A SWOT analysis of Venezuela

A SWOT analysis of Venezuela

Strengths: A natural endowment of the world’s most demanded resource, namely oil. Huge reserves of crude oil in the country. A boom in the oil price in the international market causes a flourishing of the Venezuelan economy; a rise in the employment rate and the GDP of the country. It also runs a current account surplus owing to the surplus revenues earned from oil. The non-oil sector has also been growing at a steady and fast pace. Finance and insurance has grown 258.4 percent during the current expansion, an average of 26.1 percent annually; construction, which has grown 159.4 percent, or 18.9 percent annually; trade and repair services (152.8 percent, or 18.4 percent annually); transport and storage (104.9 percent, or 13.9 percent annually); and communications (151.4 percent, or 18.3 percent annually). Manufacturing grew 98.1 percent during the expansion, or 13.2 percent per year.

Weakness: An overdependence on the oil industry often leads the economy to come crashing down in the case of drop in oil prices. The constant political instability in the region leads to rapid policy changes and an overarching control of the military forces in private and public spheres.

Opportunities: Foreign public debt is low, at about 9.8 percent of GDP. Principal payments for the next four years are about $1.5 billion a year, which is very modest. Therefore Venezuela could also increase its borrowing internationally if necessary, but it is extremely unlikely to encounter any balance of payments problems. In the face of strong deflationary pressures, Venezuela’s inflation is likely to continue falling in the near future.

Challenges: The main challenge for Venezuela in the next couple of years is to implement an effective stimulus package that can keep the economy on a steady growth path. Venezuela could make infrastructure and other public investments that will increase productivity in the years that follow.

Threats: Current concerns are a weakening of democratic institutions, political polarization, a politicized military, drug-related violence along the Colombian border, increasing internal drug consumption, overdependence on the petroleum industry with its price fluctuations, and irresponsible mining operations that are endangering the rain forest and indigenous peoples.

Theoretical Lessons learnt from Venezuela:

• Venezuelan government revenue and oil revenue into the country are indivisible as it constitutes a major chunk of its GDP.
• A more balanced version of the Big Push model could facilitate other sectors to move forward like agriculture and industries, and this would lead to product diversification.
• Equitable distribution and efficiency are positive functions of a balance between private and public undertakings. Only public ownership and maintenance fuels corruption and inefficiencies.

Kerala

Kerala is located at the southern tip of India and was formed in 1956. In terms of area, it constitutes only 1.275% of India; it accounts for 33.3 million of the total Indian population .i.e. 2.76% of the total. It is the third densest state in India but this camouflaged by plush green biodiversity.

Like Venezuela, Kerala too is a resource-driven country, exporting its ecology .This is in the form of tourism and also the export of primary products like coffee, coconuts and spices. Ecology plays an important role in the Kerala economy by providing a diversified natural resource base, enabling a large degree of occupational diversification.

A comparison between Venezuela and Kerala.

• HDI 0.748 0.625

Kerala and Venezuela are similar on grounds of following a path towards very high GDP. However, as much as they have been showing rapid development, an important issue which poses a huge problem for both economies is that of social security threatened by Crime, and the widespread corruption.

Presently, in 2013, after the death of President Chavez, President Maduro took over, the Venezuelan economy has been experiencing acute shortages due to turmoil. Marginal Propensity to consume is very high currently in Venezuela due to high inflation and shortages. In Venezuela, growth in the money supply leads to inflation. This growth in money supply is caused by an almost near full employment level in the economy.There is high consumption in basic commodities such as milk, butter, coffee, cornmeal and toilet paper. This shortage has been caused due to theState-controlled prices – prices that are set below market-clearing price.Many factories operate at half capacity because the currency controls make it hard for them to pay for imported parts and materials. Business leaders say some companies verge on bankruptcy because they cannot extend lines of credit with foreign suppliers. In April 2013, Venezuela’s scarcity index reached its highest level since 2009, while the 12-month inflation rate has risen to nearly 30%. Shoppers often spend several days looking for basic items, and stock up when they find them. Therefore, their Marginal propensity to save is extremely low.

The protests have hit the streets, but are controlled in a very gruesome matter by the government and military loyalists of the government. There is a lot of crime even among the police force. The basic freedom of speech is curtailed as the media is controlled by the President. ‘Colectivos’ is the name given to gangs of thugs sponsored by the state to hush the opposition. Venezuela is declared to be the second most corrupt country, and is also the most crime ridden country in Latin America.

In Kerala, Crime rate statistics in terms of offences coming under the ambit of the Indian Penal Code during 2012 have put Kerala on top with 455.8 cases for every 1,00,000 persons. There is also corruption which permeates all sections of society.

Policy Implications

The first step toward decreasing the income distribution gap is to increase transparency of public funds. When there is high corruption at the federal and state level, government revenues and expenditures may be miscalculated or misguided in order to swindle funds. Making sure that funds are appropriately allocated and that federal assets and liabilities are properly recorded will ensure soundness of the economy.

Kerala is one of India’s most unequal states in terms of income inequalities, as 10% of India’s richest lives there. Therefore, Kerala can adopt from Venezuela the policies of social inclusion in order to attain a more equitable society. Other ways the government can decrease the number of people below the poverty is to reduce or eliminate the value-added tax (VAT). The VAT is a regressive tax on consumable goods and services at all stages of production. The VAT takes a larger proportion of a poor person’s income than the wealthy person’s income. Decreasing the VAT will increase disposable income and may stimulate consumption.

There should be a constant check on poverty, as that can drag the economy down. In Venezuela, continuing to make sure that the Misiones are effective at increasing living standards will increase is important. The Misiones cannot be a publicity stunt; in order for there to be a decrease in poverty, there must be an increase in the standard of living. Access to low-cost food, high-quality education, and healthcare should not be a privilege of the wealthy, but rather a standard for all.

Higher (tertiary) education is developing in Venezuela, and is almost completely neglected in Kerala. Therefore there needs to be policies in place to ensure the enhancement of this education. Increasing scholarships to go to a university will also stimulate growth. Education will increase human capital and will lead to an expansion of the production possibility frontier. In order for education to be most effective for economic growth, curriculum should be up to international standards. In order for there to be an increase in human capital, which will increase the production possibility frontier, universal quality education should be provided.

Food shortages and inflation on food are also of international concern. In order to protect the citizens from malnutrition and starvation, the government must continue to provide access to low-cost essential agricultural products. In order to protect the citizens from dropping below the poverty line, the government must increase domestic production of agricultural goods.

Since crime and corruption appears to be a common problem faced by both these economic spaces, it is important that a stricter, rigid penal code be in place with its appropriate execution. When the law is strong, the rates of crimes drop.

Conclusion

Venezuela, a so-called leading Latin-American nation, has still a long way to go in order to transform completely into a ‘developed’ nation. It needs a more deeply-entrenched structural and government change, most preferably a democracy. The current autocratic government is creating an aura of fear for the people to live in, and the extreme socialism is destroying industry and trade. People’s basic and fundamental rights are being compromised upon. Kerala, although one of the most developed states in India, still lacks in a few parameters. Higher education is completely neglected; high rates of crime and murders; widespread corruption, etc. Thus, policy needs to cater to these needs of the hour.