Political Economy and Competitiveness in the Global Economy uk
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1. Hugo Rafael Chávez Rias was elected President of Venezuela in the year 1998 and assumed office in 1999. He has since changed the face of Venezuela both politically and economically. As soon as he came to power he introduced a new constitution which conveniently consolidated power under his party (Fifth Republic Movement/ MVR). He also did away with the Senate and placed his people in the courts and other important public offices. The checks and balances introduced by him only secured power in the hands of the government and kept it safe from his opposition. He does promote polarized system of Government and elections as well but his critics say that it is just a façade of democracy just to please his people.
Chavez believes that between the powerful and the weak, freedom is always curbed hence proper use of law and rule is the only way to set people free and socialism provides that law or rule. Chavez started Bolivarianism an ideology that believes in the unity of civilian and the military. His opposition planned a coup in 2002 as they were suspicious that Chavez was becoming dictatorial and controlling media and persecuting people who oppose his party.
However, very recently he has completed 12 years of leadership and has won elections again. He was voted to majority mostly by the poor. It has been observed that he has directed country’s resources in uplifting the poor by introducing communes supporting thousands of families with a $23 million government funding. Chavez has also formed 100,000 worker-owned cooperatives that provide technical training and start-up assistance since the time he was elected. This has financially supported a lot of families and reduced poverty levels. He has also introduced a series of Bolivarian Missions to improve social, economic and cultural condition of the people. The Venezuelan economy also depends a lot on its oil reserves.
Chavez has been constantly pushing for the production quotas and higher prices for oil in the international forum like OPEC. The revenue of the state has increased due to the oil export from 51% in the year 2000 to 56%in 2006 and oil exports have grown from 77% in 1997 to 89% in 2006. According to the Centre for Economic and Policy Research (CEPR) reports the Venezuelan economy has increased on an average of 11.85% annually from 2004 to 2007. Its poverty level has reduced as per the United Nations stood at 28% in 2008 than a 55.44% in 1998 before Chavez took over. However these are only income rise and do not denote an improvement in the health and education levels of the people.
2. Chavez does not follow capitalism and believes that capitalism is the “realm of injustice and a tyranny of the richest against the poorest”. Hence when Chavez came to power he introduced the policy of nationalization as he was opposed to private ownerships. Chavez encourages foreign investments as long as they are in partnership with the state owned projects and organizations. Maximum Investments are restricted a 20% of the equity in the companies in certain sectors like media, broadcasting, newspapers and other professional services.
Moreover all people in Venezuela have to take permission from the government to send any fund outside the country. It is also very difficult to take credit from the banks in Venezuela and it also has very strict foreign exchange control rules. It makes it very difficult for any kind of foreign investments as there is no security due to the political situation and the nationalization wave.
However, there is just one sector that has seen almost constant investment because Venezuela holds one of the largest oil reserves in the world-the Orinoco tar belt. Usually ally countries receive a favorable treatment like China and Russia. China has very recently invested a $20 billion tied with Sinopec Corp. Even Russia’s Lukoil and Gazprom, Iran’s Petropars and PetroVietnam have signed contracts. These contracts are usually as minority partners.
But the laws that the government has passed are not very favorable for investors as in exchange of drilling oil reserves the companies have to pay taxes and royalties to the government. Initially it was 1% but now it has increased to 16% royalty with taxes up to 30%. Hence the cost of production has increased drastically. It has also taken over the management in the oil drilling projects in the rich Orinoco belt. A lot of companies one of them is ConocoPhillips has not been duel compensated after the takeover. Thus future investments look bleak.
3. In the year 2009 as per TI corruption index Venezuela ranks 162 in the world and World Bank doing Business reports rank it 177 in the year 2010. It clearly shows that Venezuela is not a friendly place to do business not only because of its investment laws but also grave corruption levels in all government sectors. Especially now, when most of the important sectors are being rapidly nationalized and with the management controls in the hands of the government the transparency in the dealings is reduced to a large extent. In fact there would be no clarity as to where the funds invested will be directed. There is gross mismanagement and abuse of power in Venezuela. For example there are at least two state run organizations where the dealings are completely opaque and the funds are spent only with Chavez’s permission.
Such corruption, lack of transparency, favoritism projects a very bleak and untrustworthy environment for any foreign investor. Hence, growth for such countries is thwarted due to gross corruption and mismanagement of funds as the funds that should be utilized for the benefit and the growth of the nation would be used for personal reasons which could be inimical to the country’s growth.
4. Venezuela is rich in natural resources like gold, uranium, iron-ore, nickel and of course oil. There is a lot of scope for mining. However the government policies make it difficult for the companies to procure mining concessions as all subsoil resources are owned by the state. Companies that have managed to secure concessions have faced delays and legal hassles in accessing those concessions and also in exercising their mining rights. The taxes for such companies also increased after a law was passed in the year 2007. But its increasingly difficult political environment and increased corruption has definitely impeded investments.
A lot of US based companies like Coke and McDonald have faced severe harassments and government intervention as US is not an ally. The country is seeing reverse foreign direct investment since 2009 to the extent of $3.1 billion every year approximately. A country which stringent laws, persecuting political environment, limitations on investment, difficult credit faculties, no security to the property, increased taxes, limitations on the utilization of resources have all led to companies exiting from Venezuelan economy although it has some of the richest reserves.