Case II Discussion Questions:
2.1 Under Chavez’s leadership, what kind of economic system is being put in place in Venezuela? How would you characterize the political system?
It would appear that Chavez is moving toward a socialist regime. Numerous enterprises have been taken over by the state, and other companies have been forced into reorganizing as “workers cooperatives”. The government is also extending its reach into rural areas, where it has seized farms and turned them into state-owned cooperatives. Chavez has also used some of the profits from the country’s soaring oil revenues to increase government spending on various social programs, some of which are modeled after programs in Cuba.
2.2 How do you think that Chavez’s unilateral changes to contracts with foreign oil companies will impact future investment by foreigners in Venezuela?
In the oil industry, which the country depends on for some 70 percent of its ...view middle of the document...
In 2007, Transparency International lowered its ranking of the country to 162 out of 179, making it one of the most corrupt countries in the world. Government officials are permitted to demand bribes in return for permission to expand operations or enter new lines of business. Many students will recognize the challenges of operating in an environment like the current situation in Venezuela. Some students will probably suggest that firms may reassess their investments given the new political and economic risks present in the country. Many students will probably conclude that a market that is considered to be only partly free, with rampant corruption and privatization taking place, is no longer a worthwhile destination.
2.4 Currently Venezuela is benefiting from a boom in oil prices. What do you think might happen if oil prices retreat from their current high level?
Oil prices are currently at an all-time high making Venezuela, one of the world’s largest producers of oil, very rich. So far, Chavez has been using the oil profits for various social programs. Most students will probably recognize that if oil prices begin to retreat, these programs will probably suffer. Some students may wonder whether falling oil prices could spell disaster for Venezuela’s oil industry. Chavez has been maximizing the state’s share of oil revenues by pushing out foreign companies and increasing the hold of state-run Petroleos de Venezuela SA. Consequently, if prices do fall, this organization will be more significantly affected.
2.5 In your estimation, what is the long run prognosis for the Venezuelan economy? Is this a country that is attractive to international businesses?
A recent World Bank study puts Venezuela as being one of the most regulated economies in the world. The move to take various enterprises under state control is also impeding economic growth. In the oil industry, for example, Chavez has reduced the stakes owned by foreign companies to give the state run company a bigger position. Most students will probably conclude that given the levels of corruption and regulation, the country is just too risky to consider as a destination for international companies.