The Struggle to Industrialize Venezuela

Latin America has been told for decades that free trade is
the path to modernization. However, Hugo Chavez understands that free
trade is unfair for the weaker, less advanced nations, and that the true path
to national development and advancement is the strengthening of his own
nation's industry and production through direct state support, guidance and
intervention.

By Chris Carlson – Venezuelanalysis.com
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"Two systems are before
the world... One looks to pauperism, ignorance, depopulation, and barbarism; the
other to increasing wealth, comfort, intelligence, combination of action, and
civilization. One looks towards universal war; the other towards universal
peace."

-Henry C. Carey, a leading 19th Century
American economist who made the case against free trade

Latin America has been told for decades that free trade is
the path to modernization. Washington's politicians and intellectuals praise
its virtues and promise underdeveloped countries that it is a crucial element
for successful development. But Latin American leaders are getting tired of
empty promises.

When George W. Bush traveled through the region earlier this
year, once again promoting the free trade agenda, his calls fell on
increasingly skeptical ears. "We will believe Bush's promises when there is
transfer of technology, when tariff barriers are lifted," said the President of
Paraguay Nicanor Duarte.[1]

But U.S. political leaders and intellectuals haven't always
been proponents of free trade. In fact, for most of U.S. history they were
vehemently opposed to it. During the 19th and much of the 20th
century, when the United States was struggling to develop and build national
industry, U.S. leaders viewed free trade much like Hugo Chavez and other Latin
American leaders do today. 

For most of the 19th century it was the British
Empire that dominated world commerce. With superior production, more advanced
manufacturing, and control over world trade, it was British politicians and
intellectuals such as Adam Smith that then advocated "free trade" and preached
to the nations of the world about the "miracles" of the unchecked market.
American politicians, however, were insistent on developing and transforming
their nation from a poor colony into a world power, and would not be deceived.
They rejected the British creed outright.

Alexander Hamilton, for example, a contemporary of Adam
Smith, believed that free trade skewed the benefits of trade to the colonial or
imperial powers. According to Hamilton, it was a policy of protectionism that
would help develop the fledgling nation's emerging economy. The United States,
he thought, could not become fully independent until it was self-sufficient in
all necessary economic products.[2] He
wasn't mistaken as the United States would use exactly these kinds of
protectionist policies to build their industrial might in the years to follow 

A century later, the stance of US leaders had not changed.
"Free trade cheapens the product by cheapening the producer," said US President
William McKinley in 1892.

"Under free trade the trader is the
master and the producer the slave. Protection is but the law of nature, the law
of self-preservation of self-development of securing the highest and best
destiny of the race of man."[3] 

Major economists in the United States, such as Henry C.
Carey, also sharply rejected the system promoted by the British, labeling it
"barbarism." The German American economist Friedrich List explained in 1841 why
the free trade system was unfair to less advanced nations:

"Free competition between two nations
which are highly civilized can only be mutually beneficial in [the] case [that]
both of them are in a nearly equal position of industrial development, and any
nation which owing to misfortunes is behind others in industry, commerce, and
navigation... must first of all strengthen her own individual powers, in order to
fit herself to enter into free competition with more advanced nations."[4] 

The result of free trade, he believed, would be "a universal
subjection of the less advanced nations to the predominant manufacturing,
commercial and naval power."

But most leaders and intellectuals in first world countries
seem to have forgotten that the United States and other first-world nations
developed industry by rejecting calls for free trade and actively protecting
their nascent industries. The poorer nations of the world today would be wise
to remember that the United States, once a colony of the British Empire, soon
surpassed the British in industrial and economic might with policies that
directly contrasted the free trade policies advocated by the intellectuals and
politicians of the empire 

President Hugo Chavez of Venezuela
seems to understand this lesson of world history and has become the most
outspoken opponent of the free trade doctrine now promoted by the United States.
As US leaders did less than a century ago, Hugo Chavez understands that free
trade is unfair for the weaker, less advanced nations, and that the true path
to national development and advancement is the strengthening of his own
nation's industry and production through direct state support, guidance and
intervention. Before free trade could ever be fair trade, Venezuela and the
rest of Latin America would have to become stronger. And toward that end, Hugo
Chavez is making significant efforts.

The Failures of
Venezuela's Past
 

Since the beginning of democracy in Venezuela in 1958, it
has been generally understood that the main development goals of the country
include industrialization and economic sovereignty. Industrialization as a
means to national sovereignty was generally seen as a part of a larger process
of nation-building that was initiated with the overthrow of the Perez Jimenez
dictatorship in 1958.[5]

In 1962, the new government passed the Automobile Policy Law
to begin building a Venezuelan national car industry, as well as a policy to
create a national tractor industry. Both of these measures had the intention of
reducing Venezuela's technological dependence and creating the capacity for
heavy industry. It was generally understood that if Venezuela were to ever be
an independent, developed country, it would need to industrialize. National car
and tractor industries, characterized by complex technology and advanced
organization of production, were seen as two strategic industries that could
create the beginnings of a modern industrial society in Venezuela.[6] 

But Venezuela's efforts to industrialize failed. Despite the
fact that it was official government policy well into the 1980's, not one
tractor would ever be produced; no national auto industry would be created.
Venezuela remained almost completely dependent on imported technology from the
developed world, paid for with oil exports. The traditional colonial structure
of the economy had changed very little; Venezuela still exported raw materials,
mostly oil, in exchange for imported manufactured goods from the developed
world. 

To understand Venezuela's past failures to develop industry
is to understand the failures of liberal democracy. As is the case in most
liberal democracies, the democracy of the Fourth Republic (1958-1998) was built
on a political pact between rival parties. Two political parties, composed of
various conflicting sectors of society, with the exclusion of leftist parties,
agreed to share power amongst themselves and to alternate the presidency
between them.

As a government built on a coalition of conflicting sectors
and class interests, it was nearly impossible to build a coherent political
program that could satisfy the demands of conflicting interests.
Industrialization was recognized as an important development goal, but would
require significant changes in the structure of the economy. Nascent industry
would need to be promoted for the nation to become independent from imported
goods, creating a clear conflict with the traditional import sector. The
political system, built on an agreement to avoid conflict and defend the interests
of conflicting sectors, including the most powerful groups, would find it very
difficult, or nearly impossible, to make the needed changes.[7] 

So, for example, when President Carlos Andres Perez made an
extra effort to implement the auto industry policy in the 1970's, the
government guidelines for the policy said it should cause the least possible
"social and economic upset" to the existing auto companies. The existing
"structure of the market" would be a determining factor in the policy.[8] 

In other words, even though it was necessary to make
profound structural changes to the economy, the Fourth Republic planned to do
it without making any waves, without creating conflict. But given that it was
against the interests of the international car companies, and the domestic car
importers to build a national auto industry independent of imports, it would be
impossible to do without rocking the boat.

The same happened to the tractor industry. International
tractor companies were not genuinely interested in cooperating in the transfer
of technology, tractor importers were opposed to the policy, and the
government, internally divided, did not have the political will to carry the
project forward. In the end, the initiative left the empty carcass of a brand
new tractor factory in the middle of the Venezuelan jungle, never to produce a
single unit. 

It was obvious that the liberal democracy of the Fourth
Republic would not be capable of making the necessary changes, or confronting
the conflicting class interests of a divided society. As is the norm in liberal
democracies, powerful groups in Venezuela and abroad used their influence to
prevent undesired changes, undercutting the interests of the majority poor, and
the status quo was preserved.

After the failure of industrialization efforts, industry in
Venezuela went backwards. Resurgent groups in the government took the country
towards liberalization, and international financial organizations such as the
IMF and World Bank pushed the country towards Washington's "consensus" on free trade. The
economy went through a process of deindustrialization and privatization as
major sectors of the economy were sold off to international capital, including
telecommunications, the steel industry, the national airline, and plans were made
do the same with the national oil and petrochemical industries.[9] 

By the end of the Fourth Republic, the goals of national
development had been completely abandoned. Venezuela's economy would remain a
colonial economy, the desires of the impoverished masses betrayed. The lesson
was clear: the kinds of revolutionary changes needed to transform the country
could only be made by a revolutionary government.

The Bolivarian
Revolution: Building Industry in Venezuela

The rise of Hugo Chavez and the Bolivarian Revolution was
the end of democracy by pacts and coalitions in Venezuela. There would be no
power-sharing agreements, and no powerful economic groups would have undue
influence over the government. If it was the limitations of liberal democracy
that had prevented previous governments from carrying out initiatives to build
industry in Venezuela, it was the lack of those very same limitations that
would allow the Bolivarian Revolution to engage in a flurry of industrial
initiatives within the first few years of the revolution. Revolution meant just that; class conflict
would be confronted, not avoided. 

In search of the technology needed to build new national
industries, the Chavez government has not made the same errors of past
governments. Instead of attempting to arrange for technology transfer from the
dominant US and multinational corporations which are linked to powerful local
groups and are uninterested in cooperating with Venezuela's industrialization,
the Chavez government has built close relations to countries that are
interested in cooperating, such as China, Russia, Iran, Argentina, Belarus,
Brazil and others. And instead of worrying about the impact their policies
would have on powerful economic groups in the country, the Chavez government
has tended to focus more on the impact they could have on national development
and the lives of the majority poor.

"We are going to be a power on this continent and in the
world. In petroleum, in gas, in petrochemicals, in industry, there is no doubt
about it," said Chavez recently as he announced the launch of a new
petrochemicals industry in the country. The industry would include the
construction of more than 50 factories across the country, with investment and
technology from Brazil, Russia, and Iran, to produce plastic and chemical goods
from Venezuela's abundant natural resources. Chavez said the industry would not
only supply the domestic market but would also be for export to other countries
in the region.[10] 

From Argentina, the country plans to bring technology for
more than 56 industrial projects to produce consumer goods, foods, auto parts,
furniture, home appliances, and more. And not only are cooperative projects
among the countries in the region rapidly increasing, but they have the
intention of building national industries through what one Argentinean minister
recently called a "new method of cooperation."[11]

"That is the idea, authentic cooperation in industrial
technology transfer, more than commercial agreements," he said. "Cooperation
among the southern countries is the true path to national development."

In an effort to construct industry in a socialist model,
Venezuela recently announced the construction of more than 200 "socialist"
factories over the next two years. With cooperation and technology from
Belarus, Vietnam, Italy, and Brazil, the factories will produce electronics,
motorcycles, housing and building materials, health care products, and more.
The factories will be managed and operated by the communities where they are
located and spread out around the country to bring development to poorer
regions.[12] 

With Russia and Belarus, Venezuela plans to construct joint
companies to manufacture bicycles, heavy machinery, construction tools, and
plastics. Belarus has agreed to supply Venezuela with seismic technology needed
by the oil industry, a new aerial defense system, and needed aid in the
distribution of natural gas to Venezuelan cities. They have also agreed to work
with Venezuela
in the areas of science and technology, agriculture, petrochemicals, energy,
and military cooperation.[13]

Russia has provided Venezuela with military equipment to
update its army, including a factory to manufacture Russian rifles, given that
the US has refused further arms sales to Venezuela. But Moscow has also considered
the creation of a bilateral development fund to finance joint projects in the
oil sector, petrochemicals, food industry, transportation and construction. 

From Iran, Venezuela is acquiring the needed technology to
produce cars and tractors. Through an agreement for the transfer of technology,
Iran and Venezuela have set up joint factories to produce 25,000 cars annually
and 20 tractors daily, and with an increasing percentage of parts produced
nationally. By 2011, Venezuela
expects to have a line of cars that is one hundred percent nationally produced.[14]
Tractor production is moving in the same direction and now, in a symbolic
irony, Venezuela rolls the
new models out of the same old factory that Venezuela's liberal democracy left
abandoned for two decades.

Venezuela and Iran, which Chavez affirms are united in their
opposition to U.S. imperialism, are also cooperating in the exploration and
refining of oil, in petrochemicals, and technology for the production of corn
flour in Venezuela. Joint petrochemical initiatives are also being set up in
both Iran and Venezuela to the benefit of both countries, and Iran has agreed
to invest billions of dollars in these projects. 

From China, Venezuela is bringing the necessary capital,
technology and expertise to make advances in transportation, the oil sector,
the manufacture of electronics and more. China has invested several billions of
dollars in Venezuela's oil industry, creating a joint company with Venezuela to
explore new oil fields. The agreement will give Venezuela
needed investment in technology and infrastructure for the heavy-crude oil in Venezuela's Orinoco
river basin.[15]

"It's the infrastructure that our nation needs to take a
step forward in areas of industrialization and joint-companies, as well as in
other non-petroleum initiatives," said oil minister Rafael Ramirez. 

The joint venture will include the construction of oil
tankers for the transport of oil between Venezuela and China, an exchange that
has greatly increased in recent years. China has also agreed to invest several
billions of dollars in the construction of a national train system in
Venezuela, not only for the transport of oil, but also passenger trains.

In addition, Venezuela is now producing computers with
Chinese technology. The joint project will produce computers for the Venezuelan
and Latin American market, with an agreement to progressively transfer the
technology for the production of computer components inside Venezuela. The
project is not only meant for import-substitution inside the country, but to
also export units internationally. A $6 billion dollar bi-national development
fund will serve the purpose of financing future projects like these between the
two countries including the manufacture of cellular phones, automobiles, and
more.[16] 

With Brazil, Venezuela has plans to build joint oil and
natural gas refineries, as well as the huge Gas Pipeline of the South project
that will carry Venezuelan gas through the Brazilian Amazon all the way to
Argentina.

The Chavez government has also created new subsidiary
companies to the state oil company PDVSA. These different branch companies will
work to promote development in different sectors of the economy such as
agriculture, industry, shipbuilding, and even consumer goods like shoes,
clothes, tools, and electronics. 

PDVSA Naval, the shipbuilding subsidiary, has signed an
agreement with Brazil to build a joint shipyard in Venezuela for the 42 new oil
tankers that the country intends to build by 2012. The Russians intend to help Venezuela
build special natural gas tankers as well.[17]

"Within ten years we will be witness to an unprecedented
jump in the heavy and light industry of the country, allowing us to penetrate
new markets in the maritime industry in line with the strategy of PDVSA and the
national government," assured Chavez last year. 

And the list of industrial projects goes on and on. Two
weeks ago, the president inaugurated a new steel industry as well as a factory
to produce piping for the national oil industry, a product Venezuela has
traditionally imported. Huge deposits of iron, bauxite, and natural gas will
supply the new industries, thanks in part to new government policies that limit
the export of raw materials and guarantee these basic inputs to Venezuelan
producers.

The country is building an industrial framework by
establishing lower-level industry to work with its huge natural resources.
These lower-level industries will then supply more advanced industry in the
future such as the automotive and shipbuilding sectors, creating a
vertically-integrated industrial system. Venezuela, as Chavez says, "must
walk on its own feet." Its "feet," he assures, are the massive minerals and
natural resources abundant in Venezuela
on top of which the nation's industry is being built. 

And the policies have had results. Not only has the
Venezuelan economy shown impressive growth rates in recent years, but the
manufacturing sector has been one of the fastest growing sectors since 2003,
growing faster than the overall economy.[18]
Imports of final-consumption goods have gone down as well, accompanied by an
increase in goods devoted to gross capital formation, such as the machines and
equipment needed for industrialization.[19]

Venezuela
is building industry like never before in the history of the country and they
are doing it by going against almost everything the free trade model calls for.
The Chavez government has actively controlled foreign investment from a variety
of nations, funneling it into productive projects and nascent industries with Venezuelan
majority-ownership. The state has greatly intervened, nationalizing major
sectors of the economy, carrying out agrarian reform, using currency controls
to control capital flight and regulate imports, nurturing import-substitution
industries and directing their production towards more advanced national
industry. The government has also made significant efforts toward building
alternative sources of funding and bilateral development funds to escape the
mandates of the World Bank and other international lending institutions, and
increase the country's economic sovereignty. 

The Venezuelan state is playing a very active role in
directing, planning, and guiding the development of the country, totally
rejecting any illusions that the market will magically bring modernization. The
Chavez government is pursuing sovereign industrial development and technology
transfer on its own terms, with the help of a variety of allied countries, and
there are few powerful groups in Venezuela, or abroad, in a position
to stop them. To put it mildly, Venezuela has clearly shown that following the
demands of Washington is not well-advised. To put it more bluntly, the
Bolivarian Revolution seems to be demonstrating that the real path for the
industrialization and development of the third world is social and economic
revolution.


Notes:

[1] Chris
Carlson, "Presidents of Argentina, Paraguay,
and Ecuador Publicly Defend Venezuela's
Chavez," March 16, 2007, Venezuelanalysis.com http://www.venezuelanalysis.com/news/2282

[2] Alexander
Hamilton, Report on Manufactures, US
Congress December 5th, 1791

[3] William McKinley speech, Oct. 4, 1892 in Boston, MA William
McKinley Papers (Library of Congress)

[4] Friedrich List, The National System of Political Economy, 1841, translated by
Sampson S. Lloyd M.P., 1885 edition, Fourth Book, "The Politics,"
Chapter 33

[5] Fernando Coronil; Julie Skurski, Reproducing Dependency: Auto Industry Policy and Petrodollar
Circulation in Venezuela
.
International Organization, Vol. 36, No. 1. (Winter, 1982), pg. 74

[6] Coronil,
pg. 74

[7] Fernando Coronil's The Magical State: Nature, Money, and Modernity in Venezuela (1997, University of Chicago Press)
provides an in-depth discussion of the details of Venezuela's liberal democracy, with
a detailed explanation of its failed industrial programs.

[8] Coronil,
pg. 75

[9] See
Steve Ellner's The Politics of
Privatization, NACLA Report on the Americas, 30 April 1998. http://www.hartford-hwp.com/archives/42/170.html

[10] Chris Carlson, "Venezuela Officially Launches
‘Petrochemical Revolution'" September 24th 2007, http://www.venezuelanalysis.com/news/2641

[11] Chris Carlson, "Venezuela and Argentina Deepen
Industrial Integration," July 31st 2007, http://www.venezuelanalysis.com/news/2525

[12] Chris Carlson, Venezuela To Construct Over 200
"Socialist" Factories, September 6th 2007, http://www.venezuelanalysis.com/news/2588

[13] Chris Carlson, Venezuela Strengthens Ties to Russia and Belarus with Chavez Visit, June
30th 2007, http://www.venezuelanalysis.com/news/2478

[14] Chris Carlson, "Venezuelan-Iranian Car Company Releases
First Models," July 10th 2007, http://www.venezuelanalysis.com/news/2491

[15] Chris Carlson, "Venezuela and China Strengthen
Strategic and Economic Alliance," March 31st 2007, http://www.venezuelanalysis.com/news/2311

[16] Chris Carlson, "Venezuela Launches Sale of ‘Bolivarian'
Computers," June 12th 2007, http://www.venezuelanalysis.com/news/2441

[17] Steven Mather, "Venezuela
and Brazil to Build Shipyard
in Venezuela,"
August 3rd 2006, http://www.venezuelanalysis.com/news/1867

[18] The Venezuelan
Economy in the Chavez Years
,
by Mark Weisbrot and Luis Sandoval, Center for Economic and Policy Research, July 2007, http://www.cepr.net/documents/publications/venezuela_2007_07.pdf

[19] Luciano
Wexell Severo, "In Venezuela, Oil Sows Emancipation," Venezuelanalysis.com,
March 20, 2006 http://www.venezuelanalysis.com/analysis/1666

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