Question

This closing case explores the political and economic situation in Venezuela under Hugo Chavez and, after Chavez’s death, Nicolas Maduro. When Chavez, who was elected president in 1998, ran on a platform against corruption and economic mismanagement, Venezuela’s economy was in a deep recession. Once in office, Chavez consolidated his hold over the government by drafting a new constitution that put him in power until 2012. Chavez died in 2013, but during his presidency, Venezuela was considered to be only “partly free.” Economically, things were also difficult for Venezuela. Chavez did achieve some gains. Unemployment, though still high, fell to 7.6 percent in 2013 from its high of 14.5 percent in 1998. Similarly, poverty remained a problem despite falling from 50 percent to 28 percent in 2012. Yet, corruption was rampant, and there was a move to take certain industries into state ownership, with the oil industry being a particular target. Following his death, the situation for his successor, Nicolas Maduro, became worse. The decline in the price of oil resulted in economic collapse with inflation reaching 275 percent, the poverty rate above 30 percent, and considerable value reduction of the Venezuelan currency, the bolivar. The result was heavy losses in December 2015 parliamentary elections which saw the opposition gaining a majority of seats over the ruling United Socialist Party.

QUESTION 1: How do you think that Chavez’s unilateral changes to contracts with foreign oil companies affected future investment by foreigners in Venezuela?  

QUESTION 2: In your estimation, what is the long-run prognosis for the Venezuelan economy? Is this a country that is attractive to international businesses?

Answer 1

Answer 1.

The present case study is focussed on the scenario of macroeconomic mismanagement of the national economy without a consistent policy of the national government.In this perspective Hugo Chavez's decision of unilaterally changing the contract conditions for foreign oil firms has adversely affected the future foreign investment in the country for the following reasons-

1.This will result in to changes in revenue forecasts for foreign oil firms often resulting in to losses for them.

2.This will also result in higher costs of exploration and production or artificially escalate the prices which may not correspond to market determined demand and supply conditions for the commodity.

3. This may also result in the protracted legal battles between foreign oil firms and the Venezuelan government.

All the above mentioned situations may affect profitability negatively and thus impede future foreign investment in the country.

Answer 2.

The Venezuelan economy in the given scenario is witnessing a situation of hyper inflation and high unemployment coupled with low confidence in the Venezuelan currency leading to monetary mismanagement and macroeconomic instability, in the long run the country does not seem to get over from this because of the following reasons-

1. The Venezuelan economy is seeing hyper inflation i.e.275% which indicates very low confidence in the national currency and may lead to fiscal imbalances.

2. The unemployment rate in Venezuelan economy is very high i.e.30% leading to loss of purchasing power in the hands of the people.This adversely affects the demand conditions in the economy.

3.There are fears of nationalization i.e. forcibly putting certain industries under state ownership which affect the investment climate and promotes uncertainty.

4. There is rampant corruption in the country which will result in increasing the cost and would have negative effects on ease of doing business.

The above mentioned factors do not make Venezuela an attractive destination for international business in the foreseeable future.

However, the situation may change with a consistent government policy and fiscal reforms as well as external help.