Venezuela and Hugo Chavez are on the ropes. Chavez's dream of spreading "21st century socialism" throughout Latin America is being stalled by a sluggish economy both at home and abroad.
When Chavez came to power in 1999, he quickly mobilized to make the most of the country's state-owned oil production, but has reportedly blown most of the windfalls of cash buying the favor of the world's other socialist nations.
Chavez's runaway spending on social programs amid declining state revenue is further putting the nation's economy into turmoil. In 2002, following a failed coup, Venezuela's economy experienced a sharp downturn when the government-owned oil company went on strike for two months to protest Chavez's regime.
While rising oil prices in the following years would help the economy recover temporarily, declining oil prices in recent years have had a substantial negative effect as well.
Add to the mix the fact that in response to the strike, Chavez implemented a policy forcing 10% of the state-owned oil company's profits be put directly into his social programs, and you have a recipe for financial disaster.
Oil accounts for 80% of Venezuela's exports, 50% of the government's income, and about one-third of overall GDP.
In 2007, Chavez nationalized the country's electricity grid with the plans of expanding production output at Venezuela's two large hydroelectric dams that provide 70% of the country's electricity. The expansion, however, never came to pass, and the government was forced to order rolling blackouts. A lengthy drought is also further impacting electricity output at the dams.
The latest threat to Venezuela's economy is inflation. The country's economy shrunk by 4.5% last year and will shrink another 2% this year, making it the only Latin American nation still in full recession.
In Venezuela, the exchange rate between the country's bolivar and the dollar is also set by the government. It had been set at 2.15 bolivars per dollar in 2005, but in January 2010, Chavez set the rate to 2.6 bolivars for food, medicine, and other important imports, and to 4.6 bolivars for non-essential goods. This devaluation of the bolivar will have Venezuela seeing 45% inflation in 2010 and 27% inflation in 2011.
Chavez is trying to fight the inflation he caused by forcing 70 businesses to close for increasing their prices to keep up with costs, hoping to scare other businesses into eating the cost of his inflation, but panicked buying continues.
Chavez has also nationalized about 25% of Venezuela's banking system to try to get the economy back under control as well, but it would seem that nationalization of more and more of Venezuela's economy is not doing the trick.
Despite a rapidly failing economy, however, most likely driven by the country's growing social programs, Chavez's popularity rating remains close to 50%. Proof positive that popularity polls have no reflection on the true financial stability or health of a nation.
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