2009 Index of Economic Freedom

Quick Facts

Population:

• 27.0 million

GDP (PPP):

• $298.9 billion
• 10.3% growth
• 3.9% 5-year compound annual growth
• $11060 per capita

Unemployment:

• 8.5%

Inflation (CPI):

• 18.7%

FDI Inflow:

• $-543.0 million

Venezuela's economic freedom score is 39.9, making its economy the 174th freest in the 2009 Index. Its score decreased 3.8 points from last year, reflecting significant declines in eight of the 10 economic freedoms. Venezuela is ranked 28th out of 29 countries in the South and Central America/Caribbean region, and its overall score is much lower than the world average.

Venezuela's government is increasingly interventionist and reliant on oil exports. Business freedom is limited by inefficient and rigid regulation. Although foreign and domestic investments are treated equally, investment laws are opaque and burdensome. In 2007, the government expropriated the most lucrative industries. Inflation is more than 15 percent, and there are price controls on almost all goods and services. Corruption pervades civil society and the judiciary; contracts and property rights are not well protected.

Background Back to the top

A period of violence and instability that in 1989 ended several decades of democratic rule in Venezuela was highlighted by a series of coup attempts (one led by then Lieutenant Colonel Hugo Chávez) and the impeachment in 1993 of President Carlos Andres Perez. Chávez was elected president in 1998, and a new constitution was adopted in 1999. Chávez has pursued a military buildup, used electoral manipulation to hobble opponents, imposed foreign exchange controls, undermined speech and property rights, and politicized the state oil company that dominates the economy. He is spending billions on an international, anti-U.S. diplomatic campaign and propping up the regime of his mentor, former Cuban dictator Fidel Castro. Venezuela has one of the world’s highest inflation rates. Price controls on food, medicines, and basic services discourage private production and lead to shortages. A referendum to centralize even more power in the presidency and lift term limits failed to win popular approval in December 2007, but Chávez continues to pursue nationalization, purchases of Russian arms, and friendship with Iran and other rogue states.

Business Freedom 50.8 Back to the top

The overall freedom to conduct a business is seriously restricted by Venezuela's regulatory environment. Starting a business takes 141 days, compared to the world average of 38 days. Obtaining a business license takes more than the world average of 225 days.

Trade Freedom 59.6 Back to the top

Venezuela's weighted average tariff rate was 10.2 percent in 2006. Import bans and restrictions, quotas, price bands for certain products, services market access barriers, import taxes, fees and licensing requirements, non-transparent and discriminatory administration of tariff rate quotas, non-transparent government procurement, non-transparent standards and labeling regulations, export subsidies, weak enforcement of intellectual property rights, and burdensome and inefficient customs implementation add to the cost of trade. Twenty points were deducted from Venezuela's trade freedom score to account for non-tariff barriers.

Fiscal Freedom 70.6 Back to the top

Venezuela has burdensome tax rates. Both the top income tax rate and the top corporate tax rate are 34 percent. Oil companies are subject to a 50 percent tax on net income. Other taxes include a value-added tax (VAT), a property tax, a tax on interest, and an estate tax. In the most recent year, overall tax revenue as a percentage of GDP was 25.0 percent.

Government Size 69.3 Back to the top

Total government expenditures, including consumption and transfer payments, are moderate. In the most recent year, government spending equaled 32 percent of GDP. The government's economic policy has become increasingly interventionist and reliant on oil revenues. Fiscal management is weak.

Monetary Freedom53.7 Back to the top

Inflation is nearly out of control, averaging 17.2 percent between 2005 and 2007, and is steadily worsening. The government controls almost all prices through regulation, subsidies, and numerous state-owned enterprises and utilities and uses a non-legislated system of guaranteed minimum prices to protect agricultural producers. Twenty points were deducted from Venezuela's monetary freedom score to account for policies that distort domestic prices.

Investment Freedom10.0 Back to the top

Although the investment code generally provides equal treatment for foreign investment, the government restricts certain types of investment and investment in certain sectors. Investment laws and bureaucracy are non-transparent and burdensome, and the state is increasingly dominating the economy. In 2007, the government expropriated key companies and assets in the telecommunications, electricity, and petroleum sectors, which were previously considered the most promising areas for foreign investment in Venezuela. Additional expropriation of companies in the banking, cement, health, education, steel, petrochemical, dairy, and food distribution sectors has been threatened. The government controls foreign exchange and fixes the exchange rate. Foreign companies wishing to repatriate capital, dividends, or profits at the official rate have to get authorization.

Financial Freedom30.0 Back to the top

Venezuela's financial system is subject to growing government influence. Financial institutions are increasingly directed to provide credit in accordance with government requirements. Recent signs indicate that the government will impose a profit limit on banks or transfer government funds to state-controlled institutions. Capital markets are relatively small. Foreign companies may participate in capital markets and may buy shares in Venezuelan companies either directly or on the stock exchange.

Property Rights5.0 Back to the top

The government’s assault on the right to hold and accumulate private property continued in 2008 through nationalizations and expropriations. The judiciary is completely controlled by the executive, politically inconvenient contracts are abrogated, and the legal system discriminates against or in favor of investors from certain foreign countries. Pirated music, movies, and software are readily available. In an ambitious power grab, President Hugo Chávez has enacted a series of presidential decrees that formalize the creation of a popular militia and further consolidate state control of such key areas of the economy as agriculture and tourism.

Freedom From Corruption20.0 Back to the top

Corruption is perceived as rampant. Venezuela ranks 162nd out of 179 countries in Transparency International's Corruption Perceptions Index for 2007. Government tenders are vulnerable because the process frequently lacks transparency. Critics allege that price and exchange controls, involvement by government and military officials in narcotics trafficking, and kickbacks on major weapons purchases are sources of corruption in Venezuela.

Labor Freedom30.1 Back to the top

Venezuela's highly inflexible employment regulations hinder overall employment and productivity growth. The non-salary cost of employing a worker is moderate, but the difficulty of firing workers creates disincentives for employment expansion. Regulations related to the number of work hours remain inflexible.