Venezuela’s Business Environment: Inefficiencies, Distortions, and Risks

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By FTN Editorial Team

Venezuela is constantly over the news given its unprecedented economic collapse. Yet, numerous people still think that the country’s economic hardships were caused by external factors, such as declining oil prices or financial sanctions from the international community. When in reality, the Venezuelan collapse is the direct consequence of the country’s inefficient, distorted, and hostile business environment.

According to virtually all economic measurements, Venezuela is among the least competitive economies in the world. Venezuela ranks 188 of 190 countries in the ease of doing business index, 179 of 180 countries in the economic freedom index, and 133 of 140 countries in the global competitiveness report. As such, the private sector in Venezuela faces a wide range of economic constraints, hindering its productivity and profitability. These economic constraints predominantly come from three sources: microeconomic inefficiencies, macroeconomic distortions, and hostile policymaking.

Among the microeconomic issues of the country, Venezuelan entrepreneurs have to overcome daily power blackouts, unreliable water supply, aging infrastructure, rampant criminality, deficient internet connectivity, and the country’s nationwide shortage of gasoline. Together, these issues created additional costs to business activity. For instance, retail businesses have to buy power plants, farmers are often victims of criminal activity and extorsion, and working from home becomes unviable given the country’s poor connectivity. Similarly, farmers have been protesting the lack of gasoline, denouncing that they have not been able to transport food from their farms to the city, a particularly lamentable situation given the country’s humanitarian crisis.

The private sector also has to face a series of macroeconomic distortions, such as the country’s hyperinflation and gigantic commercial and financial foreign debt. Regarding the latter, Venezuela’s debt obligation surpasses 150 billion dollars. As such, it is among the highest in the world when compared to the size of the Venezuelan economy. The country’s public debt is almost twice its GDP, five times the country’s 2018 exports, or roughly equivalent to fifteen years’ worth of food imports calculated at their peak year. Precisely because of this, the risk premium of the country has been among the highest in the world since 2014. Hence, credit access has been virtually nonexistent in Venezuela for years.

Regarding the country’s monetary instability, Venezuela has had not only the highest inflation rate in the world since 2013, but it has also been experiencing hyperinflation for the last 32 months, making it the fourth-longest hyperinflationary episode in history. According to the Venezuelan National Assembly, the country’s hyperinflation reached 7,000 percent last year.This year, it will reach 15,000 percent according to the International Monetary Fund (IMF). This is extremely detrimental for workers, whose salaries have lost over 90 percent of their value since 2013. Thus, 21 percent of Venezuelans cannot even afford the basic food basket of the country, which is currently at roughly 20 dollars per month.

Beyond microeconomic inefficiencies and macroeconomic distortions, business activity in Venezuela has been dramatically hampered because of the state’s hostility towards market mechanisms. Since 2003 onwards, Venezuela has been implementing a series of policies against the private sector, such as price controls, expropriations, and production quotas. These policies have seriously mermaid business activity, even before the economic collapse began in 2013. In 2011, the number of private companies had already decreased by 36 percent from the 1998 levels, the year when Chavez became president of the country. Yet, the deterioration has dramatically worsened in the last seven years, with the country losing over 70 percent of its production. Just last year alone, over 400 industrial establishments seized operations in Venezuela, and the ones remaining reported production levels at roughly 20 percent of their capacity. As such, the Venezuelan economy is expected to shrink another 26 percent in 2020.

In conclusion, the low levels of investment and productivity of the Venezuelan economy cannot be associated to any external factor. Instead, these should be linked to the country’s hostile business environment. For too long, the Venezuelan government has rejected the importance of the private sector. Hence, the country’s business environment has been rapidly deteriorating, raising the costs and risks of doing business in Venezuela. Because of it, the country has virtually no foreign direct investment. Moreover, Venezuela’s human capital is rapidly leaving the country, as over five million Venezuelans have left in the last couple of years. And lastly, if we add the country’s capital flights in the last twenty years, that number surpasses 200 billion dollars, equivalent to twenty years of food imports calculated at their peak year. As a result, if the business environment in Venezuela is not liberalized, then the country’s humanitarian crisis will continue destabilizing not only the country but the region as a whole.

By Jorge Jraissati

Jorge Jraissati is the president of the Venezuelan Alliance. Graduated at the Wilkes Honors College, Jorge is an economist, political leader, and a fellow at the Abigail Adams Institute. Jorge has been invited as a guest lecturer to over 20 universities, such as Harvard, NYU, and Cambridge.