Venezuela. Economic Structure, Economic Policy and International Economic Relations

Term Paper, 2015

41 Pages, Grade: 1,3

Lena B. (Author)


Table of content

List of illustrations

List of abbreviations

1.1 Motivation
1.2 Structure of Paper

2.Country Background
2.1 General Information
2.2 Social Issues

3.Economic Policy
3.1 Development policy approach
3.2 Participation of government in economy
3.3 Fiscal Policy
3.4 Monetary policy and foreign exchange policy

4.Current Macroeconomic Situation
4.1 GDP growth
4.2 Inflation
4.3 Unemployment

5.Economic Structure
5.1 Agricultural sector
5.2 Industry sector
5.3 Service sector
5.4 Branches of high importance and competitiveness
6. International Economic Relations
6.1 Foreign trade broken down by major countries and commodities
6.2 Foreign direct investment
6.3 Labour Exports
6.4 Participation in customs unions and free trade areas

7. Major Problems and Potentials of Economy

List of references

I. Literature list

II. Illustrations

List of illustrations

1: Map of Venezuela and the bordering countries

2: Countries with the highest inflations

3: Trend of oil prices

List of abbreviations

illustration not visible in this excerpt

1. Introduction

1.1 Motivation

I was very pleased that I was given Venezuela as country for my academic assign­ment. I already have travelled to some countries in South America, not yet to Vene­zuela. But my investigations enabled me to have a closer look to the Venezuelan real­ity which permitted me to compare some aspects that differentiate the country from its neighbors, as well as to find similarities. Venezuela is a most interesting and fasci­nating country in a lot of aspects. Firstly, it is one of the most diverse and multifacet­ed countries in the Americas, offering natural beauty. Secondly, it has huge economic potential thanks to its natural resources and the oil reserves which are amongst the largest in the world. Hence, Venezuela could be a wealthy nation but one is aston­ished how such a gifted country continues to be in such economical and political trouble filling the headlines with a spate of negative news on poverty, civil unrest, inflation and shortage of supplies. Doing the investigations and learning about the reasons, why and how this country finds itself lagging so much behind other econo­mies that are less gifted with resources was never boring. I was keen to find out what measures the political leaders have taken and plan to take to improve the situation and what possibilities exist for them to unleash its potential.

I didn’t expect that gathering information would be that difficult. It turned out to be a real challenge, as in most cases I found differing “facts”: from official ones from the Venezuelan government and from other sources like the political opposition or inde­pendent media from other countries. I had to compare every fact and data and be skeptical towards any information coming from Venezuela. To present a better econ­omy the government for example did not allow the Venezuelan Central Bank since December last year to publish any information concerning inflation or other numbers that might be perceived as negative. It was an advantage for me that the official lan­guage in Venezuela is Spanish, which allowed me to study the original information published by the Venezuelan government, statements of the president and analyze Venezuelan newspaper articles and so better understand what image they try to pre­sent of themselves. Sometimes I couldn’t believe the magnitude of lies and ignorance that I found. I’d like to invite you to discover Venezuela in the following pages.

1.2 Structure of Paper

The following paper is about the South American country Venezuela. It starts by giv­ing a basic overview, followed by the Economic Policy. Venezuela is still a develop­ing country, so there is information about the development policy efforts to improve. Furthermore I wrote about the grade of governmental interference in economy and how the Venezuelan government carries out fiscal, monetary and foreign exchange policy. In the fourth chapter, you learn about the current macroeconomic situation concerning the GDP situation, unemployment and especially about the extremely high inflation. After that the economic structure of Venezuela is described by subdi­viding it to the agricultural, industrial and service sector and a conclusion about the most significant branch in Venezuela, the oil industry. In the sixth chapter the interna­tional economic relations of Venezuela are presented by showing the main trade part­ners and the products which exchanged. Moreover the attractiveness for FDI is exam­ined and I give a description about the reasons for emigration and besides about Ven­ezuela’s participation in customs unions and free trade areas. I conclude the paper by giving my personal opinion about Venezuela’s major problems and potentials.

2. Country Background

2.1 General Information

Venezuela, since 1999 officially called Bolivarian Republic of Venezuela, is located on the Northern Coast of South America. In the north on the coastline, the country is limited by the Caribbean Sea and the Atlantic Ocean, in the south Venezuela shares its borders with Brazil and Guyana and in the west with Colombia.[1] It is considered to be one of the world’s most ecologically diverse countries consisting of four differing regions.[2]

In July 2015, Venezuela had a total population of 29.275.460. Santiago de León de Caracas, or just Caracas, is the capital with a population of 2,912 Million in 2014. Taken as a whole, the country has one of the highest urbanization rates in Latin America with 89% of the population living in cities, which are mostly located in the North. Other big metropoles besides Caracas are Maracaibo with 2,164 million inhabitants and Valencia, Barquisimeto and Maracay with more than 1 million inhabitants each.

The different ethnical groups originate from Spain, Italy, Portugal, Arabia, Germany, Africa and indigenous Venezuelans. The official spo-ken language is Spanish, but there also still exist numerous indigenous dialects (about 25). The population is primarily Roman Catholic (96%).[3]

illustration not visible in this excerpt

According to a survey of the Mexican NGO „Seguridad, Justicia y Paz“(Security, Justice and Peace) about the fifty most violent cities worldwide, the capital Caracas finishes second with 115,98 homicides per 100.000 inhabitants. Altogether four Ven­ezuelan cities are among the listed cities (Valencia, Ciudad Guayana and Barquisime­to). [4]

Venezuela’s economic fortunes are closely related with the oil industry and the de­velopment of the world market prices for it. It was proven that the country has inter­nationally the most massive oil reserves.

Venezuela is a federal presidential republic consisting of an executive, a legislative, a judiciary, an electoral, and a citizen branch of the government. The country is divided into 23 states and the capital district Caracas and one federal dependency which is composed of 72 islands.[5] The executive branch is held by the president who is direct­ly elected for a term of six years and he can be reelected without any limitation.[6] The former president Hugo Chávez, who was elected in 1998, reinforced the power of the state in regulation concerns and nationalized companies, what he called “21st century socialism”. When Hugo Chávez passed away after a long battle with cancer, his hand­picked Vice President Nicolás Maduro(a former bus driver[7] ) took office on 19 April 2013, after a special presidential voting which he won with 50,8%. Since 2014 his 89 government has dealt with plenty of public protests and civil unrest.

2.2 Social Issues

Venezuela is a socially well developed country. It ranks 67th of 187 countries in the HDI.[8] [9] [10] The educational system seems to be well developed as 96,3% of the popula­tion can read and write and child labour is almost unknown. With an expenditure of 6,9% of the GDP for education Venezuela is 22nd in the ranking with 173 countries (Germany is 74th).[11]

According to the National Institute of Statistics of Venezuela, the country has the best index of social inequality of whole Latin America. In fact, the INE president Elías Eljuriis seems highly enthusiastic regarding his given numbers: in April 2002 14,5 million of people were called poor. Now (article from 12 august 2015) there are only 0,9 million of people considered as poor. The number of people living in extreme poverty declined as well and is at an 6,8% in august 2012 due to policy that encour­ages social investments of the National Government. For the near future he is also very optimistic and forecasts that the number will continue to decline. Elías Eljuriis made this statement in order to disprove the announcement of the lawyer Julio Bor­ges, a politician from the opposition few days before, claiming that in Venezuela at least 3 million of people go to bed every day without having eaten sufficiently. [12]

At the same time, every day new articles are published worldwide concerning the lack of convenience goods due to hyperinflation. Supermarkets are rubbed [13], simple goods go beyond price (a person with the minimum income 7.421,68 VEF (around 1066 Euros) needs 57 monthly wages in order to be able to afford a washing ma­chine)[14] and hospitals run out of medic and vital equipment[15]. But the government denies such revelations.

The fact that Venezuela (in line with Haiti) is considered as the nation with the high­est corrupt public sector in Latin America does not surprise. Compared to the rest of the world, it holds rank 161 of 174 with a score of 19 of 100 which can be interpreted as highly corrupt.[16] 65% of the Venezuelan population themselves think that the gov­ernment doesn’t fight corruption effectively and 86% complain that the corruption has increased. [17] But there are little opportunities to claim the government publicly because people trying to do so get prosecuted and arrested, being accused of spread of false information, as Maduro’s government misapplies the criminal justice system. [18] Peaceful demonstrations against the government often end up in violence, people are taken arbitrarily to prison without evidence. People get hurt and even die. The Gov­ernment justifies its forceful interventions by accusing participants of wanting to overturn the government.

Venezuelans can’t ask the American court of justice for help anymore because the country terminated the American Convention on Human Rights on 10 September 2012. Venezuela blamed the Organization to impair its government's stability because they had the impression that they were taking hand with its domestic matters. As a consequence, the control of the obeying to the human rights can’t be carried out properly anymore. People trying to defend the human rights have to deal with at­tempts to intimidate and personal attacks.[19]

Consequently it is predictable that the freedom of media has its limits in Venezuela.

As most of the media is scared off, they start to self-censor their publications. Also, the government actively reduces the number of government critical media. [20]

3. Economic Policy

3.1 Development policy approach

In September 2000 the representatives of 189 countries met in New York for the big­gest United Nations gathering so far. The result was the United Nations Millennium Declaration, which describes the tasks of the international policy in the 21st century and defines four main categories: the first one handles peace, security and disarma­ment, the second one covers development and fighting poverty, the third one pro­motes the protection of the environment and the last one deals with human rights, democracy and good governance. It was the first time in history that development goals were defined on an international level. In total eight Millennium Development Goals (MDGs) were defined that shall be reached within 15 years.[21] One of the eight MDGs on which the states had agreed on was to halve the number of starving people. Only 29 countries managed to achieve this goal, among them Venezuela.[22] Their strategy for reaching the goals is primarily social investment; from 1999 to 2009 60% of the total fiscal revenue has been attributed for it. In fact, Venezuela was the coun­try that has lowered inequality the most in Latin America and the Caribbean until 2010.

“State policies have become instruments for achieving the Millennium Development Goals and for the promotion of independent and autonomous development, without the tyranny of the World Bank and the International Monetary Fund. Against neolib­eral globalization we propose the globalization of justice and equity. Against the loot­ing and the abuse of countries we propose fair trade, in a world in which we all win, through solidarity and partnership” commented the Venezuelan ambassador Jorge Valero with regard to the achievement of the MDGs in 2010.[23]

Nevertheless Venezuela is also criticized with reference to the MDGs. There are still several points which need to be worked on, as reducing the high teenage pregnancy rate (highest one in Latin America), improving the education quality and the high rate of teenagers without higher education and job opportunities, the infrastructure defi­cits, and in particular the access to social programs which is often limited to critics of the political system.[24]

As main challenges in development policy Venezuela primarily defined the necessity to expand its economic diversity and to handle social challenges. The development plan presented by Chávez in 1999 consists of four categories: economic, social, polit­ical and territorial objectives. The economic one proposes to “increase and strengthen economic democracy and promote self-governing initiatives”, the social objective suggests the improvement of the “guarantee of equal treatment and social rights”. The third objective has the motive to “contribute to the establishment of participative de- mocracy” and the last territorial objective endorses more decentralization.[25]

The EU is sending financial development support to Venezuela. In the period of five years between 2007 and 2013 40 million € were sent with the aim to modernize the State and to diversify the economy. Furthermore projects from civil society associa­tions were supported which try to advance subjects like refugee rights or the reduc­tion of violence against women.[26]

Germany sent 72,456 million US$s to Venezuela from 2000 to 2011. This money was primarily invested for tertiary education, unspecific education and government and civil society. In the last years Venezuela ranked 109th of 181 countries to whom Ger- 27 many is sending development aid. [27]

3.2 Participation of government in economy

The government of Venezuela actively participates and to a high degree in the econ­omy which started 15 years ago when former president Hugo Chávez established his socialist policy. In the past years Venezuela’s economy could profit from high oil prices, which allowed the government to spend money for numerous magnanimous projects. The model is based on public expenditure without any restrictions and om­nipresence of the state in all economic sectors. The nationalizations, mainly in sectors such as hydrocarbons, mining and metallurgy, cement, banking and telecommunica­tions[28] and the regulatory regime affected the dynamism of business and are obsta- cles for private investment.[29] The expropriated businesses, controls of markets and prices destroyed the mechanisms of supply and demand and resulted in the general unprofitability of production.

One example is the oil company PDVSA, the heart of Venezuela’s economy and the first target of government intervention. It was a valuable, efficient business until gov­ernment started to use it as its cash cow after having nationalized it. By selling low- priced oil in order to buy the loyalty of other South American countries and subsidiz­ing unrealistic programs with its profits instead of investing in maintenance and pro­duction the company turned inefficient and weak.[30] In Chávez’ "21st century social­ism" already more than thousand companies were nationalized. Most companies failed in due course, just like in PDVSA.[31] Currently, the government is occupying even more private companies and confiscating goods depots. President Nicolás Ma­duro is blaming political enemies for the failures; he claims that they want to start an economic war: “A veces hay toda una conspiración internacional para tratar de hacer aparecer en el mundo a Venezuela como un país quebrado” (Sometimes there is a whole international plot trying to make Venezuela appear like a broken country) he said in January of this year . In that point he’s not differing from his predecessor, who insulted especially the US for Venezuela’s and the whole world’s woes.[33]

President Maduro tries to solve the state’s problems with even more government re­strictions and controls, creating more departments, ministries and commissions. He sees current lacks of convenience goods as the consequence of panic-buying and price speculation by the private sector and he reacted by imposing even more re­strictions and supervision. "When Chávez came to power there were four steps one needed to take in order to export a container of chocolate. Today it's 90 steps, and there are 19 different ministries involved in this series of permissions. It's a mess" says Jorge Redmond, president of Chocolates El Rey, a Venezuelan company which produces and exports chocolate.[34]

The government prohibited the Venezuelan Central Bank to publish economic data in December 2014 since the results were rather negative. For months neither the infla­tion rate, nor the scarcity index, GDP data nor growth analysis of sectors were ac­counted, even though the own law of the Central Bank stipulates to publish infor- mation within the first ten days of each month. [35]

In conclusion, one of the main problems is the distrust of the government in the pri­vate sector. Partly this is because a lot of business leaders collaborate with the politi­cal opposition which the government tries to sanction. Rather than cooperating and creating a process of healthy development, the government feels the need to observe the private sector as it feels rather threatened.[36]

3.3 Fiscal Policy

Especially for Venezuela the fiscal policy, taxes and budget, presents the most im­portant part of economic policy due to the exposure to the widely fluctuating oil pric­es in the last years. The majority of the public expenditure originates from the fiscal income of the oil industry, and gets allocated to current expenditure like salaries and wages, subsidies and transfers and payment of interests. In the last years the public expenditure reached the maximum levels in its fiscal history. [37]

For 2015 the Venezuelan budget was too enthusiastic in some parts. The expenditures were supposed to increase 34,7% during this year. The estimated average oil price for 2015 was at 60 US$ per barrel (rate on 21 September 2015: 45,83 US$[38] ) being part with 16,7% of the total revenue. The debt limit was reduced to 16,5% of the budget (from 112,7 billion in 2014 to 100,2 billion). The budget plan built on the assumption that the official exchange rate of the Bolívar would last at 6,30 VEF/USD, which is far from realistic. The planned draft budget expected inflation rates between 25% and 30% and GDP expenditure of 3%. The fiscal budget of 742 billion was proposed, while the 2014 fiscal budget more than doubled from 439 billion to 900 billion. All in all, this budget was widely criticized, as many parts seemed illogical and unrealistic, i.e. what the inflation is concerned. The underlying problems like limited access to foreign exchange and of convenience goods have not been resolved, so an improve- ment is not really possible for the moment. [39]

3.4 Monetary policy and foreign exchange policy

In the seven years since the introduction of the Bolívar the amount of money was raised 18 times. Still the government has enormous debts due to the imports, conse­quently creditors charge highest interest rates. For a current benchmark Dollar bond which lasts until 2027, 26,2% interest is charged to Venezuela.[40]

In order to take measures for improving the dramatic situation, the Venezuelan gov­ernment should lower public spending and use the savings for debt reduction and in­vest it in the markets. But until now none of these options were considered. Instead the President is blaming others to stockpiling the needed goods because of the “economic war” and in the interest of destabilizing his government. Therefore the taken measures contain the increase of the price controls and the introduction of strict for­eign exchange regulations. Maduro’s measures do not improve the economic situa­tion, but stress private businesses instead. In turn, Venezuelans change Venezuelan money into US-Dollars wherever they can.[41]

In 2003 former President Chávez set up strict exchange and capital flow controls in order to hold on to scarce Dollars. In the following years, the government has deval­ued the official exchange rate at least five times. Three official exchange rates exist and another fourth one on the black market. The first rate is used for government- authorized priority imports which are essential like food and medicine by the foreign trade center Concoex and is at 6,3 VEF/US$. The second one is for the system of establishing prizes by auction called Sicad at 12 VEF/US$ and the third rate, a market called Simadi, is working with the natural prize mechanism. The Simadi can be used by anyone who’s not allowed to use one of the first two rates, and is at 200 VEF/US$.

Those who can’t get Dollars through the official channels have to deal with the black market rate, being the fourth unofficial rate which is at 400 VEF/US$ (all data from June 2015, 700VEF/US$ in August 20 1 5[42] ).[43] When the currency controls were in­troduced, one Dollar bought 1.6 Bolívars[44]. These multiple exchange rates lead to opportunities for arbitrage or corruption. As the first two rates overvalue the Bolívar, the demand for US-Dollar can never be satisfied. Likewise the Venezuelan currency reserves are lower than ever (as the government used them up) the economy seems to have come to a dead end.[45]

The higher inflation rate of Venezuela‘s currency compared to its trade partners raises overvaluation. As no exchange rate realignments were realized, the internal purchas­ing power was supposed to decline. But despite the growing inflation, the official exchange rate with the Dollar stayed consistent and imports were growing thanks to a cheap Dollar at the expense of agriculture and the industry. Consequently, Venezue­lan producers tend to become purchasers instead and the country gets more and more dependent on imports, losing its production skills. Overvaluation and subsidies of other countries resulted in a distortion of relative prizes, which brought drawbacks for national products. Through the Venezuelan exchange rate policy the numerous agri­cultural and industrial policy efforts didn’t have any effects. The fixed exchange rate did not only enable cheap imports, but also damaged all the non-oil exports and pre­vented access to the other markets.[46]

The operating profit of foreign companies only depends on the exchange currency policy. Owning a company in Venezuela is an unpredictable risk. That’s why corpo­rations stop to work with and in the country, for example the airlines Air Canada and Alitalia don’t fly to Venezuela anymore. [47] Other airlines have restricted or complete­ly stopped sales of plane tickets in Bolívars. Not only airlines, but also other sectors feel the effects, especially the car production had to suffer from it. The scarcity of Dollars kept it from purchasing car parts.[48]


[1] cf. Fact Monster (w/o Y), Geography

[2] cf. Paamul (w/o Y), Ubicación geográfica

[3] cf. CIA (2015): The World Factbook: Venezuela: People and Society: Urbanization, Ethnic groups, Languages

[4] cf. Seguridad, Justicia y Paz (2015): page 1 and page 3

[5] cf. CIA (2015): The World Factbook: Venezuela: Government: Administrative Divisions

[6] cf. (2011): Nachrichten Weltatlas: S-Amerika: Venezuela: Länderinformationen

[7] cf. Shoichet E., C. (2013), headline + paragraph 1

[8] cf. Fact Monster (w/o Y), paragraph “Chávez Dies After a Long Battle with Cancer”

[9] cf. The New York Times (w/o Y)

[10] cf. United Nations Development Programme (2014), page 161

[11] cf. CIA (2015): The World Factbook: Venezuela: People and Society: Literacy, Child Labor, Education Expenditures

[12] cf. Gobierno Bolivariano de Venezuela, Fondo Nacional de Garantías Reciprocas para la Pequeña y Mediana Empresa (2015)

[13] cf. Latinapress (2015b), paragraph 1

[14] cf. Latinapress (2015 a), paragraph 2

[15] cf. Latinapress (2015 c), paragraph 2

[16] cf. Transparency International b, table

[17] cf. Transparency International b, Public Opinion

[18] cf. Human Rights Watch (2015), whole article

[19] cf. Amnesty International (2015) , Internationale Rechtssprechung, Menschenrechtsverteidiger

[20] cf. Human Rights Watch (2014), paragraph “Freedom of Media”

[21] cf. Bunesministerium für wirtschaftliche Zusammenarbet und Entwicklung (2014), paragraph 1

[22] cf. Scheer, A. (2015), paragraph 3+4

[23] cf Valero, J. (2010), paragraph 7 ff

[24] cf. Sinergia & the Venezuelan SCO network platform (2013), page 5

[25] cf. European Comission (2007), paragraph “2. The Venezuelan Government’s Policy Agenda”

[26] cf. European Comission (2015), paragraph “EU cooperation 2007-2013”

[27] cf. Open Aid Data (2011), paragraph “Alle Schwerpunkte in Venezuela - 2011” + paragraph “Alle Schwerpunkte in der Übersicht”

[28] cf. The World Bank (2015e), paragraph 3

[29] cf. Semana (2015), paragraph 8 f.

[30] cf. Ghitis, F. (2015), paragraph 14 ff.

[31] cf. Moses, C. (2015b), paragraph 2

[32] cf. Semana (2015), paragraph 7

[33] cf. Ghitis, F. (2015), paragraph 11

[34] cf. NPR (2015), paragraph 12 ff

[35] cf. (2015), whole article

[36] cf. NPR (2015), paragraph 19 f.

[37] cf. Araque R., J.J. (2015), paragraph 1+2

[38] cf. NASDAQ (2015),

[39] cf. FocusEconomics (w/o Y), whole article

[40] cf. Vyas, K. (2015), paragraph 11+13+14

[41] cf. Oppenheimer, A.(2015), paragraph 5+8+9

[42] cf. Ghitis, F. (2015), paragraph 18

[43] cf. Álvarez, V. (2015), introduction

[44] cf. Crooks, N. (2015), paragraph 4

[45] cf. Ghitis, F. (2015), paragraph 19

[46] cf. Álvarez, V. (2015), paragraphs „Die Überbewertung war schlimmer als Alca” and „Der Ruin der nationalen Produktion”

[47] cf. Murphy, M. & Vyas, K. (2014), last paragraph

[48] cf. Gould, J. E. (2014), paragraph 8

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Venezuela. Economic Structure, Economic Policy and International Economic Relations
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