FH Aachen campus Jülich Faculty 3: Chemistry and Biotechnology European Master in Nuclear Applications Poverty in Venezuela International Management I & II Antonio Jose Figueroa C. 29 th April, 2017
Contents 1 Introduction 3 2 Historical Overview 3 3 Statistics 5 3.1 GDP Balance............................. 5 3.2 Inflation................................ 6 3.3 Misery Index............................. 7 3.4 Poverty................................ 8 4 Causes 10 4.1 Economic Policies: Exchange Rate system............. 10 4.2 Price Fixation............................. 11 5 Conclusion and Outcomes 13 References 14 1
List of Figures 1 Anual GDP growth rate....................... 5 2 Inflation Rate in Venezuela...................... 6 3 Misery Index............................. 7 4 Petare neighborhood......................... 9 5 Poverty in Venezuela......................... 9 6 Ease of Doing Business in Venezuela Index............. 11 7 Status of international companies in Venezuela........... 12 2
1 Introduction The present work provides an overview of the poverty in Venezuela. Specially in later years due to boom in oil prices (in particular after the 2008 worldwide crash) it was expected that resource rich countries such as Venezuela would take hold of the opportunities given and experience growth, however this was not the case. This overview of poverty is presented through an exploration of Venezuela s recent history and an examination of the country s statistical indicators. In a subsequent section the focus is placed on the effect of two relevant economical governmental policies on poverty levels. Finally conclusions and outcomes are presented along with possible solutions. 2 Historical Overview The 20 th century marked the development of Venezuela from an agricultural economy to an Industrial fueled by the discovery and exploitation of oil which started in 1914 in the oils fields of Mene Grande in the Maracaibo Basin. At first, the economic model applied by the government to regulate the oil industry was that of concessions and royalties, based in part due to its lack of technology and political alliances in tune with the Monroe doctrine. However, it was not until the last years of Venezuela s 20 th century first dictator when the shift from the farms to the cities became notorious. This change would have a considerable impact on the economy of the country as well as on the living conditions of the population. The royalty system, although modified later, provided the country a large amount of wealth (even at the low oil prices characteristic of the early and mid 20 th century) which was to develop the country through investment and modest social policies, unfortunately the investment focused on the mining and the oil sector leaving the agriculture stagnating, as the wealth generated by the other economy branches (mainly the oil industry) allowed to import food and goods. It was not until the early 70 s when the government decided to nationalize the oil industry increasing the amount of wealth managed by the government, this marked a period of general welfare lasting until the early 80 s which also saw an increase in corruption and inequality. Until the late 90 s this inequality as corruption increased and went unaddressed resulting in the election of Hugo Chavez under promises of a radical change from the past regimes, though the implementation of his so called Socialism of the 20 th century which as the classical socialism / communism pursued the state ownership of most production mediums, hindering 3
and increasing the risk for investments. During the first years of his mandate the country saw a reduction of inequality and poverty through the use of several social programs maintained by high public spending fueled by high oil prices. Unfortunately the corruption continued to increase in his regime during which the country achieved exports of about 1 trillion US$ of which at least one third of it has vanished through obscure mechanisms [1]. As the people grew accustomed to unsustainable subsides and the oil price decreased, the situation quickly deteriorated, this is particularly notable at the start of mr. Chavez successor, Nicolas Maduro s term, during whose regime the country economy has collapsed reaching levels comparable to war torn countries such as Syria and Libya [2]. 4
3 Statistics The study of a country s statistical data allows for the analysis of its performance and for the evaluation of the result of economical and social policies on each exercise period. Unfortunately since 2013 the government stopped the publication of data on poverty as well as the Gross Domestic Product (GDP) and the Consumer Price Index (CPI) in 2015, possibly due to the country s poor performance and a deterioration of democracy levels seen in the last years [3] (although there is evidence for the deterioration of its democracy as early as the year 2002 [4]). For this reason, the data presented on the following figures consists on official government data and estimates from third party institutions such as the International Monetary Fund (IMF) and the World Bank as well as studies from Venezuelan universities. In this section several economic indicators of Venezuela are explored. 3.1 GDP Balance Through its modern history Venezuela a considerable fraction of its GDP has been due to oil exports. During the regime of president Chavez the Oil industry participation in the national GDP increased dramatically reaching levels of about 50% of the GDP and 95% of total exports. Figure 1: Annual GDP growth rate [5] 5
It is notable from figure 1 that the 2008 global crisis had a somewhat delayed impact on the country GDP, this probably due to the increase in oil prices which reached a historical maximum of about 130 US$. However after 2013 when the oil prices declined the GDP growth rate also followed, reinforcing the classification of recessing economy given by the IMF in 2013. Considering data from 2016 the Gross National Income (GNI) per capita amounts to 12793 US$ which classifies Venezuela into High income countries group of the World Bank. 3.2 Inflation Inflation is typically measured through the use of CPI. Due to the fall of oil prices and the high dependence of the Venezuelan economy on imports, public spending is financed through the conversion of foreign currency (US Dollars) into Bolivares. As the export income decreases the government requires to bring more Bolivares into the market to fund its spending. This would account to a devaluation of the currency. However, with the aim to preserve prices on imported goods the government increased the Bolivares liquidity while simultaneously keeping the exchange rate fixed to an artificially low value. This policy has created a vicious cycle in which more money has to be printed to maintaining the public spending resulting in inflation. Figure 2 shows the inflation rate based on the CPI. Figure 2: Inflation Rate in Venezuela [5] According to data from the IMF, in 2016 Venezuela ranked 1st in the list of countries by inflation rate. Estimates for the end of 2017 consider an inflation of 720% and 2068.5% for the year 2018, which suggest that Venezuela will keep its top spot in the rank [6]. 6
3.3 Misery Index The world misery index is an economic indicator created by economist Arthur Okun which aims to measure and compare the performance of a group of 108 countries based on a simple sum of economic indicators like inflation, unemployment and lending rate minus the percentage change on real per capita GDP. The index is intended to reflect the level of misery caused by life conditions in a way that can be easily understood. Figure 3 corresponds to the latest misery index report on Venezuela and its position compared to other countries. Figure 3: Misery Index as of 2016 [7] 7
In 2013 Venezuela reached the top position of the ranking and has continued to do so until the year 2016. In addition, based on current estimates on inflation from the IMF, it expected that the country will keep this infamous position on the ranking for the following years. The reason for this being the high inflation levels the country has been experiencing in the latest years. The Misery Index has attracted criticism based on reports which indicate that the level of unhappiness appears to be more influenced by unemployment than inflation, a factor which is normally not taken into account in the classical calculation of the index (which equally weights all its contributor factors). 3.4 Poverty Poverty in Venezuela has generally been influenced by several milestones such as the shift from an agricultural economy into an industrial one. This led to an improvement on the conditions of living for people with a certain degree of education, however, the rest of the population with poor education were left with little to no jobs and forced to live in the outskirts of the cities forming what is known as misery circles or barrios consisting of shacks precariously built on mountains without proper residential planning and building materials quite similar to the better known favelas in Brasil (See figure 4). A further reason behind the emergence of these barrios is a deficiency in city planning as the city population increased faster than the residential creation rate. Figure 4 shows a contrasting picture of the eastern portion of Caracas, Venezuela s capital. With the highway serving as a border dividing regions of formal residential buildings and areas formed by shanty towns indicating the borders of the city. This sight of severe contrast in living conditions being remarkable in a resource rich country. Due to the high dependence of the GDP on oil exports and their participation on the national budget (being also oil exports responsible for up to 95% of the country s foreign currency income), the poverty level became coupled to variations on the oil prices. Figure 5 shows the evolution of poverty along the past 20 years. 8
Figure 4: Petare neighborhood. Striking contrast can be observed between a traditional urban development and the favelas like residences. [8] Figure 5: Poverty in Venezuela. A letter E corresponds to estimates based on information for years 2014 to 2016 obtained through polls due to the lack of official data. Source: National Poll on Living Conditions [9] 9
4 Causes The topic of poverty in Venezuela is very complex as there is no single cause behind it but a mixture of elements such as lack of education, investment and social policies failure coupled with an economic dependence on oil exports. In this section, the focus is placed on two governmental policies which have characterized the Venezuelan regime for the last 17 years: the foreign currency exchange rate system and the goods price fixation system. 4.1 Economic Policies: Exchange Rate system Several exchange rate systems have existed in between the last 18 years of the socialist government of Mr. Chavez and his successor Mr. Maduro. Initially created with the purpose to prevent capital flight and loss of reserves in addition as a method to keep the prices of goods in the country, mainly food, low as a considerably portion of goods are imported. The system quickly devolved into a mechanism for the extraction of wealth through corruption due to its inner workings which favored clientelism and non transparent deals for the acquisition of foreign currency by private parties fomenting corruption. The general scheme of the current system is one in which the exchange of US$ to Bolivares (Bs) is kept artificially low at 10 Bs per US$ that is destined (according to the government) to the acquisition of food and primordial consumption goods accounting to 99% of the total transactions of foreign currency. Simultaneously a second floating exchange rate exists that according to the government corresponds to 1% of the total transactions. The principal mechanism of corruption and wrong doing is one in which the goverment allows a group of private companies or persons (typically owned or related to government officials) to buy cheap dollars to make imports which are not throughfully regulated and which in many cases do not happen. Later by selling these dollars in the black market (at a rate of up to 5000 Bs per US$) such groups make a very large profit. It is through this mechanism that up to 300 Billion US$ have disappeared from the nation s coffers in the last decade. This distortion coupled with price fixation which is explored in the next section drives away investment and limits the growth possibility of the country increasing poverty among its citizens. 10
4.2 Price Fixation The practice of price fixation and government aggressiveness towards private investment has resulted in diminished profitability and operating capabilities of businesses which has lead to a decrease in investment and large companies going out of business and leaving the country. This in turn led to an increase in unemployment of a large portion of the professional and educated part of the population. The prospect of a small amount of jobs and decreasing quality of life, has led to a brain drain as more professionals look outside the country for opportunities of a job and a better life. The effect of price fixation and other government policies affecting business such as nationalization and excessive regulation of economic activity can be measured through the Ease of Doing Business in Venezuela Index (Figure 6, created by the World Bank Organization and which considers a group of 190 countries. Figure 6: Ease of Doing Business in Venezuela Index [5] Comparing fig. 6 with fig. 5 a direct correlation can be observed in which as the difficulty on doing business in Venezuela increases so does the poverty levels. As it can be observed from fig. 6 since 2010 Venezuela has increased its position on the ranking slowly getting closer to the 190 th position (a higher rank indicates an economy with excessive regulation where business cannot be done easily). This factor shows the unattractiveness of the country for both national and international investments which hinders severely its potential for growth and development. This is made evident through figure 7 which shows the status of several high profile international companies and their dealings with Venezuela. 11
Figure 7: Status of international companies in Venezuela [10] With the late increase in political instability and legal insecurity the prospects for future investments becomes shrouded in uncertainty. 12
5 Conclusion and Outcomes The problem of poverty in Venezuela is not an easy one to solve. Mainly due to the country s notorious dependence on oil exports as evidenced in the above graphs. This situation puts the country in precarious and risky position, with an increased sensibility to oil price variations. A change in the energy consumption trends is expected in the developed countries (taking for instance Germany and EU policies) as well as a shift into renewable energies would certainly increase the troubles for the country and its already weakened economy. For this reason, the dependence on oil puts limits on the sustainability and middle to long term capabilities of the Venezuelan economical model. In addition to this, there exists increasing pressure on foreign debt which amounts to 90 billion US$ to be paid in the next decade [5]. Furthermore, the current political situation of high levels of civil unrest, along with business threatening government policies such as expropriations and nationalizations, greatly increases the political risk of the country reducing the legal security and attractiveness to foreign and internal investments dearly needed to develop the country. Without investments and sustainable growth, reduction in poverty cannot happen. The best case scenario consists in one in which sustainable economical measures are taken and a change in governmental policies on businesses takes place, along with a return to political stability and good social policies in education which would make the country more desirable for investors and capital both national and international. However, even in this case the poverty is expected to increase until the measures take effect on the economy and recovery effects can be observed. 13
References [1] Pons, Corina et Chinea, Eyanir. Venezuela ex-ministers seek probe into $300 billion in lost oil revenue. Reuters. http://www.reuters.com/article/usvenezuela-politics-iduskcn0vb26f. Accessed on April 23, 2017 [2] Rosati, Andrew. Venezuela s Awful Economy Got Even Worse in 2016. Bloomberg Markets. https://www.bloomberg.com/news/articles/2017-01-11/goodbye-recession-hello-depression-venezuela-gdp-takes-10-hit. Accessed on April 23, 2017 [3] Venezuela: Deteriorating Democracy. The Economist. http://www.economist.com/blogs/americasview/2013/12/venezuela. Accessed on April 23, 2017 [4] Coppedge, Michael. Explaining Democratic Deterioration in Venezuela Through Nested Inference. Kellogg Institute, Hesburgh Center. University of Notre Dame. Notre Dame, Indiana, USA. [5] Venezuela Economic Indicators. Trading Economics. http://www.tradingeconomics.com/venezuela/inflation-cpi. Accessed on April 23, 2017 [6] República Bolivariana de Venezuela and the IMF. International Monetary Funds. http://www.imf.org/external/country/ven/. Accessed on April 23, 2017 [7] Crook, Nathan. Venezuela s Revolution. Bloomberg QuickTake. https://www.bloomberg.com/quicktake/venezuela-price-revolution. Accessed on April 23, 2017 [8] Urdaneta, Isabella. DANIEL IN PETARE, LIVING IN A NEIGHBOR- HOOD WITH HALF A MILLION PEOPLE. United Youth Journalists. https://unitedyouthjournalists.com/2015/07/17/daniel-in-petare-livingin-a-neighborhood-with-half-a-million-people-isabella-urdaneta-venezuela/ Accessed on April 23, 2017 [9] España, Luis Pedro. Pobreza. ENCOVI: Encuesta Nacional de Condiciones de Vida en Venezuela. http://www.fundacionbengoa.org/noticias/2017/encovi-2016.asp. Accessed on April 23, 2017 14
[10] Companies Hang On to Venezuela Plants Despite Seizures. Bloomberg Markets https://www.bloomberg.com/news/articles/2017-04-25/companiescling-on-in-venezuela-even-as-maduro-seizes-plants. Accessed on April 25, 2017 15