VENEZUELA - Historical ReviewToms Centeno

Ernesto Revello

Traduced by: Roxana Beroes

Ernesto Revello

1. Introduction

Geographically, Venezuela is located in South America, situated between Colombia

and Guyana. It is a coastal nation with plentiful ocean access to both the

Caribbean and North Atlantic. In the late 1500s, Venezuela was discovered by the

Spanish, who were searching for gold and other riches. Within a short span of time,

it became a land of plantations, in which slave labor from Africa was used to work

the cocoa, sugar, coffee, cotton, and tobacco fields.

Cocoa, coffee, and independence from Spain dominated the Venezuelan economy

in the eighteenth and nineteenth centuries. Cocoa eclipsed tobacco as the most

important crop in the 1700s; coffee surpassed cocoa in the 1800s. Although the

war of independence devastated the economy in the early nineteenth century, a

coffee boom in the 1830s made Venezuela the world's third largest exporter of

coffee. Fluctuations in the international coffee market, however, created wide

swings in the economy throughout the 1800s.

In the 19th century the country's creoles population initiated a drive for freedom.

Although independence is celebrated on the 5th of July (based on the 1811 charge

led by Simon Bolvar) it was not until 1821 that Bolvar became the leader of a

Venezuela that was independent of Spain. The remaining Spaniards were forced

E7 Workshop Renmin UniversityDelegation of Venezuela

2out of Venezuela in 1823, after their defeat near Maracaibo. The next one hundred

years were fraught with numerous caudillos and the reign of various dictators.

This economy bases on agricultural activities was quickly put aside by the

discovered of oil. The first commercial drilling of oil in 1917 and the oil boom of the

1920s brought to a close the coffee era and eventually transformed the nation from

a relatively poor agrarian society into Latin America's wealthiest state. By 1928

Venezuela was the world's leading exporter of oil and second in total petroleum

production.

Venezuela remained the world's leading oil exporter until 1970, the year of its peak

oil production. As early as the 1930s, oil represented over 90% of total exports, and

national debate increasingly centered on better working conditions for oil workers

and increased taxation of the scores of multinational oil companies on the shores

of Maracaibo Lake. In 1936 the government embarked on its now-famous policy of

"sowing the oil". This policy entailed using oil revenues to stimulate agriculture, and

later, industry.

After years of negotiations, in 1943 the government achieved a landmark 50% tax

on the oil profits of the foreign oil companies. Although Venezuela reaped greater

benefits from its generous oil endowment after 1943, widespread corruption and

deceit by foreign companies and indifferent military dictators still flourished to the

detriment of economic development. Nevertheless, despite unenlightened policies,

economic growth in the 1950s was robust because of unprecedented world

economic growth and a firm demand for oil. As a result, physical infrastructure,

agriculture, and industry all expanded swiftly.

With the arrival of democracy in 1958, Venezuela's new leaders concentrated on

the oil industry as the main source of financing for their reformist economic and

social policies. Using oil revenues, the government intervened significantly in the

economy. In 1958 the new government founded a new noncabinet ministry, the

3Central Office of Coordination and Planning (CORDIPLAN), in the Office of the

President. CORDIPLAN issued multiyear plans with broad economic development

objectives.

The government in 1960 embarked on a land reform program in response to

peasant land seizures. In 1960 policy makers also began to create regional

development corporations to encourage more decentralized planning in industry.

The first such regional organization was the Venezuelan Corporation of Guayana,

which eventually oversaw nearly all major mining ventures.

The year 1960 also marked the country's entrance as a founding member into the

Organization of Petroleum Exporting Countries (OPEC), which set the stage for the

economy's rapid expansion in the 1970s. Throughout the 1960s, the government

addressed general social reform by spending large sums of money on education,

health, electricity, potable water, and other basic projects. Rapid economic growth

accompanied these reformist policies, and from 1960 to 1973 the country's real per

capita output increased by 25%.

The quadrupling of crude oil prices in 1973 spawned and oil euphoria and a spree

of public and private consumption unprecedented in Venezuelan history. The

government spent more money (in absolute terms) from 1974 to 1979 than in its

entire independent history dating back to 1830. Increased public outlays

manifested themselves most prominently in the expansion of the bureaucracy.

During the 1970s, the government assumed the role of primary engine of economic

growth. In addition to establishing new enterprises in such areas as mining,

petrochemicals, and hydroelectricity, the government purchased previously private

ones. In 1975 the government nationalized the steel industry; nationalization of the

oil industry followed in 1976. Many private citizens also reaped great wealth from

the oil bonanza, and weekend shopping trips to Miami, Florida, typified upper-

middle-class life in this period.

4A growing acknowledgment of the unsustainable pace of public and private

expansion became the focus of the 1978-79 electoral campaign. Because of

renewed surges in the price of oil from 1978 to 1982, however, the government of

Luis Herrera Campins (President, 1979-84) scrapped plans to downgrade

government activities, and the spiral of government spending resumed. In 1983,

however, the price of oil fell and soaring interest rates caused the national debt to

multiply. Oil revenues could no longer support the array of government subsidies,

price controls, exchange-rate losses, and the operations of more than 400 public

institutions. Widespread corruption and political patronage only exacerbated the

situation.

The government of Jaime Lusinchi (President, 1984-89) attempted to reverse the

1983 economic crisis through devaluations of the currency, a multi-tier exchange-

rate system, greater import protection, increased attention to agriculture and food

self-sufficiency, and generous use of producer and consumer subsidies. These

1983 reforms stimulated a recovery from the negative growth rates of 1980-81 and

the stagnation of 1982 with sustained modest growth from 1985 to 1988. By 1989,

however, the economy could no longer support the high rates of subsidies and the

increasing foreign debt burden, particularly in light of the nearly 50% reduction of

the price of oil during 1986.

In 1989 the second Prez administration launched profound policy reforms with the

support of structural adjustment loans from the International Monetary Fund (IMF)

and the World Bank. In February 1989, price increases directly related to these

reforms sparked several days of rioting and looting that left hundreds dead in the

country's worst violence since its return to democracy in 1958. Ironically, Prez,

who oversaw much of the government's expansion beginning in the 1970s,

spearheaded the structural reforms of 1989 with the goal of reducing the role of

government in the economy, orienting economic activities toward the free market,

and stimulating foreign investment.

5The most fundamental of the 1989 adjustments, however, was the massive

devaluation of the Bolvar (national currency) from its highly overvalued rate to a

market rate. Other related policies sought to eliminate budget deficits by 1991

through the sale of scores of state-owned enterprises, to restructure the financial

sector and restore positive real interest rates, to liberalize trade through tariff

reduction and exchange-rate adjustment, and to abolish most subsidies and price

controls. The government also aggressively pursued debt reduction schemes with

its commercial creditors in an effort to lower its enervating foreign debt repayments.

Since Hugo Chvez was elected in 1998, the government has renationalized the

steel industry, the telecommunication sector, has gained more control over the oil

sector. Therefore, the public sector has assumed the role of primary engine of

economic growth. Also, the government created in 2005 the Venezuelan

Development Fund (FONDEN), responsible for allocating huge oil revenues to

social, national defense and infrastructure projects.

Since 1999, Venezuela has gained a reputation as a price hawk in OPEC, pushing

for stringent enforcement of production quotas and higher target oil prices. The

state income from oil revenue has increased rapidly; nonetheless its dependence

on oil is one of the main problems facing the Chvez government. The current

economic expansion began when the government got control over the national oil

company in the first quarter of 2003. Since then, real (inflation-adjusted) GDP has

nearly doubled, growing by 94.7% in 5.25 years, or 13.5% annually. For the year

2009-10, the Venezuelan economy shrank severely, but it is expected to growth

3.3% during 2011. According calculations, citing estimates from the Venezuelan

Central Bank, the Venezuelan government "controls" the same percentage of the

economy as when Chvez was elected in 1998, with the private sector still

controlling two-thirds of Venezuela's economy.

An OPEC member, Venezuela is the worlds sixth exporter and the ninth-largest

producer. The state owned petroleum sector dominates the economy. Oil revenue

6accounts for roughly one third of the GDP and is the countrys main source of

wealth. 80% of Venezuelas export earnings stem from the exportation of oil and

the earnings provide for more than one half of the governments operating revenue.

In the late mid-nineties, when oil prices fell, so did the Venezuelan economy. This

crisis led to the eventual governmental reorganization. The economic recovery

from the 1999 recession was hampered due to a weak non-oil sector, capital flight,

and a continued fall in oil prices. However, a period of reduced price volatility was

achieved when Venezuela (in a coordinated move with OPEC) reduced the supply

of crude. Since then, the government has taken the lead to promote an oil

production strategy that would maintain prices between $90 and $100 per barrel.

In order to prevent future oil price induced recession, the government created the

National Development Fund (FONDEN). Portions of the petroleum revenue are

deposited into this fund. The idea was to create a fiscal safety net that can be

utilized when prices fall, and to be utilized as a social development funds, investing

in several social and infrastructure projects.

Chvezs Administration has also supported the creation of a series of Bolivarian

Missions aimed at providing public services to improve economic, cultural, and

social conditions. A 2010 Organization of American States report indicated

achievements in addressing illiteracy, healthcare and poverty, and economic and

social advances1. Most areas of spending have increased as a percentage of GDP,

such as: education, health, housing, sports, and infrastructure.

According to statistics from the United Nations, poverty in Venezuela stood at 28%

in 20082, down from 55.44% in 1998 before Chvez got into office. During the

1 Organization of American States (24 February 2010). "Press release N 20/10, IACHR publishesreport on Venezuela". Press release: http://www.cidh.oas.org/Comunicados/English/2010/20V-10eng.htm.2 Forero, Juan (19 April 2010). "Despite billions in U.S. aid, Colombia struggles to reduce poverty".The Washington Post.http://www.washingtonpost.com/wpdyn/content/article/2010/04/18/AR2010041803090.html

7economic expansion, the poverty rate was cut by more than half, from 54% percent

of households in the first half of 2003 to 26% at the end of 2008. Extreme poverty

has fallen even more, by 72%3. These poverty rates measure only cash income,

and does take into account increased access to health care or education4.

2. Early History and the Colonial Era

The Arawaks and the Caribs were the earliest inhabitants of Venezuela, along with

certain nomadic hunting and fishing tribes. Christopher Columbus first sighted

Venezuela during his third voyage to the New World, when he saw the Pennsula

de Paria from his ship at anchor off the coast of the island of Trinidad. Three days

later, on August 1, 1498, Columbus became the first European to set foot on the

South American mainland.

A second Spanish expedition, just one year later, was led by Alfonso de Ojeda and

the Florentine, Amerigo Vespucci. They sailed westward along the coast of Tierra

Firme (as South America was then known) as far as Lago de Maracaibo. There,

native huts built on piles above the lake reminded Vespucci of Venice, thus leading

him to name the discovery Venezuela, or Little Venice. Subsequent expeditions

along the north coast of South America were driven largely by a lust for adventure,

power, and, especially, wealth.

Pearls and rumors of precious metals were the initial attraction of Venezuela. By

the 1520s, however, the oyster beds between Cuman and the Isla de Margarita--

at the western end of the Peninsula de Paria-had been played out. The next of

Venezuela's native riches to be extracted by the Spanish was its people. Slave

raiding, which began in the Peninsula de Paria and gradually moved inland, helped

3 Weisbrot, Mark, Ray, Rebecca, and Sandoval, Luis. "The Chvez Administration at 10 Years."Center for Economic and Policy Research. 2009.4 Mark Weisbrot; Luis Sandoval (2006). "Poverty Rates in Venezuela: Getting the Numbers Right".Center for Economic and Policy Research. p. 2.http://www.cepr.net/documents/venezuelan_poverty_rates_2006_05.pdf.

8supply the vast labor needs in Panama and the Caribbean islands, where gold and

silver bullion from Mexico and Peru were transshipped. These slave raids

engendered intense hatred and resentment among Venezuela's native population,

emotions that fueled more than a century of continual low-intensity warfare. Partly

as a result of this warfare, the conquest of Venezuela took far longer than the rapid

subjugations of Mexico and Peru.

The prolonged nature of the conquest of Venezuela was also attributable to the

area's lack of precious metals and the absence of a unified native population.

Venezuela had low priority compared with regions of Spanish America containing

vast ore deposits. Moreover, the territory that comprises present-day Venezuela

contained no major political force, such as the Inca or Aztec leadership, whose

conquest would bring vast resources and populations under Spanish domain.

Rather, the conquerors found a large number of relatively small and unrelated

tribes of widely varying degrees of cultural sophistication.

After more than a decade of fierce fighting with the recalcitrant native population,

forces under Diego de Losada established the settlement of Santiago de Len de

Caracas in 1567. The value of Caracas lay not only in the fertile agricultural lands

in its vicinity, but also in its accessibility, through the coastal range, to the seaport

that would later become La Guaira.

The vast majority of what is today the territory of Venezuela was left untouched by

the Spanish conquistadors. Instead, tireless Franciscan and Capuchin missionaries

explored and Hispanicized the Ro Unare Basin to the east of Caracas, the Ro

Orinoco, during the seventeenth and eighteenth centuries. Much of the western

llanos and the south bank of the Orinoco remained unknown territory to the

Spanish even at the close of the colonial period.

Colonial authorities organized the local Indians into a system to grow tobacco,

cotton, indigo, and cocoa. The Spanish crown officially ended this system in 1687,

and enslaved Africans replaced most Indian labor. As a result, Venezuela's colonial

9economic history, dominated by a plantation culture, often more closely resembled

that of a Caribbean island than a South American territory. Although the war of

independence devastated the economy in the early nineteenth century, a coffee

boom in the 1830s made Venezuela the world's third largest exporter of coffee.

Fluctuations in the international coffee market, however, created wide swings in the

economy throughout the 1800s.

3. Independence and Civil Strife

In 1795 there was an uprising against Spanish control, but it was only after

Napoleon had taken control of Spain that a real revolution began (1810) in

Venezuela, under Francisco de Miranda. Events in Europe were perhaps even

more crucial to the movement for Latin American independence than Miranda's

efforts. In 1808 French emperor Napoleon Bonaparte's troops invaded Spain

amidst a family dispute in which the Spanish king Charles IV had been forced to

abdicate the throne in favor of his son, Ferdinand VII. The fearful Bourbon royal

family soon became Napoleon's captives, and in 1810 the conquering French

emperor granted his brother, Joseph, the Spanish throne, precipitating a four-year-

long guerrilla war in Spain.

These events had important repercussions in the Caracass city council.

Composed of creoles elite whose allegiance to the crown had already been

stretched thin by the gross incompetence of Charles IV and his feud with his son,

the city council refused to recognize the French usurper. Meeting as an open city

council on April 19, 1810, the Caracass city council ousted Governor Vicente

Emparan and, shortly thereafter, declared itself to be a junta governing in the name

of the deposed Ferdinand VII. On July 5, 1811, a congress convoked by the junta

declared Venezuelan independence from Spain. Miranda assumed command of

the army and leadership of the junta.

10

A constitution, dated December 21, 1811, marked the official beginning of

Venezuela's First Republic. Known commonly by Venezuelan historians as the Silly

Republic, Venezuela's first experiment at independence suffered from myriad

difficulties from the outset.

Bolvar was born in 1783 into one of Caracas's most aristocratic creoles families.

Orphaned at age nine, he was educated in Europe, where he became intrigued by

the intellectual revolution called the Enlightenment and the political revolution in

France. As a young man, Bolvar pledged himself to see a united Latin America,

not simply his native Venezuela, liberated from Spanish rule. His brilliant career as

a field general began in 1813 with the famous cry of "war to the death" against

Venezuela's Spanish rulers that was followed by a lightning campaign through the

Andes to capture Caracas. There he was proclaimed "The Liberator" and, following

the establishment of the Second Republic, was given dictatorial powers. Once

again, however, Bolvar overlooked the aspirations of common, nonwhite

Venezuelans.

Finally, in June 1821, Bolvar's troops fought the decisive Battle of Carabobo that

liberated Caracas from Spanish rule. In August delegates from Venezuela and

Colombia met at the border town of Ccuta to formally sign the Constitution of the

Republic of Gran Colombia, with its capital in Bogot. Bolvar was named president

and Francisco de Paula Santander, a Colombian, was named vice president.

Bolvar, however, continued the fight for the liberation of Spanish America, leading

his forces against the royalist troops remaining in Ecuador, Bolivia, and Peru.

11

4. The Century of Caudillismo

Two decades of warfare had cost the lives of between one- fourth and one-third of

Venezuela's population, which by 1830 was estimated at about 800,000.

Furthermore, the cocoa-based export economy lay in ruins, a victim of physical

destruction, neglect, and the disruption of trade. As a result, it was relatively simple

for the young nation to shift its agricultural export activity to the production of

coffee, a commodity whose price was booming in the North Atlantic nations with

which Venezuela was now free to trade. The production of coffee for export would,

along with subsistence agriculture, dominate Venezuela's economic life until the

initiation of the petroleum boom well into the twentieth century. Venezuela's

century-long post-independence era of caudillismo is perhaps best understood as

a competition among various social and regional factions for the control of the

Caracas-based bureaucracy that served the trade with the North Atlantic nations.

The century of the caudillo started auspiciously, with sixteen relatively peaceful and

prosperous years under the authority of General Pez. Twice elected president

under the 1830 constitution, Pez, on the one hand, consolidated the young

republic by putting down a number of armed challenges by regional chieftains. On

the other hand, Pez usually respected the civil rights of his legitimate political

opponents. Using funds earned during the coffee-induced economic boom, he

oversaw the building of fledgling social and economic infrastructures. Generally

considered second only to Bolvar as a national hero, Pez ruled in conjunction

with the creoles elite, which maintained its unity as long as coffee prices remained

high.

After Paz the Monagas brothers became presidents in two consecutives elections,

until they were overthrown in 1858, and the civil war among caudillos became

chronic. A brief liberal regime under Juan Falcn created the decentralized United

States of Venezuela in 1864. From 1870 to 1888, Guzmn Blanco dominated

Venezuela. The four years that followed Guzmn's rules were marked by several

12

failed attempts to consolidate a civilian government. After Blancos administration,

Crespo became president, but he was killed in 1898. A year later, in 1899 General

Cipriano Castro, the first of four military rulers from the Andean state of Tchira,

marched on Caracas with a private army that became a strong national army and

assumed the vacant presidency. His nine years of despotic and dissolute rule are

best known for having provoked numerous foreign interventions, including

blockades and bombardments by British, German, and Italian naval units seeking

to collect external debts of the Venezuelan government.

In 1908 Castro traveled to Europe for medical treatment; his chief military aide and

fellow tachirense (native of the state of Tchira), Juan Vicente Gmez, took this

opportunity to overthrow the dictator and assume power.

The year 1908 marked the beginning of the rule of one of the longest-lasting of all

Latin American dictators, Juan Vicente Gmez, who stayed in power until his death

in 1935. His regime was one of total and absolute tyranny, although he did force

the state (with the help of foreign oil concessions) into national solvency and

material prosperity. His dead precipitated widespread looting, property destruction

and the slaughter of Gmez family members and collaborators by angry mobs in

Caracas and Maracaibo. Gmez's twenty-seven years in power brought to a close

Venezuela's century of caudillismo and, according to many historical accounts, his

demise marked the beginning of Venezuela's modern period.

5. The Transition to Democracy

During the twenty-three years of transition to democratic rule, institutions as the

military transferred political power to civilians. However, the military was still very

dominant, and the death of Gmez left a leadership vacuum that could only be

filled by the old dictator's tachirense minister of war, General Eleazar Lpez

Contreras. After he finished Gmez's term of office in 1936, the Congress, which all

the members had been appointed by Gmez, selected Lpez to serve his own five-

13

year term in office.

Later in 1945 a military junta gained control of the government, which was then

headed by Rmulo Betancourt of the Democratic Action party. Two years later, a

new constitution was promulgated in 1947, which provided, for the first time in

Venezuelan history, presidential election by direct popular vote. The first president

elected under the new constitution was the eminent novelist Rmulo Gallegos. His

administration, however, was short-lived.

A military coup in November, 1948, overthrew the Gallegos government, and a

repressive military dictatorship was established. By 1952, Col. Marcos Prez

Jimnez had become dictator, and he made wide use of police state techniques. A

popular revolt, supported by liberal units of the armed forces, broke out early in

1958; and Prez Jimnez fled out of the country. Elections held that year restored

democratic rule to Venezuela. Rmulo Betancourt adopted a moderate program of

gradual economic reform and maintained friendly relations with the United States

despite the association of U.S. interests with Prez Jimnez. A new constitution

(1961) was adopted.

The country, long out of debt because of the oil revenues, reached a peak of

prosperity, but the new administration was nevertheless gravely challenged. Left-

wing groups, particularly the Communists, bitterly opposed the administration, and

their activities, combined with the restiveness of the poorer classes and the

dissidence of leftist elements in the military, led to numerous uprisings. Extreme

right-wing elements also plotted against the Betancourt regime. Betancourt was

succeeded by popular elections in 1964 by Ral Leoni. In 1968 the Social Christian

party came to power when Rafael Caldera won a close presidential election.

The 1973 presidential election was won by Carlos Andrs Prez of the Democratic

Action party. That same year Venezuela joined the Andean Group (later the

Andean Community), an economic association of Latin American nations. In 1976,

14

Venezuela nationalized its foreign-owned oil and iron companies, and then in 1979

the oil industry was nationalized. Luis Herrera Campns replaced Prez in 1978. A

decrease in world oil prices during the early 1980s shocked the Venezuelan

economy and massively increased Venezuela's foreign debt.

Democratic Action candidate Jaime Lusinchi defeated Campns in 1983. He

renegotiated the national debt and introduced austerity budgets and cuts in social

services, but inflation and unemployment continued to plague the country. Prez

was returned to office in 1989 amid demonstrations and riots sparked by

deteriorating social conditions. In 1992 Prez survived two attempted military

coups, but the following year he was removed from office on corruption charges; he

was later convicted and sentenced to jail for misuse of a secret security fund. In

1994 Rafael Caldera again became president, this time under the banner of the

National Convergence party. He unveiled austerity measures in 1996 and

privatized some state-run companies, such as telecommunication, commercial

aviation, electricity and water supply.

Venezuela's economy sagged and its budget deficit grew as oil prices fell again in

the late 1990s. Relations with Colombia, long strained over control of offshore oil

reserves and the illegal movement of many Colombians into Venezuela to work,

deteriorated in the 1990s as Venezuela claimed that Colombian guerrillas were

trafficking drugs and arms across the border. In 1999, Hugo Chvez Fras, a former

army colonel who had participated in a failed coup attempt against Prez, became

president after running as an independent candidate. He called for a halt to

privatization of state assets and the Congress approved a law enabling him to rule

by decree in economic matters for six months. He also cut Venezuela's oil

production to force up prices, and pushed for other OPEC members to do the

same, promoting the cooperativeness among its member countries.

A referendum in April 1999 was called for a National Constituent Assembly to draft

a new constitution and it was declared a national emergency to strip the Congress

15

of its powers and create a National Assembly instead. By the end of the year it was

called for a general election to restore the new Congress, now called National

Assembly (unicameral). The new constitution established a president with a six-

year term in office and the ability to run for immediate reelection, and increased the

government's control of the economy. In the same month Venezuela experienced

its worst natural disaster of the century, as torrential rains caused huge,

devastating mudslides along the Caribbean coast; perhaps as many as 5,000

people were killed.

The disaster slowed plans for new elections, but in July, 2000, Chvez won

election to the presidency under the new constitution; his coalition, won 99 of the

165 seats in the assembly, short of the two-thirds majority needed to rule without

constraints.

In 2001, Chvez became more unpopular within the upper middle class people

with the increasingly polarized Venezuelan people, although he still retained

significant support among the lower classes. His attempts to assert more State

control over the national oil company led to strikes and demonstrations in early

2002, and in April he was briefly ousted in a coup attempt. Latin American nations

refused, however, to recognize a self-proclaimed interim government under

business executive Pedro Carmona Estanga, who extinguished the National

Assembly, Governors, High Supreme Court, and other Constitutional National

Powers by decree, which led poorer Venezuelans mounted counter-

demonstrations in his support. Chvez was restored to office and called for

reconciliation; a subsequent cabinet shakeup gave his government a less

ideological cast.

The ongoing political turmoil, which led to a prolonged, polarizing antigovernment

strike in the vital oil industry (December 2002 to February 2003), sent the country

into recession and reduced oil exports. Although Chvez outlasted his striking

opponents, the crisis further eroded public support for his government. An

16

agreement between the two sides, negotiated by the Organization of American

States in May, 2003, called for a referendum on Chvez's presidency later in the

year. An opposition petition calling for a referendum on Chvez was accepted,

which became the fist public referendum to end a presidency term in Venezuelan

history5. In the referendum, held in August, more than 60% voted to retain Chvez,

and despite opposition denunciations of the result, foreign observers strongly

endorsed it.

In January, 2005, the president signed a decree establishing a national land

commission that would begin the process of breaking up the country's large estates

and redistributing the land. National assembly elections in December, 2005,

resulted in a sweep for parties supporting the president, but only a quarter of the

electorate voted. Most opposition candidates withdrew from the contest before the

vote in protest against what they said were biases and flaws in the electoral

process, ceding complete control of the legislature to Chvez.

Chvez was reelected in December 2006, benefiting from an economic boom due

to high petroleum prices and from the social programs he had instituted for the

poor, with the poorer classes overwhelmingly favoring the president. In January,

2007, Chvez moved to renationalize all energy and power companies, the cement

and steel industry, and the country's largest telecommunications firm (all of them

were privatized during the Calderas Administration in 1996). He also moved to

consolidate some two dozen parties supporting him into a unified socialist party,

the United Socialist Party of Venezuela (PSUV). Chvez subsequently won

passage of constitutional amendments that would have ended presidential term

limits, and increased the length of the president's term. This political right was

approved by popular referendum in 2007, and was included in the Constitution,

and applies to Mayors, Governors, Assemblymen (deputies) and the

President/Head of Government.

5 It is worth mentioning, this kind of referendum was sponsored by Chavez himself during the newconstitution draft in 1999.

17

Most recently, a new national Assembly election took place in September 2010, to

elect 165 deputies (assemblymen). Venezuelan opposition parties, which had

boycotted the previous election, thus allowing the governing United Socialist Party

of Venezuela (PSUV) to gain a two-thirds supermajority, participated in the election

through the Coalition for Democratic Unity (MUD). PSUV won a majority of the

seats and consequently retained a substantial majority in the Assembly, although

falling short of the two-thirds majority mark. The next presidential elections, as well

of governors and mayor elections, will take place by the end of 2012.

6. The Governmental System

Venezuela is a Federal Republic with twenty-two states, one Metropolitan District,

and eleven federally controlled islands. There are an additional seventy-two islands

in the Caribbean Sea, known as federal dependencies. Governors hold executive

power at the state level and they are elected to five-year terms, and the right to run

for reelection indefinitely. The local government is composed of the Mayor, the

Municipal Council, and the Parishes. The current Chief of State and Head of

Government is Hugo Chavez, elected in December 1998. His government also

drafted and won approval from the electorate for a new constitution, which

subsequently appointed the National Constituent Assembly. President Chavez was

reelected in July 2000 for a six-year term.

The political system of Venezuela is divided into five political powers or branches:

Executive, Legislative, Judicial, Electoral, and Citizen. The executive branch of the

government is presided over by the President, who also looks into the appointment

of higher posts like the Vice-President, members of the Cabinet (Ministers) and

important other members of the National Assembly. He is also the decision maker

regarding the size and arrangement of the ministers in the cabinet. It's important to

note that the legislature of Venezuela is a unicameral legislative assembly, named

as the National Assembly having 165 seats.

18

The sitting members of the house are elected by a popular referendum for a period

of 5 year which can be extended indefinitely (this is a political right, included in the

current Constitution in 2007, approved by popular referendum, applied to Mayors,

Governors and the President/Head of Government). The seats of this legislative

assembly is divided and reserved according to the provisions of law.

The judicial system of Venezuela is headed by the Supreme Court, which in official

terms is regarded as the highest law court in the country. The magistrates of this

court are appointed for a period of 12 year term, though there are lower courts,

district courts and municipal courts located at every district.

The Electoral branch is headed by the National Electoral Council, is the institution

in charge of all electoral processes that take place in Venezuela. Its five principal

members are elected by a majority vote of the unicameral National Assembly and

all its rulings have to be agreed by a majority (three out of five) of these principal

members. Constitutionally assured elections, universal suffrage, and participation

in politics for over three decades have made Venezuela a unique and much

admired democratic model in Latin America.

Citizen empowerment has been provided by the Republican Moral Council, which

consists of the Peoples Defender, the Public Prosecutor, and the General

Accountant. Their job is to observe, prevent, investigate and penalize acts against

the public ethic and administrative moral and oversee the legality of the use of

public fund.

When Hugo Chavez was first elected as the President of Venezuela, he initiated a

reform so as to bring about a radical change which would enhance the social,

economic and political development of the country.

19

The Constitution of the Bolivarian Republic of Venezuela6 is the current and

twenty-sixth constitution of Venezuela. It was drafted in mid-1999 by a

constitutional assembly that had been created by popular referendum. Adopted in

December 1999, it replaced the 1961 Constitution - the longest serving in

Venezuelan history. It was primarily promoted by the current President of

Venezuela Hugo Chvez and thereafter received strong backing from diverse

sectors. This recent constitutional changes emphasize on human rights,

development of free education and upholding the inherent Venezuelan traditions,

cultures and beliefs.

The 1999 constitution provides for mandatory voting for all Venezuelan citizens

who are at least eighteen years old (including the National Army Forces) and who

are not convicts. More than 80% of those registered voted. Each political party had

its own ballot with a distinctive color and symbol, so that even illiterate citizens

could recognize their preferred party choice.

The Constitution of 1999 was the first constitution approved by popular referendum

in Venezuelan history, and summarily inaugurated the so-called "Fifth Republic" of

Venezuela due to the socioeconomic changes foretold in its pages. Major changes

were made to the structure of Venezuela's government and responsibilities, while a

much greater number of human rights are enshrined in the document as

guaranteed to all Venezuelans including free education up to tertiary level, free

quality health care, access to a clean environment, right of minorities (especially

indigenous peoples) to uphold their own traditional cultures, religions, and

languages, among others. The 1999 Constitution, with 350 articles, is among the

world's longest, most complicated, and most comprehensive constitutions.

6 Refers the 1999 document as the "Constitucin Bolivariana" (the "Bolivarian Constitution")because they assert that it is ideologically descended from the thinking and political philosophy ofSimn Bolvar and Bolivarianism.

20

7. Evolution of the Venezuelan Economy

a) Initial Situation

During the first half of the 20th century, the Venezuelan economy was

characterized by its vulnerability with respect to external shocks, dependant as it

was in the beginning on agricultural activities and, afterwards, on oil, as its main

sources of revenue, a situation that still persists.

The economic activity has substantially evolved in Venezuela mainly due to

structural changes introduced by oil production, which displaced the weakened

agricultural activity, whose revenues, basically steaming from coffee and cocoa

exports, hindered the implementation of an investment policy supporting the

productive development of the country.

Before oil emerged, the colonial export structure was still in place in Venezuela. In

general terms, production of the working population was very low since such

workers were poorly trained and qualified, and the sector was not mechanised.

Employment levels were very low and workers were paid in tokens, particularly in

large estates. In the absence of an ownership and land distribution regime, the

prevalence of a land-ownership system based on large estates forced most of the

population to occupy small land lots to grow subsistence crops. Being the conuco

(indigenous word for very small farm) the production unit, the production system

was therefore underdeveloped.

Due to its low income, the population was not considered part of what can be

called a money-based economy. The industry was incipient and the few existing

industries operated in the sector of crude derivative production and leather tanning,

among others, and were rather very artisanal. From the beginning of the

Venezuelan history, a banking system (financial sector) that stored the countrys

gold as a guarantee to coin production and credit prevailed.

21

Venezuela had a very high percentage of rural population (almost 80%) living in

extreme poverty and unhealthy conditions, overwhelmed by pandemic diseases

with a high death toll, as were the cases of malaria, yellow fever, tuberculosis,

among others. Until 1930, approximately, life expectancy was 30 years, the

populations health was impaired by various diseases and illiteracy reached almost

75%. This showed that the social policy was rather precarious or almost inexistent.

With the emergence of oil, and subsequent oil production and export, the

Venezuelan economy started to change progressively, but the population living

conditions did not match such resource basis. In terms of the economic structure,

the share of all export items, composed basically by agricultural products and oil,

started to change, as in 1926, three years before the financial crack, the export of

agricultural products had already started to decrease because of the constant fall in

international prices, as well as to a reduction in production caused by the migration

of labor towards the new industry, and to low productivity in the traditional export

sector that lacked investments to introduce technology into the production process.

After 1930, Venezuela progressively became an oil-exporting country, being its

production managed by transnational companies. At the beginning of the 1930s,

agriculture was still the main source of employment and, until 1949, the GDP per

capita barely reached USD 147 annually (1970 exchange rate), thus showing the

state of poverty of the population.

At the height of the military government of Gen. Juan V. Gomez7, and with the

advent of oil transnational companies, the migration of rural labor started. These

workers did not have production means, were underemployed and frequently

subsisted in slavery conditions. They were seeking better paid jobs in oil fields and,

consequently, improved living conditions8.

7 This refers to the 27-year long dictatorship of Gen. Juan Vicente Gomez, from 1908 to 1935,characterized by oil opening basically to North-American transnational capital, and persecution todissidents alleging the need to maintain the country calm.8 As indicated in Toddaros model (1974), migration occurs for economic reasons, basically in the

22

Regarding the fiscal regime in force, there was a balanced budget, with fiscal

revenues coming basically from taxes on oil activities, while fiscal expenditure was

mainly limited to military expenses aimed at unifying the national army and keeping

the country calm. Remarkably, Venezuela paid its entire external debt in those

years, the management of public funds was deeply backwards due to lack of

planning and to the despotic administration by the president.

After Gen. Gomez died, in 1935, the new government of Gen. Lopez Contreras

implemented a three-year infrastructure build-up plan, particularly in the public

health sector, to assist the population living in precarious conditions, and in the

education and communications sectors, among others. A process to pass labour-

related laws began, as well as a process of greater political openness that allowed

for the legalization of trade unions and some political parties.

In the 1940s, the government of Gen. Medina Angarita continued the policy of

increasing social expense directed towards the most vulnerable sector, through

investment in road infrastructure to improve the scope in the health area. A process

to deepen the reforms is initiated, including the granting of land to rural population

so as to improve conditions in the agricultural sector and recover productivity. At

the same time, in the context of World War II, modernization of public fund

management was among the reforms carried out, including the reform on the

hydrocarbon law to obtain more resources out of Income Taxes and Royalties.

By the mid-1940s, the industrialization of the country and the reduction of

dependence on external markets became necessary to lessen the effects of wars

and crisis around the globe, a situation that led to the application of protectionist

measures in the national industry. The aim was to reduce vulnerability vis--vis

external shocks. Such measures focused on taxes on imported goods aimed at

fostering the local industry; price control on products using imported parts or

completely locally-made products, with the purpose of fighting usury; and the

search for better incomes.

23

implementation of a multiple exchange system to benefit companies with lower

costs of imported parts, as well as the availability of foreign currency to import.

Before the 1940s, Venezuela did not have industrial capacity or a qualified labour,

and there was a marked inequality in income distribution. The infusion of oil income

created the conditions for governments to engage in public expenditure and make

investments in the social sector and public works, not incurring in fiscal deficit,

while boosting the so-far impaired aggregated demand. It is from 1940 that the

countrys accelerated development process becomes evident and the State begins

to use oil wealth to raise the living standards of people.

In the 1950s, Venezuela initiates an industrialization process financed by resources

from oil revenue. At the same time, large investments in public works carry on,

many in support of fixed capital formation to foster the countrys development. The

country thus experienced rapid and elevated economic growth rates, along with a

rapid urban drift.

Also in the 1950s, during the military government of Gen. Marcos Prez Jimnez,

Venezuela took a big leap towards modernization. The impact of oil wealth was

reflected in a raise in wages and salaries for workers, and in a significant increase

of foreign currency income for government. Economic growth was about 10% year-

to-year; public expenditure was very high, basically oriented to investment,

financed by oil incomes; fiscal pressure was relatively low since tax collection was

made in a direct manner to favor investments.

Although the fiscal policy was implemented through a balanced budget, helping

create a favorable investment climate, the low level of tax collection put pressure

on further indebtedness. By the end of the 1950s the drop in oil prices affected

public finances, thus generating lower investment rates. Price and exchange rate

stability were remarkable features of those years.

24

The structural change experienced by Venezuela alter moving from an economy

dependant on agricultural products to an economy dependant on oil exports did not

prevent vulnerability to world economic upheavals considering that oil prices are

very volatile and are exposed to external shocks, wars, oil embargos, among

others.

b) Economic Recovery and Growth (1960-1969)

In the 1960s, after the fall of Gen. Perez Jimenez in 1958, Venezuela enters a new

phase with the late beginning of export substitution, which was in place since

previous decades in a non-systematized manner as a commercial policy tool,

applying measures such as the establishment of tariffs and quotas on imports. The

cost of this was sanctions imposed by the U.S. to Venezuelan products in the U.S.

market.

During those years up until 1962, when Venezuela is ruled by its first democratic

government, an economic and political instability period begins. It is marked by the

inertia effect of indebtedness growth; fiscal resources exhaustion caused by both

the rapid growth of governmental expenses and low tax collection, worsened by the

drop in oil prices that restrict governmental functioning; and investment reduction

that triggers economy and employment contraction. In this context, income claims

are made due to the adoption of wage and salary cuts in the public sector and

higher unemployment.

For these reasons, regarding fiscal aspects and the balance of payments,

restrictions that limited the governments actions to distribute income arouse. On

the one hand, the growing deficit forced fiscal austerity measures, and on the other

hand, the drop in oil income forced an adjustment of the exchange rate and,

therefore, fiscal resources were sought from taxes on oil activities. The nominal

salary cut also helped to prevent bouts of inflation resulting from devaluation, as

well as the increase in unemployment, whose average rate in those years was

25

close to 14%. The crisis undergone in this period was highly regressive in nature.

Import substitution policies were a sign of this regressive nature of measures

implemented, as protectionist policies on the national industry, based on tariff and a

fixed exchange rate of free convertibility to guarantee the import of production

items, offered an advantage for the entrepreneurial and import sectors to increase

their profit rate and take a greater share from oil income.

Generally, from 1973 up until 1978, approximately, an increase of real salary rates

began. The social policy of the State permitted the increase of the so-called social

salary (through explicit and implicit transfers to workers in the areas of education,

health care, housing and leisure). In the following years, oil income started to

recover as a result of production rise by transnational companies and greater

participation of the State in oil income.

c) Oil Boom and Beginning of Instability (1970-1979)

After a decade of relatively economic stability, amid an average growth rate of

4.3% in the early 1970s, Venezuela continued the progressive implementation of its

investment plan, which was basically fostered by the private sector, with little

participation by the public sector. This prompted constant growth thanks to the

support given to non-oil activities. The economic activity rose at an average rate of

5.2%, while GDP per capita averaged a 1.7% increase. This was reflected on a

slight improvement of income distribution despite the relative reduction of workers`

remuneration with respect to the GDP.

In the International context, in the first half of the 1970s, a political and economic

turbulence era begins, characterized by the increase of financial volatility after the

U.S. dismantled, in 1971, the world gold standard monetary regime to place the

dollar as the reference currency for economic transactions. This paved the way to

subsequent exchange and financial crisis in the world caused by the constant

26

capital mobility in pursuit of higher returns. In the political ground, the struggle to

gain control of natural and energy resources started, with direct interventions,

mainly in Arab countries, by the U.S. and other G7 countries. The purpose was to

gain political control through local players aligned with the interest of the

transnational companies, thus triggering a wave of wars and military coups around

the world.

As a result of the 1973 Arab oil embargo, a significant increase of oil prices takes

place. Consequently, Venezuela engages in a public expenditure policy due to an

important improvement of public finances. This helps increase to a great extend the

investment rhythm in Venezuela. However, indebtedness is incurred since the large

amount of resources is insufficient to cover investments that would finance the

construction of the Great Venezuela. Along these lines, measures are taken in

1974 to face the oil price increase agreed by the OPEC at the end of the previous

year, i.e., the creation of the Investment Fund of Venezuela (FIV, by its Spanish

acronym), aimed at accumulating savings out of financial resources from oil

exports and thus avoiding a monetary growth that would impact the aggregated

demand and will put upward pressure on prices.

Also, the country participated in Development Funds, like the OPEC Fund, and

credits were extended to neighboring countries as a means to balance the

important inflow of resources. As part of the investment policy, the iron and oil

industries, operated until then by transnational companies, were nationalized,

although transnational companies continued operations. As a result of the rapid

economic growth, the GDP per capita rose at average rates of 2.3% annually

before 1978. This allowed an unemployment rate of almost 4.3% in that year. The

inflation rate also remained considerable low

Then, by the end of the 1970s, between 1978 and 1979, when oil prices started to

decline, high expenditure and investments, partly financed by debts incurred in that

period, created upward pressure on prices, provoking a double-digit inflation rate

27

increase. Afterwards, from 1979 and in the years that followed, an important re-

orientation of the economic policy begins, with the application of fiscal adjustments

devised to correct the important unbalances created, and this implied a recessive

re-structuring of the labor market.

d) Debt Crisis, Recession and Inflation (1980-1989)

Between 1978 and 1984, the Venezuelan economy remained completely

contracted as evidenced by a GDP that decreased all along those years.

Afterwards, between 1985 and 1988, after showing recovery signs, the economic

activity kept a faltering growing rhythm, unable to reach the levels of 1979. Those

years characterized by a disinvestment process that caused an important capital

outflow, unemployment raise, and an increasing inflation rate.

All through that decade, the Venezuelan economy continued applying protectionist

measures to the national industry within the already-known import substitution

model. Thus, the current account and capital remained protected with the purpose

of strengthening the national economy, avoiding external competition. Likewise,

until 1983, the fixed rate exchange policy, of free convertibility, remained effective,

and was modified due to the collapse of the international reserves.

From 1984, an adjustable exchange system was adopted, complemented since

1984 by a differential exchange system and price controls on some items. The high

rate of accumulated inflation was a consequence of restrictions on foreign currency

as a result of the 1986 drop in oil prices, which led the central government to

restrict the foreign currency market.

Plummeting investment caused a productivity fall in this period that was

accompanied by an increase of unemployment rates to 13.4% in 1984 from 5.7%

in 1980. Price increase produced a deterioration of exchange terms. This situation

had an impact on distribution indexes, thus evidencing a rapid and marked move

28

backwards with respect to the functional distribution of income9. At that time, the

average salary rate records a decrease of 5.8% yearly, at all levels of the economy,

and this is also linked to a visible reduction of labor productivity.

The high level of the debt put pressure on public finances and, between 1986 and

1987, an external debt refinancing process begins, worsening the situation of

Venezuela, since the public debt doubled as a percent of the GDP because the

government took on the private sector debt. It is at the end of the 1980s that a

structural reform and fiscal adjustment process starts, aimed at recovering

macroeconomic balance.

Then, in 1989, Venezuela was burdened with social and political conflicts caused

by the violent reaction of people to the implementation of neoliberal measures

dictated by the International Monetary Fund (IMF) as a condition to finance

economies in deficit. The Adjustment Plan was known as the 8th Plan of the Nation

and it targeted the reestablishment of sustained development through price

stabilization achieved by implementing a Public Investment Plan.

The measures taken did not succeed achieving the expected results. Initially, the

economic activity contracted 7.6% and the average inflation rate reached 84.5% as

a consequence of import liberalization; the national currency devaluated 83.3%,

while the unemployment rate increased 3.5% percent points, closing at 10.4 by

1989. Fiscal measures included the sale of State-owned assets and the increase of

price of utilities administered by the State.

9 The gap of the functional distribution of income widened, and in 1989 it was of 0.34 and 0.58 forRemunerations of Employees and Workers (REW), and for the Exploitation Surplus (ES),respectively.

29

e) Structural Adjustment Programmes (1990-1999)

In the 1990s, three (3) periods can be identified in Venezuela, differentiated by

both the policies that were applied and their effects on the economy. The first one,

before 1994, was characterized by political instability and the application of

restrictive measures on the aggregated demand with the liberalization of the

current account; a second one, between 1994 and 1995, represented a break with

the previous scheme due to the bankruptcy of the financial system, which forced

the adoption of price and exchange controls. Finally, there is a third period,

between 1996 and 1999, when (neoliberal) restrictive policies are more intensively

resumed within the framework of the so-called Venezuelan Agenda.

During the first period, the policies applied on the Venezuelan economy to re-

establish fiscal balance and recover the path to growth, represented a radical

change of direction, because protectionist measures are left aside and a package

of structural adjustment measures are implemented; the current account of the

balance of payments was liberalized, and exchange, price and interest rate

controls were put to an end in pursuit of the economic and social development of

the country.

Such measures were drastic and were implemented abruptly, thus triggering a

popular reaction as the economy contracted with high-levels of inflation. The

reduction in tariffs on imported products and in subsidies to the production of local

goods and services, meant to translate into an improvement of competitiveness for

our industrial sector, did not have the expected results.

The economic and social strategy was primarily focused on an indiscriminate

external openness, both commercial and financial; deregulation of the price

system; and the reduction of participation in the economy by the public sector to

seek fiscal balance, emphasizing the privatization of productive governmental

assets and, at the same time, placing the private industry as the pivot to propel up

30

the development process.

Later, between 1994 and 1995, the liberalization of the economy, in commercial

and financial terms, together with lack of control and monitoring in the financial

sector, triggered a crisis in the financial system (1994). The banks incurred in lack

of liquidity caused by unprofitability of transactions in their investment portfolio that

hindered fulfillment of obligations.

During this period, a financial rescue policy was implemented to avoid a general

crisis in the system. This resulted in excessive capital flight that compelled the

government to adopt an exchange control regime, with significant adjustments, to

avoid further outflow of financial resources and the subsequent reduction of

international reserves.

In terms of macroeconomic results, the inflation rate was over an average 40%

during those years, the economy decreased, the unemployment rate remained at

high levels, beyond an average 10%, and the fiscal deficit reached around 7% of

the GDP.

All of this put the Venezuelan economy in a difficult situation and imposed the need

to look for fresh resources to finance the high fiscal deficit. Therefore, between

1996 and 1998, the government started to apply a package of measures devised

within the Structural Adjustment Programme called the Venezuelan Agenda. Like

1989 measures, these were a series of policies that pursued fiscal balance,

economic growth and external competitiveness of tradable goods.

In this sense, from 1996, some State-owned companies begin to be privatized and

the Oil Opening is carried out. Such oil opening consisted in opening PDVSAs

capital to transnational investment. Also, a negotiation process to modify the

workers fringe benefit regime started. This was accomplished in 1997.

31

As part of the measures to liberalize the labor market, the minimum wage, already

significantly behind inflation rates, is raised. Benefits to be paid to workers upon

retirement are cut and some compensatory contractual benefits, such as food

tickets that are integrated to salary, are established.

Despite the huge oil-related incomes and availability of resources from debts

incurred with the International Monetary Fund, such policies proved unsuccessful

and did not improve the main macroeconomic indicators. The economic activity still

did not recover and was constantly fluctuating, while unemployment recorded a

minimum rate of 10% yearly. In turn, the inflation rate in 1996 was the highest

recorded in Venezuelan history (103.3%). The exchange control was dismantled

and replaced by a band regime.

Then, in 1998, the economic activity strongly slowed down due to excessive oil

supply in world markets steaming from OPEC quota violation by Venezuela, which

led to oil prices plummeting to 7 US$/bl. The inflation rate remained at expected

levels, but the fiscal deficit worsened, reaching 4.3% of the GDP.

By 1999, a transition process begins in Venezuela. The economy was still affected

by the persistent downward trend in oil prices and capital withdrawal in emerging

markets. Political incertitude was also present in view of changes in public powers

and of the new policies to be implemented. All of these were elements that

conditioned the performance of economic variables that year.

The fiscal policy endeavored the reduction of the deficit in a context of reduced

ordinary incomes at the beginning of the year, caused by low oil prices and little

economic activity in general. At year end, the governmental financial administration

resulted in a deficit of 3.1% of the GDP, below figures recorded in 1998.

32

In 1999, the economic activity showed a 6.0% reduction against the previous year,

as a consequence of the contraction endured by the oil sector. In turn, the average

inflation rate was 23.6%, reflecting a sustained downward trend. Regarding the

labor market, the unemployment rate experienced a slight reduction, as it moved to

10.6% in 1999 from 11.0% in 1998, while the real salary contracted again by 1.5%,

as compared with the previous year.

f) Change of Policies, Growth and Instability (2000-2010)

Since 1999, a new phase of Venezuelas political and social life begins. With the

arrival of President Hugo Chavez to government in that year, the implementation of

the economic policy undergoes significant changes, now with and important social

connotation. In 2000, the new Constitution of the Republic, passed in 1999, enters

into force. This Constitution introduces important political changes defining the

legal and institutional structure, as well as the foundations and principles of the

economic system that were proposed in the National Constituent Assembly.

From 2000 to 2010, four periods may be identified, marked by changes in

tendencies introduced by macroeconomic results, though the social component

remained unchanged and continued progressing. In this sense, the first period,

which runs from 2000 to 2001, is characterized by moderate growth and economic

recovery, with low inflation levels, and the defense of oil prices with the objective of

improving foreign currency income that would be destined to development. During

this period, the exchange rate bands, under a free convertibility regime, which was

adopted in 1996, remained in place.

The basic economic policy guidelines of these first years are summarized in the

active role of public expenditure to propel economy and, more specifically,

demand, as well as an anti-inflation policy supported by a nominal anchor to peg

the exchange rate to its levels of balance, according to the established band

regime. These guidelines remained in place the following years, particularly the

33

one related to governmental expenditure.

It is in this first years of this decade that, by implementing an oil price stabilization

policy based on the defense of crude oil prices, financial resources can be

accumulated in an anti-cyclical saving fund aimed at diminishing the impact of

International volatility, as well as devoting financial resources to national

development, including food campaigns to directly assist the most vulnerable

population.

Also, in this period, public expenditure increase policies were aimed at promoting

investment, both public and private. The economy was rather instable because the

monetary balance had its own Achilles heel: free convertibility, considering that

international reserves were insufficient to offset possible attacks to the exchange

system.

The next period goes from 2002 and 2003, when the recovery of the economy is

abruptly interrupted due to political actions with destabilization purposes that

entailed big losses to the national treasure, thus causing a significant fall of

production and investment, an important rise of unemployment rates, as well as a

noticeable increase in inflation rates. In this period, due to the continued attacks to

the exchange system that caused important capital outflows that impaired the

international reserves, the floating exchange system is abandoned and a free

fluctuation scheme was adopted, with a moderate foreign currency supply by the

Central Bank of Venezuela (BCV, by its Spanish acronym). This policy was rapidly

modified after international reserves decreased due to lack of foreign currency

incomes caused by reduction of the oil industry operations to minimal levels due to

the oil sabotage.

It is in February 2003, when international reserves reached their lowest levels as

compared to the previous three (3) years, that the exchange and price control

regime is adopted. The aim was to curb speculation bouts and minimize the impact

34

of the exchange adjustment applied and the impact of financial/exchange

speculation practiced by the end of 2002, beginning of 2003.

Later, between 2004 and 2008, another period of relative stability is identified, i.e.,

there is high growth, inflation is controlled, international reserves are accumulated

and the unemployment rate is considerable reduced; monetary and credit liquidity

increases. All of this was the result of exchange controls and of the subsequent

downward adjustment to interest rates. Until 2005, a policy of adjustment to the

exchange rate was maintained with the purpose of taking the foreign currency price

to its equilibrium value, considering both its inner equilibrium and the equilibrium of

trade with commercial partners.

With the high increase in oil prices, which meant important economic incomes and

the accumulation of international reserves, the exchange rate adjustment policy is

abandoned in a controlled regime. Public expenditure is increased to important

levels, beyond budgetary planned expenditure, and a debt policy is intensely

implemented by government through loans from State-owned companies or by the

issuing of financial instruments, either in primary placement or derivatives.

At the same time, the government pursues financial resources to finance

expenditure and investment by means of changes in the law ruling the BCV and

starts to use international reserves to create a National Socio-Economic

Development Fund (FONDEN, by its Spanish acronym), whose purpose is to

maintain the pace of investments in capital goods, infrastructure and social

development.

This period was characterized by high growth levels until 2007, which slowed down

in the years that followed, an inflation rate adjusted to the goal planned to 2006,

which increased significantly later on due to restrictions in the foreign currency

market and provoked a slow adjustment in the supply of goods and services vis--

vis the demand increase. There was also a gap between controlled prices and

35

production costs, which generated, on the one hand, shortage of those items

whose production had been stopped and, on the other hand, speculation regarding

those items used as political flag to campaign against the government and its

policy to fight inflation.

The unemployment rate succeeded to be reduced and kept at low levels in this

period, despite a GDP slowdown and a reduction of investment rates. However, in

2007, price controls started to wear off, while imports increased. This compelled

the Foreign Currency Administration Commission (CADIVI, by its Spanish acronym)

to further restrict resources allocation. The effects of the financial-monetary policy

on the baking system were even more evident, as excessive financial investment

by the Banks limited credit and liquidity and increased interest rates, while the loss

of value of Venezuelan financial instruments put in risk patrimony position of the

Venezuelan baking system.

It is in 2008, after the world financial crack erupted, that a low-intensity financial

crisis broke out within the national banking system, with the collapse of a number

of small financial institutions, a situation that lasted until 2009. This difficult situation

was corrected thanks to resources from past privatizations, that were under the

custody of the Economic Development Bank (Bandes, by its Spanish acronym),

previously known as the Venezuelan Investment Fund (FIV).

Finally, a fourth period can be identified, from 2009 to 2010, when the effects of the

world financial crisis were felt. The Venezuelan economy decreased by an average

3% yearly, while the inflation rate remained uncontrolled, keeping beyond 25%.

However, despite public investment fall due to lack of fiscal resources resulting

from the drop in oil prices, the employment rate was pegged at 7% yearly; debts

with other countries were contracted, i.e., the creation of Joint Development Funds,

as is the case of long-term financing from China to Venezuela; and an important

adjustment of the exchange rate was made so as to balance the foreign currency

demand.

36

In this period, high financial speculation compelled the government to provisionally

close all brokerage firms to conduct audits and monitoring, allowing a better control

on the activity, considering that these firms were used as platforms for saving and

other surplus resources outflow, taking advantage of uncontrolled gaps of the

exchange-financial policy10.

8. Geopolitical Relevance of Venezuela

Energy is so fundamental for the survival of the contemporary civilization,

globalized through the capitalist system, as gold and precious stones in the feudal

mercantilist system. Energy sources to which nations resort to meet their

subsistence needs are varied but, there is no doubt that oil is the most important

among them and, according to all forecasts, it will continue to be so for at least the

next 50 years.

And, just as in times of the modern Renaissance world geopolitics moved around

dominion on territories with the largest proven wealth, in post-industrial

contemporary times, the world geopolitics moves around control (indirect dominion)

of territories with the largest proven oil reserves. In some cases, such as in the

Middle East and Central Asia, such control has even had episodes of dominion

through direct military intervention (Gulf War, invasion to Afghanistan, intervention

in Libya). In this context, Fazio (2002) affirms:

Venezuela is a key piece in George W. Bush administrations

global petro-politics. The coup dtat of 11 April was monitored

by oil interests. Some of the objectives of this conspiracy was to

privatize Petrleos de Venezuela S.A. (PDVSA) to the benefit of

a U.S. company linked to the Bush clan and to the Spanish

10 The combined term exchange-financial policy refers to the public sector financing policy,through the issuing of double-currency denomination and realization instruments aimed atpreventing the fall of international reserves and obtaining foreign credit to finance imports. Thiswould impact the exchange system because the instrument market value serves as a benchmark toquote the swap exchange rate.

37

State-own firm Repsol, to sell the U.S. affiliate of PDVSA, Citgo

International, to magnate Gustavo Cisneros and his partners in

the U.S., and to wipe out the Venezuela State reserve over

underground resources to give it to transnational capitals (p.1).

In order to secure an adequate energy supply, at the lowest cost possible, the U.S.

(Arriola, 2000; Benjamn, 2001; Fazio, 2002):

a) Puts pressure on various countries for them to adopt oil opening policies,

b) Fosters capital investment by North-American or British companies in the

oil industries of countries that are strategic in terms of energy,

c) Penetrates in various ways the oil industry of strategic countries and

controls their decision-making levels (management),

d) Keeps strategic oil reserves,

e) Promotes and intervenes in various ways in internal conflicts in oil-

producing countries,

f) Puts pressure on OPEC to lower prices,

g) Adopts fuel rationing measures.

Energy consumption requirements of the U.S. and of the developed world in

general show a sustained growth, while proven oil reserves grow at a lower pace.

In this sense, it is evident that demand exceeds supply, particularly when

considered in the long term. This is a very simple fact: in a world with limited

resources, consumption cannot grow unlimitedly, unless only part of the population

consumes such resources. Said otherwise, resources are insufficient for all. Heinke

(1999), very lucidly indicates so:

Three quarters of the world population currently living in the

least developed regions expect to achieve the same life

standards of the other quarter living in the most developed

regions. For this to happen, energy consumption would have to

see approximately a tenfold increase. However, when

38

considering the current energy reserves and their value, it

becomes clear that this is impossible ..Furthermore, a

tenfold increase in energy consumption may entail the same

increase in pollution, which will be difficult or (more likely)

impossible to be assimilated by the environment. Ultimately, life

standards in rich countries would have to lower to allow for the

increase of life standards in the poorest countries. May this

happen through pacific means? (p. 45).

There is no doubt that important world events are marked by energy geopolitics,

specifically oil-related geopolitics, and as energy consumption requirements grow

and the development of alternative energy sources moves slowly, many of these

events marked by oil-related geopolitics, led mainly by the U.S., first world power in

the globalization era, and by Europe in a second term, will persist.

In this context, Latin America is one region of the world that will be on the eye of

power centers, both for its geographic proximity and for its energy reserves. The

current success of Venezuela in making its heavy crude-oil deposits commercially

profitable suggests that it will substantially contribute to the diverse global energy

supply both in the medium and long term.

Being Venezuela a crucial oil supplier for the U.S.11, with the largest conventional

crude-oil reserves worldwide (over Saudi Arabia)12, with a government that

compromises North-American interests in Latin America, leading a change process

of continental scope, the country is unquestionably destined to play a leading role

in the world energy and oil geopolitics. In fact, Venezuela has already been playing

such role since long ago, with the foundation of the OPEC first, an initiative of

Venezuelas Juan Pablo Perez Alfonzo; then, having a leading role during the oil

shock of the 1970s; and now with the re-launching of OPEC (promoted by

President Chavez) and the elimination of control over PDVSA by the U.S. through

11 Department of Energy (DOE) (2011). Energy National Plan.12 OPEC Annual Statistical Bulletin 2011.

39

its managers (control over corporate decision-making).

Venezuela has wisely managed the growing importance of oil as evidenced by a

clear policy of reliable and safe supply to the U.S., even accepting participation of

transnational capitals in the hydrocarbon industry, although partnership is now

more diverse and there are clear-cut rules that grant more participation and bring

more benefits to the State for the exploitation of its natural resources.

Nevertheless, Venezuela has also been able to prop up a fair-price policy, with a

determined participation in the international scenario as a relevant OPEC member.

Similarly, despite what may be thought, Venezuela has not lost significant

production capacity and has demonstrated to the world that it has enough

resources to guarantee operations of its oil industry, even in the most adverse

circumstances, as was the case of the oil strike-sabotage of December 2002 and

January 2003.

It becomes clear then that Venezuela has opted for a balanced policy regarding the

geopolitical interests of power centers in Venezuelan oil and gas. On the one hand,

it remains as the largest hydrocarbon supplier to the U.S. in the Western

Hemisphere, a reliable and safe supplier; also, transnational capitals invested in

the country are respected and are allowed in at an even faster rhythm than before

President Chavez took office. But, on the other hand, it plays a decisive leading

role within OPEC, even incorporating non-OPEC oil producing countries, such as

Mexico, in quota system agreements, to regulate oil prices.

a) Geopolitical Implications of Reserve Increase

The importance of the Venezuelan oil reserve certification as the largest oil

reserves worldwide places the country at the world energy centre. This makes the

country vulnerable with respect to economic interests of major oil companies and

world powers that have a high-level of energy consumption and low crude-oil

40

reserves and production, since the principal zones supporting the economic

activities of the U.S. and the interests of capitalism are those zones in possession

of high reserves of energy resources.

This is why the OPEC announcement certifying Venezuela as the country with the

largest crude-oil reserves in the world marks out the path towards further ratifying

and deepening international cooperation with ally countries to develop not only

production activities, but all subsequent refining and petrochemical activities, so

that the full-sovereignty policy also be a pluripolar policy.

In the current world financial crisis, Venezuelan crude-oil reserves are a guarantee

of present and future stability for the countrys economy and, therefore, for the

Bolivarian Revolution that promotes world economic equilibrium as the basis for a

fair and humanitarian society.

41

9. Bibliography

Arriola, Joaqun (2000). Geopoltica del petrleo. La Insignia. Ciudad de Mxico,

Mxico.

Banco Mundial (1995). Anuario Estadstico. Nueva York, EEE.UU.

Benjamn, Csar (2001). Geopoltica de la venganza. Foreign Policy in Focus.

Ro de Janeiro, Brasil.

Castro Soto, Gustavo E. (2002). La verdad sobre el conflicto con Irak. Petrleo,

Gas, Bancos, Narcotrfico, Bioeconoma y Militarizacin. Ecoportal.

Department of Energy (DOE) (2011). National Energy Plan. EE.UU.

Fazio, Carlos (2002). El golpe a Chvez, con olor a petrleo. Peridico La

Jornada. Ciudad de Mxico, Mxico.

Grupo Intergubernamental de Expertos sobre el Cambio Climtico (1997).

Impactos regionales del cambio climtico: evaluacin de la vulnerabilidad.

Resumen para responsables de polticas. OMM/PNUMA.

Heinke, Gary W. (1999). Crecimiento poblacional y econmico. Prentice Hall.

Mxico.

Klare, Michael T. (2000). Detrs del petrleo colombiano: intenciones ocultas.

Servicio Informativo "alai-amlatina".

La Insignia (2002). El petrleo venezolano, clave en la geopoltica de Estados

Unidos. Mxico.

42

Organization of American States (2010). "Press release N 20/10, IACHR publishes

report on Venezuela". http://www.cidh.oas.org/Comunicados/English/2010/20V-

10eng.htm.

Forero, Juan (2010). "Despite billions in U.S. aid, Colombia struggles to reduce

poverty". The Washington Post. http://www.washingtonpost.com/wp

dyn/content/article/2010/04/18/AR2010041803090.html

Weisbrot, Mark; Ray, Rebecca; and Sandoval, Luis. (2009). "The Chvez

Administration at 10 Years." Center for Economic and Policy Research. EE.UU.

Weisbrot, Mark; and Sandoval, Luis (2006). "Poverty Rates in Venezuela: Getting

the Numbers Right". Center for Economic and Policy Research.

http://www.cepr.net/documents/venezuelan_poverty_rates_2006_05.pdf.

Baptista, Asdrbal (1997). Bases cuantitativas de la economa venezolana 1830-

1995. Fundacin POLAR. 2da Edicin. Caracas, Venezuela.

Baptista, Asdrubal; and Mommer, Bernard (1999). El petrleo en el pensamiento

econmico venezolano. Ediciones IESA. 2da Edicin. Caracas, Venezuela.

Furtado, Celso (2008). Ensaios sobre a Venezuela. Subdesenvolvimento com

abundncia de divisas. Arquivos Celso Furtado, Caderno N 1. Centro

Internacional de Polticas para o Desenvolvimento. Rio de Janeiro, Brasil.

Guerra, Jos (2004). La poltica econmica en Venezuela 1999-2003.

Universidad Central de Venezuela, Consejo de Desarrollo Cientfico y

Humanstico. Caracas, Venezuela.

Hausmann, Ricardo (1992). Shocks externos y ajuste macroeconmico.

Ediciones IESA. Caracas, Venezuela.

43

Mrquez, Gustavo (Compilador); and Mukherjee, J. (1993) Distribucin del

ingreso y pobreza en Venezuela. El Gasto Pblico y Distribucin del Ingreso en

Venezuela y El Gasto Pblico en Educacin. Ediciones IESA. Caracas,

Venezuela.

Mata, Lus (2006). Los lmites de la Revolucin. Petrleo y gobernabilidad.

Universidad Central de Venezuela. Ediciones FACES-UCV. Caracas, Venezuela.

Mata, Lus (2006). Venezuela, Macrodinmica y Poltica. Petrleo y

gobernabilidad. Universidad Central de Venezuela. Comisin de Estudios de

Postgrado. Fondo Editorial Tropykos. Caracas, Venezuela.

Mieres, Francisco (2010). El Petrleo y la problemtica estructural venezolana.

Banco Central de Venezuela. Ediciones BCV, Gerencia de Comunicaciones

Institucionales. Caracas, Venezuela.

Ross, Jaime (1993). La edad de plomo del desarrollo latinoamericano. Fondo de

Cultura Econmica. Ciudad de Mxico, Mxico.

Valecillos Toro, Hctor (1992). Mercado de Trabajo y Redistribucin del Ingreso.

Revista BCV, Vol. 7, N2. Caracas, Venezuela.

Valecillos Toro, Hctor (2007). Crecimiento econmico, mercado de trabajo y

pobreza. La experiencia venezolana del siglo XX. Ediciones Quinto Patio.

Caracas, Venezuela.

44

10. Annexes

7,6

2,7

-3,5

-8,9

-4,3

3,65,4 5,6

-4,4

-8,7

-5,9

-15,8

-26,7

-5,5

-6,5

8,0

36,1

13,1

15,7

8,7

12,09,1

9,0

12,07,8

7,2

4,9

7,23,8 3,5

0,5

-2,6-4,6

-5,8 -5,2

-1,9

-30

-20

-10

0

10

20

30

4019

98I II III IV

1999

I II III IV20

00I II III IV

2001

I II III IV20

02I II III IV

2003

I II III IV20

04I II III IV

2005

I II III IV20

06I II III IV

2007

I II III IV20

08I II III IV

2009

I II III IV(*)

2010

I II

%

Venezuelas MacroeconomicIndicators

GDP

E7 Workshop Renmin UniversityDelegation of Venezuela

Source: Central Bank of Venezuela

Coup d'tat &Oi