|Image courtesy UKBERRI.NET | Flickr|
From his election in 1998 until his death in March 2013, the administration of the late Venezuelan president, Hugo Chávez, proposed and enacted poor planned socialistic economic policies. In the early 2000s when oil prices soared and offered Chavez funds not seen since the beginning of Venezuela's economic collapse in the 1980s, Chávez's government became "semi-authoritarian and hyper-populist" and consolidated its power over the economy in order to gain control of large amounts of resources. Domestically, Chavez used such oil funds for populist policies, like redistribution of wealth, land reform, and democratization of economic activity via workplace self-management and creation of worker-owned cooperatives. Internationally, the Chávez administration used oil production to increase autonomy from U.S. and European governments and used oil funds to promote economic and political integration with other Latin American nations.
As Chávez began to increase domestic spending to build a loyal political following, high inflation, currency controls, an unfriendly environment with private businesses and the risk of default prevented the entrance of stronger foreign currencies into Venezuela. The Chávez government then turned to China to fund its overspending on social programs. Despite warnings near the beginning of Chávez's tenure in the early 2000s, Chávez's government continuously overspent in social spending and did not save enough money for any future economic turmoil, which Venezuela faced shortly before and after his death. As a result of Chávez's overspending and policies such as price controls, there were shortages in Venezuela and the inflation rate grew to one of the highest in the world. Chávez instituted several new taxes on non-priority and luxury goods, aiming to shift the nation's tax burden from the poor to the wealthy, and to control inflation. In 2012, Venezuela's taxes were ranked 188th out of 189 countries due to the high number of payments per year and a 61.7% tax on income per year. From November 2007 until the end of 2007, all bank transactions between businesses had a 1.5% tax extracted, as a means of controlling inflation.
To read more about high taxation, Adam Greene CPA's Blog offers “the Countries with the Highest Taxes in the World”: Link
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Venezuela's economy is in a deep crisis
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Nicolas Maduro the president of Venezuela, declared a state of "economic emergency" for 60 days on May 2016. The government stopped publishing any economic data about the country in 2014, other than updates on its shrinking gold and cash reserves. But that changed Friday when Venezuela finally published years of economic data. And it was ugly. Venezuela's economy shrank 7.1% in the third quarter of 2015, according to the government. It's been shrinking for seven consecutive quarters going back to the start of 2014.
Inflation in Venezuela skyrocketed 141% over the year ending in September, the central bank reported. Incredibly, some experts believe even that figure is understating the problem. The IMF projects inflation in Venezuela will increase 204% this year. The country is in economic meltdown due to the worst economic policy in the world. Here are some reasons why Venezuela continues to be an economic mess:
Oil crash hurts Venezuela the most
The economy depends mostly on oil. That was great when a barrel of oil was worth $100 a barrel in 2013 and 2014. Now oil prices have fallen to as low as $28.36, the lowest point in 12 years. As long as oil prices stay historically low, Venezuela will struggle to grow. In this situation the exports will total a mere $27 billion in 2016, down dramatically from $75 billion two years before.
A currency worth less than a penny
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A year ago, one dollar was equal to 175 bolivars. Now a dollar is worth 865 bolivars. Put another way, one bolivar is worth $0.001 less than a penny. Most Venezuelans exchange bolivars and dollars at the unofficial rate because Maduro's regime has created a confusing system that involves three official exchange rates, two for different types of imports and one for ordinary Venezuelans. The two primary rates deeply overvalue the bolivar, creating high demand for dollars.
New power struggle dooms 2016
Some Venezuelans have had enough of Maduro. In January, the opposition party, Democratic Unity, took 109 seats in Congress, far more than the 55 seats Maduro's socialist party won. The opposition now controls 65% of Congress. But the president appointed new Supreme Court justices right before the new Congress took office. They could overturn the opposition's legislation, creating government gridlock. In any case, political instability is never good for an economy and it's on the rise this year.
Default in 2016 is difficult to avoid
Venezuela has been teetering on the brink of default the past two months. The country is barely making enough money on oil exports to cover its debt payments.
This year Venezuela owes over $10 billion in debt payments. Nearly half of that is due in October and November. The only thing preventing a default is if oil prices rise soon or one of its few allies, China, Russia or Iran, bailout the government. But both of those appear unlikely for now.