Question

Critical Thinking

Please read Case 2: “Venezuela under Hugo Chávez and Beyond” available in your e-book (page no.611), and answer the following questions:

Assignment Question(s):                                            (Marks: 10)

1. Under Chávez’s leadership, what kind of economic system was put in place in Venezuela? How would you characterize the political system?                            
2. How do you think that Chávez’s unilateral changes to contracts with foreign oil companies will affect future investment by foreigners in Venezuela?                     
3. How will the high level of public corruption in Venezuela affect future growth rates?
4. During the Chávez years, many foreign multinationals exited Venezuela or reduced their exposure there. What do you think the impact of this has been on Venezuela? What needs to be done to reverse the trend?     

5. By 2016, Venezuela’s economy appeared to be on the brink of total collapse. What do you think needs to be done to reverse this?

Answer 1

1. The economic system under Hugo Chavez was that of a mixed economic system with more bending towards the public sector undertakings. Chavez instituted a Command Economy which is also known as the planned economy. Under him the country proposed and had enacted economic policies that were populist in nature. The political system of Venezuela was socialist in nature with more policies of the government directed towards providing populist policies categorised as the 'Bolivarian Missions'. However, towards the beginning of 1980's, Chavez government came to be categorised as semi authoritarian and hyper populist.

2. Chavez followed the planned economic system with more lenience towards the public sector. Chavez had taken over the foreign companies by government control over them and accused them of making outsize profits which was affecting the poor. his government also started collecting royalities from the oil companies from 1% to 30% of the sales. He also increased the sales tax rates to 50%. With these policies, it becamme difficult for foreign companies to earn a profit and stay in business. Due to these stringent policies of the government, it would be less likely that foreign investors would be willing to work with Venezuela in the present or future. This lack of investment by foreign companies will negatively affect the economy and the government owned oil companies of Venezuela.

3. Venezuela is a country that if facing high level of corruption in its public offices and has ranked the lowest by the Transparency International at rank 172 which makes it one of the most corrupted countries in the world. Rampant corruption among government employees shows the breakdown of an effective administrative system of the country. Firms may reconsider investing in the country due to economic risks and the need to bribe officials for proper functioning of the firms. Venezuela will no longer be a valuable destination for any kind of business and thus will have low economic activity. With low economic activity, the country will have lower GDP rates and higher unemployment, and will lower the economic growth rates of the country.

4. The impact of foreign companies withdrawing from Venezuela had be the low economic growth rate in the country. It also gave a monopoly to the public sector companies which increased their power and thereby corruption. There was an increase in the unemployment rates and with no foreign exposure, the level of innovation and technological changes reduced which kept the country in low ranks of business of doing index. The business environment of the country is also dry and without any incentive.

To reverse the situation, Venezuela can:

a. Conduct elections which are free and fair, bring in a responsible government and restore the rule of law.

b. Initiate economic reforms that will help in removing the unwanted regulations and bring in competitiveness in the economy and also encourage businesses.

c. Be more adaptive towards private sectors and create friendly business structure that will attract foreign businesses and investment.

d. The profits from public sectors should be used to enhance the capabilities of the firms and machines and not used for the populist measures of the government.

5. The Venezuelan government can adopt the following policies to save itself from collapse:

a] Accept foreign aid which would help to alleviate the economic crisis immediatley.

b] The government should shift from its over- dependence on oil and try to encourage investments in other sectors.

c] Fiscal measures should be initiated to correct the fiscal imbalances and government should keep a check on the high inflation rates along with rampant corruption existing in the country. The government will have to first abolish the price controls which has brought in expansive black marketwhere the goods are sold at many times to official price. this has caused high rates of inflation in the country.

d] The government should also cut down on its subsides which is a major reason for the weakening of the economy as the government spends more than what it earns and this results in perpetual debt.