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Read Case 2: Venezuela under Hugo Chvez and Beyond

On March 5, 2013, Hugo Chvez, the president of Venezuela, died after losing a battle against cancer. Chvez had been president of Venezuela since 1999. A former military officer who was once jailed for engineer-ing a failed coup attempt, Chvez was a self-styled democratic socialist who won the presidential election by campaigning against corruption, economic mismanagement, and the harsh realities of global capitalism. When he took office in February 1999, Chvez claimed he had inherited the worst economic situation in the countrys recent history. He wasnt far off the mark. A collapse in the price of oil, which accounted for 70 percent of the countrys exports, left Venezuela with a large budget deficit and forced the economy into a deep recession. Soon after taking office, Chvez worked to consolidate his hold over the apparatus of government. By 2012, Freedom House, which annually assesses political and civil liberties worldwide, concluded Venezuela was only partly free and that freedoms were being progressively curtailed. In 2006, for example, Parliament, which was dominated by his supporters, gave him the power to legislate by decree for 18 months. In late 2010, Chvez yet again persuaded the National Assembly to grant him the power to rule by decree for another 18 months. On the economic front, the economy shrank in the early 2000s, while unemployment remained persistently high (at 15 to 17 percent) and the poverty rate rose to more than 50 percent of the population. A 2003 study by the World Bank concluded Venezuela was one of the most regulated economies in the world and that state controls over business activities gave public officials ample opportunities to enrich themselves by demanding bribes in return for permission to expand operations or enter new lines of business. Despite Chvezs anticorruption rhetoric, Transparency International, which ranks the worlds nations according to the extent of public corruption, noted that corruption increased under Chvez. In 2012, Transparency International ranked Venezuela 165th out of 174 nations in terms of the level of corruption. Consistent with his socialist rhetoric, Chvez progressively took various enterprises into state ownership and required that other enterprises be restructured as workers cooperatives in return for government loans. Also, the government took over large rural farms and ranches that Chvez claimed were not sufficiently pro-duction and turned them into state-owned cooperatives. In mid-2000, the world oil market bailed Chvez out of mounting economic difficulties. Oil prices started to surge from the low $20s in 2003, reaching $150 a barrel by mid- 2008. Venezuela, the worlds fifth-largest producer, reaped a bonanza. On the back of surging oil exports, the economy grew at a robust rate. Chvez used the oil revenues to boost government spending on social programs, many of them modeled after programs in Cuba. These included ultra- cheap gasoline and free housing for the poor. In 2006, he announced plans to reduce the stakes held by foreign companies in oil projects in the Orinoco regions, to increase the royalties they had to pay to the Venezuelan government, and to give the state-run oil company a majority position. Simultaneously, he replaced professional managers at the state-owned oil company with his supporters, many of whom knew little about the oil business. They extracted profits to support Chvezs social programs but at the cost of low investments in the oil company, and over time its output started to fall. Notwithstanding his ability to consolidate political power, on the economic front, Venezuelas performance under Chvez was mixed. His main achievements were to reduce poverty, which fell from 50 percent to 28 percent by 2012, and to bring down unemployment from 14.5 per-cent at the start of his rule to 7.6 percent in February 2013. Profits from oil helped Chvez achieve both these goals. However, despite strong global demand and massive reserves, oil production in Venezuela fell by a third between 2000 and 2012 as foreign oil companies exited the country and the state-run oil company failed to make up the difference. Inflation surged and was running at around 28 percent per annum between 2008 and 2012, one of the highest rates in the world. To compound matters, the budget deficit expanded to 17 percent of GDP in 2012 as the government spent heavily to support its social programs and various subsidies. Following Chvezs death, his handpicked successor, Nicolas Maduro, took over the presidency. Maduro con- tinued the policies introduced by Chvez. Things did not go well. By 2014, the country was in a recession. The economy contracted by 4 percent that year, while inflation surged to around 65 percent. The situation continued to deteriorate in 2015 and 2016. Exacerbated by a sharp fall in oil prices and hence government revenues, the economy was forecasted by the IMF to be 23 percent smaller in 2017 than it was in 2013, the worst decline in the world. By 2015, widespread shortages of basic goods had emerged. In 2016, an estimated 75 percent of Venezu- elans lost weight, averaging 8.7 kg per person, because of a scarcity of food. Unemployment was rising. Inflation increased to 741 percent by the end of 2016 (the highest in the world). The poverty rate was back up over 30 percent. To cap this litany of disaster, the value of the Venezuelan currency, the bolivar, fell from 64 per U.S. dollar in 2014 to 960 per dollar by 2016. Parliamentary elections held in December 2015 re- resulted in large losses for the ruling United Socialist Party. For the first time since 1999, the opposition gained a majority of seats in Parliament. Maduros response was to have the supreme court, which was populated with Chavez appointees, exercise parliamentary power while declaring the legislature to be in contempt of the court. In effect, Venezuela has become a full-fledged dictatorship.

A) Under Chvezs leadership, what kind of economic system was put in place in Venezuela? How would you characterize the political system? (word limit: 100)

B) During the Chvez years, many foreign multinationals exited Venezuela or reduced their exposure there. What do you think the impact of this has been on Venezuela? What needs to be done to reverse the trend? (word limit: 100)

C) By 2016, Venezuelas economy appeared to be on the brink of total collapse. What do you think needs to be done to reverse this? (word limit: 150)