Has The Venezuelan Economy Transformed Into A Planned Economy Economics Essay


Venezuela is located in the upper corner of South America and neighbours with Colombia, Brazil, and Guyana. It has been about 200 old ages since Venezuela foremost gained its independency from Spain ( 1811 ) . From 1830 onwards, when Venezuela split from the Bolivarian Colombia ( 1819-1830 ) , the state was governed largely by military and despotic governments. That military period lasted until 1958 when the current democratic enchantment started following the ouster of General Marcos Perez Jimenez ‘s absolutism.[ 1 ]Despite that long period of military absolutisms, the Venezuelan economic system is considered to be a assorted economic system where there is a mixture of bid and free market elements[ 2 ]. These will be discussed in greater deepness in the undermentioned text.

Venezuela had until the 1980 ‘s a series of successful periods of economic growing[ 3 ]. The state had from at that place on and until 1999 a sequence of economic and political crises. The authorities old to the election of Hugo Chavez headed by Rafael Caldera was in power from 1994 to 1999. During this clip in office he had to cover with high rising prices rates and a fiscal crisis. Due to these terrible jobs, Caldera was forced to enforce an exchange control in mid-1994. This was shortly followed by more stabilisation actions that were enforced by the International Monetary Fund understanding. Due to these terrible actions taken by the Caldera ‘s authorities ( Convergencia ) he became badly unpopular among the electorate. This did non assist him win his reelection and set the phase for Hugo Chavez[ 4 ].

The intent of this essay is to discourse whether or non Hugo Rafael Chavez Frias ‘ government is traveling towards a planned economic system due his anti- American stance. Moises Naim states that “ the rise to power of Venezuelan president Hugo Chavez is frequently seen as grounds of an at hand recoil against globalisation, American-style capitalist economy. ”[ 5 ]This statement reflects the alteration in the authorities ‘s policies on the Venezuelan economic system. To farther explicate this transmutation it is critical to specify what a free market economic system and planned economic system are.

Theoretical Background & A ; Hypothesiss

If the Venezuelan authorities is traveling from a free market economic system to a planned economic system, one would anticipate to happen grounds of this passage economic system. Definitions are needed to be known before account of consequences. A free market economic system refers to an economic system in which markets, in other words the interaction of purchasers and manufacturers, determine monetary value and end product.[ 6 ]In add-on, this economic system “ [ relies ] on free markets which permit people to prosecute in economic activities mostly free from authorities control. ”[ 7 ]In other words the authorities must hold a hands-off policy in respects to the economic system. Therefore, all production is in private custodies and companies are able to set their rewards and monetary values harmonizing to the demand and supply curve. Furthermore persons are able to do independent determinations sing the monetary value of merchandises, sum of production, and retailing. The free market economic system is one that allows for the best involvements of both consumers and manufacturers to be met[ 8 ].

Advantages of the free market economic system include: “ resources are allocated by market forces and monetary value mechanisms, ”[ 9 ]and the motive of net incomes “ provides an inducement to cut down costs and be innovate. ”[ 10 ]As William Baumol points out, to some extent, invention in the economic system is of import as it indicates the enlargement of people ‘s creativenesss in concerns and therefore Fosters ‘productivity ‘ growing in the economic system.[ 11 ]What this makes clear one time once more is that a batch of the power and determination devising prevarication within companies and the market. Disadvantages can include resources being “ used up excessively rapidly… as houses seek to do high net incomes and to minimise costs. ”[ 12 ]Additionally, big houses can spread out and rule a peculiar industry ; taking to higher monetary values, and consequences in inordinate power.

A planned economic system is defined as an economic system where “ determinations are made by the authorities on the behalf of the people, and in theory, in their best involvements. ”[ 13 ]This indicates that the province has great ownership of resources in the economic system and through this provides societal public assistance to the people. In this economic system the authorities sets the monetary value of resources. There are thought to be several advantages and disadvantages in a planned economic system. The advantages are that the authorities can straight “ act upon the distribution of income to do it more equal ”[ 14 ]. In add-on the authorities determines “ which [ types of goods ] are to be supplied ”[ 15 ]. This necessarily gives the authorities the power to make up one’s mind what goods are considered to be ‘important ‘ in the society. A disadvantage of this economic system is the “ authorities [ ‘s laterality which ] may take to a loss of personal freedom of pick ”[ 16 ]. Unlike the free market economic system there is “ no inducement for persons or houses to be innovativeaˆ¦ goods are frequently of hapless quality and normally a limited pick. ”[ 17 ]No competition in the economic system and low net income ( or absence of net income wholly ) can take to inefficiencies of resources. In short, it is the authorities, and non the consumers, who make all the determinations. A planned economic system is an political orientation frequently used by authoritiess in communist provinces. States like Cuba and North Korea are presently utilizing a planned economic system system.

An of import construct of economic theory in depicting a planned economic system and free market economic system is the apprehension of economic growing. Economic growing is defined as an “ betterment in the criterion of life ( that ) typically occurs when an economic system increases its end product of goods and services during an enlargement ”[ 18 ]. This leads to economic development which “ refers to an betterment in life criterions in an economic system embracing material ingestion, instruction, wellness, and environmental concerns. ”[ 19 ]Therefore the usage of a production possibility curve ( PPC ) is implemented to find economic growing.

Looking at the graph below ( figure 1 ) , one can see the theoretical ruin of the entire goods and services ( GDP ) as the market moves from free market to planned economic system. The PPC1 curve displacements downwards to PPC2 a degree where planned economic system would work. In traveling from a free economic system to a more planned economic system orientated construction ( transition economic system ) , theoretically the end product of the state ‘s entire goods and services would diminish because of the inefficiencies. Overall the economic growing diminishes as the authorities ‘s laterality in the economic system increases.

Figure 1

The PPC can besides be used to better understand the alteration in authorities disbursement in a planned economic system. This curve demonstrates the shifting of the authorities disbursement. The graph below ( figure 2 ) nowadayss public sector production and private sector production. The PPC curve represents the maximal sum of end product possible given the available resources.[ 20 ].

At point A, there is an equal sum of production from the populace and private sector. The entire production at point A is on the PPC curve significance that the maximal degree of production is obtained[ 21 ]. As the authorities moves closer to a to the full planned economic system and it begins to put in the populace sector which include schools, wellness plans, lodging, and so forth bureaucratism and inefficiencies addition and production moves to indicate B.[ 22 ]As we can see in figure 2, point B is no longer on the PPC curve but below it, signaling that the maximal degree of end product is non being achieved.

Figure 2


Going from the undermentioned hypothesis “ If the Venezuelan authorities is traveling from a free market economic system to a planned economic system, one would anticipate to happen grounds of this passage economic system ” . This grounds would be found in several countries. One would anticipate to happen more authorities bureaucratism and interventions in private endeavors. This could take the signifier of increased undue mulcts, paper work, limitation of all sorts, and control, which all consequence in decrease of concern. One would besides anticipate to happen an addition in the nationalisation of private companies ; this could take the signifier of expropriation of private lands by the authorities. Further grounds of a motion towards a planned economic system would be greater disbursement on societal public assistance. This would be clear in countries such as wellness, instruction, and lodging. Finally, one would anticipate to happen grounds of more intervention in the economic construction exemplified by use of currency exchange rates. To turn out my hypothesis, this grounds should be demonstrated as really present in order to corroborate the passage of Venezuela ‘s economic system.

To turn out or confute my hypothesis I relied both on primary and secondary beginnings. In look intoing primary beginnings, I met with two local concern work forces[ 23 ]and one professor[ 24 ]in Venezuela. I so asked them specific inquiries[ 25 ]sing their concerns in this passage economic system. Furthermore, in October 2010 on a visit to Venezuela, I was able to do my ain observations of the province of the state. In look intoing secondary beginnings, I researched articles and books written by writers and journalists. In add-on, I looked for statistics that represent the motion from a free-market to a planned economic system.

Results & A ; Analysis & A ; Evaluation

More authorities intervention on concerns

When Hugo Chavez ‘s authorities got into office in 1999, the authorities easy imposed new ordinances on all sizes of concerns. This policy chiefly impacted negatively little concerns and employment. I interviewed one concern adult male, Otto Horn, sing the increased bureaucratism that his house, Floritec[ 26 ], brushs. In this interview he stated that “ It is harder to import and export natural stuffs and finished merchandises abroad ”[ 27 ]. Many concerns are required to make full in excess usage paper work for SENIAT ( the authorities ‘s revenue enhancement aggregation entity )[ 28 ]and face crippling mulcts for even a minor incompatibility in the eyes of usage agents. It gets harder by the twenty-four hours to maintain little endeavors in concern. This has led to higher cost for concerns as these bureaucratic obstructions force the houses to engage more labour to cover with these issues. As good, it is noticed that waiting for blessings from the authorities in so many freshly imposed demands on little endeavors means loss of clip and money which impacts the efficiency of these concerns. To set an illustration, the authorities has begun bear downing houses for the usage of their ain company logo on their ain trucks. Otto Horn stated, “ If you want to set a company logo, you need to purchase a licence from the authorities and this raises costs. ”[ 29 ]These illustrations point to an increased degree of authorities intervention. Small concerns are largely affected by these steps as they do n’t hold adequate capital to cover these new disbursals.

Large concerns have besides been affected by these authorities interventions and even though they are better prepared to get by with it the uncertainness leads to less investing and farther instability in the economic system as a whole. In early 2009, the economic system encountered high rising prices[ 30 ]. This caused a rush in the monetary values of all merchandises. The Venezuelan authorities, under Chavez, made several efforts in cut downing this high rising prices. One of the actions taken was baronial monetary value controls on certain staple nutrients in an attempt to do them more low-cost to everyone. However, this action did non hold the best result, “ [ the ] authorities [ `s ] efforts to enforce monetary value control has had limited consequence as large nutrient manufacturers have cut back on production, nutrient distributers have decreased cargos and even hoarded indispensable goods and retail Sellerss have traded on the black market ”[ 31 ]This control farther damaged the nutrient manufacturers by cutting their net income which forced them to cut down the costs, which in one illustration was achieved by cut downing the figure of employees. Furthermore, Luis Carmona of Polar provinces, “ Coercing companies to bring forth rice at a loss will non decide the state of affairs, [ and ] merely makes it worse. ”[ 32 ]In add-on, fewer goods could be established on the market.

These monetary value controls mostly affects nutrient manufacturers and many nutrient treating companies became belly-up. Hugo Chavez and his authorities decided to action or even nationalize dysfunctional companies if they do non follow the authorities ‘s regulations[ 33 ]. Hugo Chavez said he would take over the control of the nutrient processing industries, as he said in one of his statements, “ I will expropriate them, I have no job with that, and I ‘ll pay them with bonds. Do n’t number on me paying with difficult hard currency ”[ 34 ]. This suggests that the authorities is serious about doing nutrient available to the hapless but on the other manus, private houses can non get by with the monetary value alterations unless it cuts down on costs. This is all grounds of a planned economic system.

Government intervention was apparent in the conversation with another concern adult male named Jorge Redmond, CEO of Chocolates El Rey[ 35 ]. Mr. Redmond ab initio wanted to unify his company with the universe renowned company, Nestle . He wanted to unify the company to avoid smothering degrees of governmental intervention and bureaucratic hurdlings brought upon the house impacting its merchandises exports chiefly to its U.S clients. However the authorities blocked the trade between the possible amalgamations, as the authorities did non desire more foreign presence in Venezuela[ 36 ]. The authorities ‘s move against enlargement of planetary assets limits the picks of private houses. This emphasizes the authorities ‘s bureaucratism and intervention on concerns.

Government Nationalization

Turning bureaucratism and authorities intervention have led to a failure of private companies as they can non keep healthy profitableness degrees. This has given the authorities an alibi to nationalise private houses. Common illustrations are CA Nacional Telefonos de Venezuela ( CANTV ) , the state ‘s telephone company and Electricidad de Caracas, the largest electric company in Venezuela[ 37 ]. These nationalisations were linked by Chavez to his chase of Twenty-one century Socialism[ 38 ]. In July 2007, at the start of the high fuel monetary values, the authorities nationalized cardinal substructures of the Venezuelan economic system in an effort to make the ends of the authorities.[ 39 ]

Besides in 2007, the authorities stripped assets from two U.S. oil companies Exxon Mobil Corp. and ConocoPhilips.[ 40 ]The authorities seized control of the net incomes of both companies. In the undermentioned twelvemonth, 2008, Hugo Chavez and his authorities ordered the nationalisation of the cement industry, Cemex,[ 41 ]a Mexican owned company. Chavez ‘s principle was to fix for future edifice in the lodging sector. In add-on, in 2008, the Venezuelan steel factory, Siderurgica del Orinoco SIDOR, was nationalized. Chavez “ complained the companies do non set a high adequate precedence on providing the domestic market ”[ 42 ]. In 2009, the authorities for the first clip ordered the Venezuelan armed forces to take over a concern, in this instance a rice processing works[ 43 ]. In October 2010 the authorities nationalized AGROISLENA, the state ‘s largest manufacturer of goods and services for the agricultural sector[ 44 ].

Harmonizing to The Economist, since Hugo Chavez got into power in 1999, “ about 400 companies have been nationalized, the huge bulk in the past two old ages. ”[ 45 ]This shows the authorities ‘s motion to take over major industries in order to repair the monetary values of the goods.

All the above actions taken by the authorities have been brushing reforms throughout the state with the purpose of cut downing the monetary values of merchandises which would ensue in monolithic ingestion of the merchandises by the local economic system. The nationalisation of houses by the authorities points to grounds of a planned economic system as the authorities begins to de-privatize companies, traveling towards a greater control of how the economic system maps.

More Social Welfare Spending

Hugo Chavez came to power by assuring the people a decrease in poorness and an addition in quality of life for the multitudes. This disbursement was fueled by high oil monetary values in July 2007, “ petroleum had reached the singular universe market monetary value of $ US 147 per barrel. ”[ 46 ]

This increased disbursement in the public sector gives more grounds of the move to a planned economic system. The graph ( figure 3 ) below shows the statistics of authorities public outgo[ 47 ]. The current government under Hugo Chavez has increased public disbursement by a factor of 13 between 1999 ( the twelvemonth Chavez entered office ) to 2008.

Figure 3

The authorities has spent money on the educational, wellness, and lodging sectors. With the addition net incomes from the oil rents and productions, the Ministry of Education has introduced ‘mission ‘ plans, “ Robinson I and II are mission [ s ] concentrating on literacy and primary instruction for grownups, Ribas and Sucre mark secondary and university instruction for persons who ne’er had the chance to go to or those who dropped out. ”[ 48 ]This ‘missions ‘ are illustrations of increased disbursement on the populace sector.

Hugo Chavez ‘s authorities has increased public disbursement on the wellness sector of the economic system. The authorities has created new ‘mission ‘ plans such as, “ Barrio Adentro [ which ] provides free wellness attention to the hapless through the aid of 10s of 1000s of Cuban physicians ”[ 49 ]Internet correspondence with Guillermo Buhrkohl[ 50 ], a political professor from Venezuela, confirms this in the followers, “ The wellness plans known as Mission Barrio Adentro and Mission Miracle, are programsaˆ¦ taking [ at ] aˆ¦ supplying primary medical attending to the shantytown population ” ; nevertheless the professor confirms “ the authorities is literally smothering both wellness attention provided by private infirmaries and the traditional public wellness system, paradoxically the later is the topographic point where the hapless go when a really limited Barrio Adentro can non get by. ” This proves that there has been an addition in authorities disbursement on health care which could be seen as detrimental to both private and public sectors.

The authorities promised the multitudes to increase the public societal public assistance to all. This would besides include the building of stopping point to free lodging for each household. From my ain personal observation while sing the state in October 2010, the usage of the hoardings to advance lodging programs was clearly apparent everyplace[ 51 ]. This grounds of increased disbursement in the populace sector largely for political intents adds up to the motivation of the planned economic system.

Manipulation of currency

Hugo Chavez ‘s authorities has interfered profoundly into the currency market. The authorities has made terrible accommodations to currency, get downing with the debut of rigorous exchange rate controls by nail downing the exchange rate to the American dollar in 2005. In 2008, the authorities changed the numerical currency doing 1,000 Bolivars equal to the value of one Bolivar Fuerte ( strong Bolivar )[ 52 ]. This step could be seen to minimise the “ sensed ” rising prices due to authorities action. However, it does non turn to the rising prices that the state faces. In January 8th 2010, the authorities announced the “ devaluing of the currency by up to 50 % ”[ 53 ]. The authorities believed that the devaluation of the Bolivar would trip an ‘export roar ‘ as Venezuela ‘s exports would go more competitory. In world, the devaluation had small to no consequence on the state ‘s exports, as can be seen in Figure 4[ 54 ].

Figure 4

As mentioned above, in 2005, Hugo Chavez ‘s disposal made utmost accommodations to the Venezuelan fiscal system. The authorities ‘s control over the currency exchange rates is shown in a statement, “ The debut of the exchange controls has meant that companies and persons have to use to the Comision de Administracion de Divisas ( Cadivi, the official foreign exchange bureau ) . ”[ 55 ]This is where the authorities fixed the currency rate at 2.15 to the dollar. This triggered an addition 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 ] dollar ”[ 57 ]explained above caused higher consumer rising prices on goods therefore impacting the entire disbursement on imported goods like telecastings. The devaluation of the currency and exchange controls has lead the Venezuelan economic system to hold highly high rising prices. Consumption in the Venezuelan economic system has decreased and concern production has lowered to run into their outgos.

For illustration, “ Movistar, [ in Venezuela ] a nomadic phone company owned by Spain ‘s Telefonica, last month [ August 2010 ] aˆ¦ suspended rolling understandings in 13 states. ”[ 58 ]This indicated that the dollar squeezing is impacting the Venezuelan economic system profoundly. On the other manus, high rising prices means that the authorities gets more Bolivars from a speedy recovery of oil monetary values, and exporting oil to United States. This money allows the authorities to fulfill the demands of the Venezuelans to the best involvements of the authorities, and this brings the function of the authorities into mundane lives as, “ that gives Mr. Chavez the opportunity to throw money around: wage rises for the ground forces for illustration. ”[ 59 ]This use of the currency gives solid grounds of interventions in economic system by Hugo Chavez ‘s authorities which adds a new component that confirms the hypothesis of a passage towards a planned economic system in Venezuela.


In this probe, I found information that supports the transmutation to a planned economic system from a free market economic system in Venezuela. The grounds included: increased authorities bureaucratism, nationalisation of the private sector, increased authorities disbursement in societal public assistance, and increased use of the currency. This has led Hugo Chavez ‘s authorities to derive greater control of the Venezuelan economic system since his election in 1998. The authorities is able to make up one’s mind which goods and services are considered to be of import for society. Such illustrations are the to a great extent subsidized nutrient distribution houses ( MERCAL and PDVAL ) created by the authorities[ 60 ].

In this probe, there are a figure of troubles that hinder the assemblage of grounds. First, it was difficult to derive true statistics sing the economic system. For illustration, the unemployment rate is difficult to find due to the fact that workers in the informal sector of the economic system are included in the statistics which constitutes half of the state ‘s entire work force[ 61 ]. It was hard to happen statistical informations to back up the losingss of concern budget. Despite my efforts to entree this information through cyberspace beginnings, I was unsuccessful. Second there has been a strong political prejudice in many articles, books, and interviews. These prejudices affected my research and influenced me deeply, though I made every effort to stay nonsubjective. In add-on, it was frequently difficult to divide political relations from economic science where both are closely linked together.

These defects together with a deficiency of clip beg for farther and more in depth research to formalise decisions. Specifically, I would wish to concentrate on a important figure of concrete concern instances where the authorities ‘s intervention in the economic system has greatly affected their profitableness. I would be interested in corroborating the statistical information to back up the hypothesis presented. However, the grounds and research presented here demonstrate that there are elements to prolong my hypothesis. It is clear that the authorities is earnestly trying to enforce upon the state a planned economic system of the Venezuela. Whether the authorities is able to finish a passage to a to the full planned economic system or non, this decision stands irrespective.

In my sentiment, the move to the planned economic system under Hugo Chavez can hold a negative impact on Venezuela as it has negatively limited the freedom of Venezuelan concerns and increased authorities intervention in the economic system. Evidence can be found in articles discoursing the current encephalon drain[ 62 ]; the educated Venezuelans are more likely to go forth the state. Many of these educated people whom are pupils, professors, physicians, concern proprietors and so away have either moved to Colombia or to the United States.


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Appendix 1

SENIAT usage signifier

Appendix 2

Inflation Graph

Appendix 3

Billboard ( s )

Appendix 4

Appendix 1


How did the Venezuelan economic system transformed into what is called a planned economic system? ( is this true )

What and how did the authorities precede this transmutation?

Has the authorities intervention affects the Venezuelan lives? ( positive or negative )

Are the societal plans are efficient ( good ) for the Venezuelans?

Increase power in the province control through like nationalisation of nutrient companies, in your sense has theses effects causes other major manufacturer mentally decline or travel on board?

During authorities stay in office has the unemployment rise or autumn // with the authorities benefits?

Did the nationalisation of foreign owned oil Fieldss, boosts the Venezuelan ‘s

GDP? i? Does oil production is the biggest industry in the Venezuelan economic system and does it take over other smaller industries.

If the rising prices persists so the authorities is much more needed by the people. Is this a mark for increased societal disbursement? Is this correct?

Harmonizing to the 8th inquiry. Is this considered to be a planned economic system?

Overall, with societal disbursement, linking people to the government did the Hugo Chavez presidential term by definition of a planned economic system going more “ controlled than earlier ” .

Appendix 2

Appendix 3


“ Venezuela Inflation rate ( consumer monetary values ) . ” Venezuela Inflation rate ( consumer

A A A A A monetary values ) . Index Mundi, 2010. Web. 25 Nov. 2010. & lt ; hypertext transfer protocol: //www.indexmundi.com/venezuela/

A A A A A inflation_rate_ % 28consumer_prices % 29.html & gt ; .