Apr 7, 2019 in Economics

How is Venezuela Affected by the Economic Crisis?

Introduction

Venezuela had an excellent economy since 1904. This was the year in which petroleum wells were discovered in the country. This event resulted in the emergence of the “boom of petroleum” that had impact on the entire world. Currently, Venezuela has the biggest proven oil reserves that account for the 20 percent of the global ones. This fact, therefore, means that that state should be considered as being the first oil exporter in the world. However, it is not the case as the country is only ranked as the fifth leading exporter of the resource globally. Besides the oil industry, Venezuela also has several other sources of income. Some of them include the national production of goods, agriculture, other minerals that are extracted in the country and tourism. In spite of all these many revenue sources, the petroleum industry has been by far the biggest income earner for the country. The progressive economic crisis in Venezuela is the result of political failure and has affected its economic operations ranging from the value and control of its currency, businesses and the social and economic lives of the people through inadequate supply of basic needs.

The Influence of Politics on the Economy of the Country

Politics in Venezuela has taken an almost similar design and character as the one in other nations of the world. Interestingly, while the politics was undergoing some changes in the state, the prices of oil were also altering. As it was stated earlier, for the economy of the country, the value of oil has played, and still plays, a big role. From the year 1981 to 1983, the value of oil increased and attained one of the highest levels the state had ever experienced. This virtually marked the moment when the Venezuelan economy was at its height. The effect of this was that the entire world developed the interest to invest and start businesses in Venezuela.

Moreover, between 1904 and 1960, a huge number of immigrants entered the country. The most common reason for that at the time was the World War II. These individuals had the dream to build a new life with the advantage of the amazing and booming Venezuelan economy that the country had offered.

Furthermore, on February 5, 2003, the government established the Decree of Exchange Control. Under this document, the government would control the process of the exchange of the Venezuelan currency to dollars and euros. This event had a huge impact on the state’s economy. It actually meant that the Venezuelans lost the possibility to buy dollars freely. Instead, this was a mandate and transaction that the government declared as solely its own. After that, several other regulations and rules that governed the process and details of making the exchange of Venezuelan currency for euros and dollars emerged. Naturally, economists, merchants and every other business persons were affected by the introduction of this new system.

Obviously, when the market began to have an insufficient flow of dollars and other substantial foreign currency, the black market began to rise. The black market in Venezuela, just like in every other economy, has been in existence for quite a long time. This is almost relative to the age of the nation. Thus, at that time, upon such a decline in the flow of dollars and other foreign currencies, it began to have an important role in the economy. Most of the businesses started buying the dollars they were capable of finding and affording through the black market. This was simply because the government was not selling enough dollars to them.

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It is worth mentioning that the cost of the dollar in the black market was way more expensive than the official exchange rate in the Venezuelan territory. Unfortunately, as a continuing trend, the government sold fewer and fewer dollars every passing year. The effect of this tendency was that the black market gained more and more demand from the local businesses. As a result of such popularity, the price of each dollar on the black market was constantly rising. It went on to the extent that the price of the dollar in the Venezuelan black market was almost twice the amount of the dollar charge according to the national official exchange rate. 

Later on, in 2012, the selling of dollars in the black market was among the most lucrative illegal businesses in Venezuela. Such a profitable illegitimate business, however, had to have its fair share of problems. The main issue with the black market dealings in the sale of dollar was the obtaining of the currency itself. It was not a business for every other ordinary citizen. Those were only politicians that were able to get the dollars and sell them as they wanted. Consequently, a lot of the politicians in Venezuela made millions of dollars from the simple act of trading them in the black market. The word on the streets of the country was that the black market business was way more profitable than illegal activity of drug dealing that had been perceived as the most lucrative previously. In every practical sense, the Venezuelan politicians would not let their business of selling dollars stop in spite of the fact that they were ruining the economy of their own country. Their main goal was to make as much money as possible from the sale of the currency. Due to this extreme greed that was demonstrated by the politicians, they started giving virtually no dollars that were required for the running of businesses. Instead, they opted to retain most of the money for themselves because they needed more of it to sell and make themselves richer. 

Thus, as one can see, the government had created its own monopoly in the dollars market. They, therefore, had total control of the business inside the country, and every firm needed the money to keep importing and producing their products so that they would keep making some money. The economy of the Venezuelan state was declining more and more each year. In 2009, the price of oil experienced the biggest drop in the in the global market. Its cost drastically dropped from $140 per barrel to a ridiculously low price of $40 per barrel. This fact, due to its very nature, had a huge impact on the economy of the country. As it was stated previously, about 90 percent of the income of Venezuela comes from petroleum. 

In 2013, when Hugo Chávez, the current at that time president, died, Nicolas Maduro took over the position. Maduro got the power at a time when there were many problems the Venezuelans were dealing with. The most burning issue was the fact that he had to deal with one of the worst economic crisis ever seen in the country and the world. During the reign of Chávez, the economy had already started stagnating. However, instead of improving the country’s dwindled economy, Maduro did much worse than his predecessor. It is necessary to state that in 2003, Venezuela suffered the biggest inflation in its history. It was of a weighty 20 percent. Unfortunately, the new president failed to solve the problem; instead the inflation in the country experienced a further increase from 56 percent in 2013 to 68 percent in 2014. Sadly, as if this has been not enough, Nicolas Maduro, seems to do nothing about the nation’s economy. Such an attitude can be proved by the fact that the state experienced another increase in the inflation level in 2015. To be precise, the inflation rate has risen to a whooping figure of around 187 percent this year. In general, just in three years, the inflation in Venezuela has reached the figure of about 315 percent. To illustrate, in the past one can of Coke soda cost $2; however, the present value of the same can of the drink is around $8.3.

The Consequences of the Crisis

Such drastic increase of inflation has resulted in the country losing a lot of investors. Most of them have stopped investing in the country because they have lost large amounts of money due to such careless actions of the state’s government. Most of the Venezuelan stock has fallen as a result of the inflation. This fact has led to an almost absolute loss of money by the investors. No doubt, no one would ever think of reinvesting in a country that does absolutely nothing in order to salvage its dwindling economy. A country where everything, including the virtually hopeless state of its economy, is at its lowest would never attract investors. It may only stand a chance in the event that its investors make a critically strategic move and plan to make their investments within the country. 

When the stocks fell, together with the lack of money flowing into Venezuela whose 98 percent of income was dependent on the sale of oil, the country’s economy declined. The price of oil went so low that the government of Venezuela had to borrow money from other countries such as China and the U.S. Because of this, the debt of the country has risen. The value of the state’s currency has also dropped. In addition, companies do not desire to keep doing business in Venezuela. This has led to many businesses moving their production and market to other states. It can be explained by the availability of higher profitability in the sale of their goods in these countries. The most common states to which most Venezuelan businesses have been moved include Colombia, Brazil and the United States. Additionally to the availability of the market for the products, these countries enable the transaction of business in dollars and not in the volatile Bolivar, the currency of Venezuela. Since companies have moved, some products are much more difficult to find in Venezuela. Moreover, the state experiences the virtual lack of local firms and manufacturers. The result of such a lack has been continually felt in the country because most of the basic products in any given nation are not able to be found any more (International Business Publications). These include such goods as shampoo, soap, or deodorant. Furthermore, after quite a while, food has also started becoming a scarcity in Venezuela. 

The most significant effect of the economic crisis in Venezuela was the scarcity of food that led the government to establish a new system of food control. It aimed at making certain that people have quite a limited right to buy a specific quantity of food every week. It is necessary to note that this is, in every possible sense, an impracticable measure to be taken by any given administration. Naturally, Venezuelans became dissatisfied with the government and started organizing protests.

As it turns out, food was not the only problem that the citizens of Venezuela dealt with as a result of their government’s inability to perform and help the country to grow to the rank and stature that it deserved. The nation also suffered other issues such as the lack of other basic supplies such as water and, most importantly, the medicine. This presented a further problem that needed to be dealt with. The lack of medicine meant that the nation faced a great risk of experiencing high mortality rates. This was, in fact, the case. Consequently, the people of Venezuela lost many members of their families. Among those that suffered the most were the children who died in great numbers. Pregnant women and mothers with young children also suffered from a lot of grief and agony. Some of them died of causes connected with their condition while others passed away due to starvation. 

The state of the Venezuelan economy and society did not seem any promising even to the outside world. The rising cost of the dollar both in the government foreign exchange agencies and the black market resulted in several changes in the state’s economy that eventually impacted directly the salary of the citizens. First, such a rise in the value of the dollar led to the growth of the production costs almost for every business. Surprisingly, this happened in spite of the severe drop in the cost of oil in 2009. In any other fairly successful economy, the announcement that the prices of oil had experienced such a drop would have meant an increase in production as the cost of the production by companies would have also experienced a decline. Such a situation would have also meant more profit for the firm and growth of the economy of the nation in general. However, this was the complete opposite of the situation in Venezuela. The citizens suffered from a drop in their incomes. The situation was influenced by a few factors. The main of them was that the businesses had to pay corporate and other taxes that are associated with the operation of a business in the country. The resulting effect of those losses within the various existing companies that were trying to maintain their stand in the country’s economy was the reduction in the salaries paid to the employees. This was a mere effect of the poor state of the economy of the country, and not much could have been done by the companies to help their workers. It was just the natural process of the economy’s progress or change. Nevertheless, such a state of affairs resulted in the limited capacity of the citizens to purchase food and other basic things such as medicine and sanitary products due to their increased prices. To conclude, those were extremely hard times for every Venezuelan individual and the world at large. The people had already suffered for decades.

In February 2014, the citizens of Venezuela went to the streets and protested against the existing situation that was going on in the state. The ultimate effect of the government’s move to ration the food in the country and the protests that erupted was the beginning of the civil war. During the armed conflict, the people fought for the actualization of their rights. Obviously, it was quite absurd for the government to turn against its people through the issuance of resources at extreme limitations. The country had had just about enough of the government’s irrational treatment of its citizens. It was time for them to defend their inherent rights. They needed to rise up against the dictatorship for the sake of their survival. In the event that the people of Venezuela had not risen against their authorities because of the way they dealt with their business, the people would have continued to suffer in silence and even perished. Of course, would have been to the benefit of the nation’s leaders such as the president, Nicolas Maduro, who had squandered the people’s property and rights for their own benefit. However, it was not an appealing situation. It is because of the breach of the trust that the people of Venezuela eventually decided to go up in arms to dethrone the nation’s leadership in a bid to make certain that they survived. Since 1958, Venezuela's democracy had been strengthened and unified around a series of political deals that depended on the harmonization among the primary political parties, business organizations and labor unions. After all, with all the oil that the country produced, it was obliged to ensure the realization of its potential of becoming the leading exporter of oil in the entire world. 

The Possible Ways to Improve the Economy

The only way in which the economy can be improved entails the change of the nation's politicians. It also involves the necessity of alterations in the Venezuelan government system. This implies that the country’s administration requires an overhaul from its dictatorial governance to the one that is more democratic in nature. Among the most possible ways in which this aim is capable of being attained is through the changes in the nation’s parliamentary constitution. This would ultimately make the significant move of stopping the enactment of laws that are characterized by an arbitrary feeling. Such an overhaul in the nation’s leadership that would make sure that the best and most practicable and beneficial laws are passed will protect the country from a repeat of such a dreadful event. Furthermore, this would ensure that the resources of the country are well guarded and traded carefully to accumulate wealth that is critical to the recovery of the nation’s economy. Actually, this is among the most important strategies that the Venezuelan state and its populace should work for. After all, it is their right to fight and overthrow any government that does not deliver on its promises and the expectations of the Venezuelan citizenry. 

Additionally, some groups of the population, both around the world and in Venezuela, feel that the nation needs to appeal for the international assistance for their recovery. Without any international intervention into the matters of the country, it would stagnate in the same position in which it is at the moment. What is more, the state may suffer from the overall collapse without outside help. The international community should also assist the nation to attain its foundational oil market in the world. This would play a crucial role in the country’s recovery process. It would even make it possible for the state to repay the huge debts that it incurred during its early periods of the rising inflation. It would also help to pay back the debts that the Venezuelan state would have as a result of loans and assistance it would receive from other states such as the United States, China, the United Kingdom and Japan. 

Finally, a number of parties that have been affected by the crisis in Venezuela including business enterprises and some of its citizens have called for the arrest of the president, Nicolas Maduro. They are calling for the international community with the inclusion of such bodies such as the United Nations and individual countries such as the United States to charge Maduro for the negative effects of his poor governance and hold him accountable for almost everything that has taken place in Venezuela that has eventually led to its incredible and unexpected economic decline. For some people, this would serve as enough compensation in the form of consolation and the restoration of hope in their homeland.

Conclusion

The economic crisis in Venezuela is the impact of the political failures of both the past and existing administrations. The economy has begun stagnating during the presidency of Chavez and continued through Maduro’s presidency. This economic crisis affected the country’s economic dealings such as the circulation, value and control of its currency and even businesses operations. All these effects had the ultimate impact upon the citizens of Venezuela who’s social and financial lives became constrained through the inadequate supply of basic needs. All the trouble that Venezuela has gone through can be remedied through the replacement of the current administration with a democratic one. This may also be achieved through intervention by international agencies and countries such as the United Nations and United States respectively.

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