In a year marked by repression, contraction, default and hyperinflation, the publication of Leopoldo and Gustavo’s Venezuela Energética is a welcome holiday gift. Their book pushes back on the hopelessness many of us feel in the face of our political dysfunction and economic debacle, laying out a plausible vision for a prosperous Venezuela, and kick-starting a number of key policy debates our public sphere needs. Plus thinking of Leopoldo hard at work on this in Ramo Verde makes me genuinely happy and optimistic about the future.

Now, about diversification. Productive development is one of our most important challenges if we hope to achieve economic prosperity. Our economic discourse has long stressed the need to diversify but, as the book argues, irregular policy approaches mired with excess and disengagement have made results elusive.

López and Baquero support the view that diversification is a key goal for the country, which already sets them apart from the exclusivist view often advocated by bullish oil economists. The authors walk us through the evolution in the Natural Resource Curse literature, whose latest findings suggest that resource dependence, as opposed to resource abundance, is what undermines long-run economic development.

Building from this evidence, they systematically take apart the false dichotomy that we must either specialize in mineral extraction or specialize out of it, but not both. They show how other resource-rich countries have been able to amass increasingly diversified export baskets, and that our crippling reliance on exports of a single product has not been endemic to resource abundant countries.

López and Baquero suggest to have an independent government agency in charge of policy design and the coordination of policy implementation across administrative agencies.

This is the starting point for a more productive conversation about oil and diversification. While our oil exporting neighbors, with much more diversified productive baskets, were able to smoothly surf the sharp downturn in oil prices, our economy went down the drain. Sure, communism is a main force behind that, but any economy with 95% of its exports focused on a single item would have been severely hit by a ~50% drop in prices. Longer term, another reason to reach our oil production potential and diversify into (many) different sectors is that if we reached said potential without diversifying, we won’t get to a plausible level of exports per capita.

Lopez and Baquero not only recognize the need to diversify, they go on to propose specific institutions, methodologies and objective policy criteria to design, rollout, monitor and adapt interventions. They follow recent work on productive development policies from the Interamerican Development Bank, and on the Product Space and Economic Complexity literature by Ricardo Hausmann at Harvard and Cesar Hidalgo at MIT.

Part of the government’s role, Venezuela Energética argues, is to address market failures that prevent diversification. For this, the government can use a combination of public goods and market transfers that can be either cross-sector (horizontal) or industry specific (vertical). Institutionally, they review European and Latin American experiences and suggest to have an independent government agency in charge of policy design and the coordination of policy implementation across administrative agencies.

López and Baquero introduce the idea of “vertical” policies that address market coordination failures, but they do so rather timidly.

Innovative programs and organizations dealing with productive development issues are becoming prevalent throughout the region, because our neighbors understand their (much lower) levels of extractive dependence to be substantive risks to their economies. There has been some debate on this for the Venezuelan context, but limited to academic circles. López and Baquero’s discussion brings the debate to a larger audience, emphasizing how connecting market forces and private agents with alternative institutions and methods can overcome the risks of industrial policy capture and help lead the country in new productive directions.

On this aspect, however, the authors prioritize the “least controversial” of the policy profiles, such as providing horizontal public goods. I think this is also the least ambitious, as it aims at promoting diversification by investing in the necessary public goods for all sectors: roads, schools, ports, that sort of thing.

Nothing wrong with that, as far as it goes. But as a strategy for export diversification, it would take way too long to yield results. Amassing the public goods necessary for narrower activities in limited areas would be a much faster way of promoting investments and diversifying our export basket. López and Baquero introduce the idea of “vertical” policies that address market coordination failures, but they do so rather timidly, when the principles behind ideas like charter cities, special economic zones, industrial parks and local development corporations should be the core of a diversification strategy.

The chapter emphasizes how technological proximities and value chain connections of the oil sector should be at the very center of the country’s productive diversification strategy. While these connections are valuable, I find their emphasis somewhat overstated.

The Norwegian and Chilean cases are explored, envisioning ways to exploit this demand for advanced local responses, which can later be exported from the country to other oil producing regions of the world.

First, they discuss how high tech extractive sectors have become, and argue that local innovations in oil can trickle into other parts of the economy. The problem is that studies show oil is among the most technologically isolated products out there meaning learning from oil doesn’t travel very well to other sectors. This doesn’t mean oil is not an innovative and high-tech industry these days, but it does cast doubts on the idea that technologies in that sector will spillover easily into other industries. And that makes sense: the things you need to know to extract crude from the ground are pretty specific to that purpose. That’s why oil engineering is its own field!

López and Baquero discuss the topic of local content policies (PCLs) at length, as a way to diversify the economy around oil. This opportunity comes not from technological spillovers from oil extraction, but from its guaranteed demand for input in goods and services. The Norwegian and Chilean cases are explored, envisioning ways to exploit this demand for advanced local responses, which can later be exported from the country to other oil producing regions of the world.

PCLs are prevalent in the oil world, and they seem fundamental for the sector in Venezuela. They not only diversify the economy, they constitute an incentive for the return of highly specialized talent that left the country during the Chávez era. Yet I worry that, in emphasizing PCLs as heavily as they do, the authors may be somewhat disproportionate in the role that inputs to oil extraction can have in diversifying the export basket. In a way, we already had specialized and capital-intensive clusters of providers to the oil sector in the late 90’s. While we should promote the rebuilding of these clusters, I doubt their potential to lead the charge in terms of export diversification and job creation.

Overall, Venezuela Energética is a long-awaited reflection on Venezuela’s future, which is sure to improve the nature and depth of our political dialogue. Leopoldo and Gustavo urge the nation to understand that being energy exporters need not prevent, and may actually help, our productive transition towards other economic sectors. Their vision is inspiring, and I hope to see it implemented through actual policy sooner rather than later.

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I work in development economics for countries with governments that want to deal with (some of) their issues. I think I'm a fiscally-responsible progressive. I've thought a bit about the Political Economy of oil in Venezuela, and I worry about the politics of the things that need to happen. I think Rómulo Betancourt, Adolfo Suárez and George Washington were exemplary politicians. What I miss the most about Venezuela: My family, my friends, my weather, my food, my band, and teaching in my university.

24 COMMENTS

  1. The idea that the much desired diversification of our economy does not mean having to turn our backs on the continued development of our oil and gas resources but instead includes both the development of that industry and using it as a platform to create new areas of economic growth within our economy is one which clearly deserves our applause and recognition.

    The either or contrapositions are popular but they are reductionistic and irrational , we cannot develop a diversified growth economy without relying on our largest source of resources …the potentialy optimized income from our oil and gas industry …….to think otherwise is unrealistic !!

    Its true that oil and gas extraction technology does not necessarily translate well for use in other economic activities , but it does allow oil related industries , for the support of those activities or downstream from those activities a bigger chance of developing into healthy self standing industries…think that the oil and gas industry at one points converts into the petrochemical industry and from there onwards into all kinds of industries like the production of plastics , chemicals , sytnthetic textiles and so forth .

    Moreover the greatest asset which a highly technocratically developed industry contributes is people who know how to expertly manage complex business operations and activities and who transplanted into other areas can create industries using their managerial and organizational expertise to develop them into bit work producing wealth makers…

    • Totally agree Bill. One concern though, is that sometimes people say that we have an advantage in refined oil and petrochemicals just because we have the oil (“we should develop downstream in the value chain of oil”). I find that that argument is often later used to argue for subsidizing crude to those sectors. That would make those sectors thrive not because they are competitive, but because they are capable of extracting the potential rents that the country would have received had we sold the crude at international prices. Sustainability of these sectors needs not depend on subsidized inputs. The contrary would be a similar argument to the prevalent and misleading “we should consume cheap gasoline because we are oil producers”.

      • Good point !! Because space is so limited I left out something which needs clarification , sometimes petrochemical investments are less profitable than selling the oil and gas feedstocks directly into the market (no one believes this but its true) , I would suggest petrochemical use of oil and gas be fostered only where the result of the investment allows the project valuation of the oil or gas feedstock at a value at least equal to what it would obtain selling it in its original conditions. In short no subsidies, one exception sometimes the earning curve of a project requires an initial subsidy of the feedstock price which later can be recovered thru increased project earnings in which casea temporary subsidy might be allowed with the proviso that its full normal market price must be paid back to the supplier later when the project economics allow it . e.g. the gas is sold to the petrochemical project at half o the market price for 3 years after which period the sacrificed half must be paid in full to the supplier by the project (plus interest.) ……..use of oil must be prioritized where it can ultimately bring in the biggest return on such use , where the feedstock loses no value from its sale to the project and represents an overall gain in value for the country .. I too dont believe in BS use of subsidized oil in petrochemical projects ….

  2. The only diversification that will occur is what to steal next. And finding innovative ways of stealing what already been stolen, oil, food, currency, metals, all natural resources, with minimum effort and on the sort run.

    With the current levels of mass ignorance and mass corruption that’s the only diversification you can certainly expect.

  3. Diversification = Less power for the party that’s holding the government power in Venezuela.

    THAT is the only reason Venezuela was locked into the oil monopoly for decades.

  4. Development of a healthy economy does not necessarily have to involve the total workforce of the country, in fact industries that are most important to an economy often dont need to use that many people , At it best moment , when it produced 3.3 million Bls per day , Venezuelas oil industry employed some 30 to 40 thousand employees and there were Pdvsa managers who thought that they might lower that number by 30% without any loss in efficiency . Same with agricultural production in the US , which with its huge productivity only occupies a bit over 1% of the work force ……what you need is to have a small percentage of people who are dedicated, disciplined, honest and a small group of well run organizations that know how to train teams of high expertise people who grow accostumed to practicing those virtues……..Lets not forget parettos principle…….., a small workforce can make a big difference……..if you have the organizations to properly hone and develop good expertise together with good work habits..

  5. All of this excitement surrounding Leopoldo’s “plan” reminds me of the Politburo’s excitement with all of the USSR’s 5-Year Plans.

    And those worked out just great, huh?

    Did no one learn anything from the Soviet experience?

      • As a socialist you should not have any belongings or wealth that is yours…..only party.
        But then you do support Trudeau, so enough said.

      • Well, Canada never plans or leads anyway. It just follows.

        Maybe that’s why you’re confused about the various contexts of “planning.”

        • Well then Ira. Now that we’re appealing to a contextual approach to observing and commenting, could it also be that the various contexts of “planning” you are talking about would indicate that Leopoldo Lopez’s plan is not remotely comparable to the Soviet Politburo?

          • “…Now that we’re appealing to a contextual approach to observing and commenting, could it also be that the various contexts of “planning” you are talking about would indicate that Leopoldo Lopez’s plan is not remotely comparable to the Soviet Politburo?

            I read the above over and over and once more. Canucklehead, are you drunk? You sound like Bukharin.

    • I don’t think the book is about “a plan”, but mainly about “a vision” for Venezuela’s economy. A set of goals to be achieved, and some general ideas on how to get there. That vision puts the private sector at the center of all tasks. I’m sure that, once you read it, you won’t think it’s anything Soviet.

    • Políticas de Contenido Local. These are policies that condition some investments in an extractive sector to the procurement of inputs to local providers, so as to stimulate local industry, employment and innovation. I think that when they are well designed they have a big potential. The book discusses the Chilean case in copper extraction, which is pretty interesting and apparently very successful. Do check the book out!

      • Making local content purchases mandatory should not mean giving the local manufacturers a black cheque to be assured a market for sub parr over priced materials or equipment ……….buisnesmen often have connections that make them whine to the pols when they are held to a rational standard of quality price performance . We have a long story in Venezuela with these policies and sometimes they were a fraud…..one wrapped with the flag !!

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