Economy in Venezuela Shaped by Politics - Research Paper Example

Economy in Venezuela shaped by politics Worldwide, economic reforms have created new opportunities and challenges for developed and developing nations. Economic growth is followed by development in almost all the developing nations. But situation is different in Venezuela, and politics plays the most important role in shaping the economy. Earlier, during 1952-1958, Venezuela enjoyed high GDP growth and it reflected in the living standard of the people. But in 1999, when Hugo Chavez became the president of Venezuela, low GPD began to curb the economy and poverty began to show rapid increase. Most of the oil from Venezuela exported to the US, but this does not reflect in the relation between two countries. Besides, Venezuela has deep relation with Cuba, Iran and Libya, which are against US government and Chavez shows critical attitude towards the US trade policy in Latin America. Here, the attempt is to discuss and analyze different issues on Venezuelan economy, like economic growth, underdevelopment, role of politics, role of Chavez and relation with the US. Venezuelan Economy Venezuela, the Latin American country depends upon revenue from oil export. The export earnings, federal budget revenues and GDP depends upon revenue from oil export to the US and European countries. Michael J. Enright, Antonio Frances, and Edith Scott Saavedra in their work ‘Venezuela, the challenge of competitiveness’ reflects that: “The Venezuelan economy always has been closely linked to the international economy. Even in the days of import substitution, it was linked to the world economy through exports of oil; imports of capital goods, food, and industrial inputs; capital flows; and currency transfers.” (Enright, Frances & Saavedra 1996) it is evident that Venezuelan economy is closely related to international economy because its most important source of revenue is oil export. Moreover, large scale import of goods and commodities from the international market to Venezuelan economy is connected to capital flows and currency transfers. Besides, as it is directly connected to the international economy, even a small fluctuation in international market directly affects the economy. The boom in oil price was supportive to strength the economy but it does not reflect in the development process of Venezuela. Besides, this fact is clearly evident from the distribution of income inequality among the people. The rate of expenditure for the development is comparatively less and the increasing rate of people below the poverty line proves that the economic development does not have any positive influence on the people. In the first half of the 20th Century, Venezuela was under military control which promoted its oil industry and supported social reforms. High oil prices helped the government to spend the revenue to strengthen the economy, and boosted a high rate of consumption, and finally high rate of inflation within the economy. So it is clear that decline in oil rates limits the government spending on economy. In 2007, the Chavez government decided to nationalize almost all key economic sectors. Besides, in 2008, the government made a decision to increase its control on economy by nationalizing firms in the cement and the steel sectors. The WTO pointed out that there was a rapid progress of economic and trade reform in Venezuela between 1989 and 1992. But there existed an imbalance between oil sector and the rest of the economy. So it is visible that the backbone of Venezuelan economy is oil revenue and it is important to diversify the economy for further development. But political instability badly affects the economy. For instance, the political crisis of 1992 badly affected the economy. Besides, the government plays the most important role in key sectors of the economy. So as to back up the economic progress, the Venezuelan government created the Ministry of Industry and Trade in 1995. More to the point, this was helpful for the development of the new concept of public-private sector relations. Furthermore, this innovative measure helped the growth of non-oil sector in Venezuela. But less interest shown by the US and other developed countries because of some political problems badly affected the development of Venezuela. The current financial crisis, worldwide stock market collapse and decline in oil prices may badly affect the Venezuelan economy because it is based on oil revenue. So the best possible way for Venezuela to make the most of economic development is to reduce overdependence on oil revenue and to invest on other industrial sectors. Economic growth v/s underdevelopment in Venezuela The revenue from oil export is the backbone of the Venezuelan economy. But the economic development does not reflect in the living standard of the people and the country still face the problem of underdevelopment. The decision of President Chavez, to spend revenue in social programs hindered the growth and development of oil sector. To be far away from the influence of the US government, Chavez decided to set an oil embargo against the US and it raised the costs of oil supplies in US. Other policies like shifting the managerial authority of petroleum industry from PDVSA to Venezuelan Ministry of Energy & Petroleum aimed to the total authority of the state over key revenue sectors. Aiming further economic development, Chavez decided to increase cooperation with countries, other than the US. For example, China decided to invest in Venezuelan oil exploration, joint projects in cellular phone manufacturing, automobiles and railway. In addition, Venezuelan government decided to increase cooperation with the OPEC countries and adhere to its regulation on oil production and export. But these innovative steps did not help much the production of crude oil. Since 2001, the oil production is going down and it is evident that irrational measures on oil production and export are behind this reduction. Another issue which adds to the divide between economic growth and underdevelopment is the dependence on foreign aid, especially from IMF. Venezuela is economically developing but the government is not yet ready to take measures to meet all citizens’ basic needs. From another point of view, there is less public spending on marginalized groups in the society, especially on education, health, housing and land distribution among the poor. Besides, the government spending is concentrated and focused on wealthier sections of the society. Franklin Tugwell, in the book- ‘The politics of oil in Venezuela’ reflects that: “Nonetheless, there is considerable tension between different sections of the economy-agriculture versus industry, industry versus commerce, or importers versus exporters” (Tugwell 1975) there exists tension within different economic sectors in Venezuela. For instance, there is tension between agriculture and industry, industry and commerce, and importers and exporters. As the economy is supported by oil revenue, it lacks independently sustainable economic growth. Earlier, in 1920s and 1930, Venezuelan economy was open to foreign petroleum companies and there existed less economic inequality among the people. But inefficiency shown by the government to respond properly to the recent economic crises in 1980s 1990s and 2000s prove that Venezuela is not prepared to face further economic crises. The Venezuelan government shows interest to invest in education, hydroelectric dams, steel production, petrochemical and agriculture. But these large scale investments prove ineffective and the country still depends on oil revenue. It is evident that the easy revenue/income from oil created a limited society of high consumption, and they take advantage of this situation. In 2004, the Chavez government raised fund for their Bolivarian Revolution through collecting royalty tax on companies working in the Orinoco belt. From this fact, it is evident that the economic policies formulated and implemented by the government resulted in little effect on the life of the common. So as to reduce the risk of bargaining in export/import relations, Chavez government decided to deal directly to the foreign governments and neglected the dealings with private firms. For example, in 1973, oil industry was nationalized and refined the marketing system in the US and Europe. But the new markets for Venezuelan oil export, other than the US face some severe problems of refining heavy crude oil, insufficient pipeline facilities and problems on shipping routes. All these problems added to the real problem of inability for sustainable development of economy. So, it is evident that national politics plays the most important role in economic development and the underdevelopment of Venezuela. Besides, it is clear that sudden wealth from oil revenue created an illusion of development but it played a meager role in development process. Role of politics in shaping Venezuelan Economy Venezuela was a colony of Spain and a permanent settlement from the year 1522. In 1821, Venezuela gained freedom from Spain. The freedom movement was lead by Simon Boliver, and Venezuela became a separate sovereign country. The political history of Venezuela in 19th Century makes clear that it was the time of political instability, dictatorship and attempts of revolutions and bloodshed. From this fact, it is evident that the political history of Venezuela is closely related to its economical backwardness. Moreover, the political unrest badly affected the economic growth. Venezuelan economy was primarily based on agriculture and the First World War forced the country to shift its economy to petroleum production and export. In 1958, Gen. Marcos Perez Jimenez was overthrown and it paved the way for the permanent withdrawal of military from direct involvement in Venezuelan political scenario. Besides, this directed to the unbroken tradition of civilian democratic rule. Now, Venezuela is reputed as one of the most stable democracies in Latin America. The Democratic Action (DA) and the Christian Democratic (COPEI) are the main political parties in Venezuela. Related to the economic scenario, the economic austerity program launched by the president Carlos Andres Perez was a failure. As a response, in 1992, Hugo Chavez attempted an unsuccessful coup against Perez but failed. Again, in the same year Chavez attempted once more to grab the power but failed. At last, in 1993, the Congress charged Perez on corruption and finally he was impeached from the presidential power of Venezuela. From this fact, it is evident that the people feel dissatisfaction on traditional parties. Moreover, the income disparities among the people and the economic difficulties felt by the people added to the impeachment of Perez. Gradually, the government began to grab the domination over the economy. The best example for the influence of politics over the economy of Venezuela is the state oil company, namely PDVSA, which controls the entire petroleum sector. Besides, the key sectors like electricity, telecommunication and media are under the direct control of the government. In 2008, Chavez, the president of Venezuela decided to nationalize Banco de Venezuela, one of the largest private banks in Venezuela. Nationalization of the key economic sectors helped to limit privatization but it did not result in any positive change in the living standard of the common people. These economic policies paved the way to an uncertain macro-economic environment within the Venezuelan economy. Jo-Marie Burt and Philip Mauceri in their work ‘Politics in the Andes: identity, conflict, reform’ points out that: “Debt repayment, rather than social and development programs, thus become the political priority.” (Burt & Mauceri 2004) The drop in world oil prices in 1980 resulted in an economic slide in Venezuela and the government was forced to sign debt renegotiation agreements with International banks and this stunned the social and development programs. Moreover, the new economic policies, which are labeled as socialist economic policies acts as a threat to the property rights of the people and it created high inflation. The foreign exchange controls created an unhealthy environment for the private sector and it reduced space for foreign investors. The income inequality is another critical problem faced by both the government and the people. The new Hydro-Carbon law enacted by the president Chavez aims all the oil production under the direct control of the government. The joint ventures targeting extra crude oil production is an innovative step. But these innovative measures are ineffective because the Venezuelan government is not in favor of the proposed Free Trade Agreement of the Americas (FTAA). Moreover, the Chavez government aims to the expansion of Bolivian Alternative for the Americas (ALBA) project and the development of South American union against the influence of the US government in South America. Chavez claims that his government is a socialist government which is against the US policies. But the repeated violation of International Labor Organization (ILO) agreement on freedom of association and the right to organize and bargain collectively makes clear that the government of Venezuela is far away from socialism. So, it is apparent that the role of politics in shaping Venezuelan economy is crucial but it only affected the development process of the country as a whole. Role of Chavez The current president, Hugo Chavez, who was elected in 1998, is with socialist views and created a National Constituent Assembly to rewrite the constitution of Venezuela. Besides, he took major steps to nationalize the key economic sectors like telecommunication and electricity, increased the government share in oil projects, and promoted all sectors with foreign investments. Robert G. Breene in ‘Latin American Political Yearbook 2000’ makes clear that: “In Chavez’s economic system, basic industries should belong to the state.” (Breene 1998) Chavez is of the opinion that the economic system must be under the control of the state, especially, the basic industries. The new Hydrocarbons law, which was implemented by Chavez government in 2002, substituted the older law of 1943and limited the involvement of private investors in the Venezuelan economy. In 2007, Chavez announced that the government would take over the control of the oil sector by taking the majority share in foreign investment ventures. Moreover, this forced the private companies to migrate their contracts to joint venture with the state. From these facts, it is evident that Chavez promoted his ‘Bolivarian Revolution’ and socialistic views by controlling the main economic sectors. Chavez’s ultimate aim is to create an environment of greater interaction among developing countries in Latin America and other parts of the world. This is clear from the fact that he was ready to extent economic, political and military union with Russia and China. But the dismissal of workers who took part in Dec 2000-Feb 2003 general strike proves that his views are that of a dictator than a socialist. But his initiative to spend on health care, food and education was limited because of the low prices of oil. As the Venezuelan economy is based on oil revenue, the global change in oil prices will badly affect the economy. In addition, his attempt to establish joint ventures with foreign oil companies in the Orinoco basin proved less effective and limited the economic development of the country. Jennifer L. McCoy, and David J. Myers makes clear that: “Events between 2001 and 2005 made it all but impossible for President Chavez to convince Venezuelan businessmen to repatriate funds they had transferred out of the country, or for him to entice foreigners to invest large amounts of new capital.” (McCoy& Myers 2006) the political events occurred in 2001 and 2005 forced the foreign and national investors not to invest in Venezuelan economy. This proves that policies must suit the economy of the country and there must be less political influence in policy formulation and implementation. The Venezuelan economy was hit hard by the political instability in the first few years of under Chavez. The public sector investment, which was neglected for decades because of political insurgency within the country, demonstrates less improvement in the productivity of the economy. So the role of Chavez, in the underdevelopment of Venezuela cannot be neglected and it badly affected the economy than dictatorship and military rule. Relation with the US government Earlier, there existed a diplomatic relation between Venezuela and the United States. The private investors of the United States demonstrated keen interest to invest in Venezuela. But the economic policy of Hugo Chavez to nationalize the key economic sectors reduced the interest of the investors. Moreover, Chavez used each and every opportunity to criticize the United States government. For instance, in 2008, due to some political reasons, he expelled the US Ambassador from Venezuela. So, in the same year, the US government decided to expel the Venezuelan Ambassador in Washington. But it is clear that the US government show intense interest to continue cooperation with Venezuela, especially the areas of technical cooperation, import and export. Janet Kelly de Escobar, Janet Kelly, and Carlos A. Romero in the work ‘The United States and Venezuela: rethinking a relationship’ points out that: “While the United States and Venezuela appeared to have achieved a common view about the direction of the Venezuelan economy between 1996 and 1998, storm clouds were forming on the horizon in the form of collapse in the world price of oil in 1998 following the economic crisis in Asia.” (Escobar, Kelly & Romero 2002) Earlier, there existed a warm relation between the US and Venezuelan governments but the fall in oil prices and the political involvement in economical matters blocked further cooperation. Besides, the US government is interested to continue the cooperation with Venezuela because it is essential to promote the export, protection of investment, counter narcotic cooperation, counterterrorism and petroleum import. In addition, it is impossible for the Venezuelan government to survive without the cooperation of the US government because the US is its largest trade/export destination. Likewise, the Venezuelan government purchases US machinery, transport equipments agricultural goods and auto parts. In 1996, the Venezuelan government opened its petroleum sector for foreign investment, especially for the US oil companies. But the political tension between Chavez and the US government badly affected the Venezuelan economy and it is evident from the fact that Venezuela is economically developing but it does not reflect in the living standard of the people and its overall development. Before summing up, it is important to point out the main points discussed. Venezuelan economy is based on the revenue from oil export and this limits its further scope on diversification programs. Additionally, Venezuela is still facing the problems of underdevelopment. Besides, Politics plays an important role in shaping its economy, all the key economic sectors are under the direct control of the state. Hugo Chavez, the current President of Venezuela took measures to nationalize the key economic sectors to limit the dependence on the US, Venezuela’s largest trade partner. But his innovative measures of nationalization and diversification proved less effective and Venezuela is still depending on oil revenue. Besides, the tension between the Venezuelan and the US government badly affected Venezuela, directly and indirectly. Because of the measures taken for nationalization of key economic sectors, the investors from the US are hesitating to invest in Venezuelan economy and this stunned the diversification process. So, it is clear that the political tension with the US government and economic policies directly affected the economic development and development process of the country as a whole. Moreover, the political tension forced Chavez to co-operate with other countries and it was not so successful. So, the economic and political history of Venezuela makes clear that politics played the most important role in the underdevelopment of Venezuelan for decades. But still there is hope because now the US and the Venezuelan governments are showing keen interest for cooperation in future. Bibliography Breene, RG 1998, Latin American Political Yearbook 2000, Transaction Publishers. Burt, JM & Mauceri, P 2004, Politics in the Andes: identity, conflict, reform, Univ of Pittsburgh Press. Enright, MJ, Frances, A & Saavedra, ES 1996, Venezuela, the challenge of competitiveness, Palgrave Macmillan. Escobar, JK, Kelly, J& Romero, CA 2002, The United States and Venezuela: rethinking a relationship, Routledge. McCoy, JL & Myers, DJ 2006, The Unraveling of Representative Democracy in Venezuela, JHU Press. Tugwell, F 1975, The politics of oil in Venezuela, Stanford University Press. Read More