ANALYSIS OF IMPACT OF FREENOMICS ON INDUSTRY AND INFRASTRUCTURE
Authored by: Utkarsh Sharma and Vanisha Mishra
1st-year students at Institute of Law of Nirma University,
Ahmadabad pursuing BA LLB (Hons) 5 year integrated law course.
This paper discusses the impact of a freedom model on economies. finding the impact caused on investment in industry and base. Which are the viable goals of the growth of any economy. The research method used here is – case studies. Through the two case studies, this paper tries to find the freedom model policies and their impact on the economy. Also, while analyzing the case studies. It was observed that both the economies belong to very different socio, political, and geographical backgrounds. However, the similarity of patterns in both the economies has been noted with the hints of the freenomics model. This indicates a common source of problems for economists when a freedom model is employed.
Furthermore, after finding the hints and their effects. The paper goes on establishing the plans to combat the distress and possible economic failure in each case. Also, plans are provided for the same.
INTRODUCTION TO FREENOMICS
Freenomics is a business model that promotes the idea of businesses giving away their goods/services. Because it will result in more customers entering the market. This is a type of economic model which is unduly based on grant and free goods and services.
CASE STUDY – VENEZUELA
“You just pull the trigger and that’s it,”1 Yeyo. A 15-year-old Venezuelan boy murdered someone at the age of ten. He said in an interview in December 2015. “I enjoy living a bad life, it’s all about the money and the power. ”In Venezuela, where the economic crisis had hit citizens hard. More and more young people like Yeyo were choosing this route. Nicolas Maduro.
The President of Venezuela, which was once one of the richest countries in South America. He began to grab and destroying handguns, rifles, and shotguns in August 2016. They attempt to charm the country and address its rising crime rate. With more than 70% of the peoples living in poverty. The nation was in a state of economic, political, and social fall. Venezuelans were unable to obtain basic medications, hygiene products, or even basic food. The fall had become a textbook example of political turmoil and government fiscal mismanagement, ending a prosperous, democratic country. Since 2014, the country’s economy has only gotten worse due to falling oil prices.
HOW IT ALL STARTED?
Before explaining the ongoing crisis in Venezuela, we will like to light some facts for the readers about Venezuela.
1)Venezuela has the biggest oil stores of any country on the planet, with over 300 billion barrels of demonstrated stores.2
2)That is a 17.5% portion of the whole worldwide asset. In 2011 the nation outperformed Saudi Arabia to top overall rundown.
One should not think about a county with the largest oil reserves facing an economic crisis.
Reasons responsible for these crises:
1. Oil Dependence– 99 percent of the export income comes from oil
2. Decreasing production– Lack of infrastructure led to the falling of production levels.
3. Debt– Venezuela has more than 100 billion dollars of external debt which is more than its own estimated economy.
4. Political Unstableness – currently there is a power struggle between president Nicolas Maduro and Juan Gaido. It is unfavorable for the economy as it leads to apprehension in the minds of foreign investors.
5. Hyperinflation – Inflation reached 2,358 percent in Venezuela in August 2020.
6. International sanctions– USA has imposed various sanctions on Venezuela to stop the current regime from earning as this would contribute to their criminal activity and human rights violation.
Many economists speculated. Its state ownership policies, unchecked expenditure, subsidies, and domestic price controls were to blame for the country’s 2016 crisis. From 1999 to 2013, the country’s GDP followed a zigzag pattern. It began to decline after that
WHAT WENT WRONG?
NATIONALIZATION OF VENEZUELAN OIL INDUSTRIES
With the creation of Petr oleos de Venezuela (PDVSA) in 1976, the oil industry was completely nationalized. The country’s oil wealth had mostly benefited the country’s wealthy class for decades. The government believed that the oil money could be used to help the country’s poor. As a result, Pérez used the country’s vast oil wealth to finance social programs. Such as education, healthcare, transportation, and food subsidies. The economy became too reliant on a single source of income – oil – to finance all of the
THE CHAVEZ ERA – BEGINNING OF THE CRISIS
Hugo Chavez was a charismatic and beloved leader of Venezuela.
In the 90s, his Popularity among people reached heights. He blamed government corruption and Venezuela’s elite for the economic inequality. Chavez was elected based on three key promises to the people. They were drafting a new constitution and reforming the economy, combating poverty and social exclusion, and eradicating corruption. Chavez convened a Constituent Assembly in 1999 to draft a new constitution. The spike in oil prices in 2004 was a watershed moment in his presidency. Venezuela’s petroleum-dependent economy started booming. Chavez went on to spend billions from the profits on social welfare programs for the poor.
He reduced poverty by more than half by subsidized food, improved education, and built an enviable healthcare system. These Programmes aided the poor, but they also served a purpose for Chavez. To be re-elected, he needed to keep millions of poor Venezuelans happy. In addition, the new constituent assembly was made up of Chavez’s supporters. The one who proceeded to dissolve the newly elected Congress. And remove all representatives of the Supreme Court, the Attorney General, the General Comptroller. Also the majority of the country’s judges. Many of these vacancies were filled by Presidentaligned bureaucrats.
Impact on media and opposition:
Chavismo advocates were named to positions as judges, prosecutors, legislators, and election officials. Even the media was manipulated, with vocally critical
outlets being shut down and those who followed the rules being rewarded. By blacklisting or replacing labor unions, Chavez suppressed them. The opposition was painted as anti-nationals “trying to sell out Venezuelan interests.” As a result, government corruption had drastically increased.
Besides the prevailing corruption, taking advantage of the seemingly optimistic state of affairs on the economic front. Chávez silently and gradually started taking over Venezuela’s autonomous democratic establishments to secure his position. The second decade of the
new millennium therefore saw the country polarized between two opposing parties.
Impact on economy:
Moreover, the new schemes brought by Chavez rigged the economy. He did not reduce Venezuela’s reliance on oil, and his unrestrained spending contributed to the country’s growing deficit. Which meant all these programs would be impossible to sustain if oil prices fell.
Public functions were re-centralized by the federal government, taking them away from the states. Roads, airports, and ports, for example, have all deteriorated at an accelerated rate since then.
Chavez completely overlooked Sustainable development goal 9 which talks about the industry, innovation, and infrastructure. In this dynamic world, Investment in innovation and infrastructure is really important. By overlooking these factors, Chavez indulged in the
Freenomics.This model backfired in case of Venezuela as instead of giving employment by increasing investment in infrastructure. The government made people dependent on the government for basic necessities like food and medicines.
INHERITANCE OF A CRUMBLED ECONOMY –
Although the Maduro government inherited the mess that Chavez and his supporters had made. Mandir struggled to improve the situation. In fact, allowed it to worsen. Apart from political unrest, it seemed that the government would face some problems in the coming years. As it attempted to stabilize society and the economy.
Thus when, after Chavez’s death, Maduro took over as his handpicked successor and address the crisis. He announced many economic reforms, including the introduction of the country’s new “cryptocurrency”. The Petro, as well as a revaluation of the country’s conventional currency, the Bolivar. Taking a page from Brazil’s experience, the president said that the launch of virtual money was done to restructure the country’s finances and “overcome [the US-led] financial blockade.
Drastic changes in the economy:
There were, however, allegations of vote fraud, with opponents alleging . The new president had followed Chavez’s strategy of misusing state resources. Moreover, oil prices plummeted in 2014 and Maduro failed to adjust as people were dependant on government. Hyperinflation made medicines and food, which were once subsidized . Also it was unaffordable for Venezuela’s poor, who now make up about 96% of the population.
Instead of taking drastic measures to change the country’s deteriorating economic condition. Maduro has stuck too much of his predecessor’s policies. His heavily subsidized food is good. They rely solely on oil resources and assuming that the price of oil will continue to rise. However, after coming into power, Maduro saw an immediate drop in oil prices. It fell from US$100 per barrel to US$50 per barrel in 20143. As a result, the country’s social and political situation became volatile, and the country’s long-term struggle with inflation began.
Venezuela, once Latin America’s richest country. Became the 57th country in the world’s economic history to experience hyperinflation on December 3, 2016. In 2015 and 2016, the central bank recorded the highest-ever inflation rates of 180 percent and 240 percent, respectively4. The nation was in the midst of the world’s worst economic crisis ever. Food shortages, starvation, mortality due to a lack of drugs. The homicide rates were making the country the world’s second most violent country outside of open war. In 2017, there was no sign of improvement; in reality, it was even worse than in 2016. Venezuela’s opposition
party (Congress) estimated that inflation had risen. It raised nearly 800 percent between the end of 2016 and the start of 2017. According to IMF forecasts5, inflation will hit 13000 percent by the end of 2018, shrinking the economy by 15%. Economists believed that the country’s plight was caused by too much reliance on oil. A lack of policy reforms to adjust to the low petroleum price. None of the measures taken by President Nicolás Maduro’s government to combat inflation. Such as introducing price controls or setting currency exchange rates, helped to improve the situation. It was unclear how Venezuela would emerge from its economic crisis.
ECONOMIC CONTRACTION TOGETHER WITH HYPERINFLATION
Since 2016, hyperinflation has had a major impact on the average Venezuelan’s life on a variety of levels. As a result of the rise in unemployment, poverty levels have risen. The value of the currency has dropped by 90%. Since 2012, this has happened four times, implying that the currency’s value was different. In December 2017 it was nearly 10,000 times lower than it was in August 2012. Because it had lost more than 99.99% of its value. Furthermore, the rate at which the value decreased increased each time. The currency lost 90% of its value the first time in two years and two months; the second time in one year and ten months; the third time in ten months; and the fourth time in just four months.
THE FALL OF THE VENEZUELAN ECONOMY
According to analysts and industry experts, Chavez. The one who served as president from 1999 to 2013, and his successor. Maduro relied heavily on oil revenues. As a result, the economy was founded on the premise. They said to raise enough revenue from oil. They export it to fund a robust social welfare system under their leadership. According to some analysts, during the Chavez-Maduro period, the country’s reliance on oil products increased. As a result, by 2014, Venezuela was in complete chaos. Anti-government student
demonstrations were routine, with scores of people killed in clashes with security forces. Since mid-2014, when the Venezuelan economy began to collapse.
PDVSA’s operations are in shambles as a result of years of corruption and mismanagement. Which has resulted in a lack of investment. Failure to keep basic infrastructure and downstream assets running, shortages in basic supplies and equipment. The huge departure of technically qualified people. The majority of production is now held at joint venture projects principally in the Orinoco Belt. While production at PDVSA-controlled assets at Lake Maracaibo and in the Maturin Basin has dropped sharply. Restoring upgraders and infrastructure would be another major near-term priority for the Orinoco Belt’s more difficult projects.
Economic and social prospects of Venezuela
If the widely held view that “a country cannot foster development without infrastructure investment” is correct. Venezuela’s economic and social prospects are alarming, to say the least. To sustain existing infrastructure and quadruple investment in new projects requires more than $90 billion. In comparison to other countries in the region, such as Colombia, Chile, and Panama. Venezuela now devotes less than 4% of its gross domestic product to infrastructure. Because oil revenues account for the great bulk of government revenue in Venezuela. Government investment is heavily reliant on oil prices.
Venezuela is often regarded as one of Latin America’s most dangerous business environments. The populist agenda of the government has resulted in anti-market actions and disastrous economic policies. Venezuela has become a difficult environment to do business in because of high inflation, limited growth, and low productivity. Foreign funding has been at an all-time low, and it is no longer a viable choice for Venezuelan infrastructure.
Aside from political and economic uncertainties, corruption is a major issue in Venezuela’s poor investment climate. Investors will likely avoid investing in Venezuela. As no one wants to invest in a country where profit returns are uncertain.
THE ROAD AHEAD
Venezuela’s oil problems looked likely to continue in 2018. The main source of trouble among economists is the scale of the country’s oil output decline. A further drop in oil production could push Venezuela’s cash-strapped government into default. Therefore, resulting in one of the world’s worst credit disasters. Maduro had been attempting to restructure foreign debt, including US$60 billion in bonds issued by PDVSA and the government. But this was contingent on investors’ willingness to maintain their confidence. The delay in bond payments in the last few months of 2017 was the source of their skepticism.
ALONG THE PATH TO A RECOVERY
Analysts agreed that, given the severity of the crisis, the prospects of a smooth and fast recovery were slim. Adopting better policies, on the other hand, might help the government and Venezuelans buy some time. Economists assumed the country had two options. Find someone to lend it a large sum of money to help it make payments. It also tightens imports to a much greater extent. Attracting foreign investment will, without a doubt, be critical to the long-term recovery of the sector. Therefore providing the circumstances necessary to re-establish investor trust in the country will be critical. Political stability and law and order. As well as a reform of the current laws. It would be critical in establishing these conditions.
CASE STUDY – DELHI
The issue of Freenomics in Delhi, People divides into 2 sections. The first section of people says that it is the job of the government to provide subsidies. The welfare for the people and the other section Contends that this policy of freebies is to gain political appreciation. Also to gain votes which will result in the crumbling of the Economy of Delhi. But as students of economics, we should not indulge in any of these gimmicks. And rather analyze the data in order to reach a conclusion.
To analyze Delhi’s economy. First, let us have a look at some of the policies. The initiatives are taken by the Delhi government since 2015. Subsidy for those who use less than 400 units of electricity; additionally, there have been no increases in power prices in the last 5 years. Delhi currently has the lowest electricity tariffs among the country’s metropolitan cities. Decrease in fees in private schools.
Student’s study loan:
Up to 10 lakh loan for the students who are financially poor and want to study further. Free water for families who use less than 20000 Litres of water per month Free treatment in Mohalla clinics. Free surgeries in specific hospitals. The government also bears the expense of treatment of road accident victims and fire burn victims. The minimum wage of workers Increased from Rs. 9500 to Rs. 1400. -All these are welfare schemes mainly focusing on health and education
Even after increasing the expenditure. The fiscal deficit of the Delhi government has been less than the previous Delhi Governments. And also less than the rest of India’s average.
Delhi government has also maintained to keep the revenue in surplus (revenue receipts-revenue expenditure) even after providing all these freebies.
You may be wondering what is the problem in all these schemes of giving services to people for free.
Delhi revenue tax: Graphic overview—
As this graph shows, we can see the trend of decline in revenue balance. Whereas the fiscal deficit is increasing. We can see in the first graph that the Gross state domestic product. It decreased from 1.6% in 2015-16 to 0.6% in 2019-20.9. We can also see the trend of decline in own tax revenue in Delhi. It is crucial for the sustainable development of a state. Another major concern for Delhi Government should be a capital investment. Delhi government rates all the credit for the policies which they introduced for the poor. But Sustaining these policies is what matters for the long term. Delhi government
Must focus on SDG GOAL 9 which talks about building a resilient base. It promotes inclusive and sustainable industrialization and fosters change.
The capital Expenditure10 in Delhi has fallen from 1.16% of GSDP in 2011-12 to 0.54% in 2018-19. Therefore, along with these welfare policies. Delhi’s government should also focus on raising capital expenditure to ensure a resilient base in the long term.
We can conclude after this analysis that, following the model of freenomics has led to economic problems in both economies. However, the gravity of the economic distress differs. Also, after assessing the situation of both Venezuela and Delhi. We cannot say that Delhi is exactly in a position like Venezuela. This is because, in Venezuela, the government was completely helpless on the Income of oil they earn from Revenue. The economy of Venezuela shut down when old price troubles. As there was no alternative source of income which is not the case in Delhi. Even though the situation in Delhi is different.
It is moving on to a similar path, they comprise the capital investment for growth. The current infrastructure, thus, there are some things which the Delhi.
government can learn from the case study of Venezuela. Though the Delhi government should continue with the welfare schemes for the needy section of the society. This scheme is to gain equality of events and means along with these schemes. The government should also focus on Sustainable Development Goal 9 which focuses on “trade, change, and infrastructure”. Doing so is the only prudent way to make these welfare schemes sustainable.
1 “Victim and killers: Venezuela youth at the sharp end of crime”
2 “Low Oil Prices Pushing Venezuela Towards Default”
3 “What caused hyperinflation in Venezuela: a rare blend of public ineptitude and private enterprise”
4 “IMF Projects Venezuela Inflation Will Soar to 13,000 Percent in 2018”
5 “Venezuela Foreign Direct Investment”
6 “Delhi Budget Analysis 2021-22”
➢ Rebecca M. Nelson (2018). Venezuela’s Economic Crisis: Issues for Congress. Congressional Research Service
➢ Venezuela crisis: How the political situation escalated
➢ Nicolás Maduro: how can he build on the Chávez legacy