Caracas Chronicles

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.