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Economy and business in Venezuela

According to countryaah, Venezuela's economy is heavily dominated by oil production, and for a long time in the 20th century the country was the world's largest exporter of oil. This has created a strong alignment of business and oil dependency for both the state and business, which has historically made the economy in the country extremely vulnerable to fluctuations in international oil prices and business cycles.

Business and Economy of Venezuela

Although then-President Hugo Chávez declared the country socialist in 2005, Venezuela is a mixed economy consisting of both state-owned, private-owned and cooperative enterprises. However, several companies that were privatized in the 1990s were taken over by the state after Chávez came to power.

As a result of the fall in oil prices, poor governance, political conflict and corruption, Venezuela has undergone its biggest economic crisis ever since 2015, collapsing imports of food, medicines and other basic goods, with enormous social and humanitarian consequences, and massive emigration. Inflation was over one million percent in 2018, which means that even people with good jobs find it difficult to pay for food, household goods and health services, in what was once one of South America's richest countries.

In an effort to create alternative sources of income to oil, the government has opened to widespread exploitation of minerals, including gold, in the southwest of the country. Among other things, the project has led to severe environmental and indigenous conflicts, and has helped to increase an already high level of violence and crime.

Historical background

Before oil production began for the first time in 1920, Venezuela was primarily an agricultural country with cocoa and coffee as its main export products. But by 1928, Venezuela had become the world's largest oil exporter, a position the country maintained until 1970, and in the following decades the country underwent rapid economic development.

In the first phase, oil production was dominated by foreign companies; in 1928, at that time, "three major" - Dutch Shell, Gulf and Standard Oil - controlled 98 percent of production. The first state oil company, Corporación Venezolana de Petroleo (CVP), was not established until 1960. In 1976, the oil sector was nationalized, while the current state oil company Petróleos de Venezuela, SA (PDVSA) was created. Foreign companies, however, continued to actively participate in the oil sector through various cooperation agreements.

Oil revenues made the country one of the most prosperous in the continent, peaking in the 1970s when high international oil prices caused a financial boom for Venezuela. During this decade, however, the state also raised large loans abroad. At the beginning of the 1980s, corruption and poor political governance, together with an international economic crisis, caused Venezuela to have serious problems in dealing with foreign debt. This led to a crisis in Venezuela's economy, and during the 1980s the government implemented a number of unpopular measures such as the privatization of state-owned companies and cuts in public spending. The first part of the 1990s was characterized by social and political turmoil, banking crises, economic decline, high inflation, and rising poverty.and social inequality.

When Hugo Chávez took over as president in 1998, the economy was still plummeting and the price of Venezuelan oil was at its lowest level in 22 years. Economic growth in the country accelerated somewhat until 2002/2003, when the country underwent a sharp economic downturn as a result of the strike and lockout in the oil company PDVSA. The conflict surrounding the PDVSA was politically motivated, as large parts of the business community in the country were in opposition to the government and wanted to push Chávez out of the presidential office. Chávez responded by replacing the leadership of the company with supporters of his political project.

From the end of 2003, the country had several years of high economic growth in both oil and non-oil related sectors. The proportion of the poor population (income-based poverty rate) fell from 42 per cent in 1998 to 21 per cent in 2012, only interrupted by a steep rise in 2003–2004 as a result of the PDVSA conflict.

The economic crisis since 2015

The main reason for the economic growth was historically high oil prices, and that the Chávez government used the extraordinary revenues for extensive government investment and social welfare development. But instead of using part of the revenue to build up the country's capital reserves, the state took out large loans abroad based on an expectation of still high oil revenues in the future. This had serious consequences when oil prices fell in 2014, and the financial problems, which had started so little in 2010, were seriously accelerating.

Most people notice the economic crisis through hyperinflation, commodity shortages, and an extensive black exchange economy. The government has not published poverty statistics since 2015, but a survey by several of the country's private universities estimates that 87 percent of the country's households were classified as poor in 2017. This, along with a political crisis, a record high level of violence, an increasingly authoritarian regime led by President Nicolas Maduro, brain drain and systematic corruption, Venezuela is in the most dramatic crisis in the country's modern history, also referred to as the worst economic crisis in the Western Hemisphere in modern times.

The causes of the crisis

The economic crisis in Venezuela has many and complex causes. In addition to insufficient foreign exchange reserves that could buffer the large oil price fall, another basic factor is a state-controlled exchange system introduced by then-President Hugo Chávez in 2003 to prevent capital flight following the strike in PDVSA and the private business world. Even before the crisis, the exchange system created great incentives for corruption and economic crimeboth among state and private actors. Inflation and a weakened Venezuelan currency led to major differences between official exchange rates and the black exchange rate, and people with good contacts were able to switch to very favorable exchange rates, an opportunity that did not exist for most people.

Venezuela is heavily dependent on imports for everything from foods, medicines, industrial components and consumables. As the economic downturn increased and the state's currency revenues declined, the exchange system contributed to both falling imports and weakening national production, which is largely dependent on external imports. Prior to the crisis, several companies had already been severely weakened, partly as a result of government takeovers and poor governance.

Demand for currency and commodities has created an inflation spiral where currency and price speculation, smuggling and black exchange trading have continuously amplified the crisis. The government's attempt to maintain price controls on basic commodities, a scheme started in 2003 by Chávez to strengthen the purchasing power of the poor, has created major incentives for black exchange trading and undermined production and distribution.

The government's repeated attempts to overhaul the exchange system have been unsuccessful, at the same time as they have pushed up money to pay for government spending. In addition, much of the state's potential revenue in subsidies of domestic oil consumption disappears; For historical and political reasons, Venezuela has for decades been the cheapest fuel in the world.

Political conflict between the government and the opposition-friendly business community, and political pressure from outside, has also been a contributing factor. The Venezuelan opposition has been lobbying international financial institutions to limit the government's economic scope.

In August 2017, Donald Trump issued a decree prohibiting (with certain exceptions) US companies from dealing with new debt, government bonds or profits issued or belonging to the Venezuelan state, including the PDVSA. Further sanctions have been introduced afterwards. This has made it difficult for the Maduro government to operate in the international financial market and thus more expensive and more difficult to restructure debt. The sanctions thus have negative consequences both for the authorities and for Venezuela's population.

The crisis in numbers

According to the UN organization ECLAC, Venezuela's gross domestic product (GDP) has fallen continuously over the period 2014–2018, with an accumulated decline of 40 percent since 2013. In other words, the value of production of goods and services in Venezuela is almost halved in five years.

Oil revenues account for 98 per cent of the country's export revenue, which in 2017 was just over $ 32 billion. The capacity of the oil sector has weakened sharply in recent years, and production has fallen continuously since 2014. In January 2016, Venezuela produced 2.3 million barrels of crude oil per day. Two years later, in January 2018, this had dropped to 1.6 million barrels per day. Venezuela was nevertheless the world's 12th largest oil producer in 2017.

Among the causes of the fall in production are the PDVSA oil company's financial problems, poor management, and the fact that qualified personnel in the oil sector have escaped the country. In August 2017, the United States imposed sanctions that also blocked PDVSA's ability to raise new capital from the United States, including from the PDVSA's US-based branch CITGO, which has also weakened the company.

The crisis has led to an acute shortage of foreign currency, which is important for servicing debt and buying goods from abroad. In December 2017, the state's foreign exchange reserves were down to $ 9662 million, the lowest inventory in 21 years. Under Hugo Chávez and Nicolas Maduro, Venezuela has taken out large loans from Russia and China to keep the economy afloat. However, the exact scope and loan terms are unknown, but parts of the debt are paid for with oil supplies, and a large proportion of the oil produced contributes to servicing debt.

Venezuela's most important export market was the United States in 2017, followed by India and China, and most of the imports come from the United States, China and Mexico.

Inflation and currency

Inflation in Venezuela passed 100 percent in 2015, and in 2017 it was estimated at 2,500 percent. In 2018, inflation was expected to be considerably higher; According to the IMF, it was at least 1.37 million percent, and other estimates go even higher. This means that a savings account containing $ 10,000 at the beginning of the year was worth less than one dollar at the end of the year. The government has tried to counteract the rise in prices by repeatedly raising the statutory minimum wage in recent years; as of November 2018, it was worth $ 9.50 on the black exchange market.

In an effort to combat inflation, the Bolivar currency was replaced in 2008 with Bolivar Fuertes (VEF) - "strong Bolivar". For the same purpose, this ten years later, in August 2018, it was changed to bolívar soberano (VES) - "sovereign bolivar", where one VES equals VEF 100,000. In February 2018, Venezuela, as the first country in the world, launched its own cryptocurrency, called petro ("oil" in Spanish). The value of the petro is linked to the country's natural resource reserves. The purpose was to circumvent the effects of US sanctions and reduce the dependence on foreign currency, but most economists are skeptical of the project's ability to succeed.

Economic sectors

Although then-President Hugo Chávez declared the country a socialist in 2005, Venezuela is a mixed economy, comprised of both state-owned, private-owned and cooperative enterprises. During Chávez's reign, the state took over many companies, including telecommunications, transport, industry and finance. Many of these had been privatized in the 1990s. Several companies that have shut down production as a result of the economic crisis have also been turned into state-owned enterprises or cooperatives during Maduro's reign.

Historically, the country has had several dominant family-based capital groups and companies, including the Cisnero family and the Mendoza family. The latter owns the food and beverage production conglomerate Empresas Polar, which is the largest privately owned company in Venezuela.

In recent years, Venezuela has not published detailed statistics on economic key figures. This, and general economic and social turbulence, makes it uncertain what the status of different economic sectors is. It is estimated that agriculture accounted for 4.7 percent of the economy in 2017, industry for 40.4 percent and services for 54.9 percent (CIA World Factbook). Unemployment was at 37 per cent in April 2016, the latest available official statistics. 40 per cent of the workforce worked in the informal sector.

Historically, in addition to oil and gas products, the country has also manufactured industrial products, building materials, medical equipment and medicines, chemicals, and iron and steel. There are also many small, often family-owned, companies that produce for the local market (food and beverages, clothing and footwear, furniture, and more). The bulk of the industry is concentrated in the capital Caracas and Maracaibo area, and around the cities of Ciudad Guyana and Valencia (heavy industry).

Agricultural and food production

Due to the oil economy and high degree of urbanization, Venezuela's agricultural production is strongly underdeveloped. Only about three per cent of the area is cultivated, while around 20 per cent is used for grazing. Most of the breeding takes place on the grasslands inland (Los Llanos). The most important agricultural areas are located on the coastal plain, where cocoa, bananas, sugar cane and rice are grown; higher up coffee, corn, wheat, cotton and tobacco. The country also produces vegetables, sorghum, maniacs, among others, milk, poultry and eggs.

Historically, land in Venezuela has been distributed to a few, but powerful, landowners. During Chávez's reign, efforts were made to build up the degree of self-sufficiency in agriculture through the distribution of land to small farmers and extensive credit programs. This, according to FAO, led to a strong increase in the country's agricultural production over several years. However, agricultural reforms were also characterized by high levels of political conflict and lack of political and financial follow-up over time. It also focused on building small-scale fishing along the coast, a sector that has historically been underdeveloped and dominated by industrial trawlers. Sardines (anchovetas) and tunaare the main fish species in addition to shrimp and mackerel.

Half of Venezuela's territory is covered with forest; the largest forests in the Amazon region are difficult to access and have low utilization rates. The primary woods for harvesting are mahogany and cedar. In 2011, the forest sector accounted for 0.5 per cent of GDP.

Non-renewable natural resources

Venezuela has the world's largest proven oil and gas reserves. According to the Organization of Oil Producing Countries, which Venezuela co-founded in 1976, in 2017 the country had over 303 million barrels in proven oil reserves and 5707 trillion cubic meters of gas. Most of the oil reserves are in the form of extra heavy oil located in the southern Orinoco belt along and beyond the outlet of the Orinoco River. This heavy oil is both harder to extract and more expensive to refine than more thin-liquid oil. It is uncertain what proportion of the workforce is employed in the oil and gas industry, but historically it has been about one percent.

In addition to oil and gas, Venezuela is rich in natural resources such as iron ore and bauxite, as well as deposits of diamonds, gold, nickel, manganese, zinc, copper and scheelite. Large quantities of iron ore, bauxite and coal are extracted. The largest coal mines are located in Zulia in the northwest, and came into operation in 1987. Coal is used, among other things, in thermal power plants at Lake Maracaibo.

In 2016, the government redeveloped a huge land area southwest of the country into mineral extraction, a project called "National Strategic Development Zone Arco Minero del Orinoco" (Zona de Desarollo Estrategico Nacional Arco Minero del Orinoco). The area, which covers more than 111,000 square kilometers, spans the states of Bolívar, the Amazon and Delta Amacuro, making up over 12 percent of Venezuela's territory. The area has large deposits of gold, bauxite, diamonds, iron and copper, among others. The project, which is led by the Venezuelan military and also involves contracts with foreign mining companies, has led to major protests because it is causing major environmental damage and involving the territories of indigenous groups. The mining economy is also characterized by illegal recovery, violence, crime and highly critical working conditions.

The banking sector

The Venezuelan state bank (Banco Central de Venezuela) was established in 1939. 31 banks operated in the country in 2018. A number of banks, several of them privatized in the 1990s, were acquired by the state during Hugo Chávez's time as president.

Electricity

Venezuela has largely been self-sufficient in electricity from hydropower and fossil fuels. The Guri dam in the Coroni River (Bolívar state), which is part of the Orinoco Delta, has a capacity of 10,300 megawatts, making it one of the world's largest hydropower plants. Venezuela has had periodic electricity supply problems in recent years as a result of drought and lack of maintenance.

Transport and Communications

The road network is very well developed, and there are approximately 100,000 km of public roads, of which about a third are paved. The major highways include the highway connecting Caracas with Colombia (part of the Pan-American highway), the connection between Caracas and Ciudad Bolívar, and between Coro (on the coast) and La Ceiba (on Lake Maracaibo).

Venezuela has a limited rail network. Under Hugo Chávez, extensive investments were made in expanding the railway network, but due to the economic crisis most of the work has stopped. Existing lines are between Caracas and the satellite city of Cúa (opened in 2006), and between the port city of Puerto Cabello and the inland village of Barquisimeto (opened in 2014).

Caracas has had a subway (Metro de Caracas) since 1983. It is connected to several suburbs and satellite towns. Los Teques, Valencia and Maracaibo got subways in 2006. The country also has a large grid of long-distance buses.

Venezuela's most important port cities are La Guaira near Caracas, the oil ports of Maracaibo and Puerto Cabello, and the port of Puerto Ordáz. Orinocoelva is navigable approximately 1600 km to Puerto Ayacucho at the border with Colombia, for seagoing vessels 400 km to Ciudad Bolívar, which is the port and commercial center of the inland. Shipping also operates on several of the bee rivers and on other waterways. Venezuela also has a trading fleet in international traffic.

With the large distances, air traffic plays a significant role for domestic transport. Venezuela has over 60 airports, including ten international. Largest is Simón Bolívar International Airport (popularly called Maiquetía) in the state of Vargas, near Caracas.

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