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An update on Venezuela’s troubled economy

Venezuela has all but vanished from the news as the rest of the world grapples with its own problems. In this blog post, we document the state of Venezuela’s economy through FRED graphs. This has been no easy task, since recent data are actually quite scarce. And we’ll explain a second reason below.

Even just glancing at our first graph reveals there’s trouble. The economy has been in an unprecedented decline, with GDP below the level it was in 1970. That kind of economic suffering indicates major problems.

One problem is clearly inflation—or, more accurately, hyperinflation. Our second graph shows the exchange rate of the Venezuelan currency against the U.S. dollar. For most of the time period shown, the line cannot be distinguished from zero because the recently skyrocketing rate has rendered previous changes minuscule in comparison.

Also note the blip in 2018, which was a rapid increase from about 10 bolivares to the dollar in January to about a quarter of a million bolivares by August. Clearly, an economy with such price increases has been structurally disrupted. Hyperinflation also makes it even more difficult to measure economic activity, as measurement at these price levels becomes misleading. This is our second obstacle, which we alluded to above. While it’s clear economic activity has slowed down in Venezuela, there’s no way to say with any precision by how much exactly.

Our next graph shows total factor productivity—in short, a measure of how much is produced with a constant level of capital input and labor. Clearly, Venezuela’s problems are not recent; they date back to the 1970s. Again, while any measurement must be taken with a grain of salt, it’s extremely rare for an economy to show a decline over decades. Something is impeding productivity.

The clear loss of population in recent years also affects the Venezuelan economy. The graph includes a red “what if” trend line showing that the population would have been 4 million (or 14%) higher in 2020. Obviously, the direction of the causality between population loss and output loss is not clear: That is, did the bad economy cause lower population or the reverse? Either way, an economy with that many fewer people will produce much less.

To make things worse, fewer people are working among those who remain in Venezuela, with the labor force participation now below 50%. With all these economic hardships, it’s not a surprise Venezuela is one of the few countries in the world where cellular subscriptions are in decline, as shown in our last graph.

How these graphs were created: Search FRED for Venezuela, sort results by observation end, then click on series titles of interest. The only graph that requires additional adjustment is the one for population: To add the trend, go to the “Edit Graph” panel and open the “Add Line” tab; click on “user-defined line,” and enter values defining start and end of the new line.

Suggested by Christian Zimmermann.

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