Main learning objectives of the week:
Why is Venezuela's economy failing?
Corruption represents a major obstacle for businesses operating or planning to invest in Venezuela. Most sectors of the Venezuelan economy suffer from endemic corruption, due to the highly politicized and ineffective judiciary that is inefficient in cracking down on corruption and impunity.
The destablizing actions of the opposition and US government
The opposition has openly and repeatedly pushed for regime change by any means necessary. In addition to fostering a politically toxic climate, the opposition’s actions over the past three years—its refusal to recognize President Nicolás Maduro’s April 2013 victory, despite absolutely no evidence of electoral fraud; ensuing violence that targeted state-run health clinics and left at least seven civilians dead; another wave of violence beginning in February 2014 that left 43 dead, approximately half of them due to opposition actions; and recent and repeated calls for military and foreign intervention—have also had a very damaging economic effect.
The US government has not only cheered, and funded, these anti-democratic actions. By absurdly declaring that Venezuela is an “unusual and extraordinary threat” to US national security and pressuring investors and bankers to steer clear of the Maduro administration, the White House has prevented Venezuela from obtaining much-needed foreign financing and investment.
Mismanaging the currency--- High inflatation rate
The cost of foreign goods has soared in Venezuela, which is importing far less as part of Mr. Maduro’s effort to conserve dwindling central bank reserves.
The government has sought to soften the impact by raising wages and printing more bolívars, the national currency. But that is a recipe for inflation, creating too much money chasing too few goods. By some estimates, the inflation rate could reach nearly 500 percent this year and 1,600 percent in 2017.
While the official exchange rate is about 10 bolívars to the dollar, the black-market rate, which is regarded as more accurate, is about 1,100 bolívars to the dollar, though it shifts around. Many economists say this disparity is unsustainable.
What can the Venezuela government do to save the economy?
Make living affordable
Setting up a system under which people are protected from price increases, and shortages are eliminated to make sure that food, medicine, and other essentials are available at affordable prices. e.g. food-stamp-type system
Stablize the currency
Unify the exchange rate to break the inflation-depreciation spiral and put an end to the black market, as well as most of the corruption that stems from the overvalued official exchange rates.
Eliminate dysfunctional price controls (discontinue oil subsudies)
Once these measures are taken, and consumers are protected from rising prices for essential goods, the government can begin to lift some of the dysfunctional price controls. This week’s announcement of a gasoline price increase is step in the right direction, but there are other price controls on food and household items that will need to be relaxed in order to eliminate shortages. This will save billions of dollars of foreign exchange lost to smuggling, although consumers would have to be protected from price increases.
Adjust to lower international oil price
Adjusting to lower oil prices over the intermediate and longer run will mean diversifying the economy away from oil. In 2011, Venezuela imported about 24% of its food; the country could become nearly self-sufficient in food production and pursue other import-substitution and diversification strategies, which would become more feasible with a lower-valued currency.
What can Venezuela do to diversify the economy?
With oil revenues accounting for about 95% of its export earnings, Venezuela’s economy has been among the hardest hit as the global oil price has fallen almost 20% over the past 12 months.
- Set up an oil fund (like Norway), where tax revenues are saved and invested and not spent on current income.
- Invest in education, training, infrastructure – supply side policies which will help small and medium sized business do well in the long-term and make the economy more diversified.
- Access new markets in renewable energy and natural gas, take advantage of the economic opportunity—and environmental benefits—of renewable energy. Other large oil producers such as Saudi Arabia, Iran, Kuwait, and the United Arab Emirates have already taken measures to diversify their energy dynamics by encouraging homeowners to install solar energy panels. Kuwait, Qatar, Jordan, and Egypt aim to source between 15-30% of their electricity from renewable sources, particularly wind and solar, by 2030.
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