Topics: United States dollar, Currency, Foreign exchange market Pages: 7 (2765 words) Published: May 22, 2013


Case: The Venezuelan Bolivar Black market

Yue Liu (15931951)
Miguel Paolo Trinidad (17237338)
Venezuela imposes capital controls
Capital controls are usually dependent on both external and internal factors that affect a country’s economy. In this case, Hugo Chavez implemented capital controls which he sought as a means of controlling his country. It is debatable what comes first as the history of the political turmoil in Venezuela wasn’t mentioned in the case and will largely irrelevant to the discussion. The point is that capital controls were sought to control the economy in spite of the question of whether it was the economy that gave rise to the political problems or was it the other way around. Regardless, the problems have already arisen and it was mentioned that the Bolivar (Bs) was doing horribly against the United States dollar (USD). Given that relationship, businesses in Venezuela who rely on the USD and use the Bs as a means of exchange would tend to perform terribly. In this case, Santiago owns a pharmaceutical distribution business whose suppliers are based in the United States. This is an assumption because it simply mentions that he is importing for his business and that he needs USD to do so. Therefore, the economic policies of Hugo Chavez would be bad for a business that uses US imports as a factor of production such is the case with Santiago. However it did also mention that an exports such as oil markedly improved with the softening of the Bs. If that is the case then with the softening of the Bs why did Hugo Chavez see the need to implement stringent economic policies that would further devalue the Bs? If the Bs devalues further, wouldn’t export oriented businesses make up for the poor performance of export-oriented businesses? Economics is not a zero sum game in which export oriented countries gain absolutely more in comparison to countries which need imports for their businesses. Much of the trade in the world today relies on this relationship and trade is deemed to be necessary and beneficial towards economic growth. Nowadays the term global economy has been coined which just goes to show that whenever the economy is being discussed, the various interrelationships between countries is very critical because of the ripple effect of one country’s economy has on the rest of the world. This is what Hugo Chaves failed to see. In implementing his archaic economic policies he basically cut off Venezuela from the world, or more precisely the United States as a trading partner. It might be said that initially, he suspended the sale of dollars because he was worried of how the Bs keeps getting worse in comparison to the USD. However, it got even worse when he implemented the CADIVI. It sought to address the poor performance of the Bs by setting a fixed exchange rate between the two currencies (Bs and USD) and combat inflation (caused by a poorly performing Bs in conjunction with weaker imports thus reducing the buying power of the local currency) by using price fixing for goods. While this sounds good in theory, the CADIVI further shows how Hugo Chavez was basing his economic decisions for his political agenda. To qualify for the sale of dollars, the CADIVI has to verify that you are a Hugo Chavez supporter. If you were found to be anti-Chavez, you are deemed unfit to hold foreign currency and would have to use other means of obtaining it which gives rise to the gray and the black market.

Gray versus black market
The primary difference between a gray market is the extent of legality that it signifies. A gray market simply makes use of loopholes in the system while a black market is completely illegal. In the Venezuelan gray market, they purchased shares of CANTV which is a local Venezuelan business and traded it in for dollar-denominated American depositary receipts (ADRs) that were traded in the New York...

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