Venezuela's Economic Crisis: A Deep Dive into the Causes and Impacts

This report examines the severe economic crisis currently faced by Venezuela, a nation with the world's largest crude oil reserves. The paper begins by highlighting the country's reliance on oil revenues, which made it vulnerable to external shocks when global oil prices declined from 2014. The report delves into the causes of the economic downturn, including heavy reliance on oil revenues, economic mismanagement, corruption, currency controls, and price controls. Economic mismanagement, particularly by the state-owned oil company PDVSA, led to decreased foreign investment and reduced oil production. Corruption and currency controls created black markets and shortages of essential goods, while price controls further distorted the market, leading to reduced production and high inflation. The report concludes by emphasizing the multifaceted nature of the crisis, attributing it to a combination of external factors and internal policy failures, and highlights the resulting high unemployment and inflation rates.

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VENEZUELA’S ECONOMIC CRISIS
Student’s Name
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Introduction
From the start of past one decade till 2014, Venezuela profited from booming oil prices
an occurrence that facilitated increased public expenditure on ambitious schemes. However, the
decline in global oil prices from 2014, along with insufficient micro and macroeconomic policies
have considerably impacted Venezuela’s social and economic performance. This country with
the leading crude oil reserves globally is currently encountering one of the severest social,
political and economic crises. The shops and supermarkets in this country lack adequate essential
products like medical and food supplies. Moreover, the failure of the leadership of Venezuela to
accumulate savings during oil revenue boom has worsened the current economic crisis.1
Therefore, this paper explores reasons behind the current Venezuela’s economic downturn.
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
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Venezuela's economic outlook
GDP growth (Annual %)
Unemployment
Inflation (Annual %)
%
Figure 1: Data extracted from the World Bank
1 —. "The World Bank In Venezuela ." 2016.
http://www.worldbank.org/en/country/venezuela/overview (accessed September 3rd,
2017).

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Causes of Venezuela's Economic Downturn
Decline in Global Oil Prices
Heavy reliance on oil revenues has made Venezuela’s economy to be highly exposed to
external shocks. Oil accounts for approximately 95% of Venezuela’s export income and 25% of
its Gross Domestic Product. Therefore, as global oil prices declined from 111 U.S Dollars per
barrel in 2014 to 27 U.S Dollars per barrel in 2016, the economy of this country contracted
significantly.2 In 2014, the economy contracted by 3.89% and 10% in 2016.
Figure 2: Retrieved from Cable News Network (CNN)
Economic Mismanagement
The government’s decision to take a bigger role in managing of the country’s oil
production has resulted in a drop in foreign investments and consequently a decrease in oil
2 Council on Foreign Relations. Venezuela in Crisis. August 1st, 2017.
https://www.cfr.org/backgrounder/venezuela-crisis (accessed September 3rd, 2017).

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production. For instance, the state-managed petroleum firm, Petroleos de Venezuela, S.A.
(PDVSA), manages the entire country’s oil exploration, extraction, and exportation. Studies
depict that this company is highly mismanaged and suffers from underinvestment in
infrastructure.
Besides, during periods of the boom in oil prices, the leadership of this country used most
of the oil revenues to cater for housing and food subsidies. While such programs are vital for
social justice, they are not useful for long-term economic progress. The oil revenues were also
used in establishing robust and gracious international relations by selling oil resource on
conditions of preferential payment to countries affiliated to Petrocaribe alliance.3 If such
resources were diverted to constructive schemes like infrastructure improvement the current
economic downturn could have been less harsh.
Corruption
The inability of the leadership of Venezuela to fight corruption is also contributing to
economic chaos the country is facing. According to Transparency International rankings,
Venezuela ranks 166 out of 176 countries on its perceived corruption index.4 A significant share
of the oil revenues was embezzled especially between 2003 and 2013 when the income from this
resource was high. Researches exhibit that corruption adversely impacts the long run economic
progress through its impact on public expenditures, taxation, investment and human
development.
3 Council on Foreign Relations.
4 Transparency International. Venezuela. 2016.
https://www.transparency.org/country/VEN# (accessed August 3rd, 2017).

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Currency Controls
The mismanagement of currency by the leadership of this country is also another source
of problems the economy is encountering. Currency controls in Venezuela date back to 2003
when they were introduced by Chavez to curb capital flight. By selling the United States Dollars
at various rates, the government established a loophole for corruption as well as black markets.
For example, those businesses sanctioned to purchase dollars at a preferential price to facilitate
the acquisition of vital products like medicine and food sells the dollars to third parties at a high
profit. As a result, essential imports such as foods and drugs have declined significantly in the
recent years because the overseas products have become exceedingly expensive. The consumers
in this country are waiting for many hours before they purchase essential commodities due to
shortages. Moreover, the crashing of oil revenues also left Venezuela with insufficient foreign
currency to buy products from other countries.5
Price Controls
Prices perform an important role in the market economy. They indicate the producer’s
desire to continue providing goods and services and the purchaser’s willingness to pay for
commodities. Therefore, the intervention of the government through price controls without
taking into consideration the interests of both parties is likely to cause a serious problem.6 In
Venezuela, under the leadership of Chavez, the government slashed the prices essential items to
5 Sanchez, Ray. Venezuela: How paradise got lost. July 27th, 2017.
http://edition.cnn.com/2017/04/21/americas/venezuela-crisis-explained/index.html
(accessed September 3rd, 2017).
6 Kates, Steven. Free Market Economics : an Introduction for the General Reader.
Cheltenham : Edward Elgar Publishing, 2014.

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make them affordable to many individuals. As a result, many producers in the country reduced
their production resulting in shortages, high prices, and even unemployment.
The intention of the government of protecting the consumers through price ceiling is
usually good. However, the ultimate results of such interventions are often undesirable since the
users suffer more. On figure three below, equilibrium in the free market takes place at point K
where the equilibrium output is Qe whereas the equilibrium price is Pe. On the enactment of a
price ceiling, P0, the quantity demanded increases to Q3 while the amount the suppliers are
willing the supply to the market declines to Q2. The variance between Q3 and Q2 depicts a
shortage. This scenario is being encountered in Venezuela.
Figure 3: Maximum Price
Price
Quantity
Conclusion
D
S
Qe Q3
P2
Pe
P0
Shortage
Q2
Maximum price
M
K

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Although it has the leading oil reserves globally, Venezuela is experiencing a severe
recession. In 2014, the country’s economy contracted by 3.89% and by 6.2% and 10% in 2015
and 2016 respectively. In the past one decade, unemployment has remained above 6.8%, and the
country is experiencing exceedingly high inflation. In 2015, inflation stood at 109%. This
economic crisis is attributed to several reasons. Foremost, over-reliance on oil revenues made
Venezuela’s economy to be highly exposed to external shocks especially when the global oil
prices started declining from 2014. Economic mismanagement characterized by corruption,
misallocation of oil revenues and the failure of the leadership of Venezuela to accumulate
savings during oil revenue boom has also contributed to the current economic crisis.
Furthermore, currency controls provided a loophole for the thriving of black markets and
corruption that further created a severe shortage of essential goods such as food and medical
supplies. Ultimately, the introduction of price ceiling by the government of Chavez increased
distortions in the market. This move made firms to reduce their production and hence shortages
and high inflation.

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Bibliography
Central Intelligence Agency (CIA). "The World FactBook, South America : VENEZUELA."
August 31st, 2017. https://www.cia.gov/library/publications/resources/the-world-
factbook/geos/ve.html (accessed September 3rd, 2017).
Council on Foreign Relations. Venezuela in Crisis. August 1st, 2017.
https://www.cfr.org/backgrounder/venezuela-crisis (accessed September 3rd, 2017).
Kates, Steven. Free Market Economics : an Introduction for the General Reader. Cheltenham :
Edward Elgar Publishing, 2014.
Sanchez, Ray. Venezuela: How paradise got lost. July 27th, 2017.
http://edition.cnn.com/2017/04/21/americas/venezuela-crisis-explained/index.html
(accessed September 3rd, 2017).
The World Bank. GDP growth (annual %). 2017.
https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?
end=2013&locations=VE&start=2006 (accessed September 3rd, 2017).
—. "The World Bank In Venezuela ." 2016.
http://www.worldbank.org/en/country/venezuela/overview (accessed September 3rd,
2017).
Transparency International. Venezuela. 2016. https://www.transparency.org/country/VEN#
(accessed August 3rd, 2017).

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