currency, as international markets lose faith in the economy. With the inevitable weakening of the currency against others, higher import prices and more demand for exported goods ensue, driving up consumer prices.
So, what makes Mexico, Argentina and Venezuela more susceptible to high inflation than the rest of Latin America?
Under late President Hugo Chavez, oil-dependent Venezuela became reliant on imported food to feed the country. When oil prices fell, importation became unaffordable, and food fell into short supply. In addition, a series of reportedly rigged elections worried international markets, leading to a loss of confidence in the nation’s currency.
A recent report by Caritas, the Catholic humanitarian charity, found that in six out of 10 households, some family members were going without food so another member could eat. Such statistics have further weakened confidence in Maduro’s government.
Similarly, in Mexico, chronic fiscal deficits, internal and external economic imbalances as well as currency devaluations have historically lead to high inflation, as FocusEconomics reported.
Some argue that for Argentina, the history of inflation is bound up with the history of socialism, as the socialist Peronist Party printed money through the latter half of the 20th century in order to fund high levels of public sector employment and social welfare programmes. This led to a large deficit and devaluation of the peso, the Argentine currency. One report recounted how, during the 1980s, supermarket prices were being read over the loudspeaker because they were changing so quickly.
Others posit that the problem goes deeper than party politics. “These countries have some of the highest rates of inequality in the world,” says Mr. Smilde of WOLA. “This means that governments receive considerable pressure from below to satisfy the consumption demands of the poor majorities.”
Moreover, the three countries’ problems are exacerbated by issues which are endemic to the whole region. “Latin America has a history of weak institutions that are easily captured by established interests,” Mr. Smilde adds. These interests are served by a system which allows for internal stakeholders to benefit from budget deficits, for instance, and elite economic powers that can profit from exchange control, by purchasing goods at controlled prices, and reselling them on the parallel market.
Once that happens, Mr. Smilde told TWW, inflation is hard to control.

 Necessary evil? 

Yet, some degree of inflation is often encouraged as a matter of deliberate policy. Economists argue that letting prices increase gradually drives consumer spending, because individuals want to purchase goods before prices go up again. More spending leads to more demand, which in turn tends to engender higher production, boosting industry earning power.
Indeed, although Argentina’s prices have expanded, so has its economy. "We are in a process of economic policy that seeks to have the lowest inflation possible,” the director of INDEC, Jorge Todesca, told La Nación, an Argentine newspaper. “But we have taken a set of measures to stabilise the economy and the fiscal sector, which has a cost in terms of inflation."
However, by inflating an economy with too much hot air, the government risks it bursting. Most central banks say that inflation is only healthy up to around 2.5%.
“Inflation is a short-term solution,” Mr. Sticco, Infobae’s chief economist, told TWW. “It postpones the problem.” Are there any positive side effects to Argentina’s current inflation rate? “None”, replies Mr. Sticco.
Now, Mr. Smilde says, these governments need to get their deficits under control in order to sort out their untenable inflation rates. However, this kind of change requires support from international powers, support which is not currently forthcoming. “For Venezuela, it would probably take a big, notable change to get inflation to stop, like a change in government, or a rollout of a new currency.”
National elections in Venezuela and Mexico are coming up this year, and political change is on the cards. Andrés Manuel López Obrador, the leftist front-runner for Mexico’s 2018 elections, has promised not to increase fuel prices further, but has made no further announcements on his economic policy.
With the opposition in Venezuela sidelined after a crackdown, Mr. Maduro looks set for re-election in April.
These elections bring the possibility of stability. But, as history has shown, the cycle of political unrest and rising inflation is hard to break out of, and it will likely take more than a vote for inflation rates to sync with the rest of the continent.
Baya Simons
08 February 2018 - last edited today