Enough already with "Sembrar el Petróleo"

How a single, bad development essay came to blight Venezuelan development thinking for the next eighty years.

I come here not to praise Sembrar el Petróleo, but to bury it. Venezuela’s oldest, most widely cited work of petroleum strategy and its call to ‘sow the oil’ is also among the most misunderstood texts of Venezuela’s 20th century. But I’d go further, Arturo Uslar Pietri’s short 1936 essay has caused untold damage to the country’s development. The time has come to put a skewer through this sacred cow.

Arturo Uslar Pietri was the first major Venezuelan intellectual to comment on the potential perversions that finding oil could bring into our economy and public life. His essay long since attained the feel of sacred scripture: it somehow floats above critical reproach. Screw that. Let’s do some critical questioning, shall we?

What did Uslar actually say in Sembrar el Petróleo?

I’m going to go ahead and flesh out Uslar’s four core ideas for you, although it’d be best if you took the time to read the essay yourself. According to AUP:

  1. Oil wealth is temporary and destructive. Uslar thought oil exploitation would turn out to be some gold-rush type fever, at least in 1936 when he wrote this piece. He got this idea from his mentor, Alberto Adriani. Both of them had lived their early adulthood in Europe -Adriani in Switzerland, Uslar in France- where they learned that agroindustry was the true path to development. It’s not that during the 30’s there was a world-wide confusion over what the oil industry was and how important it quickly became wherever it boomed, he and Adriani were simply ignorant on the matter. Considering oil developments a transitory episode of our history, his early work played down the role of oil: why bother making large investments and draft specific regulations, if was going to run out quickly anyway?

Furthermore, Uslar also picked up from Adriani the notion that oil was a destructive and immoral source of wealth. In years to come he would elaborate on this. For Uslar, oil reserves represented “natural capital”, an initial endowment which embodied the country’s original wealth. If you extracted the mineral for consumption or exports you’d be decapitalizing the economy. That’s why in his conception, all of the income derived from oil extraction had to be reinvested back into the domestic economy to create an alternative type of capital, or else its value would be lost forever.

  1.     Fiscal dependency on oil rents had become alarming. Within the first decade of petroleum development, oil rents came to represent over half of the government’s income. This posed serious concerns to those who paid attention to fiscal accounts, particularly to those who, like Uslar, thought oil would quickly run out. Given his scant understanding/knowledge of petroleum resources and reserves, he concluded that the government should not grow used to operating out of oil rents. Had Uslar Pietri bothered to take a look at Gumersindo Torres’ notes, pass by the Hydrocarbons Technical Office at the Ministry of Development, or talked to someone at the Shell Company he would have quickly changed his mind. As far back as 1916 —twenty years before Sembrar El Petróleo— a group of geologists had put together a report detailing the huge resources known to be deposited beneath Venezuelan soil.
  2.     The oil industry was some sort of foreign enclave. An “enclave” in the sense of a foreign province within the national territory that had no connections with local economy or livelihood in general. He thought the oil business was unrelated to Venezuelans, and that oil exploitation only served foreign interests. This again is one of Adriani’s concepts. Such near-sighted vision completely ignored important issues happening in Venezuela at the moment. For instance, campesinos were already leaving coffee and cocoa plantations to go work in the oil fields; foreigners were arriving in the country along with their culture and products, changing the ways Venezuelans ate, shopped, danced, and dressed. AUP’s vision ignored that the oil rents were flowing within the economy, fostering a new consumption surge, not to mention the way it was financing the first large public spending program: Gómez’s roads and military expansion. Oil was very much present in Venezuela’s life, Adriani and Uslar just failed to notice it from exile.
  3. Venezuela must “sow its oil”. There are two underlying ideas to his proposal: on the one hand, he meant to sow the oil in the most literal way, which is to use oil rent to boost the agriculture sector. In his opinion, agriculture was the only sector capable of offering the country a sustainable growth path. On the other hand, and that has to do a little more with AUP’s philosophical beliefs –early century Latin American positivism– la siembra petrolera had to be directed by an elite-run state, the best suited group within society to make decisions in the name of the nation; the poor were yet incapable of making the right decisions. They had to be educated, washed and fed first.

Whether you agree with these ideas or not, this is what he said and meant.

80 years’ time (1936-2016) give us enough perspective to see that he had some valid points, and that he was wrong about others. The idea is not to judge Uslar with the benefit of hindsight. Uslar himself would transform some of his ideas throughout his career. But this phrase, Sembrar el Petróleo, would stick around and be bent and twisted by pretty much every politician thereafter.

So what’s the problem anyway?

Sembrar el Petróleo is a poetic phrase, metaphoric and imprecise by nature. That’s why it’s been easy to reinterpret its meaning so many times. Virtually every government since has tried to retread it. Even the PDVSA roja-rojita has its own Plan Siembra Petrolera.

At first, when Uslar sat in the cabinet during the López Contreras and Medina administrations, he made sure that the siembra was carried out in his terms. But when the Trienio Adeco (1945-1948) came along, so did its first revision.

Betancourt’s government would argue that oil-sowing should not only be used to invest in agriculture, but also to build human capital through public healthcare and universal education.

Perez Jiménez and Co. (1948-1958) would later reinterpret the siembra petrolera as a call to create public infrastructure, such as highways, ports and government buildings.

Early Puntofijismo (1958-1974) would then try to merge all of the above, creating the illusion of political stability based on oil rent distribution. In addition, a new layer was to be added by this group’s plantation: state-owned equity in heavy industry and mining, and preferential loans to local agriculture and industrial sectors.

Then saudi-wannabe CAP I (1974-1979) would take this type of siembra into the oil business with the nationalization process, and broadly expand central government’s spending in all the mechanisms mentioned above, plus the Fundayacucho Scholarship Programme. All this under one flag: the siembra petrolera.

With every reinterpretation, Venezuelan realpolitik transformed the siembra petrolera into a synonym for “government spending program”, regardless of their various ideologies.

Still, all of them were based on Uslar’s original standpoint: oil rents must be spent within the economy as soon as they enter, because oil will run out and soon we’ll need to replace it with something else. Make no mistake; oil was sowed in many different guises throughout the 20th century, and also in the 21st.

But more than anything else, Sembrar el Petróleo tattooed one idea in Venezuela’s collective thinking: that we had to walk away from oil ASAP. And with that, we became self conscious of being an oil economy. We kept thinking that if the state managed to reinvest oil rents into the correct non-oil productive sectors, we’d suddenly become less dependent of oil, and enhance the ultimate utopia: diversification -whatever that meant.

And this, I find wrong on so many levels. Mostly because it ignores all fundamental elements of Venezuela’s contemporary politics and economics.

For one thing, Venezuela is —and has always been— sitting on the largest hydrocarbons resource base in the planet; we’ve been ignoring it for decades because we’ve never bothered to look at the data. So, whenever someone says we should just ignore our oil extracting potential to focus on some non-oil-shenanigan, what they’re really saying is that if you’re born rich, you should give away that money and work hard to make a living because it’s a terrible thing to deal with rich-people’s problems.

Doesn’t that sound insane? You can’t just ignore your comparative advantages in a world that puts a nice price tag on the minerals that happen to be under your feet.

Second, since it makes economic sense to produce oil, you have to realize you are going to have a constant inflow of hard currency, and yes, that will appreciate your exchange rate. Stop daydreaming about fostering tradable-goods industries that require a depreciated exchange rate to be competitive. It ain’t gonna happen.

A classic example would be agriculture. You’ve got the entire world producing food, the competition out there is fierce. And guess what, countries that are competitive at selling food are only competitive because they don’t have much of higher value to sell or because they have abundant cheap labour, and so their currencies aren’t worth much. But your currency is worth a lot — bizarrely, this is considered a problem, and called Dutch Disease.

Dutch Disease is a problem when the rent-making industry appears for the first time, because it starts to kill other sectors via exchange rate. This is what happened in Venezuela during the 1920s, when our coffee and cocoa export sectors shrivelled up and died. But it’s a century later and we’re still talking about this?  

Some people might be moaning at this point, realizing their dream of Venezuela being capable of exporting agricultural goods is salt in water. But hey, it’s not up to me to decide, it’s up to the market and there are economic sectors that can work with an appreciated exchange rate, like banking, high tech, logistics hubs or fashion. The normal thing to do would be to let private initiative tell you what can be prosperous under the new conditions, but no. We don’t like private investment in Venezuela, which takes me to my third point.

When the central government took control of the oil industry, it put itself in control of the commanding heights of the economy. That gave it the upper hand over society. Our political traditions kept liberal capitalism at bay. Both major political parties in the 20th century profoundly believed in central planning: on one hand we had elitists and military governments, and on the other one we had a pseudo-democratic group whose political philosophy was founded on soviet socialism.

The one premise no one ever challenged is that the state had the duty to direct oil-sowing by planning which sectors of the economy should and shouldn’t grow, as if they had God taken by the beard.

I don’t have to tell you about the widespread failures of central planning, but in addition to that economic view, there was an underlying problem: no political consensus was achieved between political forces, so regimes kept overthrowing each other, and every time government changed they would modify the game rules for sowing oil rents, and thus, alter the incentives for private initiatives. So, both economic growth alternatives became unsustainable: public spending kept shifting, making every government program unreliable, and private initiatives were systematically killed off by economic policies that favoured the state.

We trapped ourselves into this corner thinking it would all go away when we ran out of oil.

***

But the oil never ran out. It kept flowing and so did government spending based on oil rents.

This didn’t seem like a problem at first, when oil could foot every bill. But after CAP’s first government it became clear that oil rents were no longer enough to sustain the country’s spending needs. Yet we failed to see that the siembra petrolera development model, as we understood it, was no longer viable.

Instead, Sembrar el Petróleo’s popular mystique kept it current. The idea turned into a handy crutch, surfacing again and again in every politician’s discourse. Every new leader promised they knew how to “correctly administer” the oil rents to finally get this oil-sowing business right.

This argument allowed governments to shift public spending from one portfolio to the next, creating a never-ending cycle of instability in public programs and investment. This crippled efforts to protect ourselves from oil price fluctuations because the siembra petrolera mental model is based on spending, not saving.

So the siembra petrolera model makes Venezuela’s economic growth pattern unsustainable for two reasons.

First, it allows every incoming government to reinterpret how oil rents should be prioritized, with the incentive to use it to its advantage (think of Chavez’s misiones, for example).

Second, it enables the central government to remain as the dominant actor in the economy, making all the key allocation decisions, picking winners and losers and attracting corruption along the way.

Since, in practical terms, we still have infinite hydrocarbon reserves, we’d do well to revise what we are doing with our oil rent situation.

What could be done about it?

We are used to thinking we have to reinvent the wheel every time a public policy problem comes up. Truth is, these challenges are not exclusive to Venezuela, and we could learn certain lessons from other resource-rich countries. Some of the most used ones are:

1) If we want to avoid exposing ourselves to external shocks when oil prices go down –like the one we are in now–, we have to stop thinking we need to spend every dollar that comes in from oil exports. A sovereign fund with stabilization and saving purposes has worked like a charm for other countries.

2) The Constitution must establish where and how oil rents should be spent, instead of leaving it to the magnificent ideas of the next government administration. Many oil countries have a pre-designed mechanism for oil rent distribution; usually something related to retirement pensions, healthcare, education and housing. This allows citizens to count on public benefits indistinctly from what type of government takes office.

3) Smart petrostates separate the state’s interest in oil revenues from operational decision-making. As long as the government in office controls the business, it will have incentives to prioritize political decisions instead of operational and investment decisions.

4) If you don’t want to socialize the risks, you have to encourage locals to make private investments in the national oil sector. Private stakes create a tangible interest in policies that favor the long-term stability of the business; also, it functions as a wealth and job-creating sector.

5) Finally, I’d root out the hideous Sembrar el Petróleo phrase out of the public conversation. Its ambiguity allows for every person to interpret some idealized version of its believes, instead of promoting one concrete and coordinated oil distribution policy for the long-term.

Sembrar el Petróleo might have been a great conversation starter. The idea long since outlived its usefulness. Until we understand the way this slogan has distorted and maimed our thinking on oil policy-making, we’ll keep reliving failed experiences again and again indefinitely.