Labor Laws Stoke Economic Turmoil in Venezuela

As Venezuela grapples with economic turmoil and widespread protests, a law that effectively prohibits companies from firing workers continues to restrict the country’s ability to compete in the global economy.

Anti-government protests led by university students and other groups escalated last month, with tempers flaring over shortages of basic goods like toilet paper and medicine.

Meanwhile, President Nicolas Maduro has called the movement a “coup in motion.” So far, about 20 people have been killed in clashes between protestors and security forces, and opposition leader Leopoldo Lopez was arrested in February.

Venezuela entered a recession late last year and has seen inflation climb above 50%, spurring credit downgrades and talk of default.

In December, Standard & Poor’s downgraded Venezuela’s credit rating another notch below investment grade. The decision was “based on the growing radicalization of economic policy over the last two months in the context of a sustained decline in international reserves and the continued high levels of political polarization,” the firm wrote in its report.

Moody’s also downgraded the South American country, saying it’s faced with a “materially higher risk of an economic and financial collapse” due to government policies that have “exacerbated” Venezuela’s problems.

Those policies, particularly a strict 2012 labor law that requires companies to seek government approval for to fire employees, are weighing on Venezuela’s economy, said Diego Moya-Ocampos, senior Latin American analyst for IHS Global Insight.

Businesses are also being forced to limit workers’ hours to 40 a week, down from a previous cap at 44 hours.

The laws have proven to be a major roadblock for companies that would otherwise be interested in making an investment in Venezuela, which rarely, if ever, gives employers the go-ahead to fire a worker. As a result, companies are forced to pay employees to do little or no work at shuttered factories.

“The labor law is having a significant impact on the competitiveness of corporations operating in Venezuela,” Moya-Ocampos explained.

Venezuela’s economy has also been beaten down by lower oil prices, as the country relies heavily on oil to drive economic growth. Data from the World Bank shows oil accounts for 96% of Venezuela’s exports and nearly half of its revenue.

S&P also blamed the growing headaches on Maduro’s unwillingness to develop policies in consultation with the private sector. In a move seen as shifting Venezuela’s focus even more toward oil, Maduro named oil minister Rafael Ramirez as the vice president of economic affairs.

Competitiveness Lacking

With labor laws and other regulations proving too big of a hurdle, Venezuela’s private sector has continued to shrink from mounting pressure on local businesses.

Venezuela already had the most restrictive hiring and firing policies in the world, according to the Global Economic Forum. In the group’s Global Competitiveness Index for 2013-14, Venezuela dropped eight spots to 134th out of 148 countries.

Moya-Ocampos said the oil-rich nation is “not favoring local production of goods,” instead driving companies away and relying on imports.

Maduro, who took over the country after the death of Hugo Chavez in March 2013, has hit back at other nations responding to the growing political and economic crisis in the country. After expelling three U.S. diplomats, he broke ties with Panama while Venezuela’s foreign minister claimed the country isn’t responsible for 90% of a $1 billion debt owed to Panama.

Venezuela imports goods from Panama’s Colon free trade zone, from which clothing, electronics and other products are shipped.

“The stringent regulatory burden is contributing to a shortage of basic goods and the whole economic mess,” Moya-Ocampos said. “It has played a role in leading Venezuela to three years of economic contraction.”

In a recent report on the developments in Venezuela, Moya-Ocampos wrote that its economy is projected to contract by 1.7% this year and 0.9% in 2015. The country will also continue to face higher inflation and shortages of goods, while the ongoing protests are likely just the first wave of a political crisis, he added.