Book Review Essay: The Magical State: Nature, Money, and Modernity in Venezuela.<br>By Fernando Coronil

September 25, 2007

A scant quarter century ago, events seemed to portend a global shift in power and wealth toward the Third World. Venezuela advanced this struggle through its leadership in organizing the Organization of Petroleum Exporting Countries (OPEC). Through OPEC the oil exporting countries dictated pricing and supply; once companies lost control over these decisions, they had little reason to resist compensated nationalization of their holdings. Petróleos de Venezuela S. A. (PDVSA), a state holding company, took over the operating companies in the fields on January 1, 1976. The law mandated that the oil industry remain a state monopoly. President Carlos Andrés Pérez proclaimed nationalization Venezuela's "second independence."

Pérez planned to use oil money to capitalize a massive expansion, not only of hydroelectric capacity but also of the steel and aluminum industries. On this base, other industries, such as automotives, were expected to rise, and Venezuela would overnight become the economic dynamo of the Andean and Caribbean regions. But before Pérez's five-year term ended there were signs of trouble: falling oil prices and recourse to massive borrowing. The Iran-Iraq War brought a reprieve, but then came devaluation, collapse of oil prices, staggering losses in basic industries outside of oil, and a moral crisis of massive corruption.

By 1988, when Pérez was re- elected, a full-scale economic and social crisis was brewing. Urban rioting erupted after Pérez announced a structural adjustment package in 1989. Lt. Colonel Hugo Chávez Frías, organizer of the first of two unsuccessful military coups in 1992, capitalized on public anger in his victory in the December 1998 elections. This came after publication of Paradox of Plenty, but Chávez's rise seemed to many to confirm the thesis of Terry Lynn Karl's highly praised book, which argues that oil resources have retarded, not advanced "petro-states"—developing countries that greatly depend on oil exports.

Karl contends that oil booms produce an economic malady known as "the Dutch Disease." The term—which originally referred to damage to Dutch manufacturing by North Sea gas development—was coined by the World Bank to describe how booms result in highly overvalued currencies that discourage other export sectors and overwhelm domestic producers competing with cheap imports. The basis for these booms is the state's use of sovereign ownership of natural resources to collect "mineral rents." These consist of extraordinarily high profits resulting from the natural productivity of the subsoil (e.g., high ore grades or light crude oil close to the surface) or from cartels that limit supply and fix prices. Karl, quoting Adam Smith, calls such rents "the income of men who love to reap where they never sowed." Too often, she says, mineral rents foster "a bias toward unproductive activities, leading to poor development outcomes."

Smith directed his criticism of rent-seeking at aristocrats whose grip on land and resistance to free trade penalized England's industrialists and workers. Karl takes aim at countries that use territorial sovereignty to submit natural resources to state, not private, control. The petro-state is, in effect, an unproductive, third-world rent seeker. The "paradox of plenty" is that such states have little incentive to develop their own administrative efficiency or to encourage a strong, productive private sector. This is one reason why Venezuela lacks an effective system of internal taxation and failed to develop the non-oil economy. Pérez's effort to transform eastern Venezuela overnight into the "Ruhr" of South America resulted, Karl shows, in an inefficient complex of steel, aluminum and energy enterprises that survived only with massive state subsidies.

Was it the bonanza that undermined state capacity or vice versa? Karl believes the former. She traces the roots of the Venezuelan crisis to the decision by dictator Juan Vicente Gómez in 1922 to reserve negotiation of oil leases to the state, which prohibited private landowners from arranging concessions with the companies. Each successful government effort to increase its share of oil profits gave it more economic power; the culmination was the OPEC oil bonanza. When prices collapsed, Karl writes, "Just as Spaniards had once waited for the next ship of gold from the New World to rescue them, Venezuelans seemed to believe that another boom in black gold was just around the corner."

When Pérez was re-elected in 1988, Venezuelans were entirely unprepared for his turn toward structural adjustment. Pérez prepared the public poorly, but the deeper problem lay in the historical tendency, says Karl, to rely on the state to collect and distribute oil rents. Neoliberal solutions fail to address the need to otherwise strengthen state authority. Reduced states may revert to rentier behavior in the future.

Fernando Coronil says the country failed despite, not because of, oil. In The Magical State, he argues that oil empowered the Venezuelan government to conjure developmental projects out of nature, as if by magic. But Venezuelans were not the only ones to benefit from the illusion. "Between the cracks one could fleetingly see that the magic of oil money could no longer sustain the magical state, as national oil money dissolved into global financial torrents of international capital." The illness is not economics but ideology, says Coronil. "As a colonial plague that malformed the third world into narrowly specialized primary exporters, the Dutch Disease should be renamed the third-world or neo-colonial disease."

Coronil challenges the orthodox view that Venezuela's democratic stability from 1958 to 1998 was due to the maturation of its ruling class and to what it learned from the collapse of the first democratic experiment from 1945 to 1948. Mass resistance helped drive out a dictator in 1958, but elites controlled the process. The great myth of Venezuelan democracy is that it originated in a struggle to wrest oil revenues from an oligarchy. This obscures the continuity between the authoritarian and democratic eras, says Coronil. With the 1958 political and economic pacts, the native bourgeoisie merely exchanged the right to rule for the right to make money.

Unfortunately, neither book deals with the issue of the Apertura Petrolera (Oil Opening). It was launched in 1989 by PDVSA executives, and permits private, foreign capital to re-enter the industry through service contracts to reopen abandoned fields and develop new ones through risk and profit-sharing agreements. The goal of the Apertura has been to raise production drastically in the short run, which contradicts President Hugo Chávez's efforts to revive OPEC. Chávez has already committed Venezuela, a notorious OPEC cheater, to adhere to production cuts. His critics denounce such policy as "rent-seeking" and a repeat of past mistakes.

The most controversial aspects of the Apertura concern the return of foreign companies into "upstream activities," such as exploration and drilling. Profit-sharing agreements spare PDVSA and the state from risk and needed investments but allow foreign companies to produce on better terms than before nationalization. PDVSA also embarked on an "internationalization" program of partnerships overseas, and purchases of refineries and distribution systems abroad. Executives say this keeps the company competitive, but critics, including President Chávez, think PDVSA uses overseas investments to shelter profits from the state.

Following Karl, one might think that the state-owned PDVSA would mistrust the Apertura. It would not surprise Coronil, however, that transnational and national oil executives are aligned in this policy debate. José Enrique Arrioja, reporter for the Caracas daily, El Nacional, documents how PDVSA executives have come to view the foreign oil companies less as competitors than as allies to promote the Apertura and to liberate themselves from state control.[1] Not surprisingly, the oil company critique of "rent-seeking" receives sympathy from most oil economists overseas. Few in Venezuela were critical either, until the election of Chávez, whose oil policies have revived debates with deep historical roots.

For decades, the independent- thinking Communist writer Salvador de la Plaza urged a more aggressive assertion of Venezuelan sovereignty over subsoil resources. He inspired Alí Rodríguez, Chávez's first Minister of Energy and Mines, and his key advisors. During the oil boom they warned that Venezuelan prosperity was a facade built on rents, but unlike advocates of Apertura they do not eschew rent-seeking.[2] They advocate a revised Apertura that retains state ownership of the subsoil, cooperation with OPEC, limits on the profits of foreign companies, and guarantees that Venezuelan private capital, not just foreign capital, participate in new investments.

The Venezuelan state has for 65 years committed itself to "sowing the oil" in economic development; yet the private sector has hardly followed. The largest beneficiaries of state largess have been private capitalists who steadfastly prefer commercial, real estate and financial speculation to entrepreneurial activity. President Chávez's oil diplomacy makes Washington nervous because it challenges a neoliberal consensus that rent-seeking obstructs the free flow of capital. Karl may think the state should divest itself of control of oil, but if Coronil is right, the symbiotic relationship among these actors will not be loosened by the Apertura that neoliberals prefer. Instead, it will only get tighter.

Daniel Hellinger is professor of Political Science at Webster University in St. Louis and has published several books and articles on Venezuela.

1. José Enrique Arrioja, Clientes Negros: Petróleos de Venezuela bajo la generación Shell (Caracas: Los libros de El Nacional, 1998).
2. Mailer Mattie and Dorothea Melcher, Salvador de la Plaza: Petróleo y soberanía nacional (two vols., Mérida: Universidad de los Andes, 1996); Comisión Ideológica de Ruptura, El imperialismo petrolero y la revolución venezolana (three vols., Caracas: Fondo Editorial Salvador de la Plaza, 1975); Bernard Mommer, La cuestión petrolera (Caracas: Asociación de Profesores, Universidad Central de Venezuela, 1988); Alí Rodríguez Araque, El proceso de privatización petrolera en Venezuela (Caracas, 1977).


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