Executive Summary Venezuela is a country located in South America, which a total area of 912,050 square kilometers, making it the 33rd largest nation in the world. Venezuela became an independent state in 1830 after separating from Spain. The population of Venezuela is 31,568,179 (2016), making it the 44th most populous nation in the world.
In recent years, the country has been experiencing widespread economic decline. Years of interventionist government policies, such as currency manipulations and restrictions on imports, have resulted in its widespread economic decline. This has led to increasing shortages of food, medicine, and other necessities. Therefore, many fear that the civil unrest in the country might soon spiral out into a full-blown civil war. This report outlines a five-year plan to improve Venezuela’s economy. The plan focuses on the following areas: business and trade freedom, job creation, fiscal freedom, export growth, innovation and research, and improving healthcare, education and infrastructure. However, it is important to remember that almost any measure to improve the economy will require political change too.
Venezuela’s situation will not be resolved by a few economic reforms, but rather a complete political overhaul is necessary to put the country on permanent path to prosperity. Background: Venezuela’s failing economy is only a symptom of a much larger underlying problem in its governing system: political corruption. Venezuela used to be one Latin America’s largest economies. Even though Venezuela was never a fully democratic country with a well-developed middle class, free market policies made it prosper. Before considering possible solutions to Venezuela’s current economic situation, the country’s history must be taken into account. Before oil was discovered in April 15, 1914, Venezuela was an unstable republic ruled by an aristocracy.
Much of these problems stemmed from the country’s colonial past and governmental mismanagement after gaining independence from Spain. Venezuela maintained many of its mercantilist policies which kept its own population very poor. However, the discovery of oil replaced the aristocracy with an industrial class which sought to open Venezuela’s markets to international businesses and foreign investment. Under the rule of Juan Vicente Gomez throughout the 1910s to 1930s, Venezuela modernised itself by allowing market actors, domestic and foreign, to freely exploit newly discovered oil deposits. By the 1950s, Venezuela had become South America’s economic powerhouse and its GDP ranked fourth in the world. This was all thanks to a free economy, an efficient immigration system that attracted and assimilated many labourers (namely from Italy, Portugal, and Spain), and strong property laws. Under the government of Rómulo Betancourt in the late 1950s and early 60s, Venezuela became a much more democratic country. Betancourt opened the path to the nationalization of Venezuela’s oil industry and used its revenue to pay for public welfare services.
In the 1970s, Venezuela officially nationalized its oil industry, therefore allowing the government to spend even more revenue on many welfare programs. Deficit spending and increasing levels of foreign and public debt became the norm in Venezuelan fiscal affairs. From the 1970s and onwards, Venezuela experienced little economic growth, foreign debt mounted, poverty rates escalated, and austerity and corruption increased.All these grievances is what caused Hugo Chavez, a former coup leader, to be elected as president in 1998. Chavez started converting Venezuela into a more socialist state; he called his project Bolivarian Socialism (Simon Bolivar is South America’s legendary liberator who fought Spain for independence). As the years passed, Chavez became increasingly autocratic.
Under his rule, welfare handout to the poor increased, but the economy became extremely volatile due to government interference. After Chavez’s death in 2013, Nicolas Maduro became the president of Venezuela. Under his watch, he socio-economic crisis in Venezuela rapidly escalated.Business Freedom Authoritarianism takes away people’s basic liberties, crushes their creativity and entrepreneurial spirit, and hinders economic prosperity. Since economics is a human endeavour, it cannot properly function if the government tries to meddle in the lives of it citizens. When Chavez took office in 1999, Venezuela scored 54 out of 100 in The Heritage Foundation/Wall Street Journal’s annual Index of Economic Freedom.
Today, it only scores 36 points. In the 2013 Index of Economic Freedom, Venezuela ranked 174th out of 179 countries, making it one the most repressed countries in the world. There is little trust among businesses, politicians, the judicial system, and the police in Venezuela. As a result, it is one of the most dangerous countries in the world.
Furthermore, non-transparent regulations of the private sector prevent long-term entrepreneurial growth. For example, there were about 14,000 private companies in Venezuela before Chavez came to power in 1999; in 2001, there were only 9,000. Under President Maduro’s mismanagement, even more companies have moved their factories out of the country and caused thousands to be unemployed. Because of all these restraints, Venezuela ranks 140 out of 144 countries in investor protection. Consequently, many investors are afraid to invest in the country. Tax holidays and foreign investment insurance policies could be implemented to remedy this issue. Tax Holidays Creating tax holidays incentivises businesses (both foreign and domestic) to invest in Venezuela. A tax holiday is a temporary reduction or elimination of a given tax.
They can help spur entrepreneurship, innovation, and induce employers to hire more workers. Taxes are one of the largest expenses on the ledger of businesses, so investors will be motivated to invest in Venezuela when the government implements tax holidays (lower costs of doing business). This will benefit the public good, because these investors and business owners will hire more Venezuelan workers and create more jobs.
Foreign Investment Insurance Policies Because Venezuela has a history of being politically volatile and hostile to the private sector, many investors do not trust its government enough in order to do business in the country. The lack of trust is further exacerbated by the fact that Venezuela was once business-friendly country where many multinational companies had factories in. In spite of that, many of these firms were forced to close down due to price controls, strict labour laws, currency restrictions, and the threat of expropriation. Gaining the trust of investors will arguably the most challenging aspect of putting Venezuela on the path of economic recovery, because investors fear being expropriated or confiscated once again. Therefore, foreign investment insurance policies must be implemented to gain their trust again.
These insurance policies must be designed to protect investors against the losses occuring due to currency restrictions, expropriation or confiscation, and political disturbances such as civil unrest or war. Transfer and convertibility insurances must cover the investors against losses resulting from inability to convert profits, capital, royalties and other remittances from local currency into foreign exchange. Expropriation/confiscation insurances must cover businesses against acts by the host government to seize assets of the investors.
War/civil disturbance insurances should protect investors from any loss resulting from damage of assets by social unrest.Trade and Investment Freedom Under the government of Chavez and Maduro, Venezuela has placed increasing number of trade barriers on imports, hence making trade with country difficult. Currency BarriersFirst of all, Venezuela’s current foreign currency regulations significantly restrict the ability of companies and individuals to convert Bolivars (the local currency) into foreign currency. As a result, it is extremely difficult for companies in Venezuela to convert profits made in Bolivars to foreign currency in order to purchase foreign supplies, pay foreign debt, etc. Venezuelan companies are in a chronic shortage of foreign cash, thus preventing them from expanding. The difficulty in exchanging currency stems from Venezuela’s use of a complex monetary system that is based on four different exchange rates (CENCOEX, SICAD I, SICAD 2, and SIMADI).
Each of these exchange rates are used in a specific sector of the economy. For example, CENCOEX is reserved for importation of food and medicine. SICAD I and SICAD 2 is used by enterprises that import all other types of goods. The SIMADI is used for the purchase and sale of foreign currency to individuals and businesses. Both individuals and businesses have immense trouble getting assigned to these rates due to the long bureaucratic process they must go through to attain one. To resolve this issue, Venezuela must adopt one currency exchange rate that applies to all sectors of the economy.
This will make it much easier for businesses and individuals to exchange money freely. Permits on ImportsAgricultural and food importers must obtain licenses in order to import their goods to Venezuela. The importer must justify its importation by proving that their products are not available domestically.
Additionally, importers must obtain Sanitary and Phytosanitary (SPS) certificates from the Ministries of Food and Agriculture. This process is not very transparent as requests are often denied without providing any reason or evidence. Consequently, concerns have been raised in regards to the consistency of these practices and whether the Venezuelan government has been using these methods to unfairly curb imports. In order to motivate trade and investment freedom, import permits should not be used as political tools, but rather as tools to protect the health of Venezuelans. To encourage free trade with the rest of the world, governmental ministries must be more consistent and transparent with issuing permits.
Export GrowthEver since the early 20th century, Venezuela has relied heavily on oil exports for revenue. Venezuela was able to prosper due to the high demand for oil throughout the 20st century. But the discovery of renewable sources of energy has dramatically decreased its demand and caused prices to plummet. Most probably Venezuela will never gain the same amount of oil revenue as it once did. The only solution to this problem will be to diversify Venezuela’s economy as much as possible. The two industries which must be most heavily developed in the next five years are the agricultural and petrochemical industries. These industries have huge potential in boosting Venezuela’s GDP and exports. Agricultural Industry Venezuela is blessed with fertile lands and a temperate climate which make it an ideal place for agriculture.
Venezuela’s economy used to rely heavily on agriculture, but its importance declined when oil was discovered. Regardless, the potential of Venezuela’s agricultural industry must not be underestimated. The government must promote investment in the agricultural industry by incentivizing both domestic and foreign companies to invest in the country. Some examples of foreign food packaging/processing/distributing companies which Venezuela should work with are Kraft Foods, Conagra Brands, Dole Food Company, and Chiquita Brands International. Given its vast resources, Venezuela could easily become one of the world’s top produce exporters. Petrochemical Industry Venezuela has the world’s largest proven oil reserves and the 8th largest natural gas reserves. Rather than just focusing on exporting crude oil, Venezuela can also invest in creating its own petrochemical industry.
The petrochemical industry uses oil and natural gas to produce chemicals used in consumer and industrial products: plastics, paints, rubber, fertilizers, detergents, dyes, textiles and solvents. Even though the demand for crude oil has decreased, the demand for petrochemicals continues to grow. Given Venezuela’s large oil and natural gas reserves, this industry is an excellent GDP booster. Through correct policy making and investment, Venezuela can become a leader in the production and export of the petrochemicals. As mentioned earlier, the government can only achieve this by working towards creating a more business-friendly environment in order to lure investors into the country. Job Creation Strategies As mentioned earlier, incentivising both foreign and domestic investors to do business in Venezuela will lead to the creation of thousands of jobs. When Chavez came to power, he took on a more patrimonial role and provided Venezuelans with many welfare benefits (i.e.
“Free” education and healthcare). He doubled the size of the public sector; the 2.4 million government employees are used as tools to keep the regime in power. Currently Venezuela is experiencing record-high unemployment rates. The best solution to this growing problem is for the government to incentivize the private sector through the methods mentioned earlier.
When Venezuela creates a business-friendly environment, investors and entrepreneurs will actually want to set their own ventures in the country. Ultimately this will cause them to offer thousands of jobs to the country’s population.Fiscal Freedom Venezuela is heavily indebted, because former president Hugo Chavez borrowed heavily to fiance the social programs that made him so popular among the poor. The country also dismantled mechanisms which insured it to save money when oil prices were high.
Now the government is short on cash as it cannot afford to import basic necessities. Furthermore, Venezuela cannot finance its debts due the sanctions US imposed on it in 2017 on the grounds that Maduro is undermining democracy. This prevents US banks from acquiring Venezuelan debt. To reduce national spending and reduce debt, the Venezuela needs to drastically cut back on many of its welfare programs. Moreover, Venezuela needs to accept help from multilateral institutions such as the International Monetary Fund (IMF) and the World Bank. Venezuela has had no contact with the IMF or the World Bank since 2008 when it paid all of its debts to them. The two organizations have offered their help, but Venezuela must allow them to first do an economic and financial assessment.
Maduro’s government has refused to grant this permission on the grounds that it violates his country’s sovereignty. The Venezuelan government must put political ideologies aside in order to save itself from an economic abyss and save the lives of its starving citizens. Improving Healthcare, Education, and Infrastructure As of now, Venezuela is too short on money in to be able to improve its healthcare, education, and infrastructure. When the government did have lots of money in its hands, many of it went to support other Chavista cronies in South America and the Caribbean.
For example, generous subsidies were given to Fidel Castro’s Cuba, ALBA (short for Bolivarian Alliance for the Peoples of Our America; established by Chavez to consolidate regional economic integration based on social welfare and mutual economic aid) and PetroCaribe (an oil alliance of many Caribbean states with Venezuela to purchase oil on conditions of preferential payment). Instead of sending the country’s petrodollars to be used by the government’s cronies, Venezuela needs to keep the money within its own borders and spend it on the public good. However, the only way to achieve this mindset is by striping the Venezuelan government of all its corruption first. Innovation and Research After Venezuela has stabilized its economy through the methods mentioned above, it can invest its time and resources in innovation and research.
The government can play an important role in this area through several ways. First, it must continue promoting free markets and free-trade agreements which encourage more innovation and the faster adoption of the world’s most brilliant ideas. Secondly, the government must provide providing tax incentives to motivate companies to conduct research on new technologies. Thirdly, the government must implement strict intellectual property laws with strong patent, trademark and copyright systems. These systems protect Venezuelan innovations, prevent them from getting copied by rival manufacturers, and ensures that they become commercial successes.