Venezuela is a Latin American country whose one of the main exports is oil. It has rich oil deposits which make a great contribution of to the national income through exports. This oil trade accounts for the largest share of the Venezuela’s exports from the industrial sector. The industrial exports in turn contribute about 60% of the total gross national income. Oil thus forms one of the basic economic generators or foreign exchange earners (Weisbrot, 2).
A review of the Venezuelan economic development reveals that the economy has grown by over 94% of the anticipated rate. Though this has been recorded, oil trade has made little contribution and development over the specified period (from year 2003 to the year 2010). With Venezuela and Mexico being one of the richest countries in Latin America with oil deposits, the two countries rely heavily on oil trade thus any factor affecting oil trade has a direct impact on the balance of trade in the national economy. Therefore, oil prices in the international markets directly affect the economy of the country. In turn this results in either national economic boom or recession. It also directly affects the levels of inflation and stability of the prices of other products. So as to understand fully the effect or impact of oil trade and price fluctuations on the economy of Venezuela, let us have an overview of the Venezuelan economy (Weisbrot, 4).
Overview of the economy of Venezuela
The economy of Venezuela largely depends on the oil price fluctuations in the international oil markets. Therefore, crisis in the international oil markets have very adverse consequences on the economy of Venezuela. As an example, the crisis in the international oil markets contracted the gross economic growth rate of Venezuela to -3.3% in the year 2009 and -1.3% in the year 2010. In the last year (2011), the country was again adversely affected making its economic growth rate since even if the economic rate recorded a positive value, it was negligible compared to the impact the oil price crisis had caused to the economy (Weisbrot, 6).
Thesis
The oil trade crisis made the Venezuelan government to think of ways of getting the country out of the economic crisis in a bid to stabilize the economy making it independent of the international oil prices. So as to achieve the set goal, some of the decisions made and steps taken are outlined below.
1. Devaluation of the national currency. This step was reached upon by the government so as to reduce the import rate. This led to an average weakening the Venezuela’s currency compared to the US dollar by almost 50%. This increased the inflation rates to almost values that some products became almost unaffordable the consumers. The double exchange rate set by the government resulted in a parallel exchange market in which the US dollar was exchanged at a very high exchange rate with the Venezuela currency. The government further authorized the currency transfer from the private banks into public banks and restricted the foreign currency flow. By doing so, the country was able to control the rates of importation and exportation thus had the full control over the international trade (fao.org, paragraph 4).
2. Excessive government control in business. With the devaluation of the currency, the government held more power in business than the actual business people. In return, the rates of business operations dropped sharply making the few operational business entities pass a lot of inflation pressure on the consumers than the pressure transmitted on them. Another result of the excessive government control in business was the drop in international trade. The drop in international trade reduced the foreign income generated by exportation. The government also had to control the oil trade directly and issue transmits direct pressure on the company making it not operate on its own feet (fao.org paragraph 6).
3. Increased unemployment rates. The increased involvement of the government in business in Venezuela has resulted in increased unemployment rates due to the restrictions put in place so as to control trade. Most of the business people have found the restrictions adverse on their side making them drop out of business.
Some companies were also forced to retrench some of its staff due to the high inflation rates making the costs of operation to be exceeding high. The power rationing which was also put made some companies which depended heavily on electricity to close down or operate only on certain durations. In the end, the trade or business within the country was very mush hit to a point that the country had almost nothing coming from within or from outside (tradingeconomics.com, paragraph 11).
4. High inflation. In a report released in January 2010, the cumulative inflation indices indicated that inflation had accumulated to over 100% in a span of three years. The highest inflation rate was recorded in the year 2009 and read 52%. This was the highest value recorded since 2003 when the inflation had last raised to such levels.
5. Imbalance between costs of different imports. After the president announced devaluation in 2010, the newly adopted rates of exchange were discriminative on some products. As an example, the importers of food products and other necessities faced 17% devaluation of the currency while importers of machinery and other heavy mechanized products were faced to face 100% devaluation. This resulted in minimization of heavy machinery importation and heavy reliance on food imports than exports. The process though in a negative manner encouraged local consumption of agricultural products due to the low earnings obtained from exportation (tradingeconomics.com, paragraph 8).
6. Uneven regional development. The instability in oil prices usually results in abrupt revenue generation which at times makes the government or oil producing regions to develop exponentially without any prior plan. As a result, the oil prices are attributed to the uneven distribution of development projects.
7. Inequitable resource exploitation. Sue to impulsive revenue generation by exploitation of oil, the government of Venezuela seems to concentrate more on oil related trade ignoring the importance of exploiting non-oil resources. This makes the country much vulnerable to economic crisis once the world oil prices become unstable. Also, it makes the country much reliant on imports even in cases of food. In the end, the country spends a lot of money on imports since it has to feed its population making the balance of trade to be a deficit (fao.org, paragraph 10).
8. Slow overall development capability. When a country or region depends on only one revenue generating project, the overall development of the region is solely dependent on the project making the overall development to be slow since the money required for development is drawn from the project which also requires some of the money to be fed back to sustain the original project. The net revenue generated which can be used for development is then too little to start and sustain a development project within a short stipulated span of time. In turn, the county or region I forced to borrow from foreign countries making the overall balance of trade to be a deficit (tradingeconmics.com paragraph 14)
9. Reduced investment in the country by foreigners. The devaluation process mostly witnessed in Venezuela after the president announced a 50% devaluation of the currency scared foreign investors. They feared losing their investment thus minimal foreign investments were made. Also, other factors surrounding the whole deal in economic crisis during that time like excessive control of trade by the government, rationed power supply and high unemployment rates discouraged foreign investors from making any investments within the country.
Shifting our focus from the impacts on the general trade to specific area of impacts on balance of trade in the country, we are to examine the direct and indirect impacts of the price dynamicity in the national trade balances.
Examining the past of Venezuela and oil business, from the years 2003 to 2005, the oil business was profitable thus Venezuela had trade surplus. The large amount of trade surplus was used by the government to reconstruct the economic status of Venezuela.
Towards the last quarter of 2011, Venezuela was able to post a positive trade surplus of about 9683 million US dollars. This contributed to about 80% of the total export earnings from the country whose main trade partners are the United States, European Union and Ukraine. The oil business stabilized in this period making the total amount earned to be much higher. The main imports into the country are raw materials and machinery. As the cost of oil improved, the cost of machinery and other factory raw materials remained constant thus the increasing exports with constant imports significantly increased the trade surplus (tradingeconomics.com, paragraph 4).
In the period between 2005 and 2007, the oil business was not to its level best. The international oil prices were unstable thus the income from oil exportation in Venezuela was adversely affected. These effects were later exhibited in trade deficits and increasing inflation rates in the country. The cost of even domestic products was exceedingly high making the business people to produce less and export minimal since the little produced was used virtually all locally.
The abrupt increase in the world market oil prices often resulted in a phenomenon known as the Dutch disease. This economic disease is contracted once an abrupt increase in sale of a commodity abruptly increases the amount of income in one sector of the economy within a very short duration of time which is not matched by any increase in other sectors of the economy. In times of oil sales boom, the income generated from the oil trade increases abruptly. This calls for impulsive increase importation of raw materials since the balance of trade in a surplus. The increased importation might not completely match the exportation due to the market dynamics making the balance of trade to be a deficit.
Another problem brought about by the Dutch disease is the impact it has had on the government fiscal policies. The government of Venezuela can’t have any fixed fiscal policies since nay decision on financial matters made is subject to change due to the changes in the main income earner. This makes it difficult for the government to project any development plan in the country while targeting to use the income from petroleum. Therefore, the government cannot have any substantial fiscal budget on its expenditure which is subject to minimal variations.
As an illustration, during one of the oil boom periods in Venezuela in the past, the increased abrupt income earned from oil trade made the government to think of using the earned revenues to industrialize the country by investing in heavy machinery. As a result, there was impulsive buying of the machinery making the government to buy even the machinery that it would not use in its investment projects. On calculating the total costs incurred on the machinery importation and the involved phase of industrialization, the trade balance was a deficit since the government had spent more than it had planned to be invested in the specific field. Therefore, an abrupt increase in revenue causes instability in fiscal policies. This usually results in squandering of the revenues making the trade balance to be a deficit instead of being a surplus (globaltrade.com, paragraph 6).
So as to understand better the balance of trade of Venezuela and how it is impacted on by oil trade, let us consider a report released by an American economist in the year 2009.
Following the declining prices of oil in the international market due to some market crisis, the Venezuelan economy was relatively stable due to the huge amount of saved earnings and reduced importation. Analyzing the data retrieved from the oil exportation datasheet, it was found that from PDVSA’s financial statements released June 2008 the net oil exports was 2.75 million barrels of oil per day. About 540,000 barrels of oil exported are not paid in full thus paid only up to 50% immediately thus the deficit of 270,000 should be subtracted when calculating the trade balance. This makes the number of barrels sold on cash basis to reduce to about 2.2 million barrels of oil per day which is used to calculate the revenues after subtracting the amount the OPEC cuts. Therefore, the total revenue earned in equivalent to the current oil price per barrel multiplied with the number of barrels. Taking the cost per barrel to be 50 US dollars per barrel, then the total revenue earned by the sale of oil is 110 million US dollars per day. Taking the total expenditure on imports and other dollar related expenses, CADIVI report reveals that the average expenditure per day on each barrel of oil is approximately 53 US dollars. This implies that the trade balance incurred is a deficit of approximately 3 US dollars per barrel. This shows that any change on the oil price will have a direct impact on the balance of trade as depicted in the above example. From the data obtained, it is easy to calculate the beak even point of Venezuela where we determine the period and quantity for the market to break even (globaltrade.com paragraphs 6-12). With this data, the economic insolvency of Venezuela can be determined and the necessary measures taken to prevent adverse conditions on the country’s economy.
Measures taken by Venezuela to ensure stability in trade balance regardless of the oil trade
In the year 2010 and part of 2011, the Venezuelan government has put in place some strategies aiming to manage its balance of trade without necessarily making it to be dependent on oil trade. Some of the measures put in place include:
1. Turning investment focus from oil export to non-oil exports. Though Venezuela depends mainly on oil as the main export, it has recently turned to agricultural exports. The price of agricultural exports is relatively stable compared to the oil prices. This makes the net balance of trade to be more stabilized and surplus compared to when relying on oil trade alone. Also, investment in the agricultural sector has reduced the importation of food products which is one of the main Venezuelan main imports. In turn, this reduces the cost of imports making the balance of trade rather stable and always a surplus even if the world oil market is in crisis.
2. Improved multi-lateral trade. Venezuelan government has of late strengthened its multi-lateral ties with its trade partners like the US and Brazil where it has been able to secure reduced import and export duties on some products. In return, the country has benefited from the improved ties by having a ready market at almost fixed oil price thus little effect of world oil prices on its economy.
3. Since Venezuela is a member of the Caribbean community, it has made strategies with other members that make it possible for the country to export its oil products and other agricultural products at a relatively stable price which is not directly regulated by the world market prices. This makes the income generated relatively stable thus the government can make good fiscal policies which are relatively easy to implement. (weisbrot, 14)
With these measures and others put in place, the economy of Venezuela has been able to record a positive trade balance in the last quarter of 2011 and analyzing some of its current records, the economy is now relatively stable.
In conclusion, from the analysis, a country that relies heavily on any export in revenue generation experiences unpredictable financial problems ranging from deficit in trade balance to surplus. This in turn results in unplanned government expenditure which the government may lack a means of explaining in future. Therefore, a country should diversify on its income generating projects so as to maintain surplus in the trade balance. It is also depicted that reduction in imports even at times when the world markets of its exports are unstable results in surplus.
Works cited
www.fao.org/docrep/003/x7352e/X7352E02.htm. 2012. Print.
www.globaltrade.net/m/c/Venezuela.html. 2011. Print.
www.tradingeconomics.com/venezuela/balance-of-trade. 2010. Print.
Weisbrot M, Ray, R. A Journal on the Oil prices and Venezuela’s economy. Wasshington: Center for Economic and Policy research. 2008. Print.
