The economy of Venezuela
Introduction:
Venezuela also known as the Bolivarian Republic of Venezuela is a country in South America established after the fall of Gran Colombia in 1830 (CIA World Factbook). Venezuela has a size of 882,050km2 of land (World Atlas) with a population of 31 977.065 million in 2017 (World Bank). Venezuela borders by Colombia to the south and west, Brazil to the south, and Guyana to the east. The Caribbean Sea and the Atlantic Ocean are Venezuela’s bordering oceans as seen in figure 1 (Geology.com). Venezuela has the largest known oil reserves worldwide which made it the one of the richest countries in South America back in the 20th century with a proven natural gas reserves of 5,707 billion cubic meters (OPEC.org). But with a risky gamble of the former president Hugo Chávez making his country's economy mainly dependent of oil and with failing oil prices in recent years has led to Venezuela becoming one of the poorest countries in South America where hyperinflation has caused inflation rates to rise to over 2688670.00% (Trading Economics) and an estimated third of the country is skipping meals to get by (Zeeshan Aleem).
Footnote: (Since the Venezuela Financial Crisis occurred, the collection of economic data has become harder therefore some of the data isn’t as recent as others so some of the data portrayed is older and won't show the recent change in the economy.)
Figure 1: Map of Venezuela (Geology.com)
Statistics
Venezuela has a Gross Domestic Product (GDP) of $482.35 billion USD (see figure 2) but with a much lower GDP per capita of $15,692.41 USD in 2014. The gross domestic product of Venezuela has had a recession in recent years with 2018 the gross domestic product decreasing by 18.5% as seen in figure 2 (World Bank). Venezuela’s financial crisis has also led to the decreased GDP per capita with the minimum wage in Venezuela being decreased by 13% to $1.61 USD at the black-market exchange rate in Venezuela (Girish Gupta). Venezuela’s GNI was $536.1 billion PPP dollars in 2014, with a much lower GNI per capita of $17440 (World Bank). The purchasing power of the Venezuelan Bolivar has also been decreasing with 1 Venezuelan Bolivar being worth approximately 0.10013 USD in the black market (Transfer Wise). In the 31 977.065 million people in Venezuela, the top 30% of people earn 80% of the wealth (Index Mundi), with 1 in 3 Venezuelan not having enough money to purchase meals (Zeeshan Aleen). One of the major causes of the recession of Venezuela’s economy was caused by a big mistake made by the former president Hugo Chávez and his economic planning committee who decided to make Venezuela’s economy dependent on its main export product, crude Petroleum. When the oil prices fell in the 2008 Financial crisis, the inflation rates increase by 30.9% and currently are at 2688670% (Trading Economics). Venezuela has a growing unemployment rate which is currently at 7.3% (Trading Economics). This is caused by the hyperinflation in Venezuela which is causing everyday products such as milk to become a rarity. The 2008 Financial crisis also caused the state-owned oil company PSDSA to have to fire thousands of employees as the oil prices fell and there were too many employees to pay. These employees were not given any warning by the government and were not helped in finding a new job and the employees that stayed were given a much lower salary. This led to an increased unemployment rate and bankruptcy in many major companies forced them to fire excess employees. Major companies such as Kimberly-Clark had to close down their shops and factories in Venezuela as the hyperinflation made them too expensive for people to buy (Venezuela Analysis). The low oil prices and low GDP led to Venezuela having a 23% debt of their GDP in 2017. Due to this the government spending has also decreased to –20% of their GDP in 2015 (Trading Economics). The 2008 financial crisis left a huge debt for Venezuela to pay off, and the low oil prices haven’t stimulated GDP growth and the government doesn't have enough money to spend on the country such as bettering infrastructure, eliminating poverty, improving literacy rates or social welfare programs to name a few. The HDI in Venezuela was 0.761 in 2017 which has decreased in recent years to the average life expectancy in Venezuela falling to 74.545. However, the adult literacy rates were still quite high at 97.13% (World bank). The HDI is determined by these factors and with hyperinflation causing things such as food and education and healthcare to become expensive, diseases once eradicated in Venezuela have come back with poverty becoming an issue, sending children to school to become too expensive and medical care to become very expensive with the hyperinflation.
The government interference into the market is quite present as Venezuela has a planned economy and the government has control over the entire market and can tax them accordingly. Venezuela has an interest rate of 22.4% all products entering Venezuela but has subsidies for all agricultural and mechanical products. Venezuela has a corporate and personal tax of 34% yearly (Trading Economics). Venezuela has reduced taxes mainly on Agricultural products, and subsidies are especially given to agricultural products, as Venezuela doesn't grow many agricultural products. The main import partner of Agricultural food into Venezuela, the US and EU are given a 16.4% and 87.9% duty free discount for agricultural products (World Trade Organization). The US has around an 80% subsidy for all its products entering Venezuela under the US-Venezuelan trade agreement and the main trade partners of Venezuela get the greatest subsidies. Venezuela has a duty-free export taxes for all agricultural, oil and mechanic products, with the export tax being quite low.
Figure 2: Images of the GDP and GDP growth in Venezuela (World bank)
Trade
In 2017 Venezuela exported $27.8 billion USD and imported $9.1 billion USD resulting in a positive trade balance of $18.7 billion USD in 2017 according to the Observatory of Economical Complexity. Venezuela’s main export product is crude petroleum which accounts for 80% of its export value followed by Refined Petroleum (10%), Acrylic Alcohols (1.6%), Iron Ore (1%) and mainly natural resources. Since the beginning of Venezuela’s financial crisis, the exports of Venezuela have decreased at a rate of -22.2% per anuum, from $153 billion USD in 2012 to $27.8 billion USD in 2017. Venezuela's main export partners are the United States which exported $11.6 billion USD in 2017, followed by China with $6.42 billion USD in 2017, then India who imported $5.25 billion USD in 2017 from Venezuela, then Singapore ($1.25B) and Spain ($390M) respectively. The United States imported 42% of all Venezuelan products but with the increased sanctions on Venezuela through the US government has caused the US to become less of a major export country for Venezuela which has led to the decreased GDP (as seen in figure 3).
Venezuela's imported $9.1 billion USD, with its main import products being Refined Petroleum which make up 22% of all import products followed by a variety of agricultural products such as rice, wheat, corn, sugar, processed food and more, followed by consumer products such as cars, vehicles, fridges, computer and infrastructure and materials such as iron (as seen in figure 4. The main import partners are the United States who imported 3.45 billion USD worth of Venezuelan products followed by China, who imported $1.65 billion USD worth of products, followed then by Mexico with $1.08 billion USD, Brazil with $469 million USD and Colombia with $318 million USD. However, the imports of Venezuela have also decreased in recent years decreasing by -31.2% per anuum, from $58.7 billion USD in 2012 to $9.1 billion USD in 2017. This is again due to mainly to the US trade tariffs which make it more expensive to import US products which make up a majority of the Venezuelan imports and with increased import taxes, the amount imported is lowered, affecting the GDP (Observation of Economic Complexity).
Figure 3: Image of Venezuela Exports (OEC)
Figure 4: Image of Venezuela Imports (OEC)
Figure 5: Image of Venezuela Trade Balance (OEC)
Type of economy
Venezuela has a mixed economy but is more of a planned market economy, with the government playing a major role in the influence of the economy. A planned market economy is when the government has access to the entire economy and how it runs, not relying the rules of supply and demand. The government controls who manufactures the product, what price they can sell it for, how many taxes they want to impose on the product etc. The government owns monopoly businesses which means there is little to no variety on products.
Venezuela is ranked the 179th freest economy in the world (Heritage.org), with the government having major control on which companies and business could sell and produce and the private sector didn’t have as much of a roll. Economic decisions were made by the Venezuelan government and the government spending was mainly made on the monopoly companies that belonged to the Venezuelan government. Entrepreneurs, businesses and the private sector had little to no say in how the economy was run. The economy of Venezuela is controlled by a government who hires a committee to decide on financial matters and who regulate the price of all products. The government can control what they want to spend their money on such as improving schools, or health care programs. There is a plan set out by the government to address issues such as the decrease of value of oil. However, these plans don’t always work as seen in an example, how the oil industry in Venezuela was controlled by the government. Back in the 1980’s when Hugo Chávez was president, a committee called as Cordiplan was formed with the Ministry of Finance by the Venezuelan government to oversee the economic decisions the country made. Back in the 1980’s Venezuela had a surplus in oil and therefore most of the economy was based on it since oil prices were relatively high back then. The government made the monopoly company PDVSA in charge of producing and supplying most of the oil. The price of the oil was up to the government and there were no other oil companies in Venezuela for investors to invest in. The plan at first was successful by depending most of its GDP on its oil reserves and its then high price point. However, the plan wasn’t changed throughout the years as the oil prices sank and got cheaper. The government didn’t adapt to this and continued depending on oil as their main resource. As we saw in the 2008 Global Financial Crisis, Venezuela’s planned economic system failed, as the government did not have any system in plant to deal with the crisis and there was no effective alternative, as 90% of Venezuela’s produce was oil and the governments dependence of oil as the GDP combined with falling oil prices led to a crash in the economy. Many other aspects of Venezuela’s economy are controlled by the government and if the planning wasn’t successful (as seen in the Venezuelan oil crisis) the economy would crash.
Inequality
The Equity in Venezuela was very equal back in the 1980’s due to the new found oil resources and job opportunities it brought. The boost to its economy modernised it rapidly making it the richest South American country with the average Venezuelan in 1977 earning €32326 per year. However, currently with Venezuela Financial crisis and the falling GDP, the average Venezuelan earned €13006 in 2017 (World Inequality Database). GINI coefficient is used to measure the distribution of wealth. A lower GINI coefficient is better, meaning that the wealth is spread out more equally. Venezuela had a GINI coefficient of 46.9 in 2006. Compared to the world average of 38, Venezuela’s is almost 10 units higher.The income share held by highest 20% in Venezuela was 50.70% of the wealth and the Income share held by highest 10% in Venezuela was 34.10%. Most of the top 10% are government officials, generals in the army, and high-ranking officials. The Income share held by second, third and fourth 20% in Venezuela was 9.20%, 14.50%, and 22.30% respectively. The Income share held by the lowest 20% was 3.20% and the lowest 10% in Venezuela income share was 0.50%. The inequity level is very unequal in Venezuela with the top 30% of people earning over 80% of the wealth (Index Mundi). The top 30% of people lived in Caracas, Venezuela capital city or in another major city while the rest 70% of people lived in smaller districts and towns with an estimated third of the people not having enough money to buy food (Zeeshan Aleem).
2008 Global Financial crisis impacts on Venezuela:
The 2008 Global Financial crisis started in the US, when the increased demand in owning and buying houses caused more and more money to be loaned from banks and mortage backed securities. Back in 2008, having many houses and properties was a safe investment as one could always sell the house for more. Money was borrowed from a bank, and monthly money was paid to the bank with interest. However, if the client failed to pay the bank, the bank could claim a mortage and get the property of the client. This was also profitable for the banks, as they gained a lot of profit through this and started to give money to any person instead of checking if the person was employed or was economically stable as they could just get a mortage. Mortage backed securities were bundled up mortgages which investors could purchase shares of. This was considered a safe investment, but as banks loosened the laws of checking how they loaned the money to, and with less people paying the banks, the banks had to collect the mortgage, but with such an increased amount, the mortgages were losing value. Banks also didn’t have enough money to loan now to investors and banks such as the Lehman brothers going bankrupt because they had no more money to loan, and this caused the 2008 financial crisis (Crash Course). This ultimately led to the stock market crash which had global consequences as seen in Venezuela.
The 2008 Global Financial crisis’s impact on Venezuela was quite profound as the inflation rate increased by 30.9% in 2008. The 2008 crisis had led to falling oil prices and which led to Venezuela having to sell their oil at a much lower price than it was actually worth leading to a recession in the GDP and leading to Venezuela’s oil companies having to fire hundreds and thousands of employees (BBC). The problem with this was, was that 90% of Venezuela’s Export product was made through oil and if the oil prices fell, the GDP also fell. This led to high inflation rates and the government couldn’t respond properly and the economy couldn’t recover leading to the economy to start collapsing, hyperinflation and unemployment rates to increase significantly (Reuters). The government didn’t have enough money to support its programs when the oil industry collapsed and has led to a $7 billion USD debt (Caleb Garvin). The 2008 Global Financial crisis was a major strike to Venezuela’s economy and the government couldn’t respond properly leading up to the ongoing Venezuelan crisis 11 years later. The 2008 Financial crisis showed that Venezuela planned economy wasn’t able to deal with such an event eventually causing the entire economic system to crumble.
2008 Global Economic crisis impacts on Venezuela
The 2008 Global Financial crisis started in the US, when the increased demand in owning and buying houses caused more and more money to be loaned from banks and mortage backed securities. Back in 2008, having many houses and properties was a safe investment as one could always sell the house for more. Money was borrowed from a bank, and monthly money was paid to the bank with interest. However, if the client failed to pay the bank, the bank could claim a mortage and get the property of the client. This was also profitable for the banks, as they gained a lot of profit through this and started to give money to any person instead of checking if the person was employed or was economically stable as they could just get a mortage. Mortage backed securities were bundled up mortgages which investors could purchase shares of. This was considered a safe investment, but as banks loosened the laws of checking how they loaned the money to, and with less people paying the banks, the banks had to collect the mortgage, but with such an increased amount, the mortgages were losing value. Banks also didn’t have enough money to loan now to investors and banks such as the Lehman brothers going bankrupt because they had no more money to loan, and this caused the 2008 financial crisis (Crash Course). This ultimately led to the stock market crash which had global consequences as seen in Venezuela.
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The 2008 Global Financial crisis’s impact on Venezuela was quite profound as the inflation rate increased by 30.9% in 2008. The 2008 crisis had led to falling oil prices and which led to Venezuela having to sell their oil at a much lower price than it was actually worth leading to a recession in the GDP and leading to Venezuela’s oil companies having to fire hundreds and thousands of employees (BBC). The problem with this was, was that 90% of Venezuela’s Export product was made through oil and if the oil prices fell, the GDP also fell. This led to high inflation rates and the government couldn’t respond properly and the economy couldn’t recover leading to the economy to start collapsing, hyperinflation and unemployment rates to increase significantly (Reuters). The government didn’t have enough money to support its programs when the oil industry collapsed and has led to a $7 billion USD debt (Caleb Garvin). The 2008 Global Financial crisis was a major strike to Venezuela’s economy and the government couldn’t respond properly leading up to the ongoing Venezuelan crisis 11 years later. The 2008 Financial crisis showed that Venezuela planned economy couldn't deal with such an event eventually causing the entire economy to crumble.
Figure 6: Command Economy Characteristics (Venezuela Analysis)