Economy of Venezuela - Essay Example

The Economy of Venezuela of the Geography 2. Trade in Venezuela 3. Government Economic Policies 4. Economic Problems 5. References The Economy of Venezuela 1. Description of the Geography Venezuela is situated in the Northern Hemisphere, to the North of the South American plate, very close to the Equator. It shares borders with Colombia to the West, Brazil to the South, Guyana to the East and the Caribbean Sea to the North. Venezuela has 2,800 km of coast line and a number of islands can be observed off its coast: Barbados, Aruba, Curaçao, Bonaire, Trinidad and Tobago, and the Leeward Antilles. Venezuela shows a great diversity of landscapes: the Andes stretch towards the northwest of the country, where its highest peak Pico Bolívar (4,979 m) is located; the middle part of the country, which stretches from the Orinoco river to Colombia, is flat; and to the south, the Guiana Highlands are located in the fringes of the Amazon Basin. It is in this latter area where the highest waterfall in the world, the Angel Falls, is situated. 2. Trade in Venezuela The USA, Mexico, Colombia and Brazil are the main trade partners of Venezuela. The economy of the country is dominated by the petroleum sector, which accounts for approximately one third of the gross domestic product (GDP). The oil trade, controlled by the state-owned company Petróleos de Venezuela (PDVSA), represents more than a half of the government revenues and 80% of the country’s exports. Other major exports are aluminum, steel and agricultural produce. Within the agricultural sector, which the country is highly dependent on, the main products are coffee and cocoa. The growth in the production of these two crops is dictated by the export market. While Venezuela had been world leading in terms of coffee production, the petroleum market of the 1960s and 1970s converted the country into the richest of South America and the coffee trade was relegated to a secondary position. Due to the importance of its oil industry, Venezuela is one of the five founding members of Organization of Petroleum Exporting Countries (OPEC), which includes the United Arab Emirates, Iraq and Iran among others. This organization was proposed in 1960 and their principal aims are: 1) safeguarding their own interests; 2) ensuring the stabilization of prices in international oil markets; 3) giving due consideration to the interests of the producing nations and to the necessity of securing a steady income; 4) the provision of an efficient and regular supply of petroleum to consuming nations, and a fair reward to those investing in the industry (OPEC, 2006). Venezuela is also a member of Mercosur (joining Brazil, Argentina, Paraguay, and Uruguay) and of the South American Community of Nations (SACN). 3. Government Economic Policies Hugo Chávez is the actual President of Venezuela. For two consecutive years (2005 and 2006) he was listed in the group of the 100 most influential people in the Time magazine. His policies and reforms have evoked exceptional controversy in Venezuela and abroad, receiving both criticism and adulation. In Venezuela, the public opinion is divided between those who argue he has stimulated the economic growth of the country and those who believe he has mismanaged the economy. Abroad, while some foreign governments, including the USA, view Chávez as a threat to global oil prices and stability within the region, others identify with his ideology and have established strong international relations (El Universal, 2006). Chávez has tackled the economy by reforming the oil sector. As a consequence, he created for himself a reputation as a price hawk in the OPEC. Since Venezuela is a major producer of oil and petrochemical products, he has pushed for the enforcement of production quotas and the establishment of higher target oil prices. He has also successfully broadened Venezuela’s customer base after signing exploration agreements with other developing countries, such as China and India or Venezuela’s neighbors Argentina and Brazil. Additionally, he has also raised royalty percentages on joint extraction contracts to repatriate more oil funds that are directly payable to Venezuela’s government. The record oil prices achieved have strengthened Venezuela’s economy greatly and have translated into more funding available for social programs, subsidies and grants. On the other hand, this has resulted in an economy that is increasingly dependent on both the Chávez government and the oil sector. During Chávezs presidency in the period 1999–2004, economic activity has been stong with the aid of rising oil prices, the end of the oil strike and a robust growth in consumption. According to government figures, in the subsequent period (2004–2006): GDP rates were 18, 9 and 9.6% in 2004, 2005 and 2006, respectively; economic growth in non-petroleum sectors was >10%; real income grew by 137%; poverty figures decreased by 10%; and unemployment dropped by 7.7% 4. Economic Problems One of Venezuela’s major economic problems is its foreign debt, which amounts to approximately $23 billion, almost one-third of the country’s annual GDP. Additionally, there is the risk that the aforementioned oil-subsidized economic growth could stop suddenly if oil prices drop, causing economic and social chaos. The government, however, defends their policies in this area by arguing that they count on $60 billion in reserves “as a cushion” in case of a sudden drop in market prices. In any case, in spite of the rising incomes due to government investment in subsidies and grants, it is believed that the number of people living in bad conditions has grown. Although the poor of Venezuela have increased their purchasing power, they are not, however, able to improve their housing or education level. In the first quarter of 2007, the unemployment was 8.4% in a labor force of 12.5 million, with 37% of Venezuelans living in poverty. Finally, although inflation dropped from 29.9% to 14.4% during 2005, imported goods are cheaper than those made in Venezuela, a factor that is very damaging for the national economy. 5. References -El Universal.com. “Chávez resumes cooperation agenda in South America”. Available at . Date created: Dec 08, 2006. Date accessed: April 28, 2007. -Organization of the Petroleum Exporting Countries (OPEC). “OPEC Statute”. Available at . Date created: 2006. Date last accessed: April 28, 2007. Read More