Opinion and Analysis: Economy
The Struggle to Industrialize Venezuela
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.
"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
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.
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. 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."
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."
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.
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.
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.
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.
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.
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.
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."
"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.
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.
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. 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.
"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.
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.
"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. 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.
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.
 Alexander Hamilton, Report on Manufactures, US Congress December 5th, 1791
 William McKinley speech, Oct. 4, 1892 in Boston, MA William McKinley Papers (Library of Congress)
 Friedrich List, The National System of Political Economy, 1841, translated by Sampson S. Lloyd M.P., 1885 edition, Fourth Book, "The Politics," Chapter 33
 Fernando Coronil; Julie Skurski, Reproducing Dependency: Auto Industry Policy and Petrodollar Circulation in Venezuela. International Organization, Vol. 36, No. 1. (Winter, 1982), pg. 74
 Coronil, pg. 74
 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.
 Coronil, pg. 75
 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