Chavez's Venezuela

Chavez’s Venezuela

Summary

Explores the political and economic situation in Venezuela since Hugo Chavez was elected president in 1998. When Chavez, who ran on a platform against corruption and economic mismanagement, initially took office, Venezuela’s economy was in a deep recession. Once in office, Chavez consolidated his hold over the government by drafting a new constitution that put him in power until 2012, and reconfiguring the Supreme Court. As a result, Venezuela is now considered to be only “partly free.” Economically, things have also remained difficult for Venezuela. Unemployment is high, and poverty continues to rise. Corruption is rampant, and there is a move to take certain industries into state ownership, with the oil industry being a particular target. Discussion of the case can revolve around the following questions:

QUESTION 1: Under Chavez’s leadership, what kind of economic system is being put in place in Venezuela? How would you characterize the political system?

It would appear that Chavez is moving toward a socialist regime. Numerous enterprises have been taken over by the state, and other companies have been forced into reorganizing as “workers cooperatives”. The government is also extending its reach into rural areas, where it has seized farms and turned them into state-owned cooperatives. Chavez has also used some of the profits from the country’s soaring oil revenues to increase government spending on various social programs, some of which are modeled after programs in Cuba.

QUESTION 2: How do you think that Chavez’s unilateral changes to contracts with foreign oil companies will impact upon future investment by foreigners in Venezuela?

In the oil industry, which the country depends on for some 70 percent of its exports, Chavez has pushed out foreign companies, and expanded the hold of the state run company. Chavez announced in 2005 that the state would increase its royalties on oil sales from 1 percent to 30 percent, and that in 2006, the tax rate of oil sales would also increase from 34 percent to 50 percent. Most students will recognize that by making it more difficult for foreign investors to do business in the country, in the oil industry or otherwise, Chavez is threatening future economic growth.