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Economy of Venezuela

Table of contents
1 Overview
2 Petroleum And Other Resources
3 Manufacturing, Agriculture, and Trade
4 Labor and Infrastructure
5 Miscellaneous data
6 External links


Although a manufacturing sector producing consumer goods including cars exists, the economy is still based on oil. Since 1950s to the beginning of 1980s the Venezuelan economy was the strongest in South America. This continuous growth during that period attracted many immigrants. Since the collapse of the oil price in mid 1980s the economy has mainly contracted. The positive sign of the economy has been a balance of payments surplus due to the strong oil export. Venezuelan officials estimate the economy contracted 7.2% in 1999. A steep downturn in international oil prices during the first half of the year fueled the recession, and spurred the Hugo Chavez administration to abide by OPEC-led production cuts in an effort to raise world oil prices. The petroleum sector dominates the economy, accounting for roughly a third of GDP, around 80% of export earnings, and more than half of government operating revenues. Higher oil prices during the second half 1999 took pressure off the budget and currency. Since the currency controls were lifted in the beginning of 2002 the value has of the bolivar has decreased. Despite higher oil prices, the economy remains in the doldrums, possibly due to investor uncertainty over President Chavez's reform agenda. Implementing legislation for the new constitution will not be passed until the second half of 2000, after a new legislature is elected. With the president's economic cabinet attempting to reconcile a wide range of views, the country's economic reform program has largely stalled. The reforms have been mainly in the microeconomics such as the reduction or abolition of education and hospital fees. The government is seeking international assistance to finance reconstruction after massive flooding and landslides in December 1999 caused an estimated $15 billion to $20 billion in damage.

Political instability has had serious effects on the performance of the Venezuelan economy, with a sharp drop in investment and a general recession during 2002 and 2003. Total GDP decreased 18.5% during the first semester of 2003 compared with the same period in 2002. This is the steepest decline in Venezuelan history. The hardest hit sectors were construction (-55.9%), petroleum (-26.5%), commerce (-23.6%) and manufacturing (-22.5%).

In 2002, the Venezuelan economy, as measured by GDP, contracted by 8.9% compared to 2001. The petroleum sector, which contracted by 12.6% in 2002 as compared to 2001, was adversely affected by a decrease in exports of petroleum products resulting from adherence to an OPEC quota established in 2002 and the virtual cessation of exports as a result of the national work stoppage that began in December 2002. The nonpetroleum sector of the economy contracted by 6.5% compared to 2001. This situation was accompanied by a significant devaluation of the Bolivar during 2002, which resulted in an accelerated inflation rate. The inflation rate, as measured by the CPI, was 31.2% in 2002 compared to 12.3% in 2001.

In an attempt to support the bolivar and bolster the government’s declining level of international reserves, as well as to mitigate the adverse impact from the oil industry work stoppage on the financial system, the Ministry of Finance and the Central Bank suspended foreign exchange trading on January 23, 2003. On February 6, 2003, the government created CADIVI, a currency control board charged with handling foreign exchange procedures. The new exchange control regime fixed the U.S. dollar exchange rate at Bs. 1,596= U.S. $1.00 for purchase operations, and Bs. 1,600=U.S. $1.00 for sale operations, and established the compulsory purchase and sale of foreign currency through the Central Bank.

While Macroeconomic Stabilization Fund (FIEM) decreased from U.S.$2.59 billion in January 2003 to U.S.$700 million in October, Central Bank-held international reserves actually increased from U.S.$11.31 billion in January to U.S.$19.67 billion in October 2003. Despite the slowdown in PDVSA output and resulting royalty payments to the Central Bank, reserves are currently 31.1% above their levels one year ago, as foreign exchange transactions remain suppressed.

There is considerable income inequality. According to official sources, the percentage of poor and extremely poor among Venezuelan population increased from 39.4% in 1995 to 48.1% in 2002. This increase has been due primarily to lower real wages earned by employees and increased unemployment.

Petroleum And Other Resources

Economic prospects remain highly dependent on oil prices and the exportation of petroleum. A founding member of the Organization of Petroleum Exporting Countries (OPEC), Venezuela reasserted its leadership within the organization during its year as OPEC's president, hosting the organization's Second Leadership Conference in 40 years, as well as having its former Minister of Energy, Alvaro Silva Calderon, appointed as Secretary General. The collapse of oil prices in 1997-98 prompted the Chavez administration to expand OPEC-inspired production cuts in an effort to raise world oil prices. In 2002, this sector accounted for roughly a quarter of GDP, 73% of export earnings, and about half of central government's operating revenues. Venezuela is the fourth-leading supplier of imported crude and refined petroleum products to the United States.

The Government of Venezuela has opened up much of the hydrocarbon sector to foreign investment, promoting multi-billion dollar investment in heavy oil production, reactivation of old fields, and investment in several petrochemical joint ventures. Almost 60 foreign companies representing 14 different countries participate in one or more aspects of Venezuela's oil sector. The Venezuelan national oil company Petroleos de Venezuela, S.A. (PDVSA) and foreign oil companies have signed 33 operating contracts for marginal fields in three bidding rounds. New legislation dealing with natural gas and petrochemicals is further opening the sector. A new domestic retail competition law, however, disappointed investors who had been promised market-determined prices.

On November 13, 2001, under the enabling law authorized by the National Assembly, President Chavez enacted the new Hydrocarbons Law, which came into effect in January 2002. This law replaced the Hydrocarbons Law of 1943 and the Nationalization Law of 1975. Among other things, the new law provided that all oil production and distribution activities were to be the domain of the Venezuelan state, with the exception of joint ventures targeting extra-heavy crude oil production. Under the new Hydrocarbons Law, private investors can own up to 49% of the capital stock in joint ventures involved in upstream activities. The new law also provides that private investors may own up to 100% of the capital stock in ventures concerning downstream activities, in addition to the 100% already allowed for private investors with respect to gas production ventures, as previously promulgated by the National Assembly.

During the December 2002-February 2003 general strike, petroleum production and refining by PDVSA almost ceased. Despite the strike, these activities eventually were substantially restarted. Out of a total of 45,000, 19,000 PDVSA management and workers were subsequently dismissed because the government asserted they had abandoned their jobs during the strike.

A range of other natural resources, including iron ore, coal, bauxite, gold, nickel, and diamonds are in various stages of development and production. In April 2000, Venezuela's President decreed a new mining law, and regulations were adopted to encourage greater private sector participation in mineral extraction.

Venezuela utilizes vast hydropower resources to supply power to the nation’s industries. The national electricity law is designed to provide a legal framework and to encourage competition and new investment in the sector. After a 2-year delay, the government is proceeding with plans to privatize the various state-owned electricity systems under a different scheme than previously envisioned.

Manufacturing, Agriculture, and Trade

Manufacturing contributed 14% of GDP in 2002. Manufacturing output decreased by 11% in 2002. The manufacturing sector continues to decrease, and remains hindered by a marked lack of private investment. Venezuela manufactures and exports steel, aluminum, textiles, apparel, beverages, and foodstuffs. It produces cement, tires, paper, fertilizer, and assembles cars both for domestic and export markets.

Agriculture accounts for approximately 5% of GDP, 10% of the labor force, and at least one-fourth of Venezuela's land area. Venezuela exports rice, cigarettes, fish, tropical fruits, coffee, cocoa, and manufactured products. The country is not self-sufficient in most areas of agriculture. Venezuela imports about two-thirds of its food needs. In 2002, U.S. firms exported $347 million worth of agricultural products, including wheat, corn, soybeans, soybean meal, cotton, animal fats, vegetable oils, and other items to make Venezuela one of the top two U.S. markets in South America. The United States supplies more than one-third of Venezuela's food imports.

Thanks to petroleum exports, Venezuela usually posts a trade surplus. In recent years, nontraditional (i.e., nonpetroleum) exports have been growing rapidly but still constitute only about one-fourth of total exports. The United States is Venezuela's leading trade partner. During 2002, the United States exported $4.4 billion in goods to Venezuela, making it the 25th-largest market for the U.S. Including petroleum products, Venezuela exported $15.1 billion in goods to the U.S., making it our 14th-largest source of goods. Venezuela has taken a very cautious approach toward the proposed Free Trade Agreement of the Americas.

Labor and Infrastructure

Venezuela's labor force of about 12.05 million is growing faster than total employment. In August 2003, official unemployment was 17.8%, but unofficial estimates are over 20%. The public sector employs about 15% of the work force, while less than1% work in the capital-intensive oil industry. About 18%of the labor force is unionized, and unions are particularly strong in the petroleum and public sectors. The “informal” sector accounts for some 53% of the work force or 6.4 million people.

In December 2000, international labor authorities declared that the Chavez administration violated freedom of association by using a public referendum to decide internal labor leadership issues. Since then, however, the government has consulted regularly with the International Labor Organization (ILO) in its ongoing effort to reform and reorganize the country's labor structure, including a multi-union dialogue and the preparation of a new labor law.

Venezuela has an extensive road system. With the exception of air service, transportation has failed to keep pace with the country's needs. Much of the infrastructure suffers from inadequate maintenance. Caracas has a modern subway but only one functioning rail line serves the rest of the country.

Miscellaneous data

GDP agriculture : 4%
industry : 63%
services : 33% (1997 est.)

Poverty lowest 10% : 1.5%
highest 10% : 35.6% (1995)

Inflation rate (consumer prices) : 20% (1999) Labor force :

revenues: $26.4 billion
expenditures: $27 billion, including capital expenditures of $NA (2000 est.)

Industries: petroleum, iron ore mining, construction materials, food processing, textiles, steel, aluminum, motor vehicle assembly

Industrial production growth rate: 0.5% (1995 est.)

Electricity - production: 70.39 billion kWh (1998)

Electricity - production by source:
fossil fuel: 25.46%
hydro: 74.54%
nuclear: 0%
other: 0% (1998)

Electricity - consumption: 65.463 billion kWh (1998)

Electricity - exports: 0 kWh (1998)

Electricity - imports: 0 kWh (1998)

Agriculture - products: maize, sorghum, sugar cane, rice, bananas, vegetables, coffee; beef, pork, milk, eggs; fish

Exports: $20.9 billion (f.o.b., 1999)

Exports - commodities: petroleum, bauxite and aluminum, steel, chemicals, agricultural products, basic manufactures (1998)

Exports - partners: US and Puerto Rico 57%, Colombia, Brazil, Japan, Germany, Netherlands, Italy (1999)

Imports: $11.8 billion (f.o.b., 1999)

Imports - commodities: raw materials, machinery and equipment, transport equipment, construction materials (1999)

Imports - partners: US 53%, Japan, Colombia, Italy, Germany, France, Brazil, Canada (1999)

Debt - external: $32 billion (1999)

Economic aid - recipient: $35 million with more assistance likely as a result of flooding (1999)

Currency: 1 bolivar (Bs) = 100 centimos Currency code VEB

Exchange rates: bolivares (Bs) per US$1 - 1440 (September 2002), 652.333 (January 2000), 605.717 (1999), 547.556 (1998), 488.635 (1997), 417.333 (1996), 176.843 (1995)

Fiscal year: calendar year

External links

See also : Venezuela, Central Bank of Venezuela