poverty in venezuela - daldrup

FH Aachen campus Julich

Faculty 3: Chemistry and BiotechnologyEuropean Master in Nuclear Applications

Poverty in Venezuela

International Management I & II

Antonio Jose Figueroa C.29th April, 2017

Contents

1 Introduction 3

2 Historical Overview 3

3 Statistics 53.1 GDP Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53.2 Inflation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63.3 Misery Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73.4 Poverty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

4 Causes 104.1 Economic Policies: Exchange Rate system . . . . . . . . . . . . . 104.2 Price Fixation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

5 Conclusion and Outcomes 13

References 14

1

List of Figures

1 Anual GDP growth rate . . . . . . . . . . . . . . . . . . . . . . . 52 Inflation Rate in Venezuela . . . . . . . . . . . . . . . . . . . . . . 63 Misery Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 Petare neighborhood . . . . . . . . . . . . . . . . . . . . . . . . . 95 Poverty in Venezuela . . . . . . . . . . . . . . . . . . . . . . . . . 96 Ease of Doing Business in Venezuela Index . . . . . . . . . . . . . 117 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 20th century marked the development of Venezuela from an agricultural econ-

omy 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 po-

litical alliances in tune with the Monroe doctrine. However, it was not until the

last years of Venezuela’s 20th 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 20th cen-

tury) 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 20th century which as the classical socialism /

communism pursued the state ownership of most production mediums, hindering

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and increasing the risk for investments.

During the first years of his mandate the country saw a reduction of inequal-

ity and poverty through the use of several social programs maintained by high

public spending fueled by high oil prices. Unfortunately the corruption contin-

ued 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 no-

table 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].

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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 exer-

cise 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 govern-

ment 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].

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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, unemploy-

ment 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 res-

idential 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.

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Figure 4: Petare neighborhood. Striking contrast can be observed between atraditional urban development and the “favelas” like residences. [8]

Figure 5: Poverty in Venezuela. A letter E corresponds to estimates based oninformation for years 2014 to 2016 obtained through polls due to the lack ofofficial data. Source: National Poll on Living Conditions [9]

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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.

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4.2 Price Fixation

The practice of price fixation and government aggressiveness towards private in-

vestment has resulted in diminished profitability and operating capabilities of

businesses which has lead to a decrease in investment and large companies go-

ing 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 regu-

lation 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 190th 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.

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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.

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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 nation-

alizations, 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 mea-

sures 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 na-

tional 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.

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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/us-

venezuela-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.


[3] Venezuela: Deteriorating Democracy. The Economist.

http://www.economist.com/blogs/americasview/2013/12/venezuela.


[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.


[6] Republica Bolivariana de Venezuela and the IMF. International Monetary

Funds. http://www.imf.org/external/country/ven/.


[7] Crook, Nathan. Venezuela’s Revolution . Bloomberg QuickTake.

https://www.bloomberg.com/quicktake/venezuela-price-revolution.


[8] Urdaneta, Isabella. DANIEL IN PETARE, LIVING IN A “NEIGHBOR-

HOOD” WITH HALF A MILLION PEOPLE. United Youth Journal-

ists. https://unitedyouthjournalists.com/2015/07/17/daniel-in-petare-living-

in-a-neighborhood-with-half-a-million-people-isabella-urdaneta-venezuela/


[9] Espana, Luis Pedro. Pobreza . ENCOVI: Encuesta

Nacional de Condiciones de Vida en Venezuela.

http://www.fundacionbengoa.org/noticias/2017/encovi-2016.asp.


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[10] Companies Hang On to Venezuela Plants Despite Seizures. Bloomberg

Markets https://www.bloomberg.com/news/articles/2017-04-25/companies-

cling-on-in-venezuela-even-as-maduro-seizes-plants.


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