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Venezuela: An Overview of the Economy

Rositsa Keranova is currently a BSc Economics student in her second year.

In the beginning of the 20th century the first significant oil reserves in Venezuela were found. This new natural resource sparked the interest of the government because it can be the basis of a very profitable industry for the country.  Juan Vicente Gómez, the president at the time, granted several concessions to foreign companies to explore, extract and refine oil. During the First World War, the industry was faced with a lack of technology and machinery because of the difficult and costly transportation of them. As a result, the production of oil was slowed down for the time being.

In 1922, the interest of foreign companies increased again in hope of gaining immediate high profits. Therefore, in 1928 Venezuela became the biggest exporter of oil in the world and by the end of the 1930s it was the third-leading producer after the United States and the Soviet Union. However, as the industry became more and more profitable, all other sectors of the economy were constricted. As an example, agriculture accounted for one-third of the total production in the country, but by the 1950s it was reduced to one-tenth. As oil production was more and more important for Venezuela, in 1971, the officials passed a law that nationalized the petroleum industry so any production, extraction or refining had to be approved by the Ministry of Mines and Hydrocarbons.

By the 1960s and 1970s the government was spending a large amount on public programs and social issues. Venezuela became one of the richest countries in Latin America and the workers were enjoying the highest wages among the other countries in the continent.

In 1973, due to the oil crisis, the economic situation turned for the worst. The collapse of the oil prices induced a contraction of the economy and the inflation levels rose. The government did manage to stabilize the overall state of the economy in the following years, however the wage levels remained low and the unemployment was quite high among Venezuelans. When Hugo Chavez was elected as a president, he took a more socialistic approach towards policymaking. He made the country’s economy dependent only on the oil industry. In the early 2000s the country was faced with another challenge; yet another oil prices decline and the reluctance of foreign investors to take interest in the country, lead to another contraction of the economy. The industries’ production declined, the housing market shrunk and the economy decreased significantly. Chavez reduced the prices of basic items such as food and medicine but the price was below the cost of production so it was no longer profitable for companies to produce. Therefore, there weren’t enough goods to satisfy the demand of the population.

Currently, Venezuela is experiencing one of the worst economic crisis in its history with hyperinflation reaching 741% in February 2017. The government is running out of funds and reserves to finance what little programs or subsidies it provides. The authorities’ currency control makes it almost impossible for a Venezuelan to exchange bolivars for dollars or any other currency. This made it difficult for companies to invest in the country and it also limited imports, putting a strain on supply. The wages are so low that families can barely support themselves on a monthly basis. This, accompanied by the significant unemployment percentage, explains the extremely high poverty level. The oil prices have been falling since 2014 and the reduction in profits keeps driving the economy into a further crisis. The prices of goods are constantly decreasing as well so more and more companies stop producing due to the low earnings. That is a major social issue as many goods, such as food products and medicines, are not available on the market. The government has tried to ration food but that proved to be inefficient as a lot of the products ended up on the black market, overpriced. A serious problem is the lack of basic and important medicine. As a result, sometimes the patients cannot receive appropriate treatment or are given ill-suited medicine.

In conclusion, Venezuela is going through some hard times not also economically, but socially as well. For this aspect I will elaborate more in a follow-up article.

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