Friday, July 01, 2005
Struggling in the Face of Adversity: An Evaluation of the Micro and Small Business Sector in Venezuela
By: Paul Holden, Enterprise Research Institute, 2001
The private sector in Venezuela has gone through prolonged trauma over the past 10 years. The economy has stagnated while at the same time experiencing the highest rate of inflation in Latin America. The dependency of the economy on oil, the price of which collapsed in the mid-90s and then soared over the past 18 months, has led to large budget deficits, swings in government expenditure and lack of fiscal discipline. These problems have been compounded by the floods that occurred in late 1999, which have resulted in many thousands of deaths, hundreds of thousands being made homeless and the total destruction of the local economy in several areas. Reform episodes have been followed by reversals. There has been extreme political uncertainty characterized by attempted coups, governments of widely different political leanings, and most recently a new constitution, many of the enabling laws for which have yet to be written. Presidential elections are scheduled soon and while the ultimate outcome will probably favor President Chavez, his less than market friendly views raises additional uncertainties for business.
The current environment for micro and small businesses appears to be especially unfavorable. Informality has increased to the point where it is estimated that over half the labor force is now engaged in informal activity, a number, which has risen over the past several years. Incentives to become formal are weak and the processes for establishing small businesses are time-consuming and costly. In addition, the interpretation of labor law in the new constitution threatens large numbers of existing small formal businesses. The main themes are similar to virtually all other countries in the Region. Unfortunately, real reform that helps small business is still all too uncommon. Consequently, this report highlights the structure, composition, and patterns in the SME sector as a first step towards developing a Bank assistance strategy. It commences with a brief overview of recent economic developments in the Venezuelan economy which describes the macroeconomic issues that businesses in Venezuela face. It then goes on to discuss in more detail various aspects of the environment for doing business with an emphasis on the problems that micro and small businesses encounter. Finally some recommendations for further analysis conclude the report.
The private sector in Venezuela has gone through prolonged trauma over the past 10 years. The economy has stagnated while at the same time experiencing the highest rate of inflation in Latin America. The dependency of the economy on oil, the price of which collapsed in the mid-90s and then soared over the past 18 months, has led to large budget deficits, swings in government expenditure and lack of fiscal discipline. These problems have been compounded by the floods that occurred in late 1999, which have resulted in many thousands of deaths, hundreds of thousands being made homeless and the total destruction of the local economy in several areas. Reform episodes have been followed by reversals. There has been extreme political uncertainty characterized by attempted coups, governments of widely different political leanings, and most recently a new constitution, many of the enabling laws for which have yet to be written. Presidential elections are scheduled soon and while the ultimate outcome will probably favor President Chavez, his less than market friendly views raises additional uncertainties for business.
The current environment for micro and small businesses appears to be especially unfavorable. Informality has increased to the point where it is estimated that over half the labor force is now engaged in informal activity, a number, which has risen over the past several years. Incentives to become formal are weak and the processes for establishing small businesses are time-consuming and costly. In addition, the interpretation of labor law in the new constitution threatens large numbers of existing small formal businesses. The main themes are similar to virtually all other countries in the Region. Unfortunately, real reform that helps small business is still all too uncommon. Consequently, this report highlights the structure, composition, and patterns in the SME sector as a first step towards developing a Bank assistance strategy. It commences with a brief overview of recent economic developments in the Venezuelan economy which describes the macroeconomic issues that businesses in Venezuela face. It then goes on to discuss in more detail various aspects of the environment for doing business with an emphasis on the problems that micro and small businesses encounter. Finally some recommendations for further analysis conclude the report.