DevelopmentIA for IB diploma
Decreasingoil prices has made Venezuela to suffer an economic slump. Oilemerges as a significant export of Venezuela because it takesapproximately 95% of the country’s export (Sullivan17).Oil being a demand inelastic commodity, the percentage change inquantity demanded is less than the proportional change in price. Thisimplies that a decrease in price will have an effect of decreasingthe quantity demanded more than the price decrease, which would lowerthe revenues for Venezuela’s export significantly. Thus,overspecialization of Venezuela in oil hinders the country fromachieving higher economic development in terms of quality of lifeenhancement as measured by HDI. This is as a result of the countryhaving immense uncertainty and unstable income. Although unstableincome is not always linked to less development, with the volatileoil value change and export revenue, the government is not in aposition to utilize its incomes so as to improve the livingstandards.
Aspart of solution to the Venezuela’s problem, China opted to investmore than 20 billion dollars in Venezuela. China extended a credit toVenezuela of 50 billion dollars since 2007, which was mostly for oilshipments exchange. The president of Venezuela indicated that theresources would be utilized in housing, energy, technology, andinfrastructure projects (Kaiman 1). This FDI long term investment byprivate multinational corporations could assist Venezuela inachieving economic development.
Investingin energy, technology, housing and infrastructure has an effect ofimproving quality and quantity of production factors. The laborquality is likely to improve since energy, advanced technology, andinfrastructure would help works to produce more commodities whileusing the same quantity of resources. This would result to shiftingof long term aggregate supply curve from LRAS1 to LRAS2, producingoutput level of Y2 at a price level PL2. In such a scenario,Venezuela is likely to attain higher economic development since GDPper capita entails one of the factors of HDI. As a result of anincrease in real output, the GDP per capita of Venezuela wouldincrease. The increase in revenue would offer resources that can beused in improving living standards.
Nevertheless,an augment in real output does not necessarily imply economicdevelopment. Since the citizens of Venezuela have a shortage of basiccommodities such as cooking oil, detergent, and toilet paper, usingthe investment on housing, energy, technology, and infrastructurewould imply that the citizens would still face a shortage in basicnecessities.
SinceVenezuela is still over-specialized in oil, FDI could only offerassistance for a short duration. As indicated earlier, Venezueladepends on oil for approximately 95% of its export. This showsoverreliance in the commodity. Investment in technology is likely tohelp in producing diverse commodities however, Venezuela staysvulnerable to change in oil prices. Venezuela does not engage indetermining oil prices in case the oil prices fall, the exportrevenue of Venezuela would decrease. Over-specialization in oil is aproblem that Venezuela faces (Corralesand Romero 48)however, investment in labor quality does not seem to offer asolution to sthe problem.
Concernsindicate that the use of FDI could be restricted the government ofVenezuela is not likely to use FDI for debt repayments or imports.Imported goods are important for the economy of Venezuela since theyinclude machinery equipment, chemicals, and petroleum products. Theseimports are critical for oil production. Debt is likely to hold backVenezuela from using its revenues for other purposes since the nationcould make paying its debts a priority. Although venezuela could makea decision to invest on other areas such as education or health care,payment of its debt must come first. In case the debt of venezuelaremains, there would be an accumulation of interest making thecountry to pay more, when repaying the loan. FDI could be used moreefficiently in case it is used in diminishing the debt or purchasingmore imports that could further increase the production capacity ofVenezuela.
Theresult of oil exploitation is significant. According to the Kaiman’sarticle, Venezuela is getting FDI in pay of oils and exports 600,000barrels of oil to China daily. Although it is not probable that Chinawill haul out all the oil from Venezuela, China is taking out a vastamount of the oil reserve. Since crude oil constitutes 95% of thecountry’s exports, Venezuela may lose an opportunity of exportingoil in the future because China is taking out a significant amount(Amineh84). Besides, Venezuela also loses a source of attraction forinvestment since multinational corporations become attracted by anabundant natural resource of a country.
Venezuelaneed to consider varied factors in order to ensure that theinvestment from china of 20 billion dollars enhance the livingstandards of its citizens. Although the investment may help inimproving the labor quality of the nation that could increase outputin the long run, the vulnerability of Venezuela would not be solvedbecause of over-specialization in oil. Besides, Venezuela citizenshave a shortage in basic commodities and the country is in debt. FDIcould be utilized in solving these problems, but deciding on whichfactor to prioritize is difficult. However, supplying citizens withthe necessary commodities and researching technology that maydiversify Venezuela’s is more importance.
Amineh,Mehdi P, and Yang Guang. SecureOil and Alternative Energy: The Geopolitics of Energy Paths of Chinaand the European Union.Leiden: Brill, 2012. Print.
Corrales,Javier and Romero, Carlos. UnitedStates-Venezuela Relations Since the 1990s.London: Routledge, 2013. Print.
Kaiman,Jonathan. Chinaagrees to invest $20bn in Venezuela to help offset effects of oilprice slump.Retrieved fromhttp://www.theguardian.com/world/2015/jan/08/china-venezuela-20bn-loans-financing-nicolas-maduro-beijing
Sullivan,Mark. Venezuela: Issuesin the 111th Congress.New York: DIANE Publishing, 2010. print.