http://en.wikipedia.org/wiki/Economy_of_VenezuelaThe economy of Venezuela is based on oil, although efforts have been made to develop heavy industry, e.g. steel and aluminium, and to revive the agricultural sector. From the 1950s to the early 1980s the Venezuelan economy was the strongest in South America. The continuous growth during that period attracted many immigrants. With the collapse of oil prices during the 1980s the economy contracted. As oil prices have increased in recent years, Venezuela's economy has strengthened, with GDP growing by about 10 percent a year.
http://www.startribune.com/business/19646609.htmlDespite oil wealth, Venezuelan economy cools as inflation rises, growth slows
By RACHEL JONES , Associated Press
Last update: June 8, 2008 - 7:22 PM
CARACAS, Venezuela - Mirina Kakalanos has been forced to double prices at her family's shoe store in the last year. Customers turn away after browsing the pumps and sandals, but Kakalanos says she has no choice.
"There is less money coming in, and more costs to cover," said the 40-year-old mother of three, whose Greek immigrant father opened the shop after moving to Venezuela in search of a better life. Now she barely makes enough to get by.
Boom times are waning in oil-rich Venezuela, even as world crude prices soar. Inflation is nearing 30 percent, the highest in Latin America, and annual economic growth slowed to 4.8 percent in the first quarter, a four-year low.
Analysts say President Hugo Chavez's economic policies are hindering private investment and growth just as he hopes to boost support ahead of November's regional elections. Many point to the economy as his Achilles' heel.
Already complaining of inflation and food shortages, voters last December rejected constitutional changes that would have allowed Chavez to run for re-election indefinitely — his first blow at the ballot box, where he had enjoyed four straight electoral and referendum wins.
Inflation has been a familiar problem, but a newly slowing growth rate is making it a more urgent concern.
Chavez plans to announce a package of economic measures to boost growth in coming days — and to name a new finance minister to lead the strategy, Information Minister Andres Izarra said.
Venezuela, the world's 10th-largest producer of crude, has seen its annual budget triple to US$63.9 billion since 2004 as oil prices soared. State oil monopoly Petroleos de Venezuela SA provides about half of the government's income.
Chavez pumped huge amounts of that revenue into social programs for the poor, flooding the economy with cash and fueling a consumer spending boom while banks increased lending.
Stanford University political scientist Terry Karl says oil booms always send growth soaring — until an economy reaches what she calls an "absorption crunch."
"You just can't absorb that huge influx of money properly," Karl said. "You get problems with your prices, you get problems of supply. ... All those bottlenecks slow down growth and eventually create inflation."
Like many oil-producing nations, Venezuela has a history of inflation, which reached 103 percent in 1996, two years before Chavez was first elected.
As prices now climb again, Chavez's government has tried to tame the trend — issuing US$4 billion in bonds in April to absorb excess cash, enforcing price controls on basic foods and holding the currency to a fixed exchange rate. It introduced a new monetary unit in January to boost confidence in its sagging "bolivar," and changed the way inflation is measured, incorporating data from smaller cities with less cash on hand.
The Central Bank embraced a more traditional anti-inflationary measure in March, raising interest rates on credit cards to 32 percent and on savings deposits to 10 percent to slow consumer spending.
But inflation is galloping, with rates of roughly 30 percent after running at nearly 20 percent a year earlier. And some of Chavez's tactics have backfired.
Price caps have caused sporadic shortages, as some food producers sought other, more profitable work. And foreign exchange controls make it harder for businesses to get dollars to buy imports, driving them to buy the U.S. currency on the black market, where it has sold at times for twice the official rate — further inflating prices.
Investors complain that these restrictions — not to mention the fear that their lands or companies could be taken over by the government — are making it harder to do business in Venezuela.
Antonio Borguno has run a successful paint solvent plant in northern Carabobo state for 30 years. But when it came time to expand last year, he decided to build the US$4 million plant in Panama.
"The economy is safer" there, he said.
Foreign direct investment fell to US$646 million in Venezuela last year, about half its average for the previous four years, according to the U.N. Economic Commission for Latin America and the Caribbean.
Analysts warn that slowing flow of capital is a drag on the country's annual growth rate, which slowed to 4.8 percent at the end of the first quarter from 8.8 percent last year.
Chavez notes that Venezuela's growth handily beats the 0.9 percent annual gain seen in the U.S. in the first quarter. But developing economies typically grow faster: Latin America as a whole expanded by 5.6 percent last year, according to the International Monetary Fund.
On Sunday, Chavez urged businesses to invest in joint projects with his socialist government. "We want private capital to invest in Venezuela," he insisted, calling for an "alliance between the state and the private sector."
But more often, state investment has replaced private capital. Since 2007, Venezuela has nationalized its largest telephone, electricity, steel and cement companies and assumed majority control over four major oil projects. And political allies including China and Iran have pledged billions of dollars for joint investments.
That leaves some economists disputing the notion that Venezuela's economy is in trouble. "Nobody would complain in Latin America about 4.8 percent growth," said Mark Weisbrot, co-director of the Washington-based Center for Economic and Policy Research.
Chavez allies insist his government respects private property and deny plans for a state-controlled economy. They say more state spending is needed to distribute vast resources more fairly.
Many Venezuelans seem to agree: 56 percent polled in April said they considered Chavez's management positive for the country, even though only 27.6 percent described themselves as pro-government, with the largest group, 46 percent, describing themselves as neutral. The survey of 1,300 adults by Caracas polling firm Datanalisis had an error margin of 2.7 percentage points.
Still, polls show inflation is a top public concern, Datanalisis director Luis Vicente Leon said.
To boost buying power, Chavez raised the minimum wage by 30 percent to US$372 a month in May. But analysts say that only fuels inflation, and nearly half of Venezuela's workers — those employed in the informal economy — will never see the wage hike.
For them, rising prices and slowing growth may yet prove too much to bear.
Yorbelis Suarez, 25, sells vegetables at an open market in Caracas, where she pays three times what she did in March for her stock.
She has always voted for Chavez, but as for whether she would again, she shrugged. "Not if things continue this way."
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