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Government InterventionWhen Hugo Chavez won the election in 1999, he did not mention anything aboutnationalization. At that moment, Venezuela was on the right track, developing rapidly with thehelp of privatization. No longer after becoming the president, Chavez started to nationalize notonly the oil industry but also other sectors with the main purpose was to enhancinggovernment power. Until now, he has nationalized the majority sectors of the economy, fromrice mills and farmland in agricultural sector, banks in finance sector to steel,telecommunications and transportation sectors. He also does not permit private and foreigncompanies to operate and develop in the country by raising taxes to even 50% in some privatesectors (Gobry 2016). Chavez’s policies have brought difficulties to firms and reduced thenation’s productivity. The most important industry of the country – oil, along with other sectorssuch as food and cement started to manufacture less each year pass by. The economyperformance became worse at a quick rate, causing foreign investors to lose interest in thecountry. Without foreign investment, national income would drop considerably, weakening thecountry’s ability to pay back loans. Venezuela government also create four exchange rates, with two of them are used forimporting priority goods, one for anybody who is not permit to buy dollars at the first two ratesand one for black market. Using many exchange rates and nationalizing too many sectors couldalso create incentives to corrupt. According to Gobry (2016), “$22.5 billion in public funds havebeen transferred from Venezuela to foreign accounts with no plausible explanation”. 20
Printing moneyThe fall in oil price and consequences from government interventions have led to a massiveshortage of money. Concerning about the lack of funds to pay for the excessive amount ofloans, Chavez government has made a dangerous decision, which is printing out moneyuncontrollably to raising funds from external financing.Figure 7. Relation between money supply and value of money (Adapted fromSparknoten.d.)If government prints more money, there will be an increase in money supply. When there is more money while the amount of output remains stable, the price of goodsand services will rise since consumers are willing to pay more for them. Therefore, to buy thesame amount of goods, it requires more money, meaning that the value of money has fallen,also known as inflation. In the case of Venezuela, money supply rise and there is a shortfall inquantity of goods at the same time, resulting in a high inflation. 21