How Emerging Economies Survived The Global Financial Crisis?

Economic performance Indicators

The present study provides an overview on the macroeconomic performance of the Venezuela economy for the past ten years. This analysis has been done with the help of economic indicators such as real gross domestic product, public debt, rate of inflation, Interest rates, current account surplus as percentage of GDP, exchange rate trends and unemployment rates. The Venezuela economy is mainly based on petroleum and manufacturing industry. This country has experienced huge growth since the global economic crisis. The present economic expansion of the Venezuela is due to oil boom that is driven by rise in the oil prices in the past and is heading for bust. The Venezuela economy still remains in dire straits. Despite increase in oil prices, the production of oil has continued to decrease steadily. In the past few years, the political circumstances has began to stabilize throughout the economic expansion. This economy has continuous economic growth since onset of political stability. The real GDP has increased at high rate since the year 2003. Recent evidences reflect that government expansionary monetary as well as fiscal policies, and exchange controls have highly contributed to the present economic upswing. This study also focuses on the macroeconomic stability and policy of the Venezuela economy. This section reflects on the analysis of how the GFC has influenced on this economy and the economic policy approaches to the economic stabilization used by the government. The vital changes in economic indicators and present outlook of this economy has been discussed in this segment.

Macroeconomic performance of the Venezuela economy over the past 10 years

Economic growth of Venezuela economy

Over the past ten years, the Venezuela economy dismiss the present economic expansion as oil boom that might end in disastrous bust as occurred before the Global Financial crisis (GFC). According to the current data, the real GDP of this economy has increased at an average of about 98.32 USD billion from the past few years. The real GDP of this economy reached the highest in the year 2014. Since first quarter of the year 2003, this economy has increased at high rate. The fastest rising industries during this period has been insurance, finance. Other fast-growing industries involve trade and repair services, construction, transport and communication. In fact, the manufacturing sector has been increasing with around 91% growth over the past ten years.

Public debt as on its percentage of GDP that is utilized by the investors to estimate nation’s ability for making future payments on the debt, thereby impacting the nation’s borrowing cost as well as government bond yields. Venezuela has recorded government debt around 23% of the nation’s GDP in the year 2017. The public debt as percentage of GDP has averaged to around 42.39 % over the past few years, reaching all time high at 72.30% in the year 2013 and low at around 20.30% in year 2008. Over the past ten years, the public debt as percentage of GDP in this economy has fluctuated at high rate. The percentage of GDP of this economy increased after the recession period (2008-2010) but again slowed down during the year 2015-2017.

Macroeconomic performance of the Venezuela economy over the past 10 years

The rate of inflation in Venezuela economy has averaged to near around 13.55% from the year 2008 to 2018, reaching all time high at 200 % in the year 2018 and low at around 0.80% imn the month of April 2012. This nation has experienced double digit inflation rates and hence has huge fluctuation over the years. Owing to huge current account surplus, large reserves and lower foreign debt, the government of this country has integrated several tools for stabilizing as well as reducing inflation rate. The policymakers of this country has slowly brought currency into alignment without even sacrificing the economic growth. However, at present it did not appear that present economic expansion is about to end in near future. The present state of this economy is termed as hyperinflation. Both economic as well as political reasons have led to rapid rise in inflation rate in this economy. On the political side, shortage of necessity goods have caused riots as well as political instability. On the economic side, decline in price of oil has led to huge decrease in total revenue from export of oil.

The benchmark rate of interest in the Venezuela economy has been 20.56 %. The rate of interest of this nation has averaged to near around 23.68% for the last few years. The below figure reflects that the rate has been more or less stable during the period 2008 to 2018. During the recessionary period, the interest rate of this economy was high. But this rate declined after this period and again increased since the year 2015.

Figure : Interest rate of the Venezuela economy over the last ten years

Source: (worldbank, 2018)

The Venezuela economy has recorded current account surplus of around 2% of this nation’s GDP in the year 2017. The current account as percentage of Venezuela GDP has averaged to around 4.29 % during this period. The current account value declined since the year 2008 but this became deficit during the period 2014-2016. Over the years, this economy has been heavily dependent on the export revenues along with high savings rate but weaker domestic demand.

Figure : Current account surplus as percentage to GDP of Venezuela over the last ten years

Source: (tradingeconomics. com, 2018)

As per US Federal Reserve, Venezuela – US foreign exchange rate was near around 9.975 Venezuelan Bolivares to around1 US $ in the year 2017. Historically, US – Venezuela exchange rate reached at high rate of around 9.975 in 2017, which was quite higher than past ten years. The figure below reflects that the value of exchange rate increased at high rate during the period 2008-2018. It has been stated by some economists that the currency of Venezuela is 30% overvalued in relation to dollar (reuters, 2018). However, it discourages development of the non- oil industries mainly the manufacturing sector. It usually makes imports more cheap and exports expensive on the global market, thereby putting nation’s tradable goods at disadvantage in international as well as domestic markets. This in turn creates long term development issue and also consists of distortions as well as inefficiencies connected with system of the exchange controls a s well as parallel market.

Economic growth of Venezuela economy

Figure : Trend of exchange rate of Venezuela over the past ten years

Source: (tradingeconomics.com, 2018)

This macroeconomic indicator signifies the total number of unemployed individuals as percentage of labor force. The rate of unemployment in the Venezuela economy has been more or less stable over the last ten years. The labor force in this nation involves those people who are unemployed but does not involve those persons who are searching for jobs. The data published by world bank also highlights that the rate of unemployment has declined sharply during the economic recovery (Mankiw, 2014). The rate has decreased from 16.78%in the year 2003 to 6.85% in the year 2007. Since then it has been quite consistent until the present year. Therefore, this reflect significant improvement in labor market of this country. Decline in unemployment rate has occurred due to increase in around 1.9 million jobs in private sector and near around 478 jobs in public sector. Private employment has been higher than the government employment in this nation during this period. Furthermore, improvement in Venezuela’s labor market occurred as the total number of individuals who were out of laborforce for education increased by around 3.4 % points in relation to labor force.

Figure : Unemployment rate in the Venezuela economy over the last ten years

Source: (worldbank, 2018)

The economy of Venezuela slowed down in the year 2008 to around 4.9% growth rate from 8.4% in the year 2007. This slowdown occurred due to the government efforts in slowing inflation in the year 2007. During this GFC period, the monthly inflation reduced from 20.4% to 15.3% before increasing again. After the GFC, the inflation rate increased to double and thus affected consumers purchasing power. In addition to this, public sector formation of capital led to slowdown in growth (Wise et al., 2015). During the year 2008, total capital formation declined by around 1.5%. Like that of other developing economies, the Venezuelan economy faces several challenges after this GFC period. Numerous people residing in this nation became unemployed. However, the unemployment rate in this nation increased above the target level. Besides this, the Venezuelan economy did not attain foreign direct investment (FDI) from US or any other developed economies, which have been hit by GFC as well as economic slowdown. It also affected on the events that occurred in this country. In fact, the export and import in this country were also adversely affected due to GFC. In terms of aggregate demand and aggregate supply model, the aggregate demand of this economy shifts in leftward direction. But the short run aggregate supply curve shifts in rightward direction. As a result, the price level declines and output also decreases. This is illustrated in the diagram below-

Public debt as percentage of GDP

Figure : AD-AS Model

Source: (Mankiw, 2014)

The above diagram shows that aggregate demand shifts in the leftward direction from AD1 to AD2. The economy therefore shifts from A to B in short run. Output declines from Y1 to Y2 and level of price also decreases from P1 to P2. Adjustment of expected price level, aggregate supply in the short run shifts in rightward direction from AS1 to AS2. Thus, the economy moves to C where new AD intersects long –run AS. However, the price level declines to P3 and output returns to natural rate.

The major determinant of the Venezuelan growth during the year 2009 and 2010 was the size, efficacy and speed of the fiscal stimulus. The Venezuelan government has adopted several economic policy approaches in order to stabilize the economy after the GFC. The policymakers of this country has announced huge public expenditure program of near around $12 billion or around 3`6% of GDP. The policymakers of this country has also integrated effectual stimulus package that might keep economy on steady growth path (Hamdi & Sbia, 2013). The government of this country has done huge investments in the infrastructure and other public as well as private investments, which in turn increased total productivity over the past few years. In fact, Venezuela under the Chavez government has managed to attain huge success in reducing poverty through various redistributive policies such as land reform in rural as well as urban areas, public education, distribution of food, health care clinics and micro- credit lending. Besides this, the finance ministry of this economy dollars in bonds that is to be sold within the country. This in turn has provided institutional investors and citizens with huge opportunity to attain currency controls. However, this economic policy approach has helped them to stimulate investment and protect from investors.

An analysis of the key economic performance indicators reflect that the Venezuelan economy has been unstable after the GFC. This economy is in full recovery after recession period, which in turn improved the economic health of this nation. The unemployment rate in the Venezuelan economy reduced and thus it led to rise in total formal employment in the job market. However, advancements in the employment to efforts of Chavez administration led to improvement of living standards. On the contrary, the inflation rate of this economy doubled after the GFC. This in turn increased the purchasing power of the consumers, thereby adversely influencing the citizens of this nation. Moreover, this also led to political turmoil and drained businesses drained out of the nation. Giacalone & Ruiz, (2013) has found out that the face of poverty rate also changed after the GFC. The economy has high poverty rate, which in turn negatively affected those people who are finding for jobs.

Rate of inflation

Figure : Economic growth of Venezuela after the GFC

Source: (worldbank, 2018)

The prospects of the Venezuelan economy remains grim. The economists have predicted that the economy will be continuing to be battered by huge hyperinflation, declining production of oil and misalignments of exchange rate (.focus-economics, 2018). Despite hovering oil prices, the production of oil has continued to decline steadily. In addition to this, hefty financial obligations overhangs state-run oil entity PDVSA adds to several sectors issue. The government of this country has limited accessibility to international financing owing to financial sanctions adds to the nations woes. Provided the severity of crisis, the conditions might emerge for political transition. The overvalued fixed exchange rate along with high rate of inflation presents intermediate- term issue. Although inflation rate is stabilized as well as starts to decline as it remains at present levels and nominal exchange rate stays fixed, the currency of Venezuela might become overvalued in the real terms. This might squeeze the domestic production of oil and gradually become unsustainable.

Conclusion

From the above discussion, it can be concluded that the Venezuelan economic growth rate has shown negative trend over the last ten years as per world bank report. The inflation rate also increased double during this period. Besides this, the poverty rate remained high during this period as the rate of unemployment has remained higher. But still the employment level in this nation increased in the formal job market. The government of this nation has adopted several measures to reduce inflation, increase employment and stabilize growth in this economy.

References

Giacalone, R., & Ruiz, J. B. (2013). The Chinese–Venezuelan Oil Agreements: Material and Nonmaterial Goals. Latin American Policy, 4(1), 76-92.

Hamdi, Management., & Sbia, R. (2013). Dynamic relationships between oil revenues, government spending and economic growth in an oil-dependent economy. Economic Modelling, 35, 118-125.

Mankiw, N. G. (2014). Principles of macroeconomics. Cengage Learning.

Naím, M. (2013). Paper Tigers and Minotaurs: the politics of Venezuela’s economic reforms. Brookings Institution Press.

Wise, C., Armijo, L. E., & Katada, S. N. (Eds.). (2015). Unexpected outcomes: How emerging economies survived the global financial crisis. Brookings Institution Press.

www.focus-economics.com (2018). Venezuela Economy – GDP, Inflation, CPI and Interest Rate. Retrieved from <https://www.focus-economics.com/countries/venezuela> (online) [accessed on 19th October 2018].

www.reuters.com (2018). Venezuela exchange rate fluctuation sparks price surge. Retrieved from https://www.reuters.com/article/us-venezuela-economy-forex/venezuela-exchange-rate-fluctuation-sparks-price-surge-idUSKBN1AP2LM (online) [accessed on 19th October 2018].

www.tradingeconomics.com (2018). Lending interest rate (%) | Data. Retrieved from <https://data.worldbank.org/indicator/FR.INR.LEND?locations=VE>. (online) [accessed on 19^th October 2018]

www.ttradingeconomics.com (2018). Venezuela Current Account to GDP | 1980-2018 | Data | Chart | Calendar. Retrieved from <https://tradingeconomics.com/venezuela/current-account-to-gdp> (online) [accessed on 19^th October 2018]

www.worldbank.org. (2018). GDP growth (annual %) | Data. Retrieved from <https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?locations=VE> (online) [accessed on 19^th October 2018]