Live Chat
Order Now

Venezuela: The Crisis of a Model

Home Free essays Economics Venezuela: The Crisis of a Model

Venezuela: The Crisis of a Model

Venezuela is a country of great contrasts. It is the only country in the world that was in the top five countries where, according to UN statistics, since 2006, the Human Development Index has improved and was in the top five countries by number of homicides per capita (U.S. Department of State, 2012) (United Nations Development Program, 2013). Typically, these two parameters are difficult to reconcile with each other. Similarly, almost erased differences in the incomes of population are accompanied by an extremely high level of inflation.

Get a price quote
- +

First Order Discount 15% OFF

The first months of the presidency of Nicolas Maduro show that developed over the years of Bolivarian revolution, the system of economic relations began to give serious failures. Certainly, the problems were in the past, but right now they are becoming more acute. The central government has recently acknowledged that the shortage of consumer goods in Venezuela reached more than 20 % the highest number in recent years. In the discharge of scarce food in the shops were sugar, flour, butter, beef and pork. Toilet paper and napkins almost completely disappeared from the shelves; the problem was to buy soap and washing powder (Sanchez & Ritter, 2013). The private sector is the main food producer in the country. Yet the fact is that the country is responsible for the issue of distribution of goods, and responsibility of the Left, thus, cannot be questioned. Much of the essential goods are imported into the country. Despite the large oil revenues, supply disruptions due to delays in allocating currency importing companies constantly arise.

In the eyes of the inhabitants, Venezuelan revolutionary camp is responsible for the controversial financial policy, which is expressed primarily in a consistent devaluation of the national currency, the bolivar. In the first four months of 2013 devaluation of the bolivar has led to an increase in food prices by 42 % (Salmeron, 2013). Thus, according to the official exchange rate in the cities of Venezuela, it is almost impossible to exchange bolivars to dollars and the difference in the course of official exchange offices and privateers greatly vary. Some economists believe that by the middle of 2013 the annualized level of real inflation in Venezuela exceeded 30% (MercoPress, 2013).

Hugo Chavez left a multidirectional and active diplomacy to his successors, through which there were many sincere and loyal allies of Caracas willing to help in any minute. Not only the neighbors of Venezuela, which have plenty of food, such as Brazil, Argentina and Uruguay have responded to the call of president Maduro about additional food supplies. Even Nicaragua tried to provide brotherly help to Venezuela, where President Daniel Ortega ordered to send to the Bolivarian Republic additional 45,000 tons of sugar (Nicaragua Dispatch, 2013). Still, the mere fact of such humanitarian aid shows how complicated in crisis remains the Venezuelan model today.

Speaking of the difficult economic situation in the country, the leader of the direction of socialism of the XXI century, added to the above, reducing the effectiveness of publicly-managed PDVSA Company (Weisbrot & Johnston, 2012). Venezuela is known for the largest known reserves of black gold, so that in times of Chavez Caracas pursued an active foreign policy on the left so many different ways. However, statistics show that in the first quarter of this year, supply of oil to the United States, for example, fell by 13% and oil exports as a whole decreased by almost 25 % (Blas, 2013). In addition, PDVSA is in a tremendous debt to the Central Bank of the Republic; the debt exceeds 25 billion U.S. dollars.

save 25%

Benefit from Our Service: Save 25%

Along with the first order offer - 15% discount (with the code "get15off"), you save extra 10% since we provide 300 words/page instead of 275 words/page

The policy of income redistribution carried out by Venezuelan President Hugo Chavez in 2002, contributed to a significant reduction in the Gini coefficient. Now it is the lowest in the region (lower values ??correspond to the least inequality in income) (Arsenault, 2013). This is rather good achievement, as countries of Latin America are well known for having great income inequality: half of the worlds 20 countries with the worst corresponding figure are situated in this part of the world. However, there is also the worlds highest inflation rate for the last 5 years (with the exception of Zimbabwe) in Venezuela, which means that incomes of Venezuelans were balanced in part due to the fact that they were absorbed by inflation.

Human Development Index of the United Nations showed a small improvement in the lives of Venezuelans, but other indicators are rather gloomy and depressing. The World Economic Forum has compared the living conditions in 144 countries. In 2012, Venezuela took an extremely low place, and in two cases the country possessed the last place on many key indicators. Higher figures can be observed only in the national income, basic education and higher education, but in other areas progress is not as significant.

It seems that Venezuela does not fully use its oil wealth. Despite the fact that the level of Venezuelan GDP per capita has always been one of the highest in Latin America (with exception of the oil boom of 2002-2007, when oil prices rose five times), the growth of Venezuelas GDP per capita was zero or thereabouts. One of the possible conclusions that can be drawn about situation in the country in the past few years is the fact that chaotic redistribution of wealth has its own price that does not let the economic pie to grow.

What is the future for Venezuela? There is something strange with the balance of payments of the country, which partly explains why increase in GDP per capita has been stalled since 2008. Net value of foreign assets in the private sector is growing. This may be a consequence of the rapid outflow of capital a process that leads to a diversion of resources from domestic investment and infrastructure. On the other hand, net foreign assets in the public sector have decreased in Venezuela. One would expect that it will grow into an active current account surplus and the high price of oil. However, reducing it means that public sector spends the accumulated wealth to support economic growth, and it cannot go on forever. Venezuela looks unattractive compared to other oil-exporting countries, since it has fewer foreign exchange reserves and higher foreign debt.

Despite all the difficulties, the economic model in Venezuela may prove to be viable if oil prices remain high. The state budget deficit and growth of domestic debt are at a dangerously high level; as well, indeed, as inflation is. Thus, the size of domestic debt to GDP ratio increased from 9% in 2010 to 13.5 % at the end of 2012. As for hard currency, Venezuela has an annual of $ 11 billion with the government debt and the state oil company PDVSA as well, but gets more than $ 80 billion in oil revenues. What no one knows is how much of hard currency the government needs to keep support of the Chavistas. Within a few years the government has devastated the international reserves to cover costs and external borrowing. If one wants to maintain the existing system to maintain the current pace of spending, then Venezuela once may turn to the lenders as the price of oil will rise again. Nevertheless, if oil prices fall, it seems that the current situation will not change.

Discount applied successfully