Economy of Venezuela

Contents
*Executive Summary 2
1 Venezuela Profiles 3 1.1 Geography 3 1.2 Population 4 1.3 Political System 4 1.4 Economic System 4 1.5 Market Spotlight 5 1.6 Trade Agreements 6
2 Doing business in Venezuela (Compare with China) 6 2.1 Starting a business 7 2.2 Dealing with construction permits 8 2.3 Employing workers 8 2.4 Registering property 9 2.5 Getting credit 9 2.6 Protecting investors 10 2.7 Paying taxes 11 2.8 Trading across borders 12 2.9 Enforcing contracts 12 2.10 Closing a business 13 2.11 The ranks trend of 10 Factors from 2007 to 2010 in Venezuela 13 2.12 The ranks trend of 10 Factors from 2007 to 2010 in China 14
3 Global Competitiveness Index 15 3.1 The comparison (Score) of GCI with Venezuela and China in 2010 16 3.2 The comparison (Rank) of GCI with Venezuela and China in 2010 16 3.3 The trend of GCI (Rank) 2 countries from 2002 to 2010 17 3.4 The trend of GCI (Score) 2 countries from 2005 to 2010 18
4 Conclusion 18 4.1 Market Challenges in Venezuela 18 4.2 Market Opportunities in Venezuela 19 4.3 Experience from China 19 4.4 Recommendation of Strategy 20 4.5 Venezuela Economy: Impact of Nationalization 20

*Executive Summary

My selected country Venezuela is the worst rank, in order to evaluate the business environment, first, I do some research for Venezuela profiles, which include basic information, population, political system, economic system, market spotlight, and trade agreement. Second, according to the data form doing business website, analysis related factors rank, Venezuela ranked 177 out of 183 countries in 2010. I draft an illustration to doing business in Venezuela, and compare with China based 10 dimensions, through comparison of doing business easily in 2 countries, China has only 2 factors weakly than Venezuela. On the other hand, 4 indicators of Employee workers, getting credit, protecting investors, and paying taxes, which is in the bottom 15 countries. The third, GCI economic factors is divided into 3 stages, Venezuela is allocated into “Transition from 1 to 2”, and China is allocated into “State 2”. Compare GCI between Venezuela with China, we are easily to know all of the China’s pillars are better than Venezuela’s. The finally is my conclusion to do business in Venezuela, includes marketing challenge, marketing opportunities, experience from China, and my recommendation of strategy.

In balance, Venezuela is an un-developed country, there is lots of improvement needed, not only political system, but also economic system, so the government should adjust policies, change business environment, to attract FDI to invest, then advances Venezuela’s GCI.

Venezuela Profiles

1.1 Geography[1]

Located in the northern part of South America, Venezuelan continental territory limits are the Caribbean Sea to the North; the Atlantic Ocean and the Republic of Guyana to the East; the Republic of Brazil to the South and the Republic of Colombia to the West. Its total area of 917.450 square km (354.227,44 square miles) is approximately 2.5 times the State of California.
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1.2 Population

Venezuela has an estimated population of 21 million. Caracas, the capital city, has a population of 2.8 million, inhabitants with unofficial estimates of 7 million. Other major cities are Maracaibo (1.4 million inhabitants), Valencia (1 million inhabitants), Maracay (0.8 million inhabitants) and Barquisimeto (0.8 million inhabitants).

1.3 Political System

The Republic of Venezuela is a representative democracy with division of powers as follows: Executive
Branch (referred to as the "National Executive") headed by the President and 22 Cabinet Ministers;
Legislative Branch, comprised of two Chambers, Senate and Deputies elected every five years; and a
Judicial Branch, headed by the Supreme Court of Justice.
The National Territory is divided into 22 states, 1 Federal District and 72 islands. Caracas, the capital of the Republic and the Federal District, is the permanent site of the headquarters of the National executive.

1.4 Economic System

The economic rights contained in the Constitution of the Republic of Venezuela include the right to exercise any lucrative or commercial activity. This right, however, is subject to the limitations stipulated in the Constitution and to those established by law with respect to security, health or other matters of national interest.

Notwithstanding, pursuant to foreign investment regulations and other related laws, there are some sectors of the economy reserved exclusively for national investors which will be discussed herein below Monopolies are not permitted in Venezuela, although certain exclusive concessions may be granted for a limited period of time, for the establishment and exploitation of works and services of public interest. The Venezuelan State may reserve to itself, the exploitation of certain industries or public services, e.g. the Organic Law which reserves the regulation of the Hydrocarbon Industry and Commerce to the State (also known as the Oil Nationalization Law).

Recently, Venezuela has opened its frontiers to foreign investment in such important fields of the economy as banks, insurance companies and, most notably, the oil sector. The oil opening has been made pursuant to Article 5 of the Oil Nationalization Law, through joint venture agreements with foreign companies and more recently through profit-sharing association agreements.

In addition, Venezuela is going through a process of privatization.

1.5 Market Spotlight

Venezuela devalued its currency and created a two tier exchange rate. Although short-term domestic currency liquidity will increase, external public solvency indicators are not expected to improve: • GDP contracted 5.6% y/y in Q1 2010. • Electricity shortages are causing very significant losses for private sector companies. • The government has introduced new restrictions to FX access.

|Economic Indicators[2] |
| |04-08 avg. |2009 |2010 |2011 |
|GDP (% growth, real) |10.2 |-3.3 |-3.5 |0.5 |
|Inflation (%chg, pa avg.) |19.9 |27.1 |37 |42 |
|Fiscal Balance (% of GDP) |0.3 |-6.2 |-3.2 |3.9 |
|Exports (%, comp. annual growth) |28.4 |39.5 |4.7 |9.4 |
|Imports (%, comp. annual growth) |36.4 |22.3 |-6.7 |1.3 |
|Current Account (% of GDP) |13.1 |2.6 |5.9 |3.4 |
|Reserves (months of curr. debits) |6.7 |5.9 |3.7 |3.2 |
|External Debt (% of GDP) |25.1 |15.5 |26.9 |27.3 |
|Debt Service Ratio (due) |10.8 |10.6 |15.8 |14.8 |
|Exchange Rate (to USD; eoy) |2.1 |2.2 |4.3 |5.5 |

1.6 Trade Agreements

• Marrakesh Agreement that Establishes the World Trade Organization (WTO). • Latin-American Integration Association (LAIA). • The Free Trade Agreement between Colombia; Mexico and Venezuela, The Group of Three (G-3). • Andean Community. • Central American Common Market (CACM). • Venezuela and the Caribbean. • Venezuela and Chile. • Other Bilateral Agreements. • Venezuela and MERCOSUR.

Doing business in Venezuela (Compare with China)

Economy Rankings - Ease of Doing Business[3]

Venezuela, R.B. is ranked 177 and China is ranked 89 out of 183 economies in 2010, Singapore is the top ranked economy in the Ease of Doing Business.

Venezuela ranks 177 (of 183) in the overall Ease of Doing Business, and among the bottom 15 countries in four indicators: Employing Workers, Getting Credit, Protecting Investors, and Paying Taxes. It is also twice as expensive to export and import per container and it takes twice as long than the regional average. The cost to export is $2,590 and to import $2,868 per container.
| |2010(Rank) |
|Factors |Venezuela |China |
|Starting a business |142 |151 |
|Dealing with construction permits |94 |180 |
|Employing workers |181 |140 |
|Registering property |97 |32 |
|Getting credit |177 |61 |
|Protecting investors |178 |93 |
|Paying taxes |182 |130 |
|Trading crosses borders |166 |44 |
|Enforcing contracts |74 |18 |
|Closing a business |151 |65 |

Through comparison of doing business easily in Venezuela and China, China has only 2 factors weakly than Venezuela, Starting a business and dealing with construction permits(the lower rank is better).

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2.1 Starting a business

The challenges of launching a business are shown below. Included are: the number of steps entrepreneurs can expect to go through to launch, the time it takes on average, and the cost and minimum capital required as a percentage of gross national income (GNI) per capita
| |2010 |
|Factors |Venezuela |China |
|Procedures (number) |16 |14 |
|Time (days) |141 |37 |
|Cost (% of income per capita) |24 |4.9 |
|Min. capital (% of income per capita) |0 |130.9 |

Venezuela’s min. capital ranked 0, and China ranked 130, which means the investor will easily to start business in capital in Venezuela, which is an important factor to attract investment.

2.2 Dealing with construction permits

Shown below are the procedures, time, and costs to build a warehouse, including obtaining necessary licenses and permits, completing required notifications and inspections, and obtaining utility connections.
| |2010 |
|Factors |Venezuela |China |
|Procedures (number) |11 |37 |
|Time (days) |395 |336 |
|Cost (% of income per capita) |233 |579.2 |

Under the data reference, not only Venezuela but also China has weakness in “Dealing with construction permits”.

2.3 Employing workers

The difficulties that employers face in hiring and firing workers are shown below. Each index assigns values between 0 and 100, with higher values representing more rigid regulations. The Rigidity of Employment Index is an average of the three indices.
| |2010 |
|Factors |Venezuela |China |
|Difficulty of hiring index (0-100) |67 |11 |
|Rigidity of hours index (0-100) |40 |33 |
|Difficulty of redundancy index (0-100) |100 |50 |
|Rigidity of employment index (0-100) |69 |31 |
|Redundancy costs (weeks of salary) |not possible |91 |

• China has a big labor market, especially low-end labor market about 200 million, especially high qualified employees (in Beijing, Shanghai and Shenzhen), and Venezuela only has 2 million population; • Venezuela faces a serious employment situation, companies are difficult to hire qualified workers, and employees can’t find an appropriate job cause of without lots of employee opportunities. • Under the comparisons, not only hiring people, but also firing employee rank, China has a big advantage.

2.4 Registering property

The ease with which businesses can secure rights to property is shown below. Included are the number of steps, time, and cost involved in registering property.
| |2010 |
|Factors |Venezuela |China |
|Procedures (number) |8 |4 |
|Time (days) |47 |29 |
|Cost (% of property value) |2.2 |3.1 |

2.5 Getting credit

Measures on credit information sharing and the legal rights of borrowers and lenders are shown below. The Legal Rights Index ranges from 0-10, with higher scores indicating that those laws are better designed to expand access to credit. The Credit Information Index measures the scope, access and quality of credit information available through public registries or private bureaus. It ranges from 0-6, with higher values indicating that more credit information is available from a public registry or private bureau.
| |2010 |
|Factors |Venezuela |China |
|Strength of legal rights index (0-10) |2 |6 |
|Depth of credit information index (0-6) |0 |4 |
|Public registry coverage (% of adults) |0 |62.1 |
|Private bureau coverage (% of adults) |0 |0 |

• Only “Strength of legal rights index” ranked 2 (ranges from 0 to 10), which means higher scores indicating that collateral and bankruptcy laws are better designed to expand access to credit. • Any other factors ranked “0”. In Venezuela the country, basically there is no credit system, so whether the domestic relationship between enterprises and banks, or foreign-invested enterprises will face a lot of money and credit problems. • By comparison, China attaches great importance to the current credit management, one to the external factors, many large foreign companies to invest in China attaches great importance to corporate credit index, while the Chinese government also constantly increased the credit index for business in recent years.

Overall, Venezuela has strength in “Getting credit” factor, and China indicates the weakness in “Public registry coverage” factor.

2.6 Protecting investors

The indicators below describe three dimensions of investor protection: transparency of transactions (Extent of Disclosure Index), liability for self-dealing (Extent of Director Liability Index), shareholders’ ability to sue officers and directors for misconduct (Ease of Shareholder Suits Index) and Strength of Investor Protection Index. The indexes vary between 0 and 10, with higher values indicating greater disclosure, greater liability of directors, greater powers of shareholders to challenge the transaction, and better investor protection.
| |2010 |
|Factors |Venezuela |China |
|Extent of disclosure index (0-10) |3 |10 |
|Extent of director liability index (0-10) |2 |1 |
|Ease of shareholder suits index (0-10) |2 |4 |
|Strength of investor protection index (0-10) |2.3 |5 |

• China’s “Extent of disclosure index” ranked 10, which measures the transparency of transactions cannot protect investors deeply. China’s laws protect the equity of investors effectively, and under a large number of media present disclosure, more and more information to open to investors. • All factors ranked no more than 3, the “Protecting investors” dimension measure the strength of minority shareholder protections against directors’ misuse of corporate assets for personal gain in Venezuela. • A survey of corporate lawyers and is based on securities regulations, company laws, and court rules of evidence in Venezuela, which indicate the laws cannot protect the investor, more to corporate high directors. • Strength of investor protection index : average of the extent of disclosure index, director liability index, and shareholder suits index, Venezuela rank(2.3) is better than China(5).

2.7 Paying taxes

The data below shows the tax that a medium-size company must pay or withhold in a given year, as well as measures of the administrative burden in paying taxes. These measures include the number of payments an entrepreneur must make; the number of hours spent preparing, filing, and paying; and the percentage of their profits they must pay in taxes.
| |2010 |
|Factors |Venezuela |China |
|Payments (number per year) |71 |7 |
|Time (hours per year) |864 |504 |
|Profit tax (%) |8.1 |2.1 |
|Labor tax and contributions |18 |68 |
|Other taxes (%) |34.9 |8.4 |
|Total tax rate (% profit) |61.1 |78.5 |

• Payments mean “total number of payments per year”, China rank is 7 better than Venezuela, and China has a stable finance system. • China income tax is 33%, and the rank is 2.1, so Venezuelan will take heavy profit tax. • Other taxes: Venezuela ranks 34.9%, is big distance than China (Better).

2.8 Trading across borders

The costs and procedures involved in importing and exporting a standardized shipment of goods are detailed under this topic. Every official procedure involved is recorded - starting from the final contractual agreement between the two parties, and ending with the delivery of the goods.
| |2010 |
|Factors |Venezuela |China |
|Documents to export (number) |8 |7 |
|Time to export (days) |49 |21 |
|Cost to export (US$ per container) |2590 |500 |
|Documents to import (number) |9 |5 |
|Time to import (days) |71 |24 |
|Cost to import (US$ per container) |2868 |545 |

• Venezuela has a big problem in cost to export(2590) & import(2868), so it is difficulty to attract FDI; • China has strength in “Time to import” ranked 24, which means China has a rational custom process decreasing import time. China has a big business window “Hong Kong”, and Shanghai international YangShan deep water harbor.

2.9 Enforcing contracts

The ease or difficulty of enforcing commercial contracts is measured below. This is determined by following the evolution of a payment dispute and tracking the time, cost, and number of procedures involved from the moment a plaintiff files the lawsuit until actual payment.
| |2010 |
|Factors |Venezuela |China |
|Procedures (number) |29 |34 |
|Time (days) |510 |406 |
|Cost (% of claim) |43.7 |11.1 |

2.10 Closing a business

The time and cost required to resolve bankruptcies is shown below. The data identifies weaknesses in existing bankruptcy law and the main procedural and administrative bottlenecks in the bankruptcy process. The recovery rate, expressed in terms of how many cents on the dollar claimants recover from the insolvent firm, is also shown.
| |2010 |
|Factors |Venezuela |China |
|Recovery rate (cents on the dollar) |6 |35.3 |
|Time (years) |4 |1.7 |
|Cost (% of estate) |38 |22 |

2.11 The ranks trend of 10 Factors from 2007 to 2010 in Venezuela

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Base on DB researching, we find the result, Most factors of the overall economy from 2007 to 2010 is declining in Venezuela, and the investment environment is deteriorating, the rank is from 164 down to 177 in the 4 years.

2.12 The ranks trend of 10 Factors from 2007 to 2010 in China

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In spite of a majority of economic factors is decreasing same as Venezuela, and affect the finance crisis, China’ s investement inviroment is still keeping better, and the DB rank increase from 93 to 89 form 2007-2010. But “starting a business” and “Dealing with construction permits” are still very lower than Venezuela.

Global Competitiveness Index[4]

According to the GCI, in the first stage, the economy is factor-driven and countries compete based on their factor endowments: primarily unskilled labor and natural resources. As wages rise with advancing development, countries move into the efficiency-driven stage of development, when they must begin to develop more efficient production processes and increase product quality.

Finally, as countries move into the innovation-driven stage, they are able to sustain higher wages and the associated standard of living only if their businesses are able to compete with new and unique products.
Countries falling in between two of the three stages are considered to be “in transition.” For these countries, the weights change smoothly as a country develops, reflecting the smooth transition from one stage of development to another. Countries/economies at each stage of development:
1) Stage 1 Transition from 1 to 2;
2) Stage 2 Transition from 2 to 3;
3) Stage 3 Venezuela is allocated into “Transition from 1 to 2”, and China is allocated into “State 2”.

3.1 The comparison (Score) of GCI with Venezuela and China in 2010

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According to the chart, we will find that: 1. All of the China’s pillars are better than Venezuela’s; 2. The 2 weaknesses of Venezuela’s indicate “institutions” and “innovation”; 3. China’s strength is “Market size”.

3.2 The comparison (Rank) of GCI with Venezuela and China in 2010

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Base on above analysis chart, we easy find that Venezuela’s GCI is far lower than China’s (based on 12 factors average, the lower rank is better), especially “Market size” and “Macroeconomic stability” is a big distance.

3.3 The trend of GCI (Rank) 2 countries from 2002 to 2010

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In 2003-2004, Venezuela’s GCI rank is more competiveness in international business, and in 2008-2009, the rank is lowest in 8 years. On the other hand, China’s GCI is weaknesses in 2007, but Chinese government takes qualified economic policy, in 2008, the GCI rank is improving highest level.

3.4 The trend of GCI (Score) 2 countries from 2005 to 2010

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Conclusion

4.1 Market Challenges in Venezuela

• Commercial uncertainties from government’s on-going “Bolivarian reforms”, vis-à-vis, e.g., private property rights, the government-private sector relationship, currency controls, and the democratic process. • Currency controls remain an issue and implementation procedures have changed frequently and significantly over the last twelve months. • Lack of transparency in the public procurement process, coupled with an anti-U.S. company bias in government procurements. • Inadequate Intellectual Property Rights protection. • Lack of judicial certainty and independence. • Aggressive tax collection and potential business closures for tax policy violations and minor infractions by the Venezuelan Tax Authority (SENIAT). • Maintenance issues and occasional closure of the major highway between Caracas and its principal port and international airport.

4.2 Market Opportunities in Venezuela

• Venezuela’s growth is primarily related to high petroleum earnings and government spending, which have stimulated demand. Economic growth is projected to continue on the strength of oil prices. • U.S. companies still benefit from established commercial ties between the two countries, e.g., strong consumer preference for U.S. products, preference for U.S. technologies, and the long tradition of U.S. foreign direct investment in Venezuela. Venezuelans are avid consumers of imported products. • Geographic proximity to the U.S., and much shorter shipping times (three to five days) compared to other suppliers. • Relatively low tariff rates and transparent customs administration on imported goods. The Venezuelan government has announced plans to develop new port, storage, and silo facilities. • Leading sectors for U.S. exporters include: oil & gas machinery, IT equipment and services, telecommunications equipment and services, auto parts/service equipment, electrical power generation systems and electrical equipment, medical equipment, chemicals, travel and tourism, agricultural commodities, aircraft/parts and aviation services, educational services, safety and security equipment, and transportation equipment.

4.3 Experience from China

Compare with China’s factors, not only Venezuela government, but also domestic enterprises, who should learn more experience from China: • Government should publish a lot of improvement business policies to attract FDI; • Setup society credit system, protect economic environment; • Increase the capital in education, to educate different level workers to satisfy the society requirement; • Improve the existing laws to protect the equity of investors; • Keeping the society stability; • Strengthen the infrastructure, particularly those related to international trade resources, Such as ports, customs.

4.4 Recommendation of Strategy

• Removing legal and regulatory barriers to private sector investment in oils and non-oil sectors; • Improve confidence to facilitate a recovery of private investment; • Improving physical infrastructure and reversing the deterioration in the business environment, through eliminating complex and uncertain business legislation, and combating crime and violence.

4.5 Venezuela Economy: Impact of Nationalization

Under President Hugo Chavez’s government, several industries in Venezuela were nationalized, including electricity, communications and even the oil industry. The move was intended to exert more control over these key public sectors of the Venezuelan economy. The move drew a general outcry by oil giants, including Chevron, BP and ExxonMobil, whose stake in the lucrative Venezuelan oil industry declined significantly. In fact, several oil companies have become hesitant to continue their investment in Venezuelan economy.
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[1] Reference from http://www.buyusa.gov/
[2]Source: EIU, EDC Economics
[3] Economic data from website http://www.doingbusiness.org/
[4] Data form http://www.gcr.weforum.org/