Question

Why has Venezuela imploded, both economically and politically? Analyze the origins and magnitude of this crisis. How could it best be resolved?

Answer 1

Solution

Venezuela has become de-stabilized internally in terms of both politically and economically.It has faced many economic crisis historically;the main reason being it's long-term dependence on one resource commodity that is crude oil.When the international crude oil price fall,the country suffers.It's entire economy mostly runs on profits generated by trading oil.

Any country when it generates surplus out of trade ,it will have to invest that either in improoving it's efficiency in production of the industry it is relying on (or) it can invest the amount in different /emerging sectors so that it's revenue risk is reduced (by diversification).Ex:Some Oil exporting countries like Saudi Arabia,which are rich in oil resources,are investing their surplus in other booming sectors like non-renewable energy,travel,tourism,etc., so they are diversifying their risk (i.e., creating alternate sources of revenue)

But Venezuela has not followed / adopted this principle.Instead of investing the profits it generated during the boom in oil prices,it used to spend the money on buying imported goods.So,self-sustanance of the country has gone for a toss.

Venezual has suffered mainly due to economic reason which is mainly due to fall in the oil prices internationally.This financial crisis has led to dissatisfaction among the citizens resulting in political instability.

Secondly,the large industries which were productive were nationalized.World renowed private companies like Exxon Mobil etc.,suffered a lot.So,in a way the competiton in these industries is killed.So,the effciencies in these sectors suffered.

Thirdly,the government adopted to stringent currency controls.The currency controls are complex.There are three different official exchange rates in Venezuela whcih make it very difficult for the people and businesses as well to operate.These foreign exchange regulations make it really difficult for the foreign companies to re-patriate their profits.So,genearlly all companies stuck with excess cash reserves.

Forthly,the number of sectors that the country has opened up for foreign investments is limited.Mostly if foreigners have to invest in the remaining sector they will have to opt for indirect route i.e., investing in a Venezuelan company operating in that sector.

It can be resolved by some steps like:

1.Liberalization and Privatization in it's economy - Simplifying the regulations and allowing private participation in the industries

2.Globalizing and opening it's economy to the world

3.Removing Currency controls

4.Diversifying it's sources of revenue

5.Focussing on different industries according to their comparitive advantage.

6.Reducing the extent of communist influence in the country.

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