Venezuelas Economic Environment - Research Paper Example

Venezuela Venezuela is country in the northern coast of South America continent. It borders Brazil in the south and borders Colombia to the west side. Venezuela is a naturally exquisite country with high biodiversity that includes the Andes Mountains and Amazon basin rainforest. Venezuela considers itself a new country after the Bolivarian revolution that toppled a previous corrupt and inefficient regime thereby creating a new constitution. The country uses a mixed economy system that has seen the nationalization of oil and petroleum resources. It is essential to note that the country possesses the world’s largest oil reserves and is one of the leading exporters of oil and petroleum reserves. This means that the country has a great share in the geopolitical structure of the world. Economic indices Venezuela, at 2013, is the world’s 34th largest economy with a GDP of $ 407.4 billion (Central Intelligence Agency 1). It experienced a growth rate of 1.6 percent, which is attributed to a slow and unstable recovery from the 2008’s world recession. In 2012, it experienced a growth rate of 5.6 percent. Besides, it has Per Capita GDP of $ 13, 600. This is the world’s 99th largest PPP. Oil forms a major part of Venezuelan economy since it contributes 96 percent of its export earnings, 12 percent of its GDP, and 45 percent of its annual budget. Manufacturing forms a huge percent of Venezuelan’s economy as the country exports steel, cement, and aluminum. The industry sector contributes 35.5% of the country’s GDP. Agriculture forms a mere 3.7 percent of the economy suggesting that the sector is underdeveloped. Although it exports agricultural products such as fish, the country imports two-thirds of its food supplies. The services’ sector is occupies the largest part of the GDP, 60.8 % thereby employing 70.9 percent of the Venezuelan population. Wellbeing indices In terms of economic freedom index, the country has a score of 36.3 thereby making it a repressed economy. This means that there is limited individual freedom and liberty as pertains to investment and economic prosperity. The government has a big stake in economic activities, which in turn limits innovation and individual economic prosperity. It is essential, however, to note that Hugo Chavez, the former president, nationalized the oil industry in order to prevent conflicts and eliminate corruption. Venezuela experiences significant economic problems that correspond with state control of economic activities. Venezuela has a corruption index of 20 and ranks 166th in the world. This also correlates with a huge black market economy that impedes accountability, taxes, and calculation of economic indicators. The government has a suppressed financial sector that the government manipulates through threats. In addition, the government exercises strong controls on the currency, restricted exchange rate, and imports. This is coupled with an expansive monetary and fiscal policy that swells Venezuela’s high inflation. It is crucial to highlight that a high inflation rate of 44 percent caused the 2014 Venezuela’s protests. Venezuela also faces a high insecurity rate. This is marked by a high homicide rate, gun killings, extortion, and robbery with violence. Most visitors find Venezuela a high volatile and violent place. It is essential to emphasize that oil has been responsible for high corruption and large class gaps that invoke resentment from the population. A rich political class coincides with a population that faces high costs of food and confronts a strong class barrier that prevents them from accessing given opportunities. The World Bank governance indicators manifests poor scores for Venezuela in terms of their indices. The indicators highlight Venezuela as a country with limited accountability, mild use of the rule of law, and perpetual political instability. In the recent times, Venezuela has shown robust commitment towards fighting corruption, maintaining crime, and instilling public accountability. This possible through the country’s practice of leftist politics that prioritize the public’s welfare. In spite of such efforts, an overwhelmed and compromised justice system is ineffective towards solving the country’s governance and rule of law problems. Investment and foreign direct investment In terms of ease of doing business, Venezuela scores poorly. This correlates with long days of acquiring a permit for business. In addition, the country imposes a high tax rate for investors and a longer time for enforcing contracts and conducting insolvency. It also possesses a low investor protection index in terms of director liability and shareholder suits measurements. The country, however, has a strong credit system that allows for taking up of loans. The country also severely cross-border trade thereby constraining foreign exchange. Hofstede’s dimensions Venezuela has a low score individualistic score of 12 thereby signaling a collectivist culture. This is visible in the country’s socialist politics that encourage the collectivization of people’s efforts and resources towards a greater cause. A MNC will have to prepare for a communal structure in leadership whereby employees share a given background. Employees in an organization would show a stronger commitment towards their social and kinship groupings than they show towards an organization. This corresponds with a high power distance score. In this sense, the social setting encourages existence of inequalities and classes. The community converges towards authoritative figures who are trusted with the sole responsibility of guiding the rest. The Venezuelan society seems to prefer a concentrated power system that is impermeable to divergent opinions and consultation. Venezuela also manifests a highly masculine culture that promotes competition and success. Competition is geared towards classes, as individuals prefer belonging to classes that accord them status and privilege. An uncertainty avoidance score of 76 manifests the Venezuelan people as individuals who dislike ambiguity. In addition, the society subjects itself towards constant change and transformation. The country promotes adherence to social conservatism that encourages the following of established rules. Consequently, such a culture suffocates experimentalism and non-conformism unless a powerful leader influences the masses towards a given cause. This parallels with a normative culture that praises absolutism in public affairs. The society, therefore, respects traditions and formulaic ways of operations. On a light note, Venezuela has a highly indulgent culture, which prioritizes leisure time and having fun. In this sense, Venezuelan shows promise in terms of consumerism. Potential for investment Venezuela, an upper middle income country, is the most modernized economy and the most urbanized country in the South American continent. In turn, the country has a high purchasing power amongst its consumers, who provide a large market to goods and services. This is propped by large oil reserves and revenue that support a large economy. In addition, the country has a robust and developed services’ sector that is useful for business. On the other hand, Venezuela has a volatile political environment that has a high potential for destabilizing a business. On a positive note, such instability, since 1999, rarely escalate into full-scale violence and civil strife. This is because such strife are mostly geared towards reforms rather than stem out of vested interests. In addition, the country has a high insecurity rate that poses danger for the establishment of a foreign firm. A high corruption index suggests a sizeable black market economy and the potential subjection to costly bribes that may jeopardize the finances and efficiency in conducting given operations. A MNC is bound to face unfavorable exchange rates and an unstable currency that impedes cross-border trade and transfer of funds. This is coupled with the government’s significant meddling in private economic activities. It is, however, important to note that the government is continually showing efforts at fighting corruption, promoting individual economic liberties, and encouraging accountability. Lessons such as the 2014 high inflation rates has prompted the government to institute long-term measures for refreshing the economy. Works cited Central Intelligence Agency. ‘Venezuela’s economy.’ The World Factbook. 2014. Web. November 1, 2014. Read More