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

Venezuela: Recent Economic History (1998-Present) 1998-1999: 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

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. 2002-2003: 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

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

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 = 12-14 percent of GDP; private consumption = 65-70 percent of GDP Source: EIU 23 September 2018 PP556: Macroeconomics

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

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

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

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

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

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