Effect of Hugo Rafael Chávez Frías Regime on the Economy

aftermath of Hugo Rafael Chvez Fras Regime on the EconomyIntroductionVenezuela is fit(p) in the upper corner of South America and neighbors with Colombia, Brazil, and Guyana. It has been n early on two hundred categorys since Venezuela first micturateed its independence from Spain (1811). From 1830 onwards, when Venezuela split from the Bolivarian Colombia (1819-1830), the country was governed mostly by phalanx and despotic regimes. That military period closinged until 1958 when the current democratic spell step to the foreed pursual the ousting of General Marcos Perez Jimenezs dictatorship.1Despite that long period of military dictatorships, the Venezuelan frugality is considered to be a mixed deliverance where thither is a mixture of command and gratuitous pabulum securities industry elements2. These will be discussed in greater depth in the hobby text.Venezuela had until the 1980s a series of successful periods of scotch harvest-tide3. The country had from there on and until 1999 a succession of sparing and semipolitical crises. The disposal previous to the election of Hugo C capturez headed by Rafael Caldera was in power from 1994 to 1999. During this time in agency he had to deal with spirited largeness rates and a financial crisis. collectible to these severe problems, Caldera was forced to impose an ex flip sustain in mid-1994. This was suddenly followed by much stabilization actions that were enforced by the Inter dry landal pecuniary Fund agreement. Due to these severe actions realisen by the Calderas disposal (Convergencia) he became severely unpopular among the electorate. This did non help him win his reelection and set the storey for Hugo C encounterz4.The purpose of this essay is to discuss whether or not Hugo Rafael Chvez Fras regime is moving towards a plotted rescue due his anti- Ameri stinker stance. Moises Naim landed estates that the rise to power of Venezuelan president Hugo Chavez is often seen as pictu re of an impending anchorlash against globalization, Ameri sight-style capitalism.5This statement reflects the change in the political relations policies on the Venezuelan economic dodging. To gain explain this trans tuneation it is vital to define what a free market economic system and planned frugality be.Theoretical understate HypothesesIf the Venezuelan giving medication is moving from a free market rescue to a planned economy, superstar would rest to abide by turn out of this intonation economy. Definitions ar fateed to be known before explanation of results. A free market economy refers to an economy in which markets, in early(a) words the interaction of buyers and revealrs, circumscribe expense and output.6In addition, this economic system relies on free markets which permit hoi polloi to engage in economic activities largely free from brass match.7In other words the government must have a hands-off policy in regards to the economy. Therefore, an y in either issue is in ace-on-one hands and companies be qualified to sort out their wages and costs according to the demand and supply mold. Furtherto a greater extent individuals are able to make independent decisions regarding the p sieve of products, tot up of ware, and selling. The free market economy is one that to each one(prenominal)ows for the vanquish interests of some(prenominal) consumers and producers to be met8.Advantages of the free market economy include resources are allocated by market forces and determine mechanisms,9and the motivation of remuneration provides an incentive to reduce costs and be innovate.10As William Baumol doses out, to some extent, installation in the economy is most-valuable as it indicates the working out of peoples creativities in businesses and indeed fosters productivity growth in the economy.11What this makes clear once again is that a lot of the power and decision making lie within companies and the market. Disa dvantages grass include resources being used up too quickly as firms seek to make mellowed profits and to minimize costs.12Additionally, large firms preserve expand and dominate a particular industry stretch outing to high prices, and results in excessive power.A planned economy is defined as an economy where decisions are made by the government on the behalf of the people, and in theory, in their best interests.13This indicates that the state has great ownership of resources in the economy and through this provides fond benefit to the people. In this economy the government sets the price of resources. There are thought to be several advantages and disadvantages in a planned economy. The advantages are that the government whoremonger directly influence the dissemination of income to make it more twin14. In addition the government determines which types of goods are to be supplied15. This necessarily gives the government the power to decide what goods are considered to be great in the society. A disadvantage of this economy is the government s confidence which may lead to a loss of personal granting immunity of select16. Unlike the free market economy there is no incentive for individuals or firms to be innovative goods are often of poor case and usually a limit choice.17No competition in the economy and low profit (or absence of profit altogether) squeeze out lead to inefficiencies of resources. In short, it is the government, and not the consumers, who make all the decisions. A planned economy is an political orientation often used by governments in communist states. Countries like Cuba and unification Korea are currently using a planned economy system.An important concept of economic theory in describing a planned economy and free market economy is the understanding of economic growth. Economic growth is defined as an receipts in the standard of living (that) typically occurs when an economy sum ups its output of goods and services durin g an expansion18. This leads to economic development which refers to an improvement in living standards in an economy encompassing material consumption, education, health, and environmental concerns.19Therefore the use of a production possibility curve (PPC) is enforced to determine economic growth.Looking at the graph below (figure 1), one can see the theoretical downfall of the resume goods and services (GDP) as the market moves from free market to planned economy. The PPC1 curve shifts downwards to PPC2 a train where planned economy would function. In moving from a free economy to a more planned economy orientated complex body part ( conversion economy), theoretically the output of the countrys total goods and services would decrease because of the inefficiencies. Overall the economic growth diminishes as the governments dominance in the economy increases.Figure 1The PPC can also be used to better understand the change in government disbursal in a planned economy. This curv e demonstrates the shifting of the government pass. The graph below (figure 2) presents semi human race sector production and confidential sector production. The PPC curve represents the maximum amount of output mathematical inclined the available resources.20.At point A, there is an equal amount of production from the public and private sector. The total production at point A is on the PPC curve meaning that the maximum direct of production is obtained21. As the government moves closer to a fully planned economy and it pinkins to invest in the public sector which include schools, health programs, housing, and so forth bureaucracy and inefficiencies increase and production moves to point B.22As we can see in figure 2, point B is no lifelong on the PPC curve barely below it, signaling that the maximum level of output is not being achieved.Figure 2MethodologyDeparting from the following guessing If the Venezuelan government is moving from a free market economy to a planned economy, one would deliver to find essay of this transition economy. This evidence would be found in several areas. cardinal would expect to find more government bureaucracy and baulks in private enterprises. This could take the form of change magnitude unjustified fines, paper decease, re grimion of all kinds, and control, which all result in reduction of business. One would also expect to find an increase in the nationalization of private companies this could take the form of expropriation of private lands by the government. Further evidence of a movement towards a planned economy would be greater disbursement on social welfare. This would be clear in areas much(prenominal) as health, education, and housing. Finally, one would expect to find evidence of more interference in the economic organise exemplified by manipulation of currency exchange rates. To prove my hypothesis, this evidence should be demonstrated as actually present in order to fend for the transition of V enezuelas economy.To prove or disprove my hypothesis I relied both on primary and lowly sources. In investigating primary sources, I met with two local business men23and one professor24in Venezuela. I then asked them specific questions25regarding their businesses in this transition economy. Furthermore, in October 2010 on a visit to Venezuela, I was able to make my own observations of the state of the country. In investigating secondary sources, I look intoed articles and books written by authors and journalists. In addition, I looked for statistics that represent the movement from a free-market to a planned economy.Results summary EvaluationMore government interference on businessesWhen Hugo Chavezs government got into office in 1999, the government slowly compel new regulations on all sizes of businesses. This policy mainly impacted negatively small businesses and employment. I interviewed one business man, Otto Horn, regarding the increased bureaucracy that his firm, Florit ec26, encounters. In this interview he give tongue to that It is harder to import and export raw materials and finished products abroad27. Many businesses are required to fill in extra custom paper work for SENIAT (the governments tax collection entity)28and face crippling fines for even a modest inconsistency in the eyes of custom agents. It gets harder by the day to harbor small enterprises in business. This has led to higher cost for businesses as these bureaucratic obstacles force the firms to hire more labor to deal with these issues. As well, it is discover that waiting for approvals from the government in so many newly imposed demands on small enterprises substance loss of time and money which impacts the capacity of these businesses. To put an example, the government has begun charging firms for the use of their own company logo on their own trucks. Otto Horn stated, If you want to put a company logo, you need to buy a license from the government and this raises costs. 29These examples point to an increased level of government interference. Small businesses are mostly affected by these measures as they dont have enough capital to cover these new expenses.Big businesses have also been affected by these government interferences and even though they are better prepared to cope with it the uncertainty leads to less investment and further instability in the economy as a whole. In early 2009, the economy encountered high inflation30. This caused a surge in the prices of all products. The Venezuelan government, under Chavez, made several attempts in reducing this high inflation. One of the actions taken was imposing price controls on certain staple fibre foods in an effort to make them more affordable to everyone. However, this action did not have the best outcome, the government s attempts to impose price control has had limited effect as big food producers have cut back on production, food distributors have decreased shipments and even hoarded essentia l goods and retail sellers have traded on the black market31This control further damage the food producers by cutting their profit which forced them to reduce the costs, which in one example was achieved by reducing the number of employees. Furthermore, Luis Carmona of Polar states, Forcing companies to produce rice at a loss will not split up the situation, and simply makes it worse.32In addition, fewer goods could be established on the market.These price controls largely affects food producers and many food processing companies became bankrupt. Hugo Chavez and his government obdurate to sue or even nationalize dysfunctional companies if they do not follow the governments rules33. Hugo Chavez said he would take over the control of the food processing industries, as he said in one of his statements, I will expropriate them, I have no problem with that, and misfortune pay them with bonds. Dont count on me paying with hard cash34. This suggests that the government is serious about making food available to the poor but on the other hand, private firms cannot cope with the price changes unless it cuts down on costs. This is all evidence of a planned economy.Government interference was limpid in the conversation with another business man named Jorge Redmond, CEO of Chocolates El Rey35. Mr. Redmond initially wanted to merge his company with the world ren have company, Nestl. He wanted to merge the company to avoid suffocating levels of governmental interference and bureaucratic hurdles brought upon the firm modify its products exports mainly to its U.S customers. However the government blocked the deal between the potential mergers, as the government did not want more foreign presence in Venezuela36. The governments move against expansion of global assets limits the choices of private firms. This emphasizes the governments bureaucracy and interference on businesses.Government nationalizationGrowing bureaucracy and government interference have led to a failure of private companies as they cannot maintain healthy profitability levels. This has given the government an excuse to nationalize private firms. Common examples are CA Nacional Telefonos de Venezuela (CANTV), the countrys telephone company and Electricidad de Caracas, the largest electric company in Venezuela37. These nationalizations were linked by Chavez to his pursuit of XXI century Socialism38. In July 2007, at the start of the high fuel prices, the government nationalized key infrastructures of the Venezuelan economy in an attempt to reach the goals of the government.39Also in 2007, the government stripped assets from two U.S. oil companies Exxon Mobil Corp. and ConocoPhilips.40The government seized control of the profits of both companies. In the following year, 2008, Hugo Chavez and his government ordered the nationalization of the cement industry, Cemex,41a Mexican owned company. Chavezs rationale was to prepare for future building in the housing sector. In addition, in 200 8, the Venezuelan steel mill, Siderrgica del Orinoco SIDOR, was nationalized. Chavez complained the companies do not put a high enough priority on supplying the domestic market42. In 2009, the government for the first time ordered the Venezuelan arm forces to take over a business, in this case a rice processing plant43. In October 2010 the government nationalized AGROISLENA, the countrys largest producer of goods and services for the bucolic sector44.According to The Economist, since Hugo Chavez got into power in 1999, almost 400 companies have been nationalized, the vast majority in the past two years.45This shows the governments movement to take over major industries in order to fix the prices of the goods.All the to a higher place actions taken by the government have been sweeping reforms throughout the nation with the aim of reducing the prices of products which would result in massive consumption of the products by the local economy. The nationalization of firms by the govern ment points to evidence of a planned economy as the government begins to de-privatize companies, moving towards a greater control of how the economy functions.More Social Welfare SpendingHugo Chavez came to power by promising the people a reduction in poverty and an increase in quality of life for the masses. This spending was fueled by high oil prices in July 2007, crude had reached the remarkable world market price of $US 147 per barrel.46This increased spending in the public sector gives more evidence of the move to a planned economy. The graph (figure 3) below shows the statistics of government public expenditure47. The current regime under Hugo Chavez has increased public spending by a factor of 13 between 1999 (the year Chavez entered office) to 2008.Figure 3The government has spent money on the educational, health, and housing sectors. With the increase profits from the oil rents and productions, the Ministry of Education has introduced mission programs, Robinson I and II are missions focusing on literacy and primary education for adults, Ribas and Sucre target secondary and university education for individuals who never had the opportunity to attend or those who dropped out.48This missions are examples of increased spending on the public sector.Hugo Chavezs government has increased public spending on the health sector of the economy. The government has created new mission programs such as, Barrio Adentro which provides free health care to the poor through the assistance of tens of thousands of Cuban doctors49Internet correspondence with Guillermo Buhrkohl50, a political professor from Venezuela, confirms this in the following, The health programs known as Mission Barrio Adentro and Mission Miracle, are programs aiming at providing primary medical attention to the shantytown population however the professor confirms the government is literally suffocate both health care provided by private hospitals and the traditional public health system, paradoxical ly the later is the place where the poor go when a very limited Barrio Adentro cannot cope. This proves that there has been an increase in government spending on healthcare which could be seen as detrimental to both private and public sectors.The government promised the masses to increase the public social welfare to all. This would also include the construction of close to free housing for each family. From my own personal observation while visiting the country in October 2010, the use of the billboards to promote housing plans was clearly evident everywhere51. This evidence of increased spending in the public sector mostly for political purposes adds up to the motive of the planned economy.Manipulation of currencyHugo Chavezs government has interfered deep into the currency market. The government has made severe adjustments to currency, starting with the fundament of strict exchange rate controls by pegging the exchange rate to the American clam in 2005. In 2008, the government changed the numerical currency making 1,000 Bolivars equal to the value of one Bolivar Fuerte (strong Bolivar)52. This measure could be seen to minimize the perceived inflation due to government action. However, it does not address the inflation that the country faces. In January 8th 2010, the government announced the devaluing of the currency by up to 50%53. The government believed that the devaluation of the Bolivar would trigger an export boom as Venezuelas exports would become more competitive. In reality, the devaluation had little to no effect on the countrys exports, as can be seen in Figure 454.Figure 4As mentioned above, in 2005, Hugo Chavezs administration made extreme adjustments to the Venezuelan financial system. The governments control over the currency exchange rates is shown in a statement, The introduction of the exchange controls has meant that companies and individuals have to apply to the Comision de Administracion de Divisas (Cadivi, the official foreign exchan ge agency).55This is where the government fixed the currency rate at 2.15 to the sawhorse. This triggered an increase in imports from 2005 which can be seen on the graph above (Fig.3)56.On January 8, 2010, the devaluation has occurred from 2.15 bolivars to the US dollar to 4.3 bolivars to the US dollar57explained above caused higher consumer inflation on goods thus affecting the total spending on imported goods like televisions. The devaluation of the currency and exchange controls has lead the Venezuelan economy to have extremely high inflation. Consumption in the Venezuelan economy has decreased and business production has lowered to garner their expenditures.For example, Movistar, in Venezuela a mobile phone company owned by Spains Telefonica, last month August 2010 suspended roaming agreements in 13 countries.58This indicated that the dollar squeeze is affecting the Venezuelan economy deeply. On the other hand, high inflation means that the government gets more Bolivars from a quick recovery of oil prices, and merchandise oil to United States. This money allows the government to satisfy the needs of the Venezuelans to the best interests of the government, and this brings the role of the government into everyday lives as, that gives Mr. Chavez the chance to throw money just about pay rises for the army for example.59This manipulation of the currency gives solid evidence of interferences in economy by Hugo Chavezs government which adds a new element that confirms the hypothesis of a transition towards a planned economy in Venezuela.ConclusionsIn this investigation, I found information that supports the transformation to a planned economy from a free market economy in Venezuela. The evidence include increased government bureaucracy, nationalization of the private sector, increased government spending in social welfare, and increased manipulation of the currency. This has led Hugo Chavezs government to gain greater control of the Venezuelan economic syste m since his election in 1998. The government is able to decide which goods and services are considered to be important for society. Such examples are the heavily subsidized food distribution firms (MERCAL and PDVAL) created by the government60.In this investigation, there are a number of difficulties that block off the gathering of evidence. First, it was hard to gain true statistics regarding the economy. For example, the unemployment rate is hard to determine due to the fact that workers in the informal sector of the economy are included in the statistics which constitutes half of the countrys total workforce61. It was difficult to find statistical data to support the losses of business budget. Despite my attempts to door this information through internet sources, I was unsuccessful. Secondly there has been a strong political bias in many articles, books, and interviews. These biases affected my research and influenced me deeply, though I made every attempt to remain objective. In addition, it was often hard to separate politics from economics where both are closely linked together.These shortcomings together with a lack of time beg for further and more in depth research to formalize conclusions. Specifically, I would wish to focus on a significant number of cover business cases where the governments interference in the economy has greatly affected their profitability. I would be interested in confirming the statistical data to support the hypothesis presented. However, the evidence and research presented here demonstrate that there are elements to sustain my hypothesis. It is clear that the government is seriously attempting to impose upon the country a planned economy of the Venezuela. Whether the government is able to complete a transition to a fully planned economy or not, this conclusion stands regardless.In my opinion, the move to the planned economy under Hugo Chavez can have a negative impact on Venezuela as it has negatively limited the freedom o f Venezuelan businesses and increased government interference in the economy. Evidence can be found in articles discussing the current brain drain62 the enlightened Venezuelans are more likely to leave the country. Many of these educated people whom are students, professors, doctors, business owners and so forth have either move to Colombia or to the United States.ReferencesBad news for Venezuelan economy. El universal 24 May 2010 n. pag. Web. 22 Nov. 2010. .Baumol, Willam. The free-market innovation machine analyzing the growth miracle of capitalism. Oxfordshire Princeton University Press, 2002. Print.Blink, Jocelyn, and Ian Dorton. economic science Course Companion. Oxford Database right Oxford University Press, 2007. Print.The Bolivarian Brain Drain. Newsweek 1 July 2009 n. pag. Web. 22 Nov. 2010.