Venezuela Analysis: Economic, Political, Financial and Cultural Perspective

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Table of Contents

Introduction
SWOT Analysis
Economic Circumstances
Principal Business Activities
Analysis of Exports and Imports
Balance of Payments and Exchange Rates
Conclusion
References

Introduction

Venezuela’s business environment includes the internal and external environment risk rating, which focuses on both short and long-term lessons the Venezuelan government has learned in context with short-term crisis phenomenon. Such ratings escorted the country towards a situation in which it had no coherent economic development plan in force that could address the problems confronting the nation. The domestic environment issues include transparency and corruption concerning the labor market, currency fluctuation, corporate taxes, and the rise and fall of interest levels. The business sector also depicts the extent to which the private sector is given access to lines of credit and the reshaping of the banking and stock market. This not only affects corporate businesses at various levels but also encourages corruption at the corporate level.

SWOT Analysis

An oil country ranking fifth in the world due to its oil-proven reserves has the largest accumulation of liquid fuel so far. Its significance for being an oil economy used to be its strength, but for a limited period. The oil prevailing economy later felt that the US expresses its deepest concerns over Venezuela’s then economic and political situation, which appeared as a strength and threat at the same time. The SWOT analysis provides us a glimpse over its environmental scanned resources and scenarios under which Venezuela identifies its potential and summarizes its observations by the relative trade-offs within the country.

Strength

Venezuelan society has a firm grip over what it experimented with in the last decade similar to neighboring Latin American countries. What it has learned from past economic devastation and experiences has enabled the country to identify in the name of threats, strengths, and abilities. Venezuela has been able to accomplish most of the radically adopted programs of economic adjustment and institutional renewal, which its neighboring countries remained unable to acquire. Venezuela acquired significant changes in the social and environmental spheres that occurred simultaneously since 1989 when it entered into an oil-dependent economy. Although in the beginning Venezuelan market confronted challenges that lead the initiative models towards collapse. With the decrease in levels of corporate welfare and increase in mass expectations for socioeconomic improvement, the system represented legitimized democracy. Unfortunately, political corruption always remained a prevailing aspect of social development.

When Venezuela realized its potential in oil as a major key strength program to secure not only the future of the Venezuelan economy but also pave the oil opening (Apertura Petrolera) and the PDVSA (Venezuelan Petroleum Company) investment plan. This opening initially brought about $11 billion into the country in the past seven years and has offered three options for participation by private capital in the oil industry which includes: sustaining through agreements the reactivation programs in marginal fields, strategic associations for the production and liquefaction of natural gas, and the development of the production and conversion of the extra heavy crudes from the Orinoco Oil Belt and risk production agreements under a profit-sharing scheme with private investors (Canache & Kulisheck, 1998, p. 6). Today, it is a major trading partner of the US, providing all kinds of oil and petroleum products.

Weakness

Political instability and incompetent public administration have been the greatest vulnerabilities of Venezuelan business and economic development. With the span of the 1980s, the political landscape in Venezuela began to transform under a positive association with the return and maintenance of democratic institutions. Such political transformation was blamed for their inefficient management of resources during the 1973 and 1978 oil booms in handling the oil and petroleum reserves. The inefficient handling of reserves was due to the corruption charges that were made from the lowest to the highest levels of government. By questioning the effectiveness of representation and the means for holding representatives accountable in Venezuela’s highly centralized democracy, the legitimacy of the entire system was openly debated and revealed the corruption in reforms. Contemporary political decentralization has been declared as a weakness for shrinking the geographic distance between citizens and their elected representatives. Decentralization was the first attempt to re-legitimize basic democratic processes such as elections and legislative decision-making. Reformers expected the decentralization of political and administrative authorities to establish a link between state responsibilities and local governments. This was perceived as a measure to overcome the barrier between citizens and their elected representatives.

These changes have had important reverberations for the country’s institutional structure which defined undervalued rules of the game for all societal actors. The cumulative effect of these changes undermined socio-political and economic reform efforts by degrading public institutions and the authorities within them. Though the government prescribed many conventions to address the shortcomings of Venezuelan public administration, the outcomes were repeated failures in the name of countless reforms. The complexity that emerged as a bureaucratic corruption resulted in discrepancies among public reforms that Venezuelans suffer. Citizens and immigrants have to wait and stay in a queue for more than a year to receive their primary document of identification because of the unreliable registration of births and deaths. Electoral fraud and tax evasion were examples of a lack of control of records, where the inefficient registration of births and deaths resulted in out-of-date voter lists. This jeopardized the legitimacy of elections.

The nationalization of the oil industry decreased petroleum exports but was compensated by an increase in contribution to the Venezuelan economy. The reason was simple, the part of the profits did not flow abroad but remain limited to the state. Such a devaluation of the Venezuelan currency escorted the petroleum taxes to increase rapidly which allowed a large expansion in government expenditures. The current situation depicts the scenario where foreign exchange is purchased at a low rate and profit is made by selling to the importers of non-essential goods and services at a high rate. This has allowed the government to seek another source of revenue originating from petroleum. The large external debt along with low returns and corruption has brought along a significant growth in the non-tradable sectors of the economy with unstable input controls (Carrillo, 2004, p. 232).

Opportunities

Latin America and the Caribbean are the significant emerging markets for Venezuelan petroleum which are expanding rapidly. Venezuela possesses a privileged position in these markets and according to the data gathered by the US Department of Energy, by 2025, Venezuela will gain priority in the US by delivering 20 percent of oil imports than what the US is originating today i.e.,14 percent. Research suggests that by the year 2025, Venezuela will be able to export 1.7 million barrels a day to 4.2 million barrels per day to the United States. Venezuela’s oil and gas reserves possess the ability to be matured in the long run. Venezuela today has initiated a new platform to build links in the oil and gas market not limited to the US dominance. This includes the investments of countries like Qatar, Iran, and Libya which are looking forward to thrust relationships with Venezuela to lay the foundation of a ‘multi-polar world free of US lateralization.

Since Venezuela’s economy is heavily dependent on a relatively small number of resource-based export products, they are bluntly exposed and vulnerable to fluctuations in global demand and price levels (Lynch, 2008). The country cannot ignore the changing global production and consumption patterns that are being created by the Latin American trading partners to maximize their joint comparative advantage.

Threats

The future threat that could be easily sensed in context with the ‘multi-polar world of global market points to the creation of a multitude of competing institutions that share overlapping responsibilities. Venezuela is trying to fragment itself in collaboration with other neighboring states, to line up more through maximizing its exports and searching new markets. However, what it is not considering according to Benvenisti & Downs (2007) is the provision of powerful states with the opportunity to abandon, or being a threat to any powerful state to abandon a given venue for a more sympathetic venue, if their demands are not met (Benvenisti & Downs, 2007). This is a major threat experienced in the present circumstances where it is a leading trading partner to the US and exports 80 percent of its products to the country. This further aggravates the competition between institutions and effectively marginalizes the role of weaker states, which do not enjoy the same leverage. This acts as a threat because it is not the kind of business environment expected by Venezuela’s economy in which a bottom-up process of constitution-making on the part of international tribunals is likely to thrive.

The administration of the oil industry continues to prove problematic because Venezuela’s oil wealth is too often plundered by politicians and their cronies and surrogates. Nonetheless, the threat of corruption is not subsided due to the charges against previous administrations that reveal how corruption in Venezuela reaches the highest levels of government.

Economic Circumstances

Difficult to swallow is the fact, that how could a country as Venezuela which is blessed with so much oil wealth be in such a state of chaos. Venezuela never made a way to escape the boom-bust cycle so prevalent throughout Latin America. It can be argued what Never (1996, p. 180) mentions that oil has been a curse for this country because other competitive Latin American nations with far fewer resources have managed to achieve more sustainable economic and political developments. Since 1992, a chain of events in this country is pointing towards circumstances where the currency has been devaluated, a banking crisis has been the utmost issue, and economic chaos has torn apart the fabric of Venezuelan life.

Being the fifth largest member of OPEC who possesses a mixed economy largely based on production, Venezuela enjoys the continuous growth in oil and gas prices for which the economy grew by 9% in 2007. However, if we analyze and compare the economic ups and downs and the challenges Venezuela confronted during the last decade to the present day, it is obvious that the share of oil in total petroleum exports has declined. In the place of petroleum and oil exports, even agricultural products have been replaced by goods such as food and beverages, chemicals, medicines, and other manufacturing items. The reason for such circumstances is the expansion in nontraditional exports of which mostly were produced by state enterprises which counterbalanced declining oil exports. If we talk about the economic changes after 1988, there was a need for the decade to compensate for the large decline of the export of petroleum products.

This change was also because of the need to arise for the first time in Venezuela to place in the world markets large quantities of aluminum and non-monetary gold (Carrillo & Cruz, 1994, p. 225). From 1990 to this date, Venezuela has witnessed many economic turnovers among which the prevalent ones include control over the state oil industry by allowing the pursuit of a unified economic policy, economic reforms in the favor of Venezuelans, and financial assistance to reconstruction after massive flooding in 1999. The worst periods witnessed by the Venezuelan economy were 2002 to 2003 for it hit the construction, commerce, petroleum, and manufacturing sector.

Venezuelan economy had to pay the cost of being a member of OPEC in the form of confronting a huge drop in the petroleum industry, as it was due to the support Venezuela provided to the OPEC quota established in 2002 and the immediate halt of exports during various strikes and lockouts. However, with other Latin American economies, the global support to the petroleum sector in the world economic crisis had its most negative effects on other economic sectors. This caused many domestic reforms to remain oligopolistic for most of the market in many key sectors developed a strong anticompetitive thrust in private economic activity which negotiated on antitrust laws to assume it usual for firms to engage in collusion. From price controls in consumer prices to shares of the market, every regulating price was fixed by detailed private agreements, which were sometimes backed by effective informal coercive mechanisms. Even after the recovery from a banking crisis in the 1990s, there existed a considerable tension between different sectors of the economy banking versus banking, agriculture versus industry, industry versus commerce, or importers versus exporters. Economic regionalism along with financial constraints such as weaknesses in loan portfolios illustrated the collapse of major financial institutions, among which the Central Bank acted as the key player in preserving the viability of the payments and financial systems by dissolving smaller institutions.

Because of the decline in GDP and unstable interest rates, the credibility of monetary policy lingered at stake and ‘Agenda Venezuela’ was developed in 1996 as a new economic plan. It requested IMF to take over and privatize some financial institutions to put an end to the financial crunch and reestablish economic growth. The measures suggested by Agenda Venezuela brought an increase in the domestic price of gasoline resulting in the abolishment of the balance of payments and the exchange rate policy shifted from the Ministry of Finance to the BCV. The banking industry was regulated and the rapid expansion of the world economy in the late 1990s helped the Venezuelan economy to recover its shares, particularly in terms of GDP, oil prices, and production.

In 2000, more and more foreign capital started entering Venezuela’s non-petroleum manufacturing and service economy. Much of this capital gave credit to the domestic capital, but a good portion added diversity to the financial and managerial actors in the country. Nonetheless, corruption remains a significant aspect of the economy due to which regulating prices is never able to set the pace with inflation. The dropping of inflation in 2005 escorted the variability to sell imported goods cheaper than commodities made in Venezuela. However, the inability to keep up with price controls forced the production quotas of various sectors to produce at a loss. In 2009 when the Venezuelan government took hold of various food plants, 70% of manufacturers of the market were accused of hoarding and smuggling food products to other Latin American countries.

Principal Business Activities

Oil being the only survivor of Venezuela’s economy is the main subject of political attacks. That is one of the reasons why political conflicts fear the press for telecasting accurate economic and business information. The press is highly developed, mature, and influential in the country which is evident from the fact that it has kept the traditions of carrying democratic freedom and independence in the daily newspapers including El Universal, El Nacional, El Globo, etc (Enright et al, 1996, p. 198). Various surveys indicate a high rate of domestic consumption in several areas including fashion and apparel, television and advertising, packaging, alcoholic beverages, and cosmetics (ibid). We can say that in times of crises in the 1990s, besides the oil sector, domestic goods that contributed towards the economic revival revealed per capita consumption to be the highest in Latin America for quality beer, personal care products, pasta, canned goods, paper, and juvenile fashion.

Businessmen and manufacturers then realized that Venezuelan consumers are sophisticated purchasers of processed food products in regional terms. Even today the local food producers are continually improving existing products and developing new products to meet this demand. According to Enright et al (1996, p. 250) “This is evident from some of the companies like Nestle Venezuela and Alfonzo Rivas & Cia who have been exporting processed food products to neighboring Latin American and Caribbean countries”.

There is a record that in 1993 Venezuela had the highest per capita consumption of cosmetics and perfumeries. Such a local demand for personal care products has remained high in Venezuela since the past decade, an example of this is Pantene, which was declared as the top-selling shampoo of Venezuela and marked an incredible market acceptance for a premium product. This reveals the true potential of manufacturing highly sophisticated Venezuelan demand. Many manufacturing cosmetics manager claims that despite tough economic times, Venezuela has remained able to appreciate its consumers for selecting their brands worldwide. Fortunately, Venezuela has remained able to maintain a reputable position in the Latin American consumer goods market. This is the reason why Venezuelan products are perceived as having an up-market position. Items like processed foods, beer, and sports footwear, and goggles have been sold several times in Puerto Rico without any product modifications.

If we talk about telecommunications and technology, Venezuelan computer software has received positive feedback from buyers on a small scale basis in Spanish-speaking countries. In the technology development sector, there has been aback by the government on promoting the social dimension of IT development and the organization of NGOs has in turn been promoted by IT. It would not be wrong to say that one of the focal points for the organizing of NGOs has been the regional free-trade initiative.

What the Venezuelan government is afraid of, is the unnecessary political integration or freer movement of people in the name of trade and commerce (Trevorton & Mizell, 2001, p. 36). The government in this sense perceives the Internet as an instrument of power. Critics assume it among one of the reasons to support IT development that high tax structures on IT give advantage not to the people or IT development but rather to government budgets. High taxes are the reason why computers in Venezuela are much more expensive than those in the US.

Moreover, there is a systematic lowering of tariffs and restrictions on the equity participation of foreigners that have made the country more attractive to investors. The privatization program in place has created an atmosphere for positive growth where the average tariff on imported goods has been continuously dropping and the sweeping economic reforms have sustained the foundation for sound, sustainable economic development, and regional integration.

“American companies like AT&T and GTE, which, as members of a consortium, acquired 40 percent of Venezuela’s state-owned telephone monopoly, known as CANTV, are watching developments closely” (Nevaer, 1996, p. 183).

Analysis of Exports and Imports

In June 1994, when Venezuela along with its trading partners Colombia and Mexico met to continue discussions on creating a free trade zone, they analyzed that recent market reforms would continue towards a market-driven economy, and without tariff amendment. This move to a market-driven system was planned as a continuation of policies that last for twenty years. Since the 1980s, with the economic turmoil, the government decided to open doors to foreign investment and diversify its economy by moving away from the stereotype import-substitution development model that had characterized the country since the 1950s (Nevaer, 1996, p. 125).

That was the time when the Venezuelan government while dependent on oil revenues, wrested greater concessions from the foreign oil companies and at the same time augmented its share of the revenue.

The government was not aware that foreign companies occupied in the Venezuelan economy would steal its oil production. Because of such a large-scale production, international oil companies focused on other competitors (Middle East), after which US traders started promoting Venezuela because of its royalty sharing arrangement (Salas, 2005). When the country found difficulty in defending its perceived interests, it relied on other high-quality items for export.

Contemporary alleviation of import licensing reforms encouraged trade between Venezuela and Colombia and among their major trading partners. However, with the initiation of free trade, emerged the economic crises which set the course for greater regional economic integration. With this trade, today, 98 percent of imports enter Venezuela under the prevailing free import regime. Restrictions were only applicable to certain areas, probably in the mining and petroleum sectors which require the authorization of the Ministry of Mines and Energy.

Venezuela has been affected by the tariff barriers that exist in Latin American countries and are much higher than those in the US. Agreements on tariff reductions have no doubt, many times, produced significant effects on the Venezuelan trade sector. Venezuela imports goods from Mexico and Colombia, and due to bureaucratic constraints turn into non-tariff trade barriers. Due to corruption, Venezuela requires that a government agency must issue a quality certification for every shipment of after-market automobile parts, even when the export firm is certified as a supplier to large automotive companies in Mexico and the United States (Macario et al, 2000, p. 41). Even in situations where the government has signed a preferential trade agreement with G-3 trading countries (Mexico and Colombia), certificates of origin often acts as a significant tool to administrate non-tariff trade barrier, particularly in several Latin American countries.

US, Brazil, and Italy are the leading export and import partners of Venezuela whereas other trading partners are Colombia, Germany, and Spain. Venezuela imports machinery, equipment, and canned food items because most of its resources cannot be utilized to produce these items regionally. However, in this stance, the US is the largest trading partner of Venezuela which in 2006 provided $97.4 billion in trade transactions. Venezuelan exports to the US include petroleum products and liquefied gases, crude oil, fuel oil, aluminum, iron and steel products, organic chemicals, coal, and vehicles and accessories (ForeignTrade, 2009). Since it is an agricultural country, it is good at producing and exporting fertilizers, pesticides, and insecticides.

Venezuela imports electronic devices, telecommunication equipment, computer accessories, petroleum products, household goods, and industrial engines. In 2006, American exports to Venezuela were the highest in terms of arms, missiles, rockets, guns, and ammunition (ForeignTrade, 2009). The import and export trade agreements have been negotiated by Colombia since 1992 when trade between the two countries touched US$1.0 billion to more than US$2.5 billion in 1997. This agreement was the result of Venezuela’s excessive imports from Colombia, most of which were manufacturing goods, at a greater value of 80 percent. In January 1995, when Colombia along with Mexico initiated a framework of the agreement between the two, Venezuela interrupted to be involved in the two, known as the G-3.

Latin American exports to neighboring markets possess the ease not to require much information about standards because all the markets are quite similar. Neighboring markets have witnessed that sending goods to Venezuelan regional markets requires fewer efforts than exporting to other regions.

Balance of Payments and Exchange Rates

There was a time when Venezuela experienced favorable trade and balance of payment conditions. Even though the country was forced to import goods to meet the demand for many industrial and household goods, the revenue it earned from exports was more than its expenditures for imports. However, with the fluctuation of global oil prices, Venezuela suffered through a series of foreign exchange problems in the 1990s. The balance of payments was at a vulnerable position which fluctuated in one year and dropped 66%. One of the reasons for such a downfall in the balance of payments was the implementation of an economic recovery program with a decline in exports.

Contemporary emerging markets have been operating under sharply different global financial conditions than those prevailing before 1989. These markets affect exchange rates which are central to the surge of capital flows. Balance of payment is one of the results of these new market structures and conditions, combined with imperfect policy and policymakers’ credibility.

In Venezuela, since 1987 the foreign exchange market has been opened even though black market foreign exchange dealing is prevalent and is known to be done in conjunctive with the operation of the underground economy.

Such a black market has operated in context with the results that the Venezuelan economy has acquired from a current or past balance of payments imbalance (deficit). The contemporary market is associated with an excess demand for foreign exchange in the local market which has only created a chaotic condition followed by disequilibrium. This disequilibrium has been a target of government policy in dual ways. First, it has put restrictions in terms of controls on access to foreign exchange that in turn has produced the black market in Venezuela. Secondly, it has enhanced all the means for promoting domestic monetary policy that is responsible for producing inflation which has added pressure for devaluation of the currency. The underlying imbalance behind the barrier of monetary policy and inflation is the key issue confronted by the policymakers and with such issues arise the black market as one of its symptoms (Grosse, 1994, p. 3).

This imbalance may be the result of several factors which either impact the progress of the economy separately or in combination. An excessive rate of monetary growth has escorted the country towards inflation. This is what the Venezuelan economy has witnessed that with the increase in inflation price has increased in other countries resulting in a demand for foreign currencies to buy foreign goods and to hold wealth in more stable currencies. Venezuela, as a less developed country, has felt that investors have lost their trust and confidence in the economic prospects of their country, therefore, the government is looking forward to placing valuable their investments in other neighboring countries and of course in foreign currencies. This has raised the demand for foreign currency in the country which further contributes to those unavoidable scenarios that Venezuela wants to avoid. Exchange rates matter so much to Venezuela that the country despite being well aware that goods produced locally are perceived as inferior in quality to similar goods produced abroad is bound to raise the demand for foreign exchange to buy those higher-quality foreign products. If the situation persists, dollarization will continue to strive in Venezuela resulting in a series of financial and economic turmoil.

Conclusion

Venezuela is confronting a crisis of variant proportions where political harassment has only reversed the free-market reforms implemented in the 1980s by then-president Carlos Andres Perez. The country has been interrupted so many times under so many controls that in no other country on the mainland of Latin America does the government exercise as much discretionary power to intervene in the economy as in this nation. The collapse of Venezuela with the abandonment of free-market reforms has captured all her currency controls where the desperate attempt to control the economy has all met with disappointing failure. New foreign exchange controls have taken effect due to which there is witnessed a huge drop in demand of logistic and air travels.

References

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