Can Venezuela’s Maduro Survive Hyperinflation?

Venezuela is probably sliding into a period of hyperinflation, says the Cato Institute’s Steve Hanke. A picture in a recent blog post of his pretty much tells the story:


The economic crisis of which this inflationary spiral is just one part has lots of people wondering how long Venezuela’s president, Nicolás Maduro, can hang on to power. Historical evidence on what happens to political leaders during periods of hyperinflation could give us a good starting point for hazarding a prediction on that matter. Best I can tell, though, this isn’t something that’s been studied before, so I decided to scrounge up some some data and take a look.

I started with a table Hanke and Nicolas Krus published in 2012 that identifies all episodes of hyperinflation around the world since the late eighteenth century (here). By their definition, a hyperinflationary episode starts when there is a month in which prices increase by at least 50%, and it ends when the inflation rate drops below that threshold and then stays under it for at least a year. Their table identifies when each episode began and ended and the peak and average daily inflation rates involved. The good news is that this data set exists. The bad news is that it is only posted in PDF form, so I had to type it into a spreadsheet to start working with it.

According to Hanke and Krus’ table, there have been more than 50 spells of hyperinflation around the world in the past couple of centuries. As the plot below shows, virtually all of those occurred the past 100 years in three clusters: one in the 1920s, another in the 1940s, and the last and by far the largest in the 1990s following the disintegration of the USSR and Yugoslavia.

Hyperinflation Episodes around the World, 1790-2012

Hyperinflation Episodes around the World, 1790-2012

The duration of those episodes has varied widely, from a few months or less (many cases) to more than five years (Nicaragua from 1986 until 1991). As you can see in the histogram below, the distribution of durations seems to be bimodal. Most episodes end quickly, but the ones that don’t usually go on to last at least two or three years.

Duration of Hyperinflation Episodes, in Months

Duration of Hyperinflation Episodes, in Months

The average daily rate of inflation in those episodes has varied much less. As the next histogram shows, nearly all of the episodes have involved average daily rates in the low single digits. Cases like Zimbabwe in 2007-2008, when the daily inflation rate averaged nearly 100% (!), are quite rare.

Average Daily Inflation Rates during Episodes of Hyperinflation

Average Daily Inflation Rates during Episodes of Hyperinflation

To analyze the fate of political leaders during these episodes, I used the Archigos data set to create a variable indicating whether or not a country’s chief executive was replaced during or soon after the episode of hyperinflation. Suspecting that those fates would depend, in part, on the nature of a country’s national political regime, I also used a data set I created in a past professional life to add a variable marking whether or not a country’s political regime was democratic when the episode started.

A quick look at a contingency table confirmed my hunches that political leaders often lose their jobs during periods of hyperinflation, but also that the pattern differs across democracies and autocracies. Of the 49 episodes that occurred in cases for which I also had data on leaders’ fates and regime type, leadership changes occurred during or soon after 18 of them (37 percent). Eleven of those changes occurred in the 23 cases that were democracies at the time (48 percent). The other seven leader changes came from the 26 episodes that occurred under authoritarian regimes (27 percent). Based on those data alone, it looks like chief executives in democracies are about as likely to lose their jobs during a hyperinflationary episode as they are to hang on to them, while autocrats face more favorable odds of political survival of roughly 3:1.

Of course, the episodes of hyperinflation aren’t identical. As we saw above, some last a lot longer than others, and some involve much steeper inflation rates. To get a sense of how those things affect the fate of the leaders who preside over these dismal spells, I used the ‘glm‘ command in R to estimate a logistic regression model with my binary leadership-change indicator as the outcome and democracy, episode duration, and average daily inflation rate as the covariates. Guessing that the effects of the latter two covariates might be mediated by regime type, I also included interaction terms representing the products of my democracy indicator and those other two variables.

The model is admittedly crude,* but I think the results are still interesting. According to my estimates, the severity of the episode isn’t systematically associated with variation in the fate of national leaders in either type of political regime. For both democracies and autocracies, the substantive effects of the average daily rate over the course of the hyperinflationary episode were roughly zero.

By contrast, the duration of the episode does seem to matter, but only in autocracies. Democratically elected leaders are relatively vulnerable no matter how long the episode lasts. For their part, autocrats aren’t very likely to get knocked out of office during short episodes, but in episodes that persist for a few years, they are about as likely to get tossed as their democratic counterparts. The plot below shows just how bad it gets for autocrats in long-lasting hyperinflationary episodes, assuming average severity. Part of that’s just the additional exposure—the longer the episode, the more likely we are to see a leader exit office for any reason—but the estimated probabilities we see here are much higher than the base rate of leadership change in authoritarian regimes, so it looks like the extended spell of hyperinflation is probably doing some of the work.

Hyperinflation Episode Duration and the Probability of Leadership Change

Hyperinflation Episode Duration and the Probability of Leadership Change

So what does all this tell us about Maduro’s prospects for political survival, assuming that Venezuela is sliding into a period of hyperinflation? I consider Venezuela’s political regime to be authoritarian, so f I only had these statistics to go by, I would say that Maduro will probably survive the episode, but the chances that he’ll get run out of office will increase the longer the hyperinflation lasts. I’m not an economist, so my best guess at how long Venezuela might suffer under hyperinflation is the average duration from Hanke’s list. That’s a little shy of two years, which would give Maduro odds of about 4:1 to of weathering that storm.

Of course, those statistics aren’t all the information we’ve got. Other things being equal, authoritarian regimes with leaders in their first five years in office—like Venezuela right now—are about three times as likely to transition to democracy as ones with guys who’ve been around for longer, and democratic transitions almost always entail a change at the top. We also know that Maduro so far has been a “boring and muddled” politician, and that there are some doubts about the loyalty he can expect from the military and from other Chavista elites. Putting all of those things together, I’d say that Maduro’s presidency probably won’t last the six years he won in the April 2013 election. Who or what might come next is a whole other question, but as a new leader presiding over an inflationary spiral with weak skills and a shaky coalition, Maduro would seem to have the deck stacked against him.

Data and code for the plots and modeling can be found here and here, respectively.

* To really do this right, I would want to plot survival curves that treat the time from the onset of the hyperinflationary episode to the leader’s exit as the outcome of interest, with right censoring at the episode’s end and regime type as an initial condition. As they say in academese, though, the data preparation that more careful analysis would require was beyond the scope of this blog post. I mean, I’m not Brett Keller.

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  2. Gyre

     /  November 17, 2013

    Is there a difference between authoritarian and competitive authoritarian during hyperinflation, or is there too little information available to make that calculation?

    And considering the similarities, would we be seeing something similar in Zimbabwe if Mugabe dies before the economy can recover?

    • On authoritarian vs. competitive authoritarian, that’s definitely an interesting question, but the samples would get very small, and it would take additional coding rules and research to make decisions about which are which.

      I don’t know enough about Zimbabwe’s politics or economy to respond intelligently to your question on that, but it certainly seems plausible. And whatever the state of the economy at that point, the statistical finding on prospects for democratization under new leaders would apply for sure.

  3. Hanke’s normally a good researcher but there are SERIOUS problem with his implied inflation measure. It’s based on the illegal parallel forex market rate, a market that is seriously, seriously distorted, extremely opaque and – did I mention? – illegal. The parallel forex market in Venezuela includes an unknowable (but probably large and growing) illegality premium. Using that price as your market for implied inflation is seriously misleading, for the same reason that it’s fanciful to think that if cocaine were legalized, current street prices in the illegal market would hold.

    The government’s strategy has been to shift much of the adjustment to hyperinflationary condition to scarcity: rather than allowing the dollar to float, they’re holding it at an extremely unrealistic fixed price. As there aren’t enough of these super-cheap dollars to go around for all the importers who want them, some of the demand for imports just goes unmet. This shows up in people’s lives in the form of bare shelves, as prices aren’t allowed to rise fast enough to bring demand down to the place where markets will clear. You could call that an instance of deferred hyperinflation, but the reality on the ground is that prices aren’t going up anywhere near Hanke’s threshold of 50% per month: it’s about an order of magnitude lower, 3-6% per month.

    So that’s a funny kind of hyperinflation we’re looking at, isn’t it?

    • Thank you for pointing this out. I’m close to clueless on the economics involved, so I was taking Hanke at his word, more or less. I would really like to hear him explain his thinking behind that choice a bit more.

      In the meantime, one way for me to think about how this affects my rough calculations the would be to reduce the probability that a hyperinflationary episode will occur in the first place. This would still leave Venezuela in that window of elevated prospects for democratization, but it would certainly shrink the conditional probability of an exit related to the inflationary spell and thus the overall likelihood of an exit from office in the next several years.

      • Grant

         /  November 18, 2013

        Does he have a good reputation in general? Obviously we should be careful on just trusting that, but it’s a starting point. I have to note that the Cato Institute is a libertarian organization, but that doesn’t mean that it’s inherently unreliable.
        And sorry for the Gyre one. That’s the problem of using a shared computer.

      • It’s almost a philosophical question, more than one about economics: if Maduro decided to let the market do its thing, prices WOULD jump at hyperinflationary rates. This month, a toaster costs 10, next month it would cost 15. That’s not something the government finds politically acceptable. So instead it adopts a policy stance that makes it impossible to keep the shelves stocked: this month a toaster costs 10, next month it officially costs 11 but that’s irrelevant to me because I can’t find anyone who’ll sell me a toaster at for 11 – actually, I can’t find a toaster at all.

        At some point you have to ascribe some kind of number to the inflationary impact of something disappearing from the market altogether. I guess Hanke could say that his number is neither more nor less arbitrary than any other number you could think of for this purpose. He wouldn’t necessarily be wrong, but it’s still an odd kind of measure he’s chosen.

  4. Very quick point. I don’t really consider Venezuela’s financial situation to be hyperinflation, per se, and much of the talk is essentially the same old media war. Hyperinflation is almost always a response to lots of very dead debt–usually from making or sponsoring wars (but also from authoritarian growth miracles as well). Venezuela’s underlying financial situation is nothing like Zimbabwe. However, in the nature of UK’s diplomatic/media and financial exploitation, that situation mirrors the US conduct towards Chavez.

    To really have hyperinflation, the actual debt burden and bad loans has to be much higher than it has been for Venezuela. There would also have to be fewer options to raise hard cash, with Venezuela still has plenty of. So forth and so on.

    Venezuela’s problem mostly has to do with the fact that they have a much larger consumer society than their neighbors, and that there is much more political accountability there than there is in Colombia, for example. So where the Colombian elites can get away with a relatively tight monetary policy, and never lift one finger for anyone outside of the cities, until they hit their Lewin point, which might not every happen, Colombia is never going to have wage push inflation. With the only people who matter being a relatively small number, almost the same as the social stratification dynamic in the Arabian Peninsula, it is easy to supply the special people with goods and services without stretching too much in the way of getting hard currency, given their resource extraction base.

    The other issue is that the US dollar has gotten very hard, and this has given many countries in the third world fits. How well Maduro and his staff is handling that aspect is a question to ponder. Given that Venezuela lies outside of the US system of cooperative geopolitics, this is a tougher task than, say, how Erdogan handles his problems. Erdogan has much easier access to hard dollars as a result of Turkey’s cooperation with the US and the GCC.

    Whether Maduro survives? Ehhh, I think many Westerners slap a label like democratic authoritarianism without really thinking about what that means. I remember how the book Dragon in the Tropics compared Venezuela to Putin’s Russia or Georgia, and like…well, Chavez has never actually been that authoritarian, in how he handles political dissent, or in how top-down policy making is. Maduro has trouble because he isn’t as smart or as charismatic as Chavez is, while also not having much of a talent for politics, either. He can easily be voted out–if people there didn’t know exactly what’s behind door number two. So long as the enemies of Chavism are crazy, racist, rightists who’d probably never learned the lessons of Carmosa, or anyone else, Maduro will benefit from people voting against that bunch with the money and the power at the core of MUD, and from people voting for a nationalist view of Venezuela.

    hmph…longer comment than intended.

    • It’s always a joy being labeled a crazy racist who never learned the lessons of CarmoSa by someone who doesn’t know how to spell CarmoNa’s name… 🙂

      • Well, yeah, I don’t read your blog, because you’re always freakin’ hyperbolic, and this pretty much always happens whenever I talk to Venezuelan expatriates. Zero self-conciousness about how they look to others, and zero willingness to concede that some degree of the appearance that showing some degree of concern for people not like them might bring them political success. It’s all “wrong people acting uppity” dialed up to ten, all the time.

      • I mean, how’s that little birtherism working for you guys? Is it working one iota for the rurals, or even simply non-well off Caracas denizens? Peeling off the nationalist types requires a bit more than screeching that Maduro is a secret Colombian!

      • You sir, have beaten that strawman to a bloody pulp!

    • Grant

       /  November 18, 2013

      I’m honestly unsure how to respond because I have no idea what you mean by the U.K.’s “diplomatic/media and financial exploitation”. If you mean Zimbabwe, I’m pretty sure that it was Mugabe’s decisions that caused the current problems, and I don’t have any idea diplomacy or media can even be exploitative, at least in an economic sense.

      • Eeeh, it’s not all that easy to find a quick summary. Basically, the UK dicked around with the Zimbabwe gov’t about financing land reform, and then did a bunch of sanctions after Mugabe went ahead with it. Ultimately, from what I can figure, it’s mostly about forcibly integrating Zimbabwe into a neoliberal order. Story ain’t simple, or even mostly told, I suspect, but that’s the bones of it. Zimbabwe also had economic and debt issues resulting from the wars in Congo and Angola.

        A lot of African geopolitics is murky as all heck, like the Western fascination with bringing Kenyatta to trial in the ITC next year. Remember, nobody really cares about the dead from the post election violence in 2007, any more than they did when the Egyptian Junta killed Ikhwan supporters. It’s probably all about some other economic or security deal in the background.

      • Grant

         /  November 18, 2013

        Forcibly? The U.K.? I’ll believe they can forcibly compel an economic system on anyone the day they make the commonwealth relevant. And that doesn’t really answer my question about the “exploitation” comment. I still have no idea how a nation is supposed to exploit anything economically with media.

        And I don’t think that sanctions are typically associated with hyperinflation combined with government denials so absurd you have to wonder if the person making those statements is actually in the same nation. Also if memory serves said land reform consisted of “nationalize and give to supporters on basis of loyalty and political power”. That’s not commonly associated with productivity.

        Then there’s the question of why the West would want Kenyan leaders specifically on trial (and it’s ICC by the way) when Kenya is friendly to the West and I wonder why you’re convinced that no one cares about Egypt when the U.S. rather publicly suspended military aid.

  5. 6 years later, prediction is mostly accurate on the hyperinflation..

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