Jonathan Di John from Windfall Curse? to oil and industrialization in venezuela , 1920 to the present 00front.qxd 9/9/2009 9:08 AM Page i from Windfall to Curse? 00front.qxd 9/9/2009 9:08 AM Page ii 00front.qxd 9/9/2009 9:08 AM Page iii Jonathan Di John from Windfall Curse? to oil and industrialization in venezuela, 1920 to the present the pennsylvania state university press university park, pennsylvania 00front.qxd 9/21/09 2:18 PM Page iv Library of Congress Cataloging-in-Publication Data DiJohn, Jonathan From windfall to curse? : oil and industrialization in Venezuela, to the present / Jonathan Di John p cm Includes bibliographical references and index Summary: “Examines the political economy of growth in Venezuela since the discovery of oil in ”—Provided by publisher ---- (cloth : alk paper) Venezuela—Economic conditions—– Venezuela—Economic conditions—– Venezuela—Economic policy Petroleum industry and trade—Venezuela Industrialization—Venezuela I Title . .´—dc Copyright © The Pennsylvania State University All rights reserved Printed in the United States of America Published by The Pennsylvania State University Press, University Park, PA - The Pennsylvania State University Press is a member of the Association of American University Presses It is the policy of The Pennsylvania State University Press to use acid-free paper Publications on uncoated stock satisfy the minimum requirements of American National Standard for Information Sciences—Permanence of Paper for Printed Library Material, .– This book is printed on Natures Natural, which contains % post-consumer waste 00front.qxd 9/9/2009 9:08 AM Page v contents Preface and Acknowledgments vii List of Abbreviations xv part one: introduction Accounting for Growth and Decline in Venezuela Trends and Cycles in the Venezuelan Economy 15 part two: a critical survey of the “resource curse” literature Economic Explanations of the Growth Collapse in Venezuela 35 Political Economy Explanations of the Growth Collapse in Venezuela 77 Economic Liberalization, Political Instability, and State Capacity in Venezuela 108 part three: an alternative political economy of venezuelan growth and decline Toward a New Political Economy of Late Industrialization 133 Periodization of Industrialization Stages and Strategies in Venezuela 169 The Structure of and Changes in Political Settlements in Venezuela 186 A New View on the Political Economy of Growth in Venezuela 226 part four: beyond the venezuelan case 10 The Political Economy of Growth in Malaysia and Venezuela 271 11 Conclusion: Rethinking the Political Economy of Growth 285 References 303 Index 327 00front.qxd 9/9/2009 9:08 AM Page vi 00front.qxd 9/9/2009 9:08 AM Page vii preface and acknowledgments Understanding why the wealth of less developed nations increases over time is one of the oldest concerns of political economy and development economics Reigning theories of economic growth postulate that there are linear tendencies in the growth process Depending on the assumptions, growth theories predict either divergence or convergence of the income per capita of less developed counties trying to catch up with advanced industrial countries Reality paints a different picture of the growth process The fastest-growing countries are never the countries with the highest per capita incomes, but always a small subset of lower-income countries Economic theories of growth are thus of limited use in explaining the wide and persistent divergence of performance among late developing countries Furthermore, growth theories cannot explain why some countries sustain rapid growth for long periods only to fade into long periods of stagnation and even downward spiral and disintegration A major challenge of political economy is to explain why economic growth varies so widely within countries over time The Venezuelan experience since the discovery of oil in the 1920s provides one such interesting example Venezuela was among the fastest-growing economies in Latin America in the period 1920–80 However, two important trends mark the period 1968–2005 First, from the mid-1960s the non-oil economy, and particularly the manufacturing sector, experienced a dramatic decline in non-oil and manufacturing productivity growth Second, output growth in the manufacturing sector (and the non-oil economy more generally) collapsed in the period 1980–2003 Accompanying this decline was the virtual collapse of once vibrant political parties and the rise of a more volatile and unstable form of antiparty politics and governance in the first decade of the 2000s More perplexing is the fact that worsening economic performance coincided with many favorable initial conditions such as high levels of human and physical capital investment, a competitive democratic system since 1958, and plentiful resources to finance growth Was this worsening economic performance due to policy errors or inappropriate institutions, or did oil windfalls themselves become a “curse” by crowding out the development of non-oil sectors such as manufacturing, or were there other factors that explain the slowdown in growth? This book attempts to answer these questions 00front.qxd 9/9/2009 9:08 AM Page viii viii Preface and Acknowledgments Explaining what factors contribute to growth (such as high levels of investment, secure property rights, macroeconomic stability) does not tell us how or why such factors are achieved This is where role of the state becomes relevant, since the state is the set of institutions that is responsible for the creating and implementing the regulatory structure of the economy, which determines the incentives of economic actors One of the oldest (and most ideologically charged) debates in the political economy of development is identifying what types of state intervention are most likely to promote sustained economic growth Advocates of laissez-faire suggest that state intervention distorts markets, stifles competition, and generates corruption, all of which create obstacles to potentially growth-enhancing investments In recent times, this view has dominated as manifested in the adoption of widespread economic liberalization, particularly within Latin America The outcome of such reforms in Venezuela as well as in most of the region, however, has been disappointing Economic liberalization has failed to revive investment and growth to the levels of 1950s and 1960s, when more interventionist policies were followed While the state in Venezuela and many other less developed economies have failed to generate and implement growth-enhancing regulatory structures, market liberalization does not eliminate the market failures and risks of late development that justified state intervention in the first place The failure of economic liberalization to deliver positive developmental outcomes is not confined to the world of less developed countries For instance, advocates of laissez-faire saw little need to regulate financial markets because it was thought that market competition would weed out poorly performing investments and thus generate socially productive resource allocation The world financial and economic crises that emerged in 2008 suggest that such confidence in lightly regulated financial markets was unfounded In contrast, developmental state theorists have pointed to the benefits that state intervention, and particularly industrial policy, can have in promoting learning and technology acquisition, and in socializing the risks infant industries face in the context of trying to catch up with more experienced and productive firms in advanced industrial countries Advocates of more dirigiste strategies will point to the effectiveness of various types of industrial strategies in East Asia And indeed, the Venezuelan state attempted to implement stateled industrial policy from the late 1950s While the potential benefits of state intervention may be accepted, developmental state theorists not explain why most countries that tried policies similar to those of more successful industrial policy states have been far less successful 00front.qxd 9/9/2009 9:08 AM Page ix Preface and Acknowledgments ix The historical evidence suggests that there are a variety of models of state intervention that can promote economic development The broader question is why leaders in economies undergoing economic decline not alter the regulatory structure that approximates one of the various production strategies that could enhance growth The analytical narrative of the Venezuelan growth process since the 1920s presented in this book also attempts to answer this broad question Part One summarizes the main argument and introduces the main economic trends in the Venezuelan economy Part Two provides an extensive critical examination of arguments have dominated discourse on Venezuela’s long-run economic decline in the post-1968 period The most important is the so-called resource curse, which is the idea that oil abundance harms the prospects of economic growth There is a vast “resource curse” literature in economics, political science, and political economy which attempts to explain the negative effects oil windfalls and busts can have on the structure of the economy and on patterns of governance The main problem with these arguments is that they cannot explain why oil abundance has been compatible with cycles of growth and stagnation in Venezuela over the period 1920–2005 Comparative evidence presented in this book suggests that Venezuela has not been an “exceptional” case in Latin America Problems of growth slowdown, external debt, and capital flight (which featured in post-1980 Venezuela) were a feature of most countries in the region This suggests that understanding Venezuela’s growth trajectory may have resonance for other middle-income Latin American and oil-abundant economies in other regions Part Three offers a new explanation of the long-run cycles of growth and decline that Venezuela has experienced since 1920 It argues that reigning explanations of Venezuela’s growth slowdown (as well as the more general literature on state intervention whether from a neoliberal or developmental state perspective) not examine the extent to which different development strategies and stages of import-substitution affect the economic and political challenges and conflicts that state policymakers face in attempting to implement industrial policies Detailed historical evidence presented in Part Three suggests that the process of industrialization involved two very different strategies over time The period from the early 1900s to the late 1960s was a period of “easy” import-substitution strategies, where infant industry production tends to be technologically simple and small-scale and where require major coordination of investment by the state is not essential for rapid growth to occur Moreover, ... 1970s and 1980s, the state became increasingly ineffective in channeling oil revenues in productivity-enhancing and growth-enhancing ways The failure of the state and other actors within the economy... Cataloging -in- Publication Data DiJohn, Jonathan From windfall to curse? : oil and industrialization in Venezuela, to the present / Jonathan Di John p cm Includes bibliographical references and. .. to the benefits that state intervention, and particularly industrial policy, can have in promoting learning and technology acquisition, and in socializing the risks infant industries face in the