1. Venezuela: Oil, Inflation and Prospects for Long-Term Growth
Melody Chen
Maggie Gebhard
23 September 2018
PP556: Macroeconomics

2. Venezuela: Recent Economic History (1998-Present)
: Hugo Chavez is elected as president on a populist platform know as the “Bolivarian Revolution.” His administration implements various social welfare programs aimed at Venezuela’s poor.
2002: April - Chavez dismisses top executives of Petróleos de Venezuela (PDVSA); largest trade unions organize mass demonstrations and protests; an attempted coup temporarily displaces Chavez.
23 September 2018
PP556: Macroeconomics

3. Venezuela: Recent Economic History (1998-Present)
2002 (cont’d): December – PDVSA workers force another strike and a lockout, which halts all activities for two months, including exporting 2.8 million barrels of oil/day. This costs the Venezuelan government $6 billion in lost revenues.
: Venezuela experiences a massive recession.
2004-Present: Venezuela recovers from the recession and undergoes substantial growth, largely due to high oil prices.
23 September 2018
PP556: Macroeconomics

4. Venezuela: GDP and GDP per capita Growth
GDP: $176.4 billion (2006) adjusted to PPP
GDP per capita: $6,900 (2006); ranked 92nd world-wide, 3rd in S. America
Since Chavez took office, GDP growth has fluctuated significantly from a low of -9 percent to a high of 18 percent. In 2006, GDP growth was 8.8 percent.
Source: CIA World Factbook
23 September 2018
PP556: Macroeconomics

5. Venezuela: Government Expenditures and Private Consumption
Government expenditures include Plan Bolivar 2000 and the Bolivarian Missions.
Rise in private consump-tion due to: tax cuts, minimum wage hikes, high government spending.
Government expenditures = percent of GDP; private consumption = percent of GDP
Source: EIU
23 September 2018
PP556: Macroeconomics

6. Venezuela: GDP, Private Consumption and Investment
Source: EIU
23 September 2018
PP556: Macroeconomics

7. Venezuela: Public Debt and % GDP
Despite absolute increases in public debt, public debt ratios have remained fairly low.
The public debt ratio was 24.3 percent of GDP in 2006, which ranked 33 of 120 countries. (The U.S. ranked 90th at 64.7 percent.)
Source: EIU
23 September 2018
PP556: Macroeconomics

8. Venezuela: IS-LM-BP Model
Interest Rate, r
Output, Y
LM1
IS1
BP1
IS2 r2 r*
LM2 Y1 Y2
23 September 2018
PP556: Macroeconomics

9. Venezuela: Policy Recommendations
Allow for Discretionary Monetary Policy
Monetary policy has been devoted to maintaining fixed exchange rate
Banco Central de Venezuela needs flexibility to target inflation and other macroeconomic variables
Two necessary components to achieve this:
Float the Bolivar
Grant full autonomy to the Central Bank
Impact growth rates
23 September 2018
PP556: Macroeconomics

10. Venezuela: Policy Recommendations
II. Reduce Reliance on Oil Revenues
Currently make up 30 percent of GDP
Social projects funded by national oil company
Government expenditures have fluctuated with oil prices
Create more sustainable source of revenue through tax system
Impose fiscal responsibility
23 September 2018
PP556: Macroeconomics

11. Venezuela: Conclusions
Experienced periods of both robust growth and severe contraction
Chavez’s policies have had a polarizing effect on the economy
Current expansionary policies are unsustainable in long-run
Future challenge for Venezuela is…
To weigh the social benefits of implementing Chavez’s populist policies against the long-term economic costs
23 September 2018
PP556: Macroeconomics