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Venezuela's volatile economy

By Alexander Whatley
web posted November 10, 2014

Right now, the economic situation in Venezuela is grim. The standard of living of Venezuelan citizens is low, as many commodities, such as newspaper and toilet paper, are rationed. Crime has skyrocketed in the last few years, the murder rate reaching 80 per 100,000 people, one of the highest in the world. Corruption is also rampant throughout many of the country's economic sectors. Due to currency controls and price ceilings, the black market is booming. Talented people, who would otherwise be able to help improve the situation, are leaving the country in droves to seek better jobs elsewhere in the Americas, leading to a drain in human capital. Clearly, much needs to be done in order to improve the economic scenario. Several suggestions will be elucidated in this report.

The most urgent issues that need to be dealt with are price and currency controls. During the presidency of your predecessor, Hugo Chavez, the government placed stringent currency controls on the bolivar, in an effort to prevent rapid inflation which was endemic throughout the last 30 years. However, Venezuela however still has one of the highest inflation rates in the world, causing rapid depreciation, and due to this many citizens are trying to exchange bolivars for more stable currencies, such as the US dollar. However, your government is usually only willing to supply dollars for paying for essential imports, and as a result the black market in US dollars has flourished. Now on the black market, 1 dollar goes for nearly 90 bolivars, driving up inflation rates, and defeating the entire purpose of currency controls. As a result, your administration should lessen the currency controls, as they have little impact, if any, on inflation, and are driving the black market.  

Price controls should also be lifted and replaced with vouchers instead. Due to the price controls on commodities there is little incentive for firms to produce such goods which causes shortages, and as result Venezuela must import goods to meet domestic demand. However, so far imports have not been able to keep up with consumption. For example, in August 2014 it was necessary to import 50 million rolls of toilet paper, but only 39 million were delivered. Importing massive amounts of such goods also lowers GDP, and the currency controls used in such imports raise the level of inflation even more. To exacerbate the problem, many individuals have bought commodities from Venezuela, and sold them on the black market in neighboring countries such as Colombia, which do not have stringent price controls. Eliminating the price controls and instead giving vouchers to poor and needy families would greatly help to eliminate many of these problems, and reduce inflation as well.

Finally, the emigration of talented worked and subsequent loss of human capital needs to be addressed. Chavez fired more than 18,000 employees of Venezuelan national oil company PDVSA in 2002 including more than 80% of the staff of Intevep, the research and development part of PDVSA. As a result, most of these workers left for Colombia, the US, Canada, and other South American countries. This dealt a major blow to PDVSA, whose oil production has stagnated, but the workers' expertise has helped Colombia tremendously, whose oil production has more than doubled since 2002. In the short term, I would suggest striking a deal with a major oil company, such as ExxonMobil or Royal Dutch Shell, to train workers and drill for oil, and  in the long term create a program for Venezuelan expatriates who worked for PDVSA to come back home by offering them employment or tax benefits. As oil accounts for more than 50% of Venezuela's GDP and around 90% of exports, having a large pool of talented workers to drill for oil is necessary to maintain a strong economy in the future.

If these changes are made, I expect that Venezuela will eventually be able to repair its economy and begin addressing other societal issues. Venezuela has the world's largest proven oil reserves, and by ramping up oil production, it will become a major player in exports and trade. Through loosening price and currency controls, inflation will slow, and black market operations will fall as well. Eventually, Venezuela will be able to invest more in education, which will help to reduce its high levels of crime and poverty. By implementing these changes, Venezuela's citizens will again have enough supply of goods, and can look forward to a prosperous future. ESR

This is Alexander Whatley's first contribution to Enter Stage Right. © 2014

 

 

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