This explains the popularity of reforms designed to bring about a less unequal society in opposition to powerful vested interests in maintaining the status quo. The current administration has labelled the reform and poverty reduction agenda as the “Bolivarian Revolution” and is using oil industry profits to finance social programmes aimed at reducing poverty.
The Venezuelan economy is dependent on its oil industry and approximately one third of its Gross Domestic Product (GDP) and more than 50% of government revenues are generated from oil and its derivatives. The government has made efforts to diversify into the exploitation of other mineral reserves including iron, aluminium, coal, and cement; and is trying to close the infrastructure gap in transportation and energy supply.
The government is also privatising loss making state owned enterprises and seeking foreign investment in petrochemical, mining, forestry and tourism - albeit with a strict emphasis on state control of assets. Tax collection is being improved and now accounts for the other 50% of governmental revenue.
GDP has risen by more than 600% since 1996 reaching 206,125 billion Bolivar’s in 2004. The figures for 2001 and 2002 would have been higher had it not been for the nine week national strike and general shut down which affected industrial production. During this period economic activity and oil output fell dramatically but have recovered since. For 2005 the official GDP exchange rate figure is expected to be around $116.2 billion which represents an annual growth rate of over 9%.
Other Latin American countries have been experiencing similar gains and the economic outlook for the whole region is positive for the short to medium term. If the current social and anti poverty policies prove effective, barriers to economic participation should lower and this in turn will increase GDP and tax revenues. However unemployment has hovered stubbornly high for the last decade and around 12% of the 12 million strong workforce were unemployed in 2005.
Consumer prices in Venezuela were high in the 1990s but have fallen since 1998. Figures for 2006 are expected to fall a further 5% according to the International Monetary Fund (IMF). High inflation levels have historically been a big problem for Latin American economies and other developing countries. During the 1970s, 1980s and 1990s high inflation was largely the result of commodity price shocks and loose fiscal and monetary policies. The former of these was particularly problematic for Venezuela because its economy is based primarily on producing, and exporting, primary goods.
The main unit of currency in Venezuela is the Bolivar. In February 2002 the Venezuelan government abolished the exchange rate controls and the Bolivar fell 25% against the US dollar. The Bolivar has continued to depreciate against the dollar and the average annual exchange rate in 2005 was 2,090 Bolivar’s per US$, five times in 1996 when it stood at 417 Bolivar’s per US$.
Surprisingly, given the dominance of the oil industry, Venezuela sources two thirds of its electricity from hydroelectric plants. However it is still a major emitted of carbon dioxide due to its oil industry. Mining operations especially illegal mining is causing environmental damage in rainforests and river courses. Indigenous communities face the destruction of their way of life and violence from the mining industry, and require greater protection from the state. Bari, Yukpa and Wayuu indigenous people from the state of Zulia, many of whom voted for the Fifth Republic, held a demonstration in Caracas against coal mining in Sierra de Perija in 2005.
Gold mining is causing mercury contamination, excessive sedimentation and deforestation. In July 2005 the Minister of Environment and Resources, Jacqueline Faria indicated that the government was intending to ban mining in the state of Amazonas and revise mining operations in the state of Bolivar. Mining operations are banned along the Caroni river due to high levels of mercury and cyanide. Illegal miners are generally vulnerable people who are extremely poor and work in dangerous conditions. Any long term solution to stop illegal mining must provide alternative employment for miners.
Whilst devastating floods hit northern Venezuela in 1999, water shortages have affected the country in more recent years. The government is therefore encouraging domestic consumers to be more careful. At present the cost of water in Venezuela is 700 Bolivar’s per 1,000 litres but the government is indicating that this price will increase. Currently only 21% of sewage is properly treated but the government claims that it will increase this to 40% by 2010.
Lake Maracaibo faces many environmental threats including pollution from oil tankers, excessive growth of duckweed which thrives on nutrients carried downstream and subsidence as a result of hydrocarbon extraction in the Maracaibo basin. Pollution from industry has also compromised Lake Valencia and the government is trying to improve water quality in the lake.
The threat to Venezuela’s environment, and indigenous communities, will continue to grow as the government pursues a development strategy based on exploiting minerals such as gold and oil revenue. Grand infrastructure projects will also be difficult to manage and construct. However, reducing social inequalities by investing in people through education and health will improve the economy through an expanded skills base and a more cohesive society.
Copyright: Rowena Slope 2006 (Redkite Research)
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