Government Intervention When Hugo Chavez won the election in 1999 he did not

Government intervention when hugo chavez won the

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Government Intervention When Hugo Chavez won the election in 1999, he did not mention anything about nationalization. At that moment, Venezuela was on the right track, developing rapidly with the help of privatization. No longer after becoming the president, Chavez started to nationalize not only the oil industry but also other sectors with the main purpose was to enhancing government power. Until now, he has nationalized the majority sectors of the economy, from rice mills and farmland in agricultural sector, banks in finance sector to steel, telecommunications and transportation sectors. He also does not permit private and foreign companies to operate and develop in the country by raising taxes to even 50% in some private sectors (Gobry 2016). Chavez’s policies have brought difficulties to firms and reduced the nation’s productivity. The most important industry of the country – oil, along with other sectors such as food and cement started to manufacture less each year pass by. The economy performance became worse at a quick rate, causing foreign investors to lose interest in the country. Without foreign investment, national income would drop considerably, weakening the country’s ability to pay back loans. Venezuela government also create four exchange rates, with two of them are used for importing priority goods, one for anybody who is not permit to buy dollars at the first two rates and one for black market. Using many exchange rates and nationalizing too many sectors could also create incentives to corrupt. According to Gobry (2016), “$22.5 billion in public funds have been transferred from Venezuela to foreign accounts with no plausible explanation”. 20
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Printing money The fall in oil price and consequences from government interventions have led to a massive shortage of money. Concerning about the lack of funds to pay for the excessive amount of loans, Chavez government has made a dangerous decision, which is printing out money uncontrollably to raising funds from external financing. Figure 7. Relation between money supply and value of money (Adapted from Sparknoten.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 goods and services will rise since consumers are willing to pay more for them. Therefore, to buy the same 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 in quantity of goods at the same time, resulting in a high inflation. 21
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