The policies of Venezuela's leaders have led to shortages of food and consumer goods.
Hugo Chavez, the leader of Venezuela since 1999, died in March of last year.
Chavez had an enormous impact on the country and left behind a questionable legacy.
Chavez embraced Marxist views early in his career.
Venezuela was blessed by natural resources such as oil and gas, but it was marked by extreme inequality and a high degree of poverty.
Chavez was sentenced to two years in jail in 1992 for leading a coup against the elected government.
As the country underwent a period of wrenching economic reform, his justification for the coup-- to improve his country's social conditions-- resonated with many.
In the 1998 presidential elections, Chavez won over 50 percent of the vote and took office to transform the country.
The country was transformed over the next 15 years, but not in ways that created greater democracy or economic stability.
Chavez made changes to the political- economic system during his presidency.
The new system was meant to improve the standard of living and increase political sovereignty, which Chavez and his supporters viewed as compromised by American imperialism.
Venezuela's oil reserves are the largest in the world.
Parts of the agricultural, industrial, telecommunications, and financial sectors were nationalized by the government.
The social welfare system was expanded after the nationalizations.
Medical clinics were built, staffed in part by over 30,000 Cuban medical personnel; primary and secondary education were extended to the population, with a particular focus on eliminating il iteracy; food and fuel prices were subsidized; and public housing was constructed.
During the 2000s, Venezuela experienced high rates of economic growth and an improved standard of living.
Poverty rates fell from 50 percent to 30 percent.
Current problems call this into question.
The increase in the world price of oil gave Chavez the means to implement his socialist policies.
The country became even more dependent on oil exports to the United States and other countries despite the fact that they were for greater independence from global capitalism.
When compared with the rest of Latin America, the standard of living was less impressive.
Other countries in Latin America had higher rates of economic growth, lower inflation, and better infant mortality rates during Chavez's rule.
The amount of oil revenue Venezuela was dedicating to these goals was unprecedented.
Homicide rates doubled despite the economic improvements, making them the second highest in the world.
The post- Chavez era in Venezuela was unstable.
The country's democratic institutions were concentrated in the hands of Chavez and his supporters.
The poor and the middle and upper classes have become more polarised by this situation.
The special presidential election that took place after Chavez's death was between Vice President Nicolas Maduro and the governor of Miranda State, Henrique Capriles.
On his platform, the uncharismatic Maduro said he would uphold Chavez's socialism.
The middle and upper classes supported him because he promised to end nationalization and open the economy.
The election ended in a victory for the leader of the country.
Chavez's policies have been attempted to sustain by Maduro.
More of the public is concerned about the future and he faces increased opposition.
Protests, at times deadly, against shortages of basic goods like milk and flour, rising crime, and what is now the world's highest inflation rate, at over 700 percent.
Weak investment in the oil industry has led to a decline in output since Chavez first came to power.
Because of the decline in world oil prices, there is less state revenue and more national debt, making it difficult for the government to maintain socialism.
Much of the population has been pushed into poverty in Venezuela.
It is difficult to see how this situation will be resolved in the immediate future because of the presidential term that lasts until 2019.
The case of Venezuela shows that economics is not separate from politics and that wealth can cause more problems than it helps.
Understand how states are involved in property management.
Discuss how states give public goods to society.
The political and economic systems reconcile freedom and equality.
Like politics, economies are made up of many different institutions that influence how the economic system is constructed.
Economic systems are thought of as "natural" with functions similar to the law of gravity.
An economy is dependent on an array of institutions that allow people to exchange goods and resources.
Political institutions are hard to replace or change once they have been constructed.
People have a hard time imagining life without them.
Political and economic institutions influence each other.
The economy is one of the main arenas of the struggle for freedom and equality.
Some view the economy as the central means by which people can achieve individual freedom, while others view the economy as the central means by which people can achieve collective equality.
The government, the Political Economy 99 state, and the regime are involved in the struggle.
The degree of security and prosperity that people enjoy is influenced by how the balance between freedom and equality is struck.
The prosperity of every citizen will be affected by the interactions between political and economic institutions.
In this chapter, we look at the relationship between freedom and equality.
We want to know what role states play in managing the economy.
States commonly involve themselves in economic life in several different areas; depending on such things as the dominant ideology and regime, the scope and impact of these actions can vary dramatically.
The ideal relationship between the state and the market is not the same as the ideal relationship between the state and society.
Each ideology leads to a different political system.
We consider how we might measure and compare their outcomes after we compare their differing views.
Some of the most common standards of measuring wealth and its distribution will be looked at in the process.
We will look at the future of the relationship between state and market and how their interaction shapes the balance between freedom and equality.
Before we compare the different types of relationships between states and economies around the world, we need to understand the basic components of political economy.
Modern states are heavily involved in the day to day affairs of their economies at both the domestic and global level.
A variety of economic institutions are used by states and regimes to achieve their stated ideological goals.
Markets and property are the most fundamental components of the political economy.
A physical place where people buy and sell goods is the first thing that comes to mind when people talk about markets.
There have been markets for as long as human beings have been alive.
Markets are closely connected to the rise of cities and political institutions, and people would settle around markets, and markets would often spring up around fortifications, where residents could engage in commerce with some sense of security provided by the state.
In most of the world, such markets are still common.
When social scientists talk about markets, they mean the interaction of supply and demand without a specific location.
The two forces arrive at specific prices for goods and services as they interact.
Markets can be so independent.
Millions of people make decisions about what they will buy and sell, not a single person or government.
I will not be able to turn a profit if I set the price too high for people to pay.
I will either have to lower my price or go out of business because of this result.
If I have a good that no one wants, I have to change it or face economic ruin.
Both sellers and buyers want to buy the best products at the lowest prices.
Competition and innovation tend to occur because more than one seller or producer exists for a product.
Sellers want to dominate a market by offering their goods at the cheapest price or by offering a good that is innovative and superior to any other alternative.
Markets are communities of buyers and sellers who are constantly interacting with each other.
Markets are in demand.
People want to buy the best goods at the lowest price.
Markets are not easily controlled by the state.
The state is typically required to enforce contracts, sanction activity, and regulate supply and demand.
Setting a minimum wage is a way for a state to control the price of labor.
The state is trying to stamp out a part of the market by making certain drugs and prostitution illegal.
These goals are not always easy to achieve.
Minimum wages can be subverted by relying on illegal immigrants and "black" or underground markets where drugs and prostitution are illegal.
While markets rely on states, they also have a life of their own, and each state must decide in what way and to what extent it will sustain and control the market.
Any economy is dependent on property.
Some of the most common forms of property include land, buildings, businesses, and personal items.
There is a certain set of property rights that can accompany ownership, such as the right to buy and sell property or the right not to have it taken away by the state or other citizens without a good reason.
Property rights must be regulated by the state.
Property is not secure if state power is not functioning in a fair manner.
As economic developments center more and more on intangible forms of information and knowledge, the concept of property and property rights becomes invisible.
We don't have a physical entity to make transactions clearer.
Anyone who has downloaded a song or software from the internet knows what they are talking about.
Similar to the role states play in regulating markets, the role they play in constructing and enforcing property rights varies from state to state.
States may fail to enforce the rights of individuals to protect their own property from other individuals if they neglect to enforce the laws against counterfeiting or theft.
States may assume certain property rights for themselves, such as oil, land, or businesses.
Property rights don't come into being automatically.
Many less developed countries have a wealth of property but are unable or unwilling to establish and enforce property rights.
We will talk about this more in Chapter 10.
Property is goods that individuals acquire or use through the market for their own benefit.
There are limits to what the markets can achieve.
Their interaction doesn't produce the benefits society wants.
Take transportation as an example.
Private forms of transportation infrastructure, such as toll roads and passenger ferries, have a long history thatpredates the state.
The moral and practical implications of allowing these goods to belong to a few are questioned by most modern societies.
A network of privately held roads may impede trade or fail to reach certain parts of the population if the goods are privatized.
The underlying public good on which all markets and property rest is the core definition of a state.
In many countries, roads, national defense, health care, and primary education are public goods, and everyone in the country may use them or benefit from their existence.
The role of ideology in the relationship between states and markets is one of the reasons why states differ in the amount of public goods they provide.
Not everyone has equal access to health care in the United States.
In Canada, health care is provided by the state in the form of publicly owned hospitals and universal benefits for all citizens.
Most businesses in Cuba are owned by the state.
The goods and profits of these firms are owned by the state and will be distributed as the government sees fit.
In many countries, redistribution of wealth in this manner can be controversial; its critics argue that social expenditures lead to counter productive behavior.
They argue that high unemployment benefits may discourage people from looking for work.
Alternative forms of social security, such as the family, the community, or churches, could be weakened by too broad a welfare system.
Immigrants rely on social expenditures more than the rest of the population, which complicates issues of welfare.
None of these arguments are true for all countries.
We will talk about this in a moment.
One problem for many countries is that social expenditures can be very costly if unemployment is high or the population is aging.
Many countries have tried to control the growth of social expenditures, but it is difficult to do.
As we consider problems in advanced democracies, we will explore this issue further.
The state provides social expenditures to those who find themselves in circumstances where they need greater care: the unemployed or underemployed, children, the elderly, the poor, and the disabled.
Expenditures include health care, job training, income replacement, and housing.
Public goods are more widely used in social expenditures.
Employed and unemployed people are treated differently in the national health care system.
The well- off may benefit from highways, public higher education, and cultural institutions.
In many countries, social expenditures benefit the middle class, not the poor.
The modern welfare state is not a structure that taxes the middle class and the rich to benefit the poor, but one that taxes the middle class and the rich for services that benefit themselves.
Over the past 50 years, states have become more responsible for providing public goods.
Taxation is a major source of funds.
Some see taxation as the means by which a greedy state takes the hard- earned revenues of its citizens, stunting economic growth, while others see it as a critical tool for generating a basic level of equality.
Regardless of one's opinion of taxation, societies expect states to provide a number of public goods and services; 104 CHAPTER FOUR # POLITICAL ECONOMY and for most countries, taxation is the key source of revenue.
Borrowing money from domestic and international lenders is the other option.
The amount of tax collected varies from country to country.
European countries with large social expenditures tend to have high tax rates.
The revenue comes from different countries.
Some countries have high personal taxation, while others have low taxes on businesses and goods.
All countries struggle with finding the right mix and level of taxation, aiming to extract needed funds and invest them in a way that will generate development and prosperity.
There are many political and economic processes that are interrelated.
States must form a relationship with markets and property, deciding what goods and property should be in private hands, what should be public, and what kinds of rights exist for each.
A basic standard of living and security for all citizens must be determined by the level and forms of social expenditures.
States typically draw on the public's resources through taxation for this distribution.
A growing economy is needed for a successful tax base.
While the state is charged with managing markets, property, and public benefits, it also has a hand in fostering economic growth.
The creation and management of money is one of the ways the state fosters growth.
Money is a medium of exchange.
Money is an instrument people use to conduct economic transactions.
Money is only a small part of the world's wealth, which is tied up in houses, factories, land, and other property.
Economic transactions are difficult without money.
States play an important role in providing money as a means of stimulating economic transactions.
Money did not exist long ago.
As complex political systems began to take shape, they established some basic monetary relationships through a monetary system that relied on metals like gold and silver.
Money has lost its value in the past century and people have come to rely on their trust in a state's currency.
People accept payments in foreign currencies because they know they will be accepted by others.
A society only trusts its currency if it trusts its state.
States have a lot of influence over their domestic economies because they control money.
Changing a national interest rate is one of the ways a central bank influences these two areas.
When the central bank lowers the interest rate charged to banks, those banks in turn lower their own interest rates for businesses and individuals.
Saving becomes less lucrative and loans become less expensive, which can prompt people to borrow more and spend more.
The amount of money in the economy is stimulated by this activity.
People are likely to borrow less and save more if the central bank raises interest rates.
Economic growth is likely to slow because the money supply in the economy contracts.
The U.S. Federal Reserve cut interest rates six times in the first half of 2008.
The interest rate was half of 1 percent.
It was 17 percent in 1980.
The central bank's actions are tied to inflation and deflation.
Inflation can become problematic when it is too high, even though small levels of inflation are not a problem.
Workers and those on fixed incomes find that their money buys less and less as wages and savings lose their value.
People want higher wages or benefits to offset higher prices.
Central banks can try to control inflation by raising interest rates and making credit more expensive.
Many things, like oil or other imports, are not in the state's control.
If the government is forced to borrow money at higher interest rates, it can cause inflation.
The situation can lead to high inflation.
When governments are unable to borrow money due to lack of tax revenues, they may decide to print money to cover their debts, thus expanding the money supply.
A collapse of legitimacy is often accompanied by a public belief that there is no longer a strong state to support the currency.
Normal economic processes fail under such conditions.
Zimbabwe is an extreme example.
The government began to cover expenses by printing money around the turn of the century after it disrupted its agricultural economy.
By the year 2008, inflation had reached 231,000,000 percent.
About 30 U.S. dollars were issued for 100 trillion Zimbabwean dollars.
Currency collapse is usually caused by hyperinflation because people refuse to accept the devalued currency as payment and switch to other means of transaction, from foreign currency to barter.
This happened in Zimbabwe and is happening in Venezuela.
The dangers of inflation might lead us to conclude that tight control over the money supply is a government's first priority.
There are problems at the other end of the spectrum.
The economy will be stimulated by lower interest rates.
Interest rates are raised to check money.
If businesses are unable to make a profit, dropping prices can be devastating.
Lower prices lead to unemployment, less spending, and even more deflation.
Japan has suffered deflation almost every year since 1998 and has been a concern in North America and Europe since 2008.
Heavy levels of debt by banks, consumers, and states have led to a tightening of spending.
The goal of the central banks is to encourage borrowing, spending, and growth.
They have had limited effect.
The state's role in markets and property has been the focus of our discussion so far.
The means by which output is created must be of concern to states.
moral and technical issues can affect a state's approach in this area.
The concerns draw states into economic regulation.
The boundaries of a given procedure may be set in different ways.
Regulations may be economic in nature.
Food or energy prices may be controlled by such regulations.
Economic regulations can affect what firms can do in certain markets.
The market is controlled by chapter four of politics.
A second set of regulations is referred to as social in nature.
In contrast to economic regulations that focus on how businesses function in the market, social regulations deal with managing risk, such as safety and environmental standards.
For example, environmental regulations can affect what firms may enter the market and how they can operate.
The challenge of regulating economic production between citizens and the outside world must be wrestled with by states.
Goods and services come from all over the world in most economies.
States can influence the degree of competition and access to goods within their own country by determining what foreign goods and services may enter the domestic market.
The way that a state structures its trade can affect it.
In Canada, between 50 and 60 percent of television programs must be Canadian.
American owned airlines only fly within the United States.
States may favor tariffs as a way to generate revenue, and they may see barriers as a way to protect local industries and firms.
The ability to produce a particular good or service is more efficient in other countries.
We've covered a lot in this section, so let's review what we've talked about.
Markets and property are the most basic building blocks of the political economy.
States help fashion markets and define property, and they use taxation to provide public goods and services.
The growth of an economy can be influenced by interest rates, regulation and trade.
A complex web of cause and effect can affect freedom, equality, and the generation of wealth.
States have taken vastly different approaches to the ideal relationship between state and market, leading to a variety of different political and economic systems around the world.
The ideal relationship between state and market and between freedom and equality are different in different ways.
Liberalism, social democracy, communism, or mercantilism are some of the political- economic systems that are classified.
We discussed the political ideologies in Chapter 3.
Political- economic systems can be seen as an attempt to realize an abstract ideology in the form of real economic institutions and policies.
Between theory and practice there is always a disjuncture.
Some subscribers to a liberal ideology would say that existing "liberal" political- economic systems around the world do not live up to liberal ideals.
The communist political- economic system that was practiced in the Soviet Union was condemned by many communists.
The ideologies of anarchism and fascists do not have a political or economic counterpart.
The fascist political- economic systems of the 1930s were destroyed by World War II.
The classifications simplify the political economy.
Many different variations are found within these categories.
The politics of the economy strike a different balance between state power and the economy, thus shaping markets and property, public goods and social expenditures, taxation, regulation, and trade.
In Chapter 3, liberalism places a high priority on individual political and economic freedom and advocates limiting state power in order to foster and protect this freedom.
Liberalism believes that people are best suited to take responsibility for their own behavior.
Liberal scholars such as Adam Smith put their faith in the market and in private property: if people are allowed to harness their own energies, sense of entrepreneurialism, and, yes, greed, they will generate more prosperity than any government could produce through " top- down" policy making and legislation
The best state for liberals is a weak one.
Other than securing property rights, the state should not be involved in the economy.
To prevent free riding and to encourage individual responsibility, public goods should only be located in critical areas such as defense and education.
Unemployment should be accepted as part of market flexibility.
To keep wealth in the hands of the public, taxes should be kept to a minimum.
Trade should be encouraged and regulation should be light.
The state should only intervene to defend the public when crises arise.