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World Bank Document ReportNo. 10404-VE Venezuela Structuraland Macroeconomic Reforms- The New Regime Public Disclosure Authorized March18, 1993 Country Operations Division CountryDepartment I Latin America and the Caribbean Region iI- .;i: . I1 1 . I ; :a,, ,.; 1 1.t .' ' ' : .1 . ; ~~~~ti,.~~~~~~~~~~~ FOR OFFICIAL USE ONLY ji ,i Public Disclosure Authorized Public Disclosure Authorized of the WorldBank Public Disclosure Authorized Document This documenthas a restricteddistribution and may be usedby recipients only in the performanceof their official duties.Its contentsmay not otherwise bedisclosed without World Bankauthorization. FISCAL YEAR January 1 to December 31 CURRENCY EQUIVALENTS Currency Unit = Bolivar (Bs) Exchange Rate Effective December 31, 1992 US$1 = Bs. 79.7 Bs. 1 = US$0.012 Bs. 1,000 = US$12.55 FOR OFFICIAL USE ONLY GLOSSARY OF ACRONYMS AEROPOSTAL LUneaAeropostal Venezolana Venezuelan Postal Airliie ALCASA Aluminio del Caroni, S.A. Caroni Aluminum, S.A. BANAP Banco Nacional de Ahorro y National Savings and Loan Bank Prestlmo BANDAGRO Banco de Desarrollo Agrfcola Agricultural Development Bank BAUXIVEN Bauxita Venezolana, C.A. Venezuelan Bauxite, S.A. BCV Banco Central de Venezuela Central Bank of Venezuela BIV Banco Industrial de Venezuela Venezuelan Industrial Ea ,k CADAFE Compania Anonima de Desarrollo y Development and Cooperation for Fomento Electrico Electrical Power Company CAMETRO Compailia An6nima Metro de Caracas Subway Company Caracas CANTV CompafiliaAndnima Nacional de National Telephone, S.A. Telefono CARBOSUROESTE Carbones del Suroeste Southwest Coal Company CASA Agricolas, S.A. Agrarian Industries, S.A. CAVEINEL Camara Venezolana de la Industria Venezuelan Chamber of Electrical Electrica Industries CAVN Compaffia An6nima Venezolana de Venezuelan Navigation, S.A. Navegaci6n CORDIPLAN Ministerio de Planificacion y Ministry of Coordination and Coordinacion Planning CORPOINDUSTRIA Corporaci6n de Dsarollo de la Corporation for the Development of Pequefla y Mediana Industria Small and Medium Industry CTV ConfederacdonTrabajadores de Venezuelan Workers Confederation Venezuela CVF Corporaci6n de Venezolana de Venezuelan Development Fomento Corporation CVG Corporaci6n Venezolana de Guayana Development Corporation Guayana DFI Instituciones Financieras de Development Financial Institutions Desanrollo EDELCA Electrificacid6ndel Caroni Caroni Electrification Company ELECAR Electricidad de Caracas Caracas Electricity Company This document has a restricted distribution and mavbe used by recipients only in the performance of their officialduties. Its contents may not otherwise be disclosed without World Bankauthorization. ENELBAR Energia Electrica de Barquisimeto Barquisimeto Elelectricity ENELVEN Energia Electrica de Venezuela- Venezuela-MaracaiboElectricity Maracaibo ENSAL Empresa Nacional de Salinas National Saltworks Company FCA Fondode Credito Agrfcola Agricultural Credit Fund FERROMINERA Ferrominera del Orinoco Orinoco Ironore Company FINEXPO Fondo de Financiamiento de las Export Financing Fund Exportaciones FIV Fondo de Inversiones de Venezuela Investment Fund of Venezuela FOGADE Fondo de Garantfa de Dep6sitos Dtposit Insurance Fund FONCREI Fondo de Credito Industrial Industrial Credit Fund GATT General Agreement on Tariffs and Trade HCD Hogares de Cuidado Diario Community-Based Day Care Centers ICAP Instituto de Credito Agropecuario Fanning and Livestock Credit InsCitute INH Instituto Nacional de Hipodromos National Race Tracks Institute INP Instituto Nacional de Puertos National Ports Institute INTERALUMINA Internacional de Aluminio, C.A. Aluninum International, S.A. MEM Ministerio de Energia y Minas Ministry of Energy and Mines MH Ministerio de Hacienda Ministry of Finance MINFAM Ministerio -le la Familia Ministry of the Family NGOs Non Governmental Organizations OCEPRE Oficina Central de Presupuesto Budget Office PDVSA Petrdleos de Venezuela, S.A. Venezuelan Petroleun Company PEP Plan de Enfrentamiento de la Povert Alleviation Plan Pobreza RECADI Officina dAelRgtinen de Cambios Office of the Differential Exchange Diferenciales Rate S&L Savings and Loans SBIF Superiotendencia de Bancos e Superintendency of Banks and Instituci snesFinancieras Financial Institutions SIDOR Siderqrgica del Orinoco, C.A. Orinoco Steel Industries VENALUM Industrias Venezolanasde AlMninio Venezuelan Aluminum Industries VIASA Venezolana Internadonal de International Venezuelan Aviation Aviaci6n VV3UgEL1 STRUB-RAL AND NACR-O0C IC 33 ME-!33EV RESINS TABLE OF CONTETS ABSTRACT . iv BXECUTIVE SUMMARY . vi 1. STRUCTURAL REFORMS . 1 A. IntroductLon ........... a. *.. 1 B. Major Areas of Reform ................. 2 Prlvatization . 2 Prior Conditions. 2 objectives, Policies and Targets . 3 ImplementatLon 5 Lessons and Issues... 5 Foreign-Trade Reforms ............. 6 Prior CondLtionsdit.n..... ....... 6 (a) Foreign Exchange Controls and Import Bazriers 6 (b)Tariffs . * . 9 (c) Export Incentives . 11 ReformMeasures .................. 12 Evaluationand Further Reforms . 15 C. 8ectoral Surveys . ....... ........ 16 Agriculture ............... *......16 Prior CondLtLonsi ................ 16 Policy Reforms. ..... .. ........ 17 Zvaluation and Further Reforms . 18 Power and Energy . .. ............ 19 Prior CondLtLonsiti ............... 19 PolLcy Reformso. ..... ........... 21 Evaluation and Fu:ther Reforms . 23 Infrastructure.. .. 24 Prior Conditions . ............ 24 Policy Reforms. .. ............... 27 Evaluationand Further Reforms . o . 30 FinancialSector ...... .......... 34 PrLor Conditions.......... .... 34 Pol$cyReform .............s . ... 36 Evaluationand Further Reforms . 37 Social Sectors . 39 Prior Conditions ...... .. .. .. .. .. 39 Policy Reforms . ... :... ... 40 Evaluation and Further Reforms. 42 II. MACROECONOMIC REFORMS . 46 A. The Stabilization Policy ...... .. .. .. .. .. 46 Prior Conditions ....... .. ......... 46 Major Elements of the Stabilization Policy . 47 The Foreign-Exchange Rate . 47 Fiscal Policy . 49 Monetary Policy . 50 Impact of the Stabilization Policy . 52 The Policy Change ....... ... .. .. .. .. 55 Evaluation of the Stabilization Policy . 58 S. Inherent Macroeconomic Problems . 59 Fiscal Issues ........ ... ... .. ... 60 Government Revenues . 60 Government Expenditures . 61 The Budgetary Process . 63 Fluctuations in Oil Revenues . 64 Targets and Instruments of Monetary Policy . 66 The Real Exchange Rate ................ 70 - iii - LIST 0P TABLES Table 1: IMPORT RESTRICTIONS AND AVERAGE TARIFFS BY SECTOR AND STAGE OF PROCESSING, 1989-91 . 10 Table 2: IMPORT RESTRICTIONS AND AVERAGE TARIFFS BY MANUFACTURING SURSECTOR, 1989-91 . 14 Table 3: RATE OF INFLATION AND THE FOREIGN EXCHANGE RATE, 1970-91 . 46 Table 4: NOMINAL AND REAL EXCHANGE RATES, 1988-91 . 48 Table 5: FISCAL ACCOUNTS, 1988-91 (ANNUAL) . 49 Table 6: MONEY SUPPLY, 1988-91 .51 Table 7: THE RATE OF INFLATION, 1988-91 . 53 Table 8: GDP AND ITS MAIN COMPONENTS, 1988-91 . 54 Table 9: FISCAL SURPLUS OR DEFICIT, 1989-91, (QUARTERLY) . 56 - iv - PREFACE The Administration of Fresident P6rez, which assumed power in early 1989, has introduced several fundamental measures of ezonomic reform and macroeconomic stabilization. The present study, three years after the introduction of these policies, is intended to serve as a stock-taking. It describes and analyzes the circumstances under which the policies were adopted and the nature of the policies as they were announced and implemented. It also evaluates the achievement of the policies, and indicates the directions in wwhich policies could be further pursued, improved, or changed. Structural reforms are discussed in the first part of the study and macroeconomic policies are analyzed in the second part. The first part has drawn on sector work and current sources of knowledge in the Department. It encompasses the contributions of Malcolm Bale (Agriculture); Bruce Fitzgerald (the Foreign-Trade Regime); Feliciano Iglesias (the Financial Secto, Vladimir Jadrijevic (Power and Energy); Robert Taylor (Privatization and I- tructure); and Cecilia Valdivieso (the Social Sectors). The saca- -t is the work of a macroeconomic evaluation mission that visited Venezueli .u June 25 to July 5, 1991. Mission members were Bruce Fitzgerald, Felica.dno Tglesias, Mayra Zermeno, and Michael Michaely (Mission Leader and principal author of the report). The analysis also draws on deliberations in a worksh p. on Ver- Aela's macroeconomic policies held in Annapolis, Maryland, from September 23-24, 1991, and attended by Venezuelan officials, World Bank staff, ane -ml _l of academia. A draft of the report was submitted to the Venezuela Government in April 1992, and discussed with the Government in a seminar held in Caracas on August 29-30, 1992. Written comments have also been made subsequently by the Government. The Government's concerns are addressed in this revised version of the report. Some of the issues discussed in Part II of this report (Macroeconomic Reforms) are analyzed more thorcughly in a study authored by Sebastian Edwards, on "Venezuela: Oil and Exchange Rates--Historical Experience and Policy options" (Report No. 10481-VE, February 1993). Consulting that report, in conjunction with the present one, would shed further light on the issue of the real exchange rate. ABSTRACT This report provides an evaluation of the policy changes implemented by the new administration of President Perez in Venezuela three years after their introduction. The pattern mostly followed in the discussion of each policy &rea is as follows: a description of conditions
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