VENEZUELA
Rank: 144 Regional Rank: 28 of 29
V
enezuela’s economy is 47.7 percent free, according to our 2007 assessment, which makes it the world’s 144th freest economy. Its overall score is 2.6 percentage points higher than last year, partially reflecting new methodological detail. Venezuela is ranked 28th out of 29 countries in the Americas, and its overall score is much lower than the regional average. Venezuela scores fairly well only in fiscal freedom. The top income and corporate taxes are relatively high, but overall tax revenue is relatively low as a percentage of GDP. As a staunchly socialist nation, Venezuela is weak in labor freedom, financial freedom, investment freedom, monetary freedom, freedom from government, property rights, and freedom from corruption. The commercial regulatory process is burdensome and confusing. The judiciary is heavily influenced by the government and does not enforce contracts well. The labor market is rigid, and the financial market, though sophisticated, has become more vulnerable to political interference. Corruption pervades the civil service and, along with the likelihood of expropriation, helps to deter foreign investment. Inflation is extremely high, and the government has the power to set prices. BACKGROUND: Since his initial election in 1998, President Hugo Chávez has engaged in a military buildup, adopted draconian libel laws to constrain the media, hobbled opponents through electoral manipulation, imposed foreign exchange controls on the private sector, and politicized the state oil industry, which dominates the economy. Manufacturing and agricultural products like cocoa and coffee comprise a small share of GDP. Although Chávez promised to help the poor, Venezuela’s National Statistics Institute has calculated that poverty rose from 43.9 percent to 55.1 percent from 1998 to 2003.
The economy is 47.7% free
100
80
@ @ @ @@ @ @ @ @ @ @ @ @ @ @ @@ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @@
60
40
Americas Average = 62.3 World Average = 60.6
20
0
1995
2007
QUICK FACTS
Population: 26.1 million GDP (PPP): $157.9 billion 17.9% growth in 2004 1.2% 5-yr. comp. ann. growth $6,043 per capita Unemployment: 15.1% Inflation (CPI): 21.8% FDI (net inflow): $1.9 billion Official Development Assistance: Multilateral: $20 million Bilateral: $34 million (26% from the U.S.) External Debt: $35.6 billion Exports: $39.8 billion Primarily crude oil, marine products, rice, coffee, rubber, tea, garments, shoes Imports: $22 billion Primarily machinery and equipment, petroleum products, fertilizer, steel products, raw cotton, grain, cement, motorcycles
How Do We Measure Economic Freedom? See Chapter 3 (page 37) for an explanation of the methodology or visit the Index Web site at heritage.org/index.
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VENEZUELA’S TEN ECONOMIC FREEDOMS
Business Freedom Trade Freedom Fiscal Freedom Fdm fm Government Monetary Freedom Investment Freedom Financial Freedom Property Rights Fdm fm Corruption Labor Freedom 48.8 56.2 83.7 69.5 57.6 20 40 30 23 48
0
prices. Consequently, an additional 15 percent is deducted from Venezuela’s monetary freedom score to account for these policies.
L
L L L L L L L L L
50 100
INVESTMENT FREEDOM — 20%
The government restricts certain types of investment and requires that certain professions be licensed in Venezuela. Foreign equity participation in media companies is limited to 20 percent, and the number of foreign workers that foreign companies may hire is limited. The government controls key sectors of the economy, including oil, petrochemicals, and much of the mining and aluminum industries. Expropriation is likely. The government controls foreign exchange and fixes the exchange rate. Special regulations exist for a range of transactions including foreign investment, remittances, foreign private debt, imports, exports, insurance and reinsurance, and the airline industry.
100 = most free,
= world average
BUSINESS FREEDOM — 48.8%
Starting a business takes an average of 141 days, compared to the world average of 48 days. To maximize entrepreneurship and job creation, it should be easier to start a company. Obtaining a business license can be difficult, and closing a business is very difficult. Complicated regulations are sometimes inconsistent, causing unreliability of interpretation. The overall freedom to start, operate, and close a business is seriously restricted by the national regulatory environment.
FINANCIAL FREEDOM — 40%
Venezuela’s financial system is relatively well developed but subject to growing government influence. As of November 2005, there were 51 financial institutions (43 private and eight state-owned). Foreign banks may acquire existing banks, create a new wholly owned foreign bank, or establish a branch; and they accounted for over 30 percent of loans as of March 2005. The government created a new bank in 2005 to centralize public-sector resources, now largely held in private institutions, and act as its financial agent. The government increasingly directs financial institutions to provide credit in accordance with its requirements, and even the central bank is subject to government influence. Maximum and minimum levels for lending and deposit interest rates were established in 2005. There were 50 insurance companies as of April 2005, and the top two insurers were foreign-owned. Capital markets are relatively small. Foreign companies may participate legally in capital markets and may buy shares in Venezuelan companies, either directly or on the stock exchange.
TRADE FREEDOM — 56.2%
Venezuela’s weighted average tariff rate was 11.9 percent in 2004. Discriminatory import licensing requirements, import bans and restrictions, mismanagement of tariff rate quotas, currency controls, non-transparent and burdensome standards and labeling regulations, export subsidies, service market access barriers, weak enforcement of intellectual property rights, and inefficient customs implementation add to the cost of trade. Consequently, an additional 20 percent is deducted from Venezuela’s trade freedom score to account for these non-tariff barriers.
FISCAL FREEDOM — 83.7%
Venezuela has burdensome tax rates. Both the top income tax rate and the top corporate tax rate are 34 percent. Other taxes include a value-added tax (VAT) and a property tax. In the most recent year, overall tax revenue as a percentage of GDP was 11.5 percent.
PROPERTY RIGHTS — 30%
Property rights are weakly protected. The judiciary is influenced by the executive, and the government routinely backs off from “inconvenient” contracts, particularly in the oil sector.
FREEDOM FROM GOVERNMENT — 69.5%
Total government expenditures in Venezuela, including consumption and transfer payments, are moderate. In the most recent year, government spending equaled 26.7 percent of GDP, and the government received 41.6 percent of its revenues from state-owned enterprises and government ownership of property.
FREEDOM FROM CORRUPTION — 23%
Corruption is perceived as widespread. Venezuela ranks 130th out of 158 countries in Transparency International’s Corruption Perceptions Index for 2005.
MONETARY FREEDOM — 57.6%
Inflation in Venezuela is high, averaging 18.7 percent between 2003 and 2005. Relatively high and unstable prices explain most of the monetary freedom score. The government has the authority to control most prices through extensive regulation, subsidies, and numerous state-owned enterprises and utilities and protects agricultural producers through a non-legislated system of guaranteed minimum
LABOR FREEDOM — 48%
The labor market operates under highly inflexible employment regulations that hinder overall productivity growth. The non-salary cost of employing a worker is moderate, but dismissing a redundant employee is costly. Regulations related to increasing or contracting the number of work hours are rigid.
390
2007 Index of Economic Freedom