Venezuela’s Barriers to the Promise of an Information Technology Industry

Matthew R. Bloom

Spring 2006



“I call petroleum the devil’s excrement. It brings trouble. Look around you. Look at this locura [madness]—waste, corruption, consumption, our public services falling apart. And debt, we shall have debt for years.”


- Juan Pablo Pérez Alfonso, Venezuelan founder of OPEC

1           Introduction

Until the 1980’s, Venezuela was viewed as an example of Latin American exceptionalism, it had enjoyed economic diversity, variety of natural resources, democratic stabilization, and the perception that it was free of class conflict that plagued other Latin American countries.[1]  The model of exceptionalism in Latin America eroded  when the economic crisis of the 1980s and 1990s exposed their oil for what it was—“the devil’s excrement.”[2]  Venezuela’s reliance on oil as the centerpiece of its economy resulted in widespread corruption, lack of human capital development, and lack of economic diversity.[3]  This resulted in high poverty rates, high income distribution inequality, and high rates of unemployment, the effects which are still felt today. [4]

Running on a populist platform in1998, Hugo Chavez[5] was voted the president of Venezuela by denouncing the corruption and neoliberal policies of past regimes, which he blamed for the current economic failures.[6]  In his nine years in office, Chavez has instituted many reforms which placed oil and its revenues back into the control of the state.  Chavez does not reject markets or capitalism, but undoubtedly believes in state intervention.  He desires to insert Venezuela in the international economy and attract foreign investment on Venezuela’s terms.[7]  His reforms, however, have mostly been welfare programs that reallocate oil revenue or property to the poor, but have yet to foster a strong, diverse, or equitable economy.  Chavez touts that his primary objective is to relieve Venezuela of economic inequality and poverty,[8] but reclaiming and redistributing the national oil revenue to the indigenous poor through social welfare programs, with nothing more, will not achieve this difficult goal. 

Chavez must free Venezuelans from their reliance on oil exportation.  This must be achieved by developing the non-oil economy independent of the oil sector.  Chavez has implemented and encouraged the development of cooperatives in both the business and agriculture.  Although cooperatives will facilitate the development of human capital, they will not allow Venezuela to be competitive in the international markets.  Moreover, cooperatives will not allow Venezuela to develop a sustainable economy independent of the unpredictable and fluctuating oil economy.  Instead, Chavez must encourage the development and diversity of the private sector so that Venezuela’s economy will be sustainable and competitive when oil prices fall. 

Chavez makes no effort to hide his rejection of traditional liberalized economic policies advanced by of the IMF, the World Bank and the United States.[9]  Chavez’s rejection of liberal economic policies has been one of the primary appeals to the populist support necessary, not only to win the presidential election in 1998, but also to maintain the support throughout the past decade. 

This paper embraces Chavez’s position against economic liberalization for several reasons.  First, it would be impractical to propose policy that would unarguably be rejected by the person who sustains the power to initiate policy.  Second, this paper proposes an alternative to Chavez’s current economic policy, which appears to be a politically charged reaction against the failure of traditional Western economic liberal intervention in Venezuela.   Although economic liberalization failed in Venezuela, it is mistaken, and arguably economically disastrous, for Chavez to reject all economic principles that are embraced by the West merely because he loathes Washington politics.  Chavez must separate economic policy from politics, which should begin by embracing an effective middle position between radical economic liberalization and extensive protectionism.  This paper will identify a necessary starting point for a balanced and calculated economic policy—the advancement of an information technology industry.

An essential part of launching sustainable development for Venezuela is through efforts to expand, not only access to information technology (IT), but also encouraging the growth of a competitive IT sector.  Both initiatives will promote a sustainable non-oil economy in Venezuela.  Enhanced access to IT will provide the necessary tools facilitating Venezuela’s competitiveness in the international market.  Additionally, Venezuela will be able to exploit Latin America’s slow integration of IT by cultivating an IT industry that can supply Latin America’s future IT demands.  This will benefit Venezuela not only by cultivating high value added exports to their economy, but also because the development of the region will support their international competitiveness.

The purpose of this paper is two-fold.  First, it will provide economic justification for the position that Chavez’s interventionist government can succeed in developing a non-oil economy.  Second, this paper will identify the opportunities and demonstrate how to establishing an IT sector in Venezuela by exploiting the current manufacturing capabilities and human capital in Venezuela. 

            The next section of this paper provides a brief history and context for Venezuelan development.   This includes both an explanation of the Dutch Disease and an identification of Venezuela’s current economic woes. 

The third section provides development theory that Chavez should use as a guide for Venezuela’s future economic policies.  The third section explains how East Asian governments successfully intervened in industrial policy.  It concludes by presenting an approach to diversification of exports using Hausman and Rodrik’s recent theory that, contrary to conventional trade theory, predictive growth is indicated where countries have more sophisticated export packages than their comparative advantages and income levels. 

The fourth section explains why IT is essential to growth in today’s international economy and provides Ireland as model for successful integration of an IT industry through carefully planned industrial policy.  It concludes by explaining why Venezuela must develop a sustainable IT sector.

The last section of the paper describes what Venezuela must do to establish a sustainable IT industry, which would provide opportunities for growth and diversity in Venezuela’s non-oil economy.  More specifically, the last section identifies:  (1) the potential promise that an IT sector will provide for Venezuela; (2) the current industries, manufacturing capabilities, education systems, and current IT accessibility in Venezuela which will provide the current available inputs to be exploited for transitions to an IT industry; (3) the incentives and investments that will be necessary to foster an IT industry in Venezuela; and (4) the implementation of the plan, indicating both the role of government and the private sectors.

2           Venezuelan History

For Hugo Chavez, Venezuela’s history begins in 1783 with Simon Bolivar. He was born to a wealthy Spanish father and a mother who was part Native American.  At the time he born, Venezuela was a Spanish colony.  The Spanish regarded the natives as subhuman and relegated them to positions of slavery.  It was not until Napoleon defeated the Spanish monarchy in 1808, that the natives of the Spanish colonies took advantage of the opportunity to overthrow the Spanish authority.  Starting in 1810, Bolivar led a year long revolution against Spain with the United States and Britain’s assistance.  Independence was won on July 5, 1811.  A constitution was signed that declared federalism, liberty, equality, guaranteed property rights, and freedom of the press was signed in December of 1811. Bolivar continued to defeat the Spanish throughout northern South America until he concluded his military campaign in 1824.

Bolivar was a philosopher, in addition to being a military leader.  He believed that the state should protect the weak from the strong, but that the executive should be checked by a Parliament.  Similar to the United States, who had helped him achieve independence from the Spanish, Bolivar dreamed of a confederation of Latin American states.[10]  Bolivar’s dream never came to fruition.  Instead, they quickly deteriorated because of regional feuds led by caudillos, or “little generals.”  The caudillos took over Venezuela and the rest of the region that Bolivar had conquered.  Chavez claims that the oligarchy who ruled during the Punto Fijo regime are the direct ancestors of the cauldillos who destabilized the foundation of Bolivar’s 20-year fight for independence.  Chavez refers to the suffering under the ruling oligarchy and the IMF policies during the Punto Fijo regime as the Bolivarian curse that the people have to overcome.[11] 

Venezuela was ruled only by military generals during the period from the1820s to 1920s.  Almost every succeeding general wrote a new constitution.  This pattern ceased when oil reserves were discovered in the 1920s.  Juan Vincente Gomez, also known as the “tyrant of the Andes,” was president of Venezuela at the time oil was discovered.  Not soon after the oil discovery, Gomez established the Venezuelan Oil Company, with himself as principal shareholder.  Almost immediately, he began selling the oil sites to foreign companies.  By the late 1930s, Standard Oil and Shell, both foreign companies, owned 85% of the oil in Venezuela.[12]  Foreign control resulted in many fenced-in oil communities for foreign workers who remained completely closed off to Venezuelan society. 

Although Venezuelan oil was owned primarily by foreign actors who fenced themselves off from Venezuela, oil had an immediate impact in Venezuelan industry. Many traditional agricultural families moved to the urban centers to redirect their energies into commerce.  After the death of Gomez in 1935, Venezuela’s GDP grew rapidly.  Despite political turmoil during the some period, the GDP increased by an annual average of 8% between the 1950s and the 1960s.[13] 

The common Venezuelan, however, did not enjoy the benefits of the oil wealth.  It was not until the Accion Democratica (AD), a social democratic party, promised to enact democratic reforms and deliver benefits from oil wealth to all Venezuelans that the people were able to realize any benefits from Venezuelan oil.[14]  The AD was led by Romulo Betancourt and a group of professionals, who had participated in student revolts against the military dictatorship in 1928.[15]  They claimed to represent the workers and peasants by arguing that Venezuelans must free themselves from foreign influence and reclaim Venezuelan oil for the people.  The AD also favored state intervention to improve the livelihood of the Venezuelan people.[16]  In 1945, AD came to power by executing a coup of General Isaias Medina Angarita.  AD asserted that the coup was necessary to establish democracy in Venezuela.[17]  Although democratic elections were held, AD was overthrown by the military in 1948.  AD came to power again in 1958, but this time they devised a way to quell the opposition through a power sharing agreement.[18]

AD and two other main parties, Comite de Organizcion Politica Electoral Independiente (COPEI) and Union Republicana Democratica (URD) assent to power sharing agreement in 1958 in order to establish a democracy and exploit the widespread disapproval and lack of support of military dictator President Perez Jiminez.[19]  There were several political parties that were prepared to take power, but AD, COPEI, and URD enjoyed the most popular support.  It did not matter that AD, COPEI, and URD were ideologically distinct.  Instead, it mattered that they all had the common goal of establishing a democracy for Venezuela.

The Pact of Punto Fijo’s points of agreement included power sharing, reliance on the state as an engine for economic development, reconciliation of old antagonisms, and support for the United States in the Cold War.[20]  The agreement was successful. The three political parties that had once lacked common ground, executed their obligations under the agreement with good faith, and by the early 1970s, it was clear that Venezuela was a successful representative democracy. 

Nevertheless, there were problems that became apparent over time.  Two of the problems resulted from the parties’ interest in maintaining the Punto Fijo unity. Thus, they avoided proposing policy that would create divisions among the ruling elites.   First, the ruling elites used distributive policies to govern and preserve political support of the poor.[21]  It was easier to maintain the party unity by short-term distributive policies, rather than debate potentially divisive policy that would create long-term solutions.  Second, the democracy became increasingly centralized since there was no meaningful dialogue regarding the limitations of government intervention.[22]  The distributive policies, however, were effective so long as both oil income steadily increased and political stability ensued.[23]

By the early 1970s, the distributive polices had caused the Bolivar to be overvalued.  Thus, private enterprise turned to state assistance to remain competitive in foreign markets.[24]  State assistance forced merchants, industrialist, and bankers and other businesses to maintain ties to the state to stay competitive in both, domestic and foreign markets.  Both public and private society became increasingly corrupt the longer that private enterprise and government stayed in bed together.[25]  Further, public-private corruption was invited when the state nationalized the oil company in 1976.

Venezuela’s mobile middle class and stable democracy led many political scientists to believe that Venezuela was an apparent exception among Latin American countries throughout the second half of the 20th century. Venezuela is distinct from other Latin American states because of its rich variety of natural resources, such as oil, natural gas, iron, gold, diamonds, and bauxite.   Also, unlike other Latin American countries, Venezuela’s social mobility can be seen through its historically populist military.

Between the 1960s and the early1980s, there existed several explanations for Venezuela’s stable democracy throughout the second half of the 20th century.  Some political scientists explained that exceptionalism was the result of the two leading political parties establishing a coalition that was pro-establishment and pro-institutions, which guaranteed political stability.[26]  The coalition prevented extremist or violent dissent by giving small fringe parties minimally influential positions of power.[27]

Another explanation pointed to the benefits Venezuela enjoyed because of its natural resources that helped avoid class-based politics.  This thesis also asserted that oil weakened the oligarchy by empowering the middle class with “petrodollars.”[28]  There were other explanations that stressed Venezuela’s strong ties to the United States as the reason no ultra-nationalistic rhetoric existed in Venezuela, unlike its neighbors.[29]

Ironically, the explanations for Venezuela’s exceptionalism were the same that were used to explain its sharp economic decline in the 1980s and 1990s.  Like a wolf in sheep’s clothing, the coalitions and oil, which the political scientists had used to explain Venezuela’s success, were reinterpreted as the reason for Venezuela’s political and economic crisis in the 1990s.[30] 

According to Ricardo Hausman, the eventual economic collapse in the 1990s can be explained by two costly mistakes of poor decision making the mismanagement of the 1973 oil windfall and second and the steep drop in oil prices in 1982.[31]  President Carlos Andres Perez began his term in 1974 by investing the oil windfall in overseas funds.  The investments had to cease because state-owned enterprises sprang up everywhere soaking up most of the oil windfall.  The new state owned enterprises quickly ran out of oil money and turned to contracting foreign debt and borrowing from international markets to stay afloat.  By 1982, the Venezuelan government was $28 billion in debt, which was almost six times the debt of the country.[32]  So, when oil prices dropped in 1983, the state owned capitalism collapsed.  Leading to further economic decline, Venezuela devalued the currency as a short term solution.  By 1989, Venezuela decided to turn to the International Monetary Fund (IMF) for an answer to the crisis.[33]  The structural agreement with the IMF required Venezuela to adopt many liberal economic policies that were contrary to their traditional interventionist policies.[34]

Another change occurred when PDVSA, the state oil company, began to privatize because of the opportunity created by the liberalized IMF policy.  The oil company allowed foreign private investors back into the Venezuelan oil industry for the first time since oil was nationalized in 1976.  PDVSA also assumed the responsibility of overseeing oil contracts, which was previously done by the Ministry of Mines.  At the same time, PDVSA’s paramount goal was to pay low taxes and to redirect oil revenue away from the state.[35]  The government complied with the demands of the oil company, and therefore the government’s share of oil revenues markedly diminished.[36]  PDVSA’s influence and power were swelling.  The oil company’s liberalized policies regarded oil as a free gift of nature to international producing companies and foreign consumers.[37]  The average Venezuelan, on the other hand, had learned to rely on the oil wealth and felt alienated from oil which they had believed was rightfully theirs.[38]

     The new liberal economic policies put AD, who had ruled for many of the years since 1958, in an awkward position because they had traditionally been the party to govern through state interventionist policies. Embracing liberal economic policies put AD on shaky ground with their constituents who expected the continuation of short-term policies funded by oil wealth.[39]  This signaled the end for AD.  Venezuela had always been a country of divided classes, but oil and the Pact of Punto Fijo acted as a temporary band-aid that helped Venezuelans believe they were a middle class society rested on a fundamentally strong economy. Instead, Punto Fijo only produced short-term solutions to satisfy the people.  The poorer classes took to the streets in protest of the 1989 agreement with the IMF. Three years later and more organized, many of those same people attempted a failed coup led by Lieutenant Colonel Hugo Chavez.[40]  Although the coup was unsuccessful, Chavez garnered much support that day.  He appeared on television to order his soldiers to cease the attempted coup.  More importantly, he took complete responsibility for the failure of the coup, which captivated Venezuelans because they were not used to hearing political leaders take blame for mistakes [41]  . 

Venezuela’s adherence to the liberal economic policies remained consistent throughout the 1990s.  The gradual economic decline also remained consistent.  The state oil company isolated itself from government control by transferring most of its profits overseas with foreign investors.[42]  Poverty levels rose sharply and steadily the 1990s.[43]  The undercurrent of dissatisfaction with the government and the economy begged for new leadership.  There were many politicians that stepped forward attempting to exploit the dissatisfaction, but they were no more that students of past Punto Fijo regimes.  On the other hand, Hugo Chavez became the most attractive candidate to Venezuelans who desired radical change, but loathed by the ruling elite.

While other candidates who exploited the unrest in the country made ambiguous promises, Chavez’s platform was most radical.  Chavez not only rejected neoliberalism and privatization of the state oil company, PDVSA, but also rejected the alliances of the traditional political parties.[44]  Chavez was elected in large part because of a swell of support from the poorest demographics.[45]  He was inaugurated on February 2, 1999.  Once in office, Chavez drafted a new “Bolivarian” Constitution that focused on economic and political rights of the people.  The Constitution also reformed the state oil. 

Government has become increasingly more centralized during Chavez’s presidency.  He remains a divisive figure in Venezuela.  Many of the traditional ruling class have emigrated from Venezuela.  Chavez’s policies are complex because they respect markets, but also emphasize state intervention.  It is difficult to predict future policy for Venezuela because Chavez replaces members of his cabinet so frequently.  This has resulted in many unpredictable policy shifts.  The “Bolivarian” state remains a work in progress.  The economy has experienced growth under Chavez.  Further, unemployment and poverty levels have both declined.  Since oil prices have remained high since 1999, it is difficult to make a clear assessment as to the effectiveness of Chavez’s reforms.  Chavez has successfully reclaimed PDVSA revenues for the state.  Whether this is ultimately beneficial to the state, remains arguable. 

2.1         The remaining problems facing Venezuela

Without its oil wealth, Venezuela’s economy would be unsustainable.  It is evident that the decline of the agricultural and industrial sectors, due to the overwhelming and corrupting influence of PDVSA, is a primary cause of Venezuela’s current economic crisis. There are two reasons Venezuela needs to establish a diverse economy independent of the oil industry.  First, Venezuela’s oil reserves are estimated to be depleted within 50 years.[46]  It is therefore essential that Venezuela plan for its future economic stability when oil is no longer a viable option for economic stability.  Since sustainable economic growth generally takes decades, there is no better time to start than immediately.  Second, Venezuela’s once-prominent agricultural and industrial sectors are still weakened because of reliance on the oil sector.  It is important to note that Venezuela fell from the distinguished role of the exceptional Latin American state because of misdirected energies, not because of lack of capital, infrastructure, or physical capabilities.  This is an advantage for Venezuela because they already have many existing inputs needed to develop new efficient non-oil industries.  The success of new industries, such as the IT sector, will depend on whether Venezuela’s state industrial policies can progress undistracted by oil.

Venezuela’s diverse economy during the first half of the 20th century serves as evidence of the need to establish and pursue growth in various sectors of the economy which should be independent from the oil industry and PDVSA.  It is not impossible to achieve this goal under Chavez, regardless of one’s opinion of him.  Nor should it be concluded that the state interventionism is an impediment to non-oil sector development.  There are developmental models and principles which are effective and consistent with Chavez’s preference for state control that will provide guidance for Venezuela’s new IT sector. 

            Hugo Chavez recognizes that most of the problems facing Venezuela have solutions in a strong economy.[47]  It is even more important to Chavez, however, that Venezuela practice economic policies which benefit all Venezuelans, not just those of the oligarchy.[48]  Since he has been in power, Chavez has exerted much effort to reverse many of the problems that continue to hobble Venezuela’s economy.  Initially, the Chavez government instituted many reforms through the Bolivarian Constitution.  This included an immediate reformation of PDVSA policy to redirect oil revenue to the state,[49] redistributing property,[50] and encouraging self-reliance through agriculture and education.[51] 

Two consistent premises run through Chavez’s reforms.  First, he entitles economic rights to individuals via a welfare regime. Second, he protects the free market, subject to state corrections of market failures.[52]  Although improvements to Venezuela’s economy have been evident since Chavez took power in 1999, many problems still remain. 

            The remaining economic problems facing Venezuela are great.  Venezuela lacks a diverse economy which is crucial to any sustainable economy.  For instance, oil accounted for $58 billion of the $65 billion of exports in 2006, or 87% of export earnings.[53]  The performance of the non-oil sectors are directly correlated to the performance of oil.[54]  Moreover, the profits from oil are the primary source for the welfare programs, educational institutions, and state subsidies of the private sector.  As evidenced by the Dutch Disease, relying on one primary resource for a country’s needs results in unsustainable programs and sharp economic declines when the world resource price falls.  Venezuela’s primary dependency on oil revenue places its economic and social stability in the unpredictable hands of the world oil market.  The oil market has been highly favorable to Venezuela since Chavez took power in 1999, so it is difficult to accurately understand the strength of Chavez’s reforms until they stand in the face of a bust oil market.

Moreover, the agricultural sector is inefficient and therefore not competitive in world markets.[55]  In fact, Venezuela imports two-thirds of its food needs.[56]  Poverty rates remain high even after significant declines since 1999.[57]  Similarly, unemployment also remains high after significant declines from the double-digit levels during the 1990s.  There are also too many inefficient welfare programs that could be replaced by sustainable development programs. 

Venezuela possesses virtually no information technology sector.  Most of the industrial sector is devoted to producing basic goods.[58]  Even more troubling, oil profits are the underlying root of all of the advancements in the Venezuelan economy.[59]  Although Chavez is attempting to diversify, oil still predominates in Venezuela’s economy.[60]

            Finally, paternalism has plagued Venezuelan politics since the Pact of Punto Fijo in 1958.  Equitable distribution of the oil rents and political power sharing was the premise behind the Pact of Punto Fijo.  COPEI, the party of the elites, believed that rent distribution and power sharing with the more leftist regimes would quell the threat of violent overthrows suffered by previous regimes.[61]  This, however, meant that the oil rent was used to pacify the lower classes with welfare programs.[62]  The 1990s economic crisis provided a political opportunity for Chavez when the state adopted neoliberal policies, effectively abandoning its promised programs to the poor.  This was devastating to the expectations of the Venezuelan people who relied on the government programs.

Chavez exploited the opportunity and promised the people that the state would reclaim the oil revenue from external investors and redistribute it the Venezuelan people who rightfully owned it.  It was a winning political stance because 82% of the population, at the time, believed that it was the job of the state to equitably distribute the oil wealth.[63]  Chavez’s promises heightened Venezuelan’s expectations for their government to levels unseen.  For instance, citizens send personal financial requests to Chavez and shove them in his pockets wherever he goes.  Some of the requests are minor, such as roof repairs or meals.  There are also major requests, such as money for needed surgeries or an apartment.  Chavez often symbolically grants the requests in public to strengthen political support of the people.[64] 

Venezuelan paternalism is a serious problem that must be resolved to establish new industries and achieve economic growth.  The people must learn to believe in the power of their own productivity and ingenuity to provide themselves with economic prosperity, rather than feeling entitled to wealth and services from the state.  This reversal of attitude can be achieved, in great part, by Chavez utilizing his charisma and support from the people to force them to recognize their responsibility and potential.  He could frame the citizens’ new role as a necessary part in his oft-cited Revolution.  Before any of this can be achieved, however, Chavez must first recognize that the non-oil sector should be the focus for Venezuela’s economic future.

Chavez can achieve this by initiating development policies that operate under the assumption that Venezuela has no oil wealth.  It is therefore essential that Chavez implement development initiatives that will generate self-sustaining sectors of the economy independent of wealth to stay afloat.  

No sustainable development strategy, however, will be successful unless it takes into consideration the inherent and rigid limitations imposed by the Chavez government, the Bolivarian constitution, and Chavez’s penchant for intervention.  More specifically, the limitations include the constitutional right to all Venezuelans to “life, work, culture, education, social justice and equality.”[65] Moreover, the policy must be consistent with the principle that the visible hand of the state should counter the weaknesses and imperfections in the market.[66] 

Information technology development should be Chavez’s primary development initiative.  Increased access to IT should be an attractive possibility for Chavez, because once established, it will provide great benefits to Venezuela.  IT will provide efficient educational and job-training programs for the poor.  It will provide more efficient communication between the government and the people. It will also increase growth potential in non-oil sectors of the economy by providing business and employment opportunities for the poor.  More importantly, technological capability determines how potentially competitive any one country can be in the international economy.  Although this plan will require a well-developed strategy and great investment in physical and human capital, the returns will solve many of Venezuela’s current economic problems and provide solutions to future economic obstacles. 

2.2         The problem of the Dutch Disease

            The economic problems that Venezuela faces are not unique.  Imperial Spain experienced great economic and political decline despite its gold-rich colonies in the 1600s.[67]  Similarly, most contemporary petro-states encounter severe economic and political problems. Venezuela had a relatively strong agricultural sector in the first half of the 20th century.  Oil, which had been second in importance to agriculture, became an increasingly promising part of the Venezuelan economy in the 1930’s.[68] 

Venezuela’s agriculture sector eventually failed in the 1940s because of the strength and efforts invested in the oil industry.  The oil wealth was used to foster a diverse industrial state.  Oil, however, remained the primary economic source and resulted in a redistributive state and an overvalued currency.  Therefore, industrial leaders not only turned to the state for protections, but also instinctively became instrumental lobbyists that influenced each successive administration’s policies.[69]   While the industrial lobbyists encouraged policies that directed oil wealth towards their industries, they should have instead lobbied for measures that would have made businesses more competitive and less dependent on government subsidies.[70]

Venezuelan governments throughout the last century believed that the strength of oil wealth alone could be exploited in various ways to create a diverse economy.  The country was often fooled into believing they had achieved economic wealth when oil prices were high, but the state, instead, had only created massive expenditure programs funded by oil rent.[71]  Each successive administration promised to restructure the economy and institutions.  Predictably, each successive administration failed to reform the Venezuelan economy since they would only address the short term problems of the constituents, which could only be funded by oil.  Venezuela would be better off if a prior administration created long-term economic restructuring solutions.  Economic restructuring, however, was never addressed in a meaningful way because no regime could modify the one necessary piece of the economic structure—reliance on oil as the primary export.[72]

2.2.1        The Shared Symptoms of the Dutch Disease

Venezuela’s problems due to oil are shared by many other resource rich countries—a problem called the “Dutch Disease.”  In all but the most industrialized and transparent countries, discovery of resources has had negative consequences.[73]  For instance, the GNP per capita of all OPEC countries decreased annually by an average of 2.3% between 1965 and 1998, compared with a 2.2% increase in all lower- and middle-class countries.[74]  The most common economic problems of natural resource dependent states are deindustrialization, overvalued currencies, exchange rate volatility because of fluctuations in world markets, and the lack of lack high-tech and high-value-added manufacturing exports that are crowded out by oil exports.[75] 

Another primary problem is rent seeking, which is the competition between public and private institutions to get a share of the national oil revenue from the government.  Rent seeking results in corruption and wastes energy that could be directed at more productive activities for the economy.[76]

The aforementioned economic conditions associated with the Dutch Disease commonly result in high poverty rates, income inequality, child mortality, child malnutrition, high incidences of political corruption, higher risks for authoritarian governments, higher sovereign debts, and higher military spending.[77]  There is also a strong correlation between high resource dependency and low human development.  These evident problems compelled Juan Pablo Pérez Alfonso, a Venezuelan founder of OPEC, to refer to oil as the “devil’s excrement.”[78]

2.2.2        The Explanations for the Dutch Disease

The Dutch Disease has several explanations.  One of the earliest explanations came from Jean Bodin, a 16th century French philosopher, who attributed the failed performances of resource-rich countries to sloth: “''Men of a fat and fertile soil are most commonly effeminate and cowards; whereas contrariwise a barren country makes men temperate by necessity, and by consequence careful, vigilant and industrious.''[79]

More recently, the Nigerian Economic Minister, Nedadi Usman, echoed Bodin when he said, “Oil has made us lazy.”[80]

There is, however, a deeper understanding of the causes of the Dutch Disease than mere laziness.  First, resource rich governments often use the windfall of the resource to protect the people from international competition through needless protectionist measures.[81]  Second, dependence on oil tempts states to believe they are richer than they actually are.  This leads to high spending that cannot be reversed when the natural resource market is down because of political pressures, which ultimately leads to external debt.[82]  Third, high resource dependence encourages corruption in the public and private sector.  Fourth, the oil revenue goes directly to the government (when the oil is state-owned).  This generates rent seeking, which is competition between public and private institutions for the oil revenue.  This has the effect of weakening institutions and encouraging corruption.[83]  Fifth, high oil revenues diminish incentives to invest and save, leading to lower interest rates and less rapid growth.

2.2.3        An Exception to the Dutch Disease: Norway

High levels of natural resources do not per se have deleterious effects on a country’s economy and human development.  Norway provides an example of a country that has benefited from the discovery of oil.  Norway enjoys low poverty rates, low income inequality, and a diverse export package.  Oil was discovered in Norway in the 1970s.  Although Norway’s manufactured exports have dropped slightly since their discovery of oil, Norway has otherwise not shown any signs of the Dutch Disease.  In fact, there have not been any needless protectionist measures.  There have not been any illusions of their actual wealth.  There have not been any signs of abnormal corruption. There have not been any signs of rent seeking behavior.  Nor has there been any lack of savings.[84]  There are several reasons for this.

The most cited reason for Norway’s ability to avoid the Dutch Disease is that Norway was already industrialized and had a diverse economy when it struck oil in the 1970s.[85]  It follows that their institutions were developed and mature at the time oil exportation became part of their economic equation.  In contrast, most of the OPEC nations did not have mature governments or institutions at the time they discovered oil.[86]  Next, there was deliberate long-term planning for the best and most responsible use of the oil wealth.[87]  The methodical and cautious planning resulted in an oil fund with only one expenditure line, which is the non-oil budget deficit.[88]  The fund is then invested abroad into many countries and companies, 40% in equities and 60% in bonds.[89]  The purpose of the fund is to benefit any future problems the current generation will face, as well as future generations.  Lastly, the fund is controlled by the Bank of Norway in order to avoid political considerations and corruption.[90]

Although Norway is an exception among petro-states, the reasons for its economic stability are clear.  Further, the working principles evident in Norway’s oil policy planning are replicable.  In simple terms, Norway treats the oil wealth as an auxiliary form of income that is effectively shielded from the current generation.  Conversely, Venezuela depends on oil as the primary source of national wealth to fund all the many current social and welfare programs.  Norway’s approach forces the current generation to remain vested in the various non-oil sectors because the oil wealth is currently not available for general public use. 

More simply, oil is distraction to governments and societies. It prevents countries from investing energies and capital into other necessary, productive, and efficient activities.  Although Norway benefited from a developed economy at the time of oil discovery, all oil dependent states can begin to divest by emulating three basic principles from Norway’s experience.  First, oil dependent states must create policies for the non-oil sector with the assumption that they have no oil wealth.  Second, they must invest the oil wealth into many international investments, but only spend the oil wealth sparingly and efficiently.  Third, they must keep the oil revenue independent and secure from political interests.  It is essential that oil dependent states keep these three principles in mind for both short- and long-term policies to prevent oil from becoming a distraction.

3           A Brief History of Development


            It was not until after World War II that the international community began to invest in developing other states on the scale that we are familiar with today.  Since that time, development, in theory and practice, has gone through a significant evolution.  It was first believed that undeveloped nations would succeed if only developed nations would successfully transmit their values and aid to underdeveloped nations.  During the 1950s and 1960s, the Modernization Theory was applied to developing nations.  This also was a one-size-fits all model.  The working principle was that the success of developed nations stemmed from their methods, techniques, and ways of solving problems and delivering services.  It was therefore believed that a developing state would succeed if the international community provided developmental aid in conjunction with the application of the practices and methods of developed states.[91]  These theories proposed the reallocation of surplus labor from agriculture to more productive non-agricultural pursuits,[92] intricate planning models focused on flow of resources and sources of investment,[93] and the utilization of technology to facilitate growth.[94]  These policies, which focused primarily on creating structural changes, led to import substitution, low generation of employment, and windfall profits for favored elites.[95]

            Due to the obvious failure of the Modernization Theory in the 1970’s, two similar reactionary theories emerged in reaction.  The Dependency Theory stated that developing countries were trapped by the foreign capital of the developed nations.  The dependency existed because developing countries were systematically compelled to export their raw materials to the developed countries.  The developing countries would then import the same raw materials and other materials in a processed and manufactured form.  This circular dependency existed because developing states lacked the means to process their own materials; whereas developed countries had the ability to process raw materials for useful products.[96]  Consistent with the theory of dependency, Argentine economist Raul Prebisch concluded that Third World countries were not “underdeveloped,” but instead “badly developed.”[97]

            The other theory in response to the failure of Modernization Theory was the Center-Periphery Theory.   Center-Periphery Theory expanded the Dependency Theory by postulating that developed countries progressed at the expense of the developing countries they once colonized.  The center represents the industrialized developed countries.  The periphery represents the agrarian developing countries.[98]  This theory argues that applied Modernization Theory results in the same exploitation of developing countries which resulted from colonization.  However, both theories were widely criticized because they only state the problem, but offered little as an alternative model.[99]

            Most economists were unconvinced that Modernization Theory was completely wrong.  For instance, the Washington consensus believed that there needed to be a stronger focus on macro-economic stability by reliance on the optimum allocation yielded by free markets.  Similarly, they believed that the state should not correct markets because government failures are more severe than market failures.  There was also a change in focus to promote export orientation, and discourage import substitution. 

Although the effectiveness of many of the ideas of the Washington consensus are still debated, it remains widely believed among economists that openness to foreign direct investment (FDI) and gradual deregulation of the private sector promotes sustainable development.[100]  Partly due to the East Asian success, the Washington consensus now accepts that there is a role for the state in development.  The state role, however, should be limited to nonselective intervention to provide basic public goods and should never influence allocation of market activities.[101]

Financial crises in the 1980s forced many developing countries to turn to the International Monetary Fund (IMF) and the World Bank in order to borrow money to pay off external debts.  The aid, however, was lent with policy-based conditions which required developing countries to generally cut public expenditures, as well as to create a more efficiency and transparency.  In essence, this applied development model closely resembled a renewed modernization approach.[102]  Generally, these conditions only served to shrink the size of the developing state governments with little or no increase in efficiency or transparency.[103] 

            Since the 1990s, the international community realized that many development models failed because they lacked flexible methods to address the unique factors of each state.  The focus of development has shifted from economic growth to sustainability.[104]  The modern approach to development requires individualized approaches to each developing country based on social development, human development, environmental development, and economic development.[105] On one hand, many principles of development theory predating the 1990s remain key tools of development, such as openness to trade, FDI, and export-orientation.[106]  On the other hand, sustainable development also requires human development, attention to institutions, and technological growth.[107] 

            A growing number of economists criticize the neoliberal policies supported by the Washington consensus and international development institutions.  The criticism points to the fact that liberalization policies, alone, have yet to prove that they are effective in creating sustainable economic growth.  The critics further point to the successes of East Asian economies that relied heavily on state intervention to correct market failures and influenced market allocations at the activity, firm, and technological levels.[108] 

            For all that is still debated, there are certain principles of development which appear to be effective.  First, gradual institutional reform is more effective than reforming everything at once.  Gradualism helps avoid corruption when transferring public goods into private hands and permits the proper regulatory agencies to form in order to respond to harmful externalities of reform.[109]  Second, although openness to trade is essential to economic sustainability, infant industry protectionism is essential in the early stages of a country or industry’s development.  Early industry protectionism, however, must be strictly time-constrained by gradual reduction of state intervention.[110]  Third, continuous improvements in human development are essential to sustainable growth.[111]  Lastly, economic maturity and sustainability requires competence to adopt and adapt to new technologies.[112] 

Digitalized information flows, communications, and coordination mechanisms are changing the organization of society and production.  A country’s access and utilization of technology is highly correlated with its level of development.[113]  For example, Malaysia, Indonesia, and Thailand, the East Asian countries that suffered most during the economic crisis in the late 1990s, lacked the technological capacity that the least-affected East Asian countries possessed.[114]

3.1         Basic Development Considerations

            Developed countries have followed alternative paths to development depending greatly on when each county became industrialized.  The involvement of government varied accordingly.  For example, there was no government involvement in countries that first experienced the industrial revolution.  The industrial revolution was mostly the result of the investments and efforts of private individuals.  However, the industrial revolution emerged in wealthier countries that had better institutions equipped to embrace and foster the growth of industry.

In contrast to the first industrialized countries, government involvement became more prevalent in countries that were less equipped for industrialization.  Late comers to the industrial revolution benefited from intervening governments that nurtured the growth of industry.  This was achieved either by direct investment in industrialization or by providing extensive regulatory frameworks for private enterprise.[115]  It was essential for the governments of the late comer to stimulate industrialization because they were forced to catch up to the already-industrialized economies.  Similarly, developing countries are in a position where they must catch up to developed countries in order to enjoy healthy economies.  It is therefore clear that there must be some governmental involvement to bolster and stimulate industry in a country. 

Even the United States, which has relatively open markets, used protectionist strategies up until the end of World War II in order to catch up to the industrialization of Britain and Germany.[116]  Japan was protectionist until the 1970s.  Taiwan and Korea were both protectionist until the 1990s, as well.  Hong Kong and Singapore, the exceptions to the rule that governments must intervene during development, are distinct because they are effectively city-states.[117] 

Even in the face of East Asian developmental success, Washington consensus liberalization remains the general trend in international institutional development standards.  Interestingly, Latin America’s developing countries, which instituted the most liberal policies between 1980 and 2000, performed the worse than countries that did not institute liberal policies.  For instance, the East Asian countries that heavily relied on state intervention and conditional protectionism performed the best in the same twenty-year timeframe.  Even in spite of the East Asian financial crisis in the 1990s, East Asia greatly outperformed neoliberal Latin America between 1980 and 2000.[118] 

Infant industry protection was one of the keys to East Asian success.  Free trade advocate, John Stuart Mill, supported the practice of infant industry protectionism:

“The one case, in which, on mere principles of economy, protecting duties can be defensible, is when they are imposed temporarily…in the hopes of naturalizing a foreign industry, in itself perfectly suitable to the circumstances of the country.  The superiority of one country over another in a branch of production often arises only from having begun sooner.  There may be no inherent advantage on one part or disadvantage in another, but only a present superiority of acquired skill and experience…[I]t cannot be expected that individuals should, at their own risk, or rather to their certain loss, introduce a new manufacture and bear the burden of carrying on until the producers have been educated to the level of those with whom the processes are traditional.  A protective duty, continued for a reasonable time, might sometimes be the least inconvenient mode in which the nation can tax itself for support of such an experiment.”[119]


Infant industry protection only works if it is supplemented by two conditions.  First, firms must be required to satisfy time-constrained performance targets, including minimum export targets where the products compete with best practice.[120]  Industry protectionism has failed in the past where there were no performance-based conditions. Although infant firms needs industry protections to provide an artificial level playing field to reduce the risk of information spillovers, time-constrained performance targets provide incentives for infant firms to climb the steep learning curves of industrial production.[121] 

Second, industrial policy must coordinate inputs where the factor market fails to do so. This may require the coordination of new skills, technical and market information, risk finance, or necessary infrastructure.[122]  Hausman and Rodrik offer a simple example of coordination failures where someone wants to build and hotel on a beach.  The hotel will not be profitable unless there is an airport built nearby.  Neither structure would be built without the assurance that the other would also be built.  In such an instance, the government should intervene to provide a guarantee to both investors that the other will be built.[123]

Information spillovers and coordination failures are common market failures that act as barriers to potential growth-enabling industries, such as IT.  Governments, however, have the power to alleviate these barriers by selectively curing the market failures specific to each product or activity.  This requires sensitivity and discipline by governments to limit intervention to addressing market failures.[124] 

It is well settled that sustainable development models are not only difficult, but unique to each individual country.  Generating extensive access to IT is imperative to sustainable development.  Further, developing countries must become oriented towards exporting sophisticated products that developed countries export.[125]  Although export-orientation policies may lead to short-term instability, stability quickly returns and economies usually experience growth as the new industries acquire technological and managerial knowledge.[126]  Therefore, developing countries must invest in infrastructures and human capital that will promote technological adaptation and comparative advantage in new export-oriented industries. 

3.2         The Role of Government Intervention in the East Asian Model

Although developing countries have taken several paths to development, some countries have been more successful than others.  Most recently, East Asian countries have been successful where the government has played a unique entrepreneurial role at the microeconomic level by providing necessary functions to the market where it otherwise failed.[127]  The success of the East Asian countries challenged the neoliberal Washington Consensus’ ideas regarding financial and trade liberalization.  Although the crisis of many East Asian economies was invoked to prove the weakness of the East Asian model, the ultimate success of the model has caused even orthodox Washington Consensus economists to acknowledge the failings of certain liberalization policies.[128]

 The East Asian model of government involvement is distinct from both the relative hands-off approach of American capitalism, as well as the centralized approach of more socialist states.  Developmental successes were ultimately reached where governments incrementally deregulated and reduced government involvement in the market when specific market goals were reached.[129]  Malaysian economist Jomo K.S.[130] explains that the East Asian experience taught several lessons in successful development, none more important than the principle that responsible and efficient government intervention will advance development in countries that are disadvantaged in international markets.

First, the most successful East Asian countries subsidized primary education, as well as tertiary, or university, education.  This is contrary to the World Bank recommendation that developing states should only subsidize primary education leaving the student to bear the costs of post-primary education.  For instance, Korea’s subsidies allow over 40% of their youth to attend university.  Most East Asian countries average over 25% of their youth attending university.[131]  The East Asian development of human capital as a pre-condition for physical capital provided sustainability.  In contrast to East Asia, many of the less successful developing countries of Latin America accumulated physical capital before human capital, resulting in low productivity and compensatory import substitution.[132]

            Second, East Asian governments secured domestic reinvestment by encouraging corporate savings and investments.  This led to high profit rates in corporations and firms.  The East Asian governments encouraged savings and investments by subsidies, tax breaks, and other incentives for investments that the governments favored.  For example, Korea and Taiwan instituted policies that made capital flight difficult and unattractive.  These domestic reinvestments were usually subject to little or no tax.[133]

            Third, in contrast to generally liberalizing financial markets, the East Asian governments attracted domestic investment and FDI by incentives which encouraged specific types of activity.  According to the East Asian experience, venture capital markets are more suited to support emerging industrial and technological capabilities.

            Fourth, in the late 1950’s, the strongest East Asian economies rapidly switched import orientation to export orientation policies in order to ensure international competitiveness.  This was executed by providing infant industry protections conditioned on exporting certain shares of output within specified timeframes.[134]  The protections provided East Asian firms an appropriate timeframe to adapt to the specific activity and identify the externalities of the new technology or industrial activity.  On the other hand, the short-term conditions acted as incentives for firms to push down production costs quickly, achieve international standards quickly and compete internationally against best practice.[135]    Not all firms did, but many firms did achieve international competitiveness quickly.[136]

            Jomo acknowledges two arguments no state should try to apply the East Asian model.  The first argument states that no East Asian regimes are unique and impossible to emulate because they enjoy a tradition of meritocracy influenced by Confucianism.  This is an erroneous criticism because one only has to look to Taiwan, South Korea, and Japan who have engaged periodically in corruption and incompetence.  Jomo further argues that superior policy-making and implementation does not prove the existence of competent and incorruptible policy-makers.[137]

            The second argument Jomo acknowledges is that East Asian countries had very different initial conditions that many developing countries do not share.  This argument, however, fails to acknowledge the initial conditions of most East Asian countries in the 1950s.  For instance, in 1950, South Korea had a lower literacy rate than contemporary Ethopia.  Therefore, the current high level of education in South Korea is the result of their investment in human development over the past 60 years.  Another example is the American-influenced stakeholder economy of Japan, which persists today.  The stakeholder economy is the result of the post-WWII American effort to redistribute shares of traditionally family owned companies to employees and communities.  This has created a culture of strong employee commitment to firms that is not seen in much of the world.  It is important to note, however, that this unique cultural aspect of Japanese business was not a result of a traditional Japanese condition.  Instead, it was the result of a manufactured condition in the process of development.[138]

            Jomo does not claim that the East Asian model should be emulated by developing countries.  Instead, the international community should learn from the resulting lessons the East Asian model provided development theory.  Most notably, the East Asian experience proves that advocacy of absolute liberalization is no longer reasonable.  The result is that development policy includes more variety of potential effective solutions to particular conditions.[139]

            The most important lesson that should be learned from the East Asian model is that government action has the ability to promote efficiency and cure market failures.  Although there are many cases throughout history that prove the inefficiencies of government, East Asia provides a clear example of governments promoting efficiency through intervention and protectionist measures.  There is a clear distinction between governments that only regulate and intervene with temporary, performance-based standards in reaction to market failures on the one hand, and governments who retain permanent control of economic institutions through permanent policies.  The former type of government intervention assumes that markets are generally more efficient than governments, except for government intervention that cures market failures.  The latter type of government intervention, which is permanent, assumes that government is more efficient than markets.  

Although markets are efficient, they do experience failures.  Markets have the ability to identify natural competitive advantages and allocate resources.  Markets create incentives for people and institutions to act in ways that the market determines are efficient.  Market failures occur when necessary inputs do not exist for an activity to be efficient.  Neither people nor institutions will risk investing in an activity that lacks the necessary inputs.  There are situations where a government has the ability to provide inputs that would make an activity efficient that would otherwise be inefficient.  The East Asian practice of subsidizing higher education serves as an example of governments providing necessary inputs (i.e. human capital) for more efficient economic activities. 

            Curing market failures is difficult because it not only requires governments to be sensitive to market activity, but they must also react to specific failures.  This requires high degrees of restraint and selectivity since it is impossible to address every market failure in every industry.  This challenge does not lead to the conclusion that governments should not intervene. Instead, it means that governments should intervene so long as they allow the markets to dictate their economic policy.  Moreover, the economic policies should only provide interventions that ultimately result in more efficient and productive economic activities, like technological growth. 

3.3         Hausman and Rodrik Industrial Policy Model

Virtually all economists agree that export-orientation policy promotes development.  Conventional wisdom traditionally maintained that countries should only export products where they enjoy comparative advantages.  Conversely, Hausman and Rodrik present evidence that regardless of comparative advantage of an infant industry, the sophistication of a country’s export packages predicts its growth over the next decade.[140]  The evidence encourages developing countries to export more sophisticated export packages by implementing industrial policies that provide the necessary inputs to cure market failures.[141]

There are several difficulties in creating sound industrial policy in order to support new export activities.  First, a government must identify the coordination failures and information spillovers that are going to necessitate government intervention.  There are more coordination failures and spillovers for newer industrial activities because most of the market failures will be unknown in advance.  The government will most likely be involved in providing and coordination infrastructure, gathering and publishing objective market information, initially subsidizing private firms until cost structure is determined, and subsidizing appropriate training.  This is a highly specific process that identifies the numerous inputs[142] necessary to develop the new activity.  It is best at this early stage of planning to acknowledge what capabilities the economy has presently and manipulate them for the purposes of developing the new activity.[143]

Countries should look to their existing capabilities that can be exploited for the benefit of the new activity in order to simplify the enormous complexity of the numerous factors that must be coordinated.  These capabilities include existing markets, physical and human capital, and institutions that were created for similar pre-existing activities.  For instance, an existing garment industry has more similar capabilities to car part manufacturing and shoes than are the capabilities necessary for agriculture or mining.  The differences between the necessary capabilities of a garment industry from the capabilities of agriculture are apparent when comparing the necessary infrastructure, trained labor force, regulatory needs, and property rights.[144]

            The way a developing country should specialize and diversify exports is explained through the metaphor of a forest.  The forest is the world market full of products.  There are rich parts and poor parts of the forest.  Each product is a tree.  The trees are spaced at distanced relative to the similarity of the products’ necessary capabilities.  Firms are monkeys in the trees that exploit specific products.  It follows that monkeys are able to exploit trees that are closer to them and have a more difficult time exploiting trees in other parts of the forest.  Further, the rich countries have their monkeys in the rich forest and the poor countries have their monkeys in the poor forest.  Sophistication of export packages entails developing countries having their monkeys move from trees in the poor forest to trees in the rich forest.[145]

            Hausman and Rodrik quantified the value of exported products (trees).  Taking those quantified values, they determined the approximate value of selected countries’ export packages.  Then, they predicted the speed that developing countries could increase the sophistication of their export packages by calculating the “open space” between the locations of countries’ monkeys and the unoccupied trees on the path to the rich part of the forest.  It is more difficult to move to a richer part of the forest if there are few or no trees nearby.[146]

            Although it is more difficult to move from a sparse part of the forest to a rich part, comparisons between Columbia and Malaysia exemplify that it is possible for a poor country to move around the rich part of the forest quickly once it establishes a foothold in one part of the rich forest.  Malaysia established their foothold by intense industrial policy to develop electronics manufacturing, while Columbia did not.[147] 

Malaysia’s success is explained by the finding that once a product is exported, regardless of initial comparative advantage, there is unconditional convergence to the frontier within that good.  Similar to the IMF finding in 1987, it was found that moving to a new product produces short-term export instability that is quickly cured because of the quick acquisition of the necessary technology and knowledge.[148]

Bolivia is another example of a country that failed to move to the rich part of the forest.  Bolivia lost its tin mining industry in the 1980s.  The country only identified three potential replacement exports: soybeans, coca, and natural gas.  The country never sufficiently invested in the necessary inputs for any of the three alternatives because each industry has highly specific and distinct capabilities that needed to be developed.  The state never invested enough in the necessary public inputs for any of the potential industries to succeed. New industries need great productive capabilities and the market cannot provide those capabilities quickly enough to be beneficial.[149] 

This raises the question as to the role of government in providing inputs for new industries.  Henry H. Perritt, Jr. identified several inputs that government must provide since they do not have markets:  inequality of bargaining power; “externalities” not taken into account by market trasactions; public goods; imperfect information; and natural monopolies.[150]  These are compliments to the market-based inputs and will hinder productivity of the activity if not specifically adapted to the activity.  These non-market inputs cannot be applied neutrally to all sectors, but instead must adapt and conform to the needs of industries.  This need leads to two problems: it would be unaffordable to address all the specific needs of industries and the necessary government interventions are only known as the industry matures.  Therefore, Hausman and Rodrik conclude, governments must choose where intervention is most efficient and needed.[151]  Most importantly, governments should allow industries to evolve without interference, but governments should only intervene when maximum information is available.

4           Information Technology

Technology is essential to development in the modern world because it dictates the way global business operates, it creates more efficient production processes, and also improves the exchange of ideas across borders between individuals and institutions.  Education, government services, market transactions, and firm operations are all made increasingly more efficient because IT has digitalized information storage and processing.[152] 

Technology is not only an end goal of development, but also the means to development. [153]  This is evidenced by the clear correlation between a country’s access to IT and its GDP per capita.[154]  Barriers exist to developing countries that have low access to IT because of the initial expense of obtaining the necessary IT interfaces and infrastructures.  The problem is exacerbated for developing countries because the high rate at which IT is progressing creates a target that is moving away from them.  This problem is referred to as the “digital divide.”[155]  In spite of these obstacles, it is increasingly necessary to develop a competitive IT sector in order to maintain a sustainable economy.  Such development requires a multifaceted approach involving high levels of coordination between national and international institutions, high levels of financial investment, and development of human capital.

Unlike the experience in the United States, developing countries cannot rely on a laissez faire model of IT development for the same reasons that late comers to the industrial revolution had to rely on various levels of government intervention.  Private and public sectors must work together in a coordinated way to establish sustainable technological development.  Private institutions, where possible and efficient, should drive the IT development process because they promote ingenuity, preserve diversity, and enhance user choice and satisfaction.[156]  Public institutions, however, have the ultimate responsibility to provide oversight of the development process.  In order to achieve this coordination the digital processes and digital products must be compatible with each other; IT must be developed at a balanced and consistent rate because the failure of one point of IT development will slow down all sectors; and all sectors of society must use uniform IT systems.  This is best achieved if the common IT systems are compatible with the regional IT systems so that digital communications and transactions in the region are more efficient.[157] 

            The best way to achieve this coordinated approach to IT development is through the oversight of by private and public institutions.  It is preferable to rely on private institutions to provide technical management of the coordination process because they will be more flexible in responding to the needs of society.  Public institutions should provide oversight to ensure that coordination is sufficient.[158]  It is the responsibility of these institutions to ascend to standard systems and common goals.[159]  The institutions should have involved roles in IT development through the form of regulatory agencies and private interest groups.[160]

            Access and development of IT sectors requires much financing.  Developing countries should finance IT investments through government subsidies and incentives, private national wealth, and foreign direct investment (FDI).  It is crucial that the investments do not result in excluding the poor from participation in national IT development or else inequities will grow wider and deeper.[161]

            Human capital must also be cultivated in order to support emerging IT.  This not only involves education, but also the introduction of IT into society and schools.  Education involves IT training at every level of society from preschools to continuing adult education for teachers and members of the potential workforce.  Primary education should greatly increase the focus of mathematics and science.  At the university level, governments should provide great incentives for students to study IT sciences at home or abroad, if conditioned upon return.  Additionally, the universities should enhance their focus on IT development.  It may also be necessary to attract foreign IT leaders in business, research and education to temporarily come to the developing country to create a national underpinning of IT competency.[162]

Programs introducing IT into society must provide IT access the poor in order to achieve an equitable economic result from IT.  Information technology only benefits those who have access to the appropriate hardware and software.  Since only high income groups can afford the appropriate interfaces, inequality in developing countries will be intensified if IT accessibility is not provided to the poor.[163]  Public institutions in India and Latin America have introduced IT to the general public and educational institutions in various ways, including: free public internet booths, incentive-based e-tax filing, government loans to small IT businesses, and producing very basic inexpensive computers which provide access to the internet.[164]

Lastly, the national objectives must be clear to the general public, business, and government.  Otherwise, confusion would result in lack of motivation and administrative support.  It will also be necessary for the government to cure IT market failures through subsidies or the creation of incentives.  An example of an IT market failure would exist if too much investment was spent on video game consoles, but not enough on health care technology.[165]

4.1         Ireland as a Model

Ireland provides a great model of IT development for Venezuela because it was similarly situated at the time it decided to undertake the development of an IT sector.  In 1975, Ireland had a similar export menu as Venezuela’s current export menu.  Ireland’s main exports were foodstuffs, textiles and clothing, rubber and plastics, and transport equipment.[166]  Ireland also had unemployment rates as high as 17% into the 1980’s, high levels of emigration, as well as one of the worst performing economies in Europe until the late 1980’s.[167]  In addition to exploiting the existing manufacturing capabilities and attracting FDI, Ireland invested heavily in developing a workforce that was highly trained and integrated with the industrial goals of technological manufacturing.[168] 

Ireland successfully developed the IT industries over time which resulted in unemployment rates that have fallen as low as 4%, national debts transformed into surpluses, and Ireland currently enjoy more foreign direct investment than any other EU member.[169]  A poor economic situation is not the only similarity that Venezuela shares with 1960s and 1970s Ireland.  More importantly, Venezuela shares a similar export package and similar manufacturing capabilities.  Moreover, just as Ireland offered foreign investors an entry into the European market, Venezuela can exploit the underdeveloped Latin American IT market. 

In the first half of the 20th century, Ireland turned to import-substitution and protectionism in an effort to shift from an agricultural society to an industrial society.  However, the protectionist policies resulted in a lack of sustained growth, a balance of payment deficits, and high levels of unemployment and emigration.  In the 1960s, Ireland responsively altered its industrial policy by actively promoting export growth and attracting FDI by capital grants, tax concessions, as well as large investments in IT human development.  Ireland fostered economic growth through government grants for new industrial projects to local and foreign business.  Ireland’s Industrial Development Authority (IDA) directed the development of an IT industry through industrial policy.[170] 

In 1970, the IDA was charged with the responsibility to further industrial development in Ireland, which was focused highly on development of IT by the end of the decade.  This has resulted in the IDA providing grants to new and existing manufacturing and technical industries, providing training grants for training workers, acquiring industrial sites and constructing advance factories to be sold to private manufacturers, promotes joint ventures, and designs regional and national industrial policy.[171]  The IDA encouraged investment by providing incentives for entities that invested in manufacturing specifically identified electronic devices, such as computers, medical devices, circuits, microprocessors, and scientific instruments.[172]  The IDA approached not only indigenous firms, but more importantly approached key foreign electronics firms and encouraged them to move their manufacturing operations to Ireland.[173]  The IDA’s offered two incentives to the foreign firms: (1) grants and tax incentives for machinery, plants and training; and (2) access to the European market.[174]

      The incentive proved fruitful because Ireland attracted many smaller electronics companies that sold parts to larger electronic and IT companies, such as IBM.[175]  Once the IDA had successfully attracted a healthy lot of electronics hardware manufacturing firms by the early 1980s, the IDA shifted its focus to attract investment in computer software, research and development (R&D), IT training services, and international financial services.[176]  The IDA adjusted its incentive structure in order to achieve this new policy initiative.  Grants and tax incentives were conditioned on the ability to export internationally traded services.    In addition to the tax incentives, a brochure directed at entrepreneurs was distributed that outlined how the state agencies would assist startups in taking an idea from infancy all the way to marketing.[177]  This new incentive structure resulted in many successful local software startups in the 1980s.[178]   

Much the success of the local startups can be attributed to the human capital development in science and technology that Ireland invested in heavily since the 1970s.  The Irish workforce’s education and skills rank as the second most important reason[179] for Executives of U.S. multinational corporations for choosing Ireland.[180]  Similarly, international executives ranked Ireland second of countries whose workforce meets the demands of a competitive economy.[181]  This is, in large part, because the education system was coordinated with the industrial policies starting in the 1970s.  Although Ireland made access to second and third level education more readily available later than the rest of Western Europe, they now boast most educated and skilled workforces in the European Union.[182]  Irish educational reforms centered on expanding opportunities to secondary education, which were mostly funded by tax revenues.

      Ireland adopted a binary education system that offered both traditional university education and two-year technical training programs.  The initial focus was to generate a workforce of technicians to provide the foreign corporations that moved to Ireland.  This was achieved by the development of Regional Technical Colleges (RTC) that offered trade certificate programs for apprentices, post-primary certificate courses, and adult education and retraining courses that were all shorter than university programs.[183] Further, the RTCs taught practical technical skills that were useful to Ireland’s industrial goals, rather than the traditional theoretical education offered at universities.  Ireland provided incentives to attend the RTCs by issuing grants to Irish citizens.  The RTCs were coordinated with government economic policy, but the universities remained autonomous.  Thus, the RTC were useful in creating a workforce that was responsive to the needs of the IDA’s industrial policy.[184]

It is not enough to acknowledge that the grant and tax incentives, the scientifically educated and technically skilled labor force, and access to the European market provided the three primary attractions to foreign investors in Ireland.[185]  It is also necessary to acknowledge that it took 25 years of effectuating industrial policy before Ireland experienced the economic boom in the 1990s.  Although the Irish industrial policy was successful in part because it remained consistent, the policy’s investment incentives were calculatingly modified in response to the changing dynamics in the economy. 

The Irish industrial policy was aggressive, but also patient. For instance, the creation of a new third-level educational landscape to provide the necessary human capital to satisfy the industrial policy was aggressive.  Exploiting the current manufacturing capabilities at the early stages of industrial development, however, was patient and far-sighted because it allowed IDA to appropriately react to the conditions and opportunities of the developing industry.  East Asian industrial policy exhibited a similar mix of aggressiveness and patience.


4.2         It is in Venezuela’s interest to develop an IT industry

Venezuela must develop a sustainable information technology (IT) sector.  Only 17% of the Latin American population has access to the internet.[186]  This problem is exacerbated by the fact that Latin Americans in the top 15% of income earnings have enjoy virtually all access to the internet in the region.[187]  Even though Venezuela has been expanding Internet accessibility, they rank near the bottom of Latin American countries since only 12% of Venezuelans enjoy Internet access, which ranks below the world level of 16%.[188]  Moreover, Venezuela imports IT, but does not manufacture or export technology.[189]  For instance, only 20% of the $213 billion (US) that Venezuela invested in software was for licensed local manufacturers.[190]  Venezuela only has approximately 200 small software manufacturers which are all focused on niche finance and oil markets.[191]  All of Venezuela’s ISPs depend on connections through NAP of the Americas in Miami.[192]  Similarly, the United States continues to be the primary provider of most IT software and hardware in Venezuela.[193]

            First, Venezuela needs to continue to provide greater IT access to the poor through public infocentres and other projects.  It is clear that the government is investing correcting this problem, but they must be aggressive.  Increased access to IT would provide greater educational opportunities, enhanced participation and information gathering for democratic functions, entrance to the international market for small businesses, and would also provide a base familiarity in IT to support further educational initiatives.  Accessibility to IT, however, is only the first step in exploiting the benefits IT can offer Venezuela.

            Venezuela must begin to export more sophisticated products and services.   The IT industry will provide Venezuela with a great opportunity because Latin America’s IT sector is severely underdeveloped.  Information technology provides Venezuela with the opportunity to export a new variety of services and value added products enabling the necessary growth in non-oil industries.  Latin America’s underdeveloped IT sectors provide several exploitable opportunities for Venezuela.  The US Department of Commerce has already identified some of the underdeveloped markets to exploit in Venezuela and Latin America.  These opportunities include Spanish-based educational software, open source software and hardware solutions, triple play products (services combining Internet, television, and telephone), and last mile solutions (connecting the end user to digital IT).[194]  Venezuela should exploit these opportunities to create a diverse non-oil sector, rather than allow the United States continue to profit from demands that Venezuela can provide more customized to itself and Latin America.

            [Translating the English net into Spanish?]

The low

Venezuela’s sustainability is dependent on broad IT accessibility as the parent of development on one hand, and the generation of an IT sector as the child of development on the other.  A developed IT sector may not alleviate all of Venezuela’s problems, but the problems will not be alleviated without such development.  Therefore, this is one developmental area that Venezuela cannot ignore. 


5           The Proposed Model for Venezuela

The Venezuelan government is going to play an important role in the industrial policy to establish an IT sector.  The government should not apply the policies of Norway, Ireland, or East Asia directly because each country must develop according to their unique qualities.  Venezuela, however, should apply the principles that each country’s experience offered. 

5.1.1        Setting Aside the Distraction:  Methodically Planning an Oil Fund

Venezuela’s recurring problem is that every successive administration been the obvious distraction of oil.  It is nearly impossible to ignore the distraction that oil provides governments.  The effects of the Dutch Disease in resource-rich countries exemplify that each government that preoccupies itself with oil will likely experience a vulnerable economy and risk numerous social ills.  Venezuela has a bad case of the Dutch Disease.  Distinct political differences separate Chavez and the Punto Fijo administrations.  The primary weakness of both governments, however, is their reliance on oil revenue for all government expenditure.  Venezuela must address their preoccupation with oil before an industrial policy or economic reform can succeed.  Therefore, Venezuela should turn their whole attention toward an industrial policy with the assumption that oil does not exist.  This is, effectively, the lesson from Norway.

Like Norway, the first step to breaking the distraction with oil should be an impermanent independent committee whose primary responsibility is to create a long-term plan with two goals: (1) to create a system that effectively shields the oil revenue from politically accountable government officials; and (2) to provide a long-term regulatory scheme that that will ensure that future generations will benefit from current oil revenue.  The appointments to the committee should include Venezuelans and specialized foreign consultants from various backgrounds. 

The committee should be limited to only consider the most responsible investment and regulatory scheme to protect the oil revenue for future generations.  In order to protect the present generation, the committee must create gradual plan to incrementally transfer oil revenue from the government to the secured investment fund.  The gradual plan will minimize any negative economic consequences that will result from diminishing amounts of government spending. 

The oil revenue must be administered by a third-party institution that is not politically accountable. The third-party trustee should be criminally liable for misuse or misappropriation of the oil revenue.  The account should also be invested in various foreign investments.  The regulatory scheme should provide strict and clear guidelines.  Moreover, the long-term regulatory scheme should both preserve the benefit of the revenue for future generations and shield the revenue in a way that guarantees that the government will legislate and execute policies undistracted by oil.  Lastly, there must be an independent committee with the power of bringing criminal prosecution to oversee the third-party institution that administers the oil fund.

The transition plan should be prepared and implemented at an aggressive pace in order to pressure the government and the Venezuelan citizens to be creative and involved, rather than complacent.  An aggressive transition will address the paternalism problem directly because it will signal to the Venezuelan people that a fundamental change is occurring in government.  It will be clear to the people that expectations of citizens are changing.  Chavez must communicate to the people that securing the nation’s oil revenue from government officials is consistent with the Bolivarian constitution.   There should be a corresponding public relations campaign both warning citizens that Venezuela’s reserves are going to be empty within fifty years, while simultaneously encouraging the people to prepare for a “Better Venezuela,” or a similar slogan.  

Chavez must begin to regard the people as if they are the hope and future of Venezuela.  Thus far, Chavez has only exacerbated the paternalistic nature of the government-citizen relationship by his reckless appropriation of oil revenue for every social program.  The paternalistic nature of his government policies is reversible, however, because Chavez has treated these years as an interim period between the inequities of the Punto Fijo system and the new 21st century Socialism.  He has implemented many equitable programs to provide remedies for the harms and injustices committed to the indigenous people under the Punto Fijo regime. For instance, Chavez instituted a series of temporary misiones (missions) to provide adults with literacy training, basic education, and college education that the Punto Fijo regime could not offer.  Chavez should implicate the evolution of the revolutionary process[195] and the goal of national self-sufficiency, of which he often speaks, to explain to the people that paternalistic measures were only a necessary phase of the revolution.   He must be explicitly clear that Venezuela is moving into the “self-sufficiency” phase of the revolution.  Chavez must utilize his captivating and charming nature to inform and persuade the people of the necessity of securing the oil revenue for Venezuela’s future. Most importantly, Chavez must cease his paternalistic gift and social programs that have provide no performance conditions.

It will be a great hurdle to persuade Chavez to transfer the oil funds to a secured fund.  Not only did he run for office on a platform which promised to return the oil wealth to those who rightfully owned it, but he uses oil revenue as the primary sources of revenue for his many social programs.  Shielding oil revenue from government officials is in the interests of Venezuela’s future.  Chavez should look to the problems of the Punto Fijo Regime to find justifications for locking the oil revenue in shielded accounts.  He will find that their most severe policy blunder was their reliance on oil revenue for every solution. 

5.1.2      Venezuela’s current IT regime

            In 2005, Hugo Chavez said to a group of Venezuela’s most promising scientists, “Either we invent or we err…We are obligated to invent.  Each society requires a scientific style.  We cannot copy models.”[196]  Taken at face value, Chavez’s words express a great dedication to science and technology.  Although the success of Chavez’s IT initiatives are unclear, there are signs that government programs are bridging the gap of the digital divide between Venezuelans who have access to IT and those who do not.  The barrier to IT is generally economic.  For instance, Venezuela’s access to the internet has grown in conjunction with a recent boom in the telecommunications sector, which grew 28% in the first quarter of 2006.  Similarly, internet accessibility has grown 29% on average over the last five years.[197]  In 2006, Venezuela also ranked fifth in Latin America in terms of openness to undertake Internet based solutions and business opportunities.[198]  Despite the recent growth, Venezuela’s accessibility to IT remains low where only 4% of the population owns a personal computer (PC)[199]

Efforts to bridge Venezuela’s digital divide are led by the telecom regulatory agency (CONATEL), the Ministry of Science and Technology, and the National Center for Information Technology.  All of the institutions share the belief that IT is the primary tool for future economic, cultural, educational, and political activity.[200]  The government has initiated many training programs to provide Venezuelan citizens with the necessary skills to use IT.  The government has also provided internet access to the community at large through various types of public internet access points, which are accessed for free or very reasonable fees[201] in the form of internet cards.[202]  Internet access are accessible in three ways: (1) Infocentros, which are public centers that have 10 connected PC; (2) Infopuntos, which are telephone booths with internet access; and (3) Cbits, which are rooms of connected PCs in low income schools.  As of 2006, there were over 2,200 public access points for Venezuelans,[203] but only 5% of the population accesses the Internet from the Infocentres.[204]

Chavez has turned to the private sector to promote further growth in the IT sector by a tax initiative that forces “large companies,” mining or energy sectors excluded, to spend 0.5% of their gross annual income on technological research and development (R&D) and innovation.[205]  The requirement can be satisfied by either giving the contribution to an institution approved by the Ministry of Science and Technology, or by investing in science, technology or innovation to benefit the company itself.[206]

The market share of internet service providers is primarily controlled by two separate companies: CANTV, Venezuela’s largest telecommunications company, and CVGT, a new government-owned telecommunications company that was granted control of the government’s telecom infrastructure.[207]  United States manufacturers control the market share of Venezuela’s hardware demands.[208]  Venezuela’s public and private institutions are progressively adopting free Linux open source software instead of private software like Microsoft Windows.[209]  The transition to open source software is part of a larger two-step plan to create a “Venezuela Internet” that would serve as a platform for endogenous IT development and to manufacture a “Bolivarian” computer that is inexpensive and primarily compatible with open source software.[210]

            Venezuela’s indigenous production of software is limited to about 200 small companies that produce software for the financial and oil industries.  Additionally, there are is a small group of indigenous small businesses that assemble inexpensive PCs made from imported parts.[211]  Neither one of these two industries exports their products.[212]

5.1.3        Industrial Policy

By first looking to the duration of development in East Asia and Ireland, Venezuela should expect a long gradual process of implementing economic policy before the industries are completely developed.  This demands that Chavez commit to specific policies and react to them accordingly.  Chavez’s history of abandoning policies and government officials is not conducive to long term industrial policy, so he will have to prove a commitment to the IT industrial strategy.

            There is a fundamental problem with Chavez’s grant distribution, which rewards any type of labor or service regardless of its efficiency, profitability, or competitiveness.[213]  It is intuitive that efficiency and productivity breeds economic reward.   Chavez is going to have to make additional adjustments where he must accept losers.  Thus far, Chavez has no competitive industrial programs.  By looking at Chavez’s current system of cooperative grants and small business, funded by oil revenue, it is clear that it is more important that everyone be working or contributing to a group, than they are productive and efficient. Many grants are distributed without first providing any organizational plans.[214]  People also immediately abandon the projects just to receive the grant money.[215]  Chavez has also implemented a series of grants to encourage groups of citizens to form cooperatives in industries that they choose, in addition to issuing small business grants.[216]  The cooperatives grants include skills training in a trade. Upon completion of the training, the apprentice can choose to work in the private sector or a cooperative.  There is a definitely merit to programs that increase human capital, and there is no doubt that Venezuela needs human capital development.  The problem will arise, however, when oil prices drop and Chavez can no longer freely distribute cooperative grants that have no performance-based standards.  Cooperatives are primarily concerned that performance is rewarded with self-sufficiency.  Conversely, businesses are primarily concerned performance is rewarded with profit.  Cooperatives do not provide economic growth, but instead only meet the basic needs of their members.  Businesses, if profitable, do provide economic growth.  Hence, cooperatives cannot provide sustainability in the face of devastating oil prices, but a diverse selection of profitable industries can provide economic security.  It would not be difficult for Chavez to amend his current cooperative grant policy into a performance-based IT business grant conditional upon profitability and benchmarks to reach best practice.

             Industrial grants should be given to entrepreneurs who apply with promising plans for small start up IT businesses.  The government must demand that profitability and export standards are met within a period of time that places pressure on the beneficiary of the grant to reach specified performance goals that are consistent with the industrial policy.  Chavez should also promote R&D grants to educational institutions, grants to manufacturing and technical industries to train workers, and grants to manufacturers to transition current industrial sites.  Chavez should embrace such performance-based grants because they are similar to the cooperative grants that encourage private parties to develop Venezuela from within, but also provide macroeconomic economic security during depressed oil markets.  Industrial grants are similar to cooperative grants because they allow the people to develop Venezuela from within. 

Both Ireland and East Asia provided performance based conditions for grants.  If the performance standards were not met, then the government ceased support.  Assurances of performance protect the government investment, and simultaneously provide incentives for the recipients to perform.  It is essential that Chavez create standards for performance-based grants affecting education programs, private investment in start-up companies, and investment in R&D.  Chavez’s commitment to providing equity and fairness to Venezuelans who were left behind in the Punto Fijo government should be treated as a an interim phase to the “Bolivarian Revolution.”  Chavez must now enter the next phase of the revolution where the people become self-sufficient and are rewarded with non-oil economic growth. 

Although Ireland, and to a lesser degree East Asia, attracted FDI to promote their industrial policy, it is unlikely that Chavez would make efforts to promote invite FDI.  Venezuela does have good relations with the multinational corporations that are there, but smaller foreign investor left in great numbers between 1999 and 2001.[217]  The state government policy stresses the need to regulate foreign capital and stimulate investment from the local businessmen.[218]  Chavez has been the cause of billions of dollars of foreign capital flight.[219]  Political instability and media images of Chavez in the West have dissuaded foreign investors from investing in Venezuela.  In addition, Chavez clearly prefers to choose local capital before foreign capital.[220]  Chavez has openly takes private property from local landowners and foreign investors through eminent domain.[221]  It seems that it would be difficult to persuade Chavez to attract foreign investors in IT. 

A presumption against foreign investment does not lead to the conclusion that Venezuela will have to find local investors.  There are two other options that Chavez could choose.  First, he could make an exception for the IT industry because it would give Venezuela an advantage in Latin America that is has an undeveloped IT sector.  Second, Chavez could invest in IT from the $25 billion oil revenue reserve.[222]  It would be wiser for Chavez to provide incentives for IT companies to move to Venezuela.  IT corporations would provide employment opportunities for manual high-tech jobs which many of the poor could be trained to perform.  Even if Chavez would end up funding investment in IT from the oil reserves, Venezuela would at least see the returns in the growth and opportunity that an IT industry will provide Venezuela.  Lastly, if Venezuela did invest in IT as the primary direct investor, it would be absolutely necessary that the investments were conditional upon high performance standards to give the IT entrepreneurs every incentive to be profitable and internationally competitive.

There is one last option that requires Chavez to realize the importance of an established IT sector in light of the Hausman and Rodrik model.  Assuming that Chavez understands the importance of Venezuela’s future with oil, it would be in Venezuela’s interest to invite foreign manufacturers to Venezuela in order to provide Venezuelans access to the trade practices of both software and hardware industries.  The trade practices are nuanced and require experience.  The trade practices and necessary knowledge for production of hardware include the manufacturing processes, estimation of the costs of production units, predicting cost related to production volume, calculating warranty and service costs, ordering and fabricating all of the parts, and assembling and testing the systems.[223]  The hardware industry is especially difficult to penetrate because it is so saturated.  Because it is unquestionable that the hardware manufacturing industry is a desirable industry to enter, Chavez may find that the IT industry is worth making an exception to his presumption against FDI. 

Chavez has great leverage in trade because of Venezuelan oil.  Therefore, Chavez should apply pressure to a trading partner who manufactures hardware and software, such as the Netherlands[224]  Even if only one IT manufacturer in the Netherlands were to move to Venezuela under favorable conditions, it would provide a jumping off point for Venezuela to hold itself out as the Ireland of Latin America.  So long as Venezuela offered foreign investors favorable tax incentives and also had a technically and scientifically trained workforce, Venezuela could promote itself as a favorable site to manufacture hardware or software.

5.1.4        Current Manufacturing Capability

Oil currently makes up 87% of Venezuela’s exports each year.[225]  The other 13% of exports include both high end and basic products.  The high end products include: pharmaceutical products, chemicals, rubber and plastics, wires, circuits, mineral-based processed construction material, manufactured metals, machinery and mechanical appliances, traffic devices, electrical devices, and precious stones and metals.[226]  The basic good include everything from food, textiles and furniture.[227]  The production growth rate grew at 7% in 2006.[228]  The United States, Columbia, and Mexico are Venezuela’s primary export partners. 

Similar to Ireland, Venezuela has a very promising manufacturing capability to accommodate an emerging IT industry because the manufacturing inputs are easily transferable to produce plastic and metal parts for computer and other IT hardware.  There are many entry points, but the markets are all very saturated worldwide. 

Potential hardware items to that Venezuela could manufacture include, but are nto limited to: cases/chassis; CD/DVD; central processing units; controller cards; display screens; graphics cards; hard disks; keyboards; loudspeakers; mice; modems; motherboards; network cards; power supplies; printers; RAM; scanners; sound cards; TV tuner cards; webcams.

According to Hausman and Rodrik’s model, Venezuela’s manufacturing has very similar inputs that would be need to manufacture specific hard ware.  For instance, Venezuela currently manufactures circuits, which are similar to motherboards.  Plastic shells of PCs, keyboard keys, speaker shells, printer frames, screens, and many other parts could be manufactured in Venezuela’s current manufacturing capacity.  Similarly, wires that are manufactured in Venezuela can also be made for IT hardware. 

Even if Venezuela could not attract FDI or the desirable access to trade practices, Chavez could provide strict performance-based incentives for the existing plastics, circuit, and wire manufacturers to begin manufacturing hardware.  The current manufacturers could adopt the procedures and learn the industry customs through research and experience.  There is no greater opportunity for the plastics, wire, and circuit manufacturers to learn industry customs, than through the production of the “Bolivarian” computer.  If the computer became a popular item, which it realistically could in Latin America, then Venezuela would at least have a monkey in one tree in the rich part of the forest. 

Additionally, marketing and regulating the “Bolivarian” computer would provide Venezuela the opportunity it needs to identify all the market failures from design to the end-consumer. 

5.1.5        Current educational landscape

Venezuela withdrew necessary funding for public schools throughout the 1980s and 1990s because of the economic crisis.  The lack of funding led to great inequities between public and private education.   Thus, only the families who could afford private education could provide their children with decent education.  Chavez immediately reformed the education system in order to provide all Venezuelan children with a quality education. Additionally, free education, from preschool through university or technical school,[229] is constitutionally guaranteed to any Venezuelan who desires it.[230]  Free education, however, is part of a larger education reform, called the Bolivarian education strategy.

The Bolivarian education strategy also includes two other principles.  First, the empowerment of students to become subjects to the national “endogenous development” is stressed.  Second, temporary programs, called misiones, provide education to adults who missed an opportunity to a proper education under the Fourth Regime.[231] 

The Bolivarian strategy distinguishes itself from conventional education systems that concentrate on providing individuals with the tools and skills necessary to integrate into society.  The Bolivarian strategy shifts the focus from training the individual to compete with everyone else.  Instead, the Bolivarian strategy focuses on teaching the power of collective empowerment.  This is realized by educational methods that encourage students to develop a critical understanding of their communities and to seek solutions in an organized way.[232]  Collective empowerment is closely tied to Chavez’s belief that Venezuela must unite with Latin America to reverse the international power imbalance and dependencies on the traditional colonial powers. 

Venezuelan education system includes four levels: preschool (3-5); basic education (7-15); middle education (16-17); and higher education (18+).  More than 95% of Venezuelan children attend primary school, which is an increase from the 1990s when parents had to pay fees to provide their children with an adequate education.[233]   Chavez’s higher education policy is the most radical of the education reforms.  In response to the financial barriers posed by the cost of attending universities, Chavez created several public universities and technical university institutes, which any Venezuelan may attend.[234]  Moreover, in order to cure the inequities of the Fourth Regime, a 20-week initiation program was created for adults who have not attended school for several years, but desire to attend university.[235]  University enrollment has increased significantly for all socio-sconomic classes in Venezuelan society since Chavez took office.[236] 

The role of the university was also reformed to promote the principles of the Bolivarian Revolution.  First, Chavez has not allowed commercial agreements between corporations and Venezuelan universities because it would disrupt the role the university plays in society.[237]  Instead of commercial agreements with foreign companies, Venezuelan universities foster international cooperation through formal international exchanges of teachers, researchers and students. The shared objective is to strengthen policies that affect the common problems of the participated developing states.  Cooperation between similarly situated states is believed to address the needs of developing countries better than cooperation with foreign corporate interests.[238] 

Temporary misiones, or missions, were implemented to fill the educational gap for adults who were ultimately never afforded a formal education experience under the Fourth Regime.  The educational misiones are directed at adults who either are illiterate or lack productive skills.  The first mission was Mision Robinson, which provided literacy classes to illiterate adults.[239]  According to Chavez, Mision Robinson was successful and completely rid Venezuela of illiteracy.[240]  The misione was extended to provide adults primary education and middle education.[241]  

Applying Chavez’s educational reforms

This is not like the free education system in either Ireland or East Asia that provides students the necessary skills to further the national industrial policy, and a resulting economic growth and sustainability.  Collective empowerment is only reactionary, but provides no structure or set of skills to further economic sustainability. 

My primary criticism with Chavez’s educational reform is that collective empowerment will not reverse the imbalance of power with the traditional colonial power relationship.  The reform, beyond the entitlement of education to all, is purely reactionary.  Collective Bargaining is misplaced.  The harmful nature of the colonial powers rests in their productive capacity, as well as their abundance of human capital.  Both productive capacity and human capital are creatures of skills-based or professional educations.  It does not make sense to reject an education model only because it was effective for a group that was historically dominant over the disgruntled person’s culture.  

This problem seems to be a pattern of Chavez’s.  He often seems to fail to identify the exact causation of a problem, but instead rejects every policy of the party he finds reprehensible.  For instance, Chavez expressly rejects the Punto Fijo government.  Yet, Punto Fijo’s economic sin was it’s inability to separate the oil from national policy, effectively cutting off consideration or development of potential aspects of Venezuelan society.  Unknowingly, Chavez is just as distracted by oil.  It doe not make Chavez any more responsible of a leader just because he spends more oil revenue on the poor than Punto Fijo did.  Chavez would be more responsible if he had allocated the oil revenue to foreign investments, and correspondingly provided developed new industries and, thus, a more diverse economy.

Therefore, the problem with the Collective Empowerment is that it does not provide the Venezuelan people with a proper empowerment since they are discourage from markets.  Markets may be less equitable than an interventionist government, but markets do identify the best, most efficient, and most powerful. 

[1] Steve Ellner & Miguel Tinker Salas, The Venezuelan Exceptionalism Thesis:  Separating Myth from Reality, in Venezuela: Hugo Chavez and the Decline of an “Exceptional Democracy,”  3-5 (Steve Ellner & Miguel Tinker Salas eds., 2007).

[2] Melissa Dell,.  The Devil’s Excrement: The Negative Effect of Natural Resources on Development,  Harvard International Review (Fall 2004).

[3] Ellner, supra note 1, at 12.

[4] Kenneth Roberts, Social Polarization and the Populist Resurgence, in Venezuelan Politics in the Chavez Era: Class, Polarization, and Conflict, 59-60 (Steve Ellner & Daniel Hellinger eds., 2003).

[5] I refer to Chavez and Venezuela (the government, not the people) interchangeably throughout the paper. 

[6] Daniel Hellinger, Political Overview, in Venezuelan Politics in the Chavez Era: Class, Polarization, and Conflict, supra note 4, at 52.

[7] Ellner & Hellinger, Conclusion, in Venezuelan Politics in the Chavez Era: Class, Polarization, and Conflict, supra note 4, at 226.

[8] Aleida Guevara, Chavez: Venezuela and the new Latin America, An Interview with Hugo Chavez, 34-35, (2005).

[9] See Id. at 24.

[10] Michael McCoughan, The Battle for Venezuela, 44 (2004)

[11] Guevara, supra note __, at 10.

[12] Id. at 46.

[13] Nelson Ortiz, Entreprenuers: Profits without Power, in The Unraveling Representative Democracy in Venezuela, 72-73 (Jennifer L. McCoy & David J. Meyers eds., 2004).

[14] Hellinger, Political Overview, in Venezuelan Politics in the Chavez Era: Class, Polarization, and Conflict at 28.

[15] Jose E. Molina, The Unraveling of Venezuela’s Party System, in The Unraveling of Representative Democracy in Venezuela, at 154.

[16] Id.

[17] Hellinger, supra note __.

[18] Salas, U.S. Oil Companies in Venezuela: An Enduring Alliance, in Venezuela: Hugo Chavez and the Decline of an “Exceptional Democracy,” at 43-45.

[19] David J. Meyers, The Normalization of Punto Fijo Democracy, in The Unraveling of Representative Democracy in Venezuela, at 15.

[20] Id. at 17.

[21] 24.

[22] Id. at 25.

[23] Id.

[24] Ortiz, supra note __, at 75.

[25] Id.

[26] Ellner & Salas, The Venezuelan Exceptionalism Thesis, in Venezuela: Hugo Chavez and the Decline of an “Exceptional Democracy,” 6 (2007).

[27] Ellner, Introduction, in Venezuelan Politics in the Chavez Era, 9 (2003)

[28] Ellner & Salas, supra note __,

[29] Ellner, supra note __, at 8.

[30] Id. at 11.

[31] Ortiz, supra note __, at 77.

[32] Id.

[33] Hellinger, surpa note __, at 31.

[34] Ellner, supra note __, at 15.

[35] Bernard Mommer, Subversive Oil, in Venezuelan Politics in the Chavez Era: Class, Polarization, and Conflict, 135 (2003).

[36] Id. at 137.

[37] Id.

[38] Id. at 144.

[39] See Ellner, supra  note __, at 17.

[40] Hellinger, supra note __, at 32.

[41] Margarite Lopez Maya, Hugo Chavez Frias, in Venezuelan Politics in the Chavez Era: Class, Polarization, and Conflict, 78 (2003).

[42] Dick Parker, Chavez and the Search for an Alternative to Neoliberalism, in Venezuela: Hugo Chavez and the Decline of an “Exceptional Democracy,” 63-4 (2003).

[43] Kenneth Roberts, Social Polarization and the Populist Resurgence, in Venezuelan Politics in the Chavez Era: Class, Polarization, and Conflict, 60 (2003).

[44] Maya, supra note __, at 84.

[45] Id. at 85.

[46] Nigel Chalk, Fiscal Sustainability with Non-Renewable Resources, International Monetary Fund, Foreign Affairs Department, 19 (March 1998).

[47] [find quote from Chavez]

[48] Id.

[49] Dick Parker, Chavez and the Search for an Alternative to Neoliberalism,  in Venezuela: Hugo Chavez and the Decline of an “Exceptional Democracy,”  64.-66 (2007).

[50] Julia Buxton, Economic Policy and the Rise of Hugo Chavez, in Venezuelan Politics in the Chavez Era: Class, Polarization, and Conflict, 129 (2003).

[51] Roberts, supra note 4.

[52] Buxton, supra note __, at 128.

[53] U.S. Department of State, Background Note: Venezuela, (last viewed on April 28, 2007).

[54] Latin Focus, Venezuela-GDP Growth by Sector (1995-2006), (last viewed on April 25, 2007).

[55] CIA World Fact Book 2007-Venezuela. (13% of the work force is employed in the agricultural sector, but agriculture only contributes 3.7% to the GDP).

[56] U.S Dept of State Background Note: Venezuela, supra note __.

[57] Mark Weisbrot, Luis Sandoval & David Rosnick, Poverty Rates in Venezuela: Getting the Numbers Right, Issue Brief, Center for Economic and Policy Research  (May 2006).

[58] U.S Dept. of State Back ground Note on Venezuela, supra note __.

[59] [use statistics from CIA World Fact Book and supporting text]

[60] Council on Foreign Relations, Venezuela’s Oil-Based Economy, (last viewed on April 25, 2007).

[61] Hellinger, supra note __, at 29.

[62] Buxton, supra  note __, at 113.

[63] Patricia Marquez, The Hugo Chavez Phenomenon, in Venzuelan Politics in the Chavez Era, 210 (2003).

[64] Id.

[65] Constitution of the Bolivarian Republic of Venezuel, pmbl.

[66] Buxton, supra note __, at 125.

[67] Daphne Eviatar, Petro Peril: Why Iraq’s Oil Wealth Will Do More Harm than Good, The American Lawyer (April 2003).

[68] Nelson Ortiz, Entrepreneurs: Profits Without Power, in The Unraveling of Representative Democracy in Venezuela, 75.(Jennifer L. McCoy and David J. Meyers eds., 2004).

[69] Id.

[70] Ortiz, supra note __, at 92.

[71] John V. Lombardi, Prologue, in Venezuelan Politics in the Chavez Era, 4 (2003)

[72] Id.

[73] Dell, supra note __.

[74] Thorvaldur Gylfason, Natural Resources and Economic Growth: From Dependence to Diversification, European Institute for International Economic Relations, University of Wuppertal, Germany, 26 (November 2004).

[75] Gylfason, supra note __, at 2.

[76] Ibsen Martinez, The Curse of the Petro-State: The Example of Venezuela, Reflections from Latin America, (September 2005).

[77] Dell. Supra note __.

[78] Id.

[79] Eviatar, supra note __.

[80] Gylfason, supra note,__ at 25.

[81] Id.

[82] Dell, supra note __, at 25.

[83] Martinez, supra  note __.

[84] Gylfason, supra note __, at 26-27.

[85] Eviatar, supra note __.

[86] Gylfason, supra note, at 27.

[87] Id.

[88] Kristin Halvorsen, Minster of Finance of Norway, The Norwegian Economic Model—Prosperous and Sustainable?, Address at the Norwegian Embassy in Berlin (February 2007) (transcript available at

[89] Id.

[90] Gylfason, supra note, at 28.

[91] Olympio Barbanti, Development and Conflict Theory, (last visited on April 9, 2007).

[92] Gustav Ranis,  The Evolution of Development Thinking: Theory and Policy, Yale University, Economic Growth Center, 2-3 (May 2004).

[93] Id. at 5.

[94] Id. at 6.

[95] Id. at 7.

[96] Supra, note 24.

[97] Economy Professor, Raul Prebisch, (last visited on April 12, 2007).

[98] Joseph L. Love,  Raul Prebisch and the Origins of the Doctrine of Unequal Exchange, Latin American Research Review (1980).

[99] Edinborough Global Partnerships, “What is Development?”, (last viewed on April 11, 2007).

[100] Ranis, supra note __, at 9.

[101] Sanjaya Lall, Reinventing industrial strategy: The role of government policy in building industrial competitiveness, 13 (University of Oxford, International Development Center, Second Draft, 2003).

[102] Id.



[105] See Irma Adelman, Fallacies in Development Theory and Their Implications for Policy, (California Agricultural Experimentation Station-Giannini Foundation of Agricultural Economics, Working Paper No. 887, 1999).


[107] Ranis, supra __, at 14-18.

[108] Lall, supra note __..

[109] Id. at 18-19.

[110] Id. at 16.

[111] Michael Boozer, et al., Paths to Success: the Relationship Between Human Development and Economic Growth, (Yale University Economic Growth Center Working Paper No. 874, 2004).

[112] Ranis supra note __, at 17.

[113] Martine Hilbert, et al., United Nations Economic Commission on Latin America and the Caribbean, Road Map Towards an Information Society in Latin America and the Caribbean, 9 (July 2003).

[114] K.S. Jomo, Growth After the East Asian Crisis:  What Remains of the East Asian Model?, 10 (United Nations and Harvard Center for International Development, G-24 Discussion Paper, 2001).

[115] Id. at III.

[116] R.H. Wade, Creating Capitalisms, in Governing the Market: Economic Theory and the Role of Government in East Asian Industrialization, (2003), available at 

[117] Id.

[118] Lall, supra note__, at 9.

[119] Id. (quoting John Stewart Mill,  Principles of Political Economy, 922 (London: Longmans Green 1940).

[120] Id. at 17.

[121] Ricardo Hausman & Dani Rodrik, Doomed to Choose: Industrial Policy as a Predicament,  7 (Harvard University, John F. Kennedy School of Government, Draft, 2006).

[122] Lall, supra note __, at 18.

[123] Hausman, supra note __, at 7.

[124] Lall, supra note __, at 17.

[125] Alicia Mullor-Sabastian, A New Approach to the Relationship Between Export Instability and Economic Development, 15 (International Monetary Fund, Bureau of Statistics, 1987).

[126] Id. at 16.

[127] Kyung Tae Lee, Financial Crisis and East Asian Development Model,  (Korean Institute for International Economic Policy, 2001), available at

[128] Jomo, supra  note __, at 45.

[129] Id.

[130] Assistant Secretary General for Economic Development in the United Nations' Department of Economic and Social Affairs (DESA) since January 2005.

[131] Jomo, supra note __, at 3.

[132] Adelman, supra note __, at III, part II..

[133] Jomo, supra note __, at 4.

[134] Lall , supra note __, at 17.

[135] Id.

[136] Jomo, supra note __, at 5.

[137] Id. at 7.

[138] Id. at 8.

[139] Id. at 45.

[140] Hausman, supra note __, at 6.

[141] Id. at 38.

[142] The inputs for a new economic activity include, but are not limited to, physical installations and machinery, skilled workers, intermediate inputs, logistical systems to transport the inputs and deliver outputs, marketing systems, information gathering systems, property and contract systems, standards and regulations based on product characteristics, labor norms, financial rights and consumer protections, etc.

[143] Hausman, supra note, at 8-9.

[144] Id. at 13.

[145] Id. at 15.

[146] Id. at 16.

[147] Id. at 17.

[148] Id. at 18.

[149] Id. at 21

[150] Henry H. Perritt, Jr., Law and the Information Superhighway, 301 (1996).

[151] Id. at 25.

[152] Nirvikar Singh, Information Technology and Rural Development in India, 5-8 (University of California, Santa Cruz, 2004).

[153] Hilbert, supra note __, at 9.

[154] Id. at 23.

[155] Id. at 16.

[156] A Proposal to Improve Technical Management of Internet Names and Addresses, Discussion Draft, Proposed Rule by the Department of Commerce (1998),

[157] Hilbert, supra note __, at 15.

[158] A Proposal to Improve Technical Management of Internet Names and Addresses, Discussion Draft, Proposed Rule by the Department of Commerce, (1998),

[159] Hilbert, supra note __, at 94.

[160] Id. at 76.

[161] Id. at 44.

[162] Id. at 46.

[163] Singh, supra  note __, at 9.

[164] Hilbert, supra note __, at 77.

[165] Id. at 79.

[166] Frank Barry, Third-level education, foreign direct investment and economic boom in Ireland,  38 Int. J. Technology Management, 198, 200 (2007).

[167] Id. at 198-199.

[168] Id. at 203.

[169] Id.

[170] Eileen P. Drew, Development of information technology in Ireland, in Information Technology in Selected Countries, (Eileen P. Drew & F. Gordon Foster eds., The United nations University, 1994), (follow “1: Development of information technology in Ireland” hyperlink).

[171] Drew, supra note __, (then follow “3. Government policy and the role of key institutions” hyperlink).

[172] Id.

[173] Id.

[174] Drew, supra note __, (then follow “4. Development of the electronics industry” hyperlink).

[175] Id.

[176] Drew, supra note __, (then follow “5. Development of the software industry” hyperlink).

[177] Id.

[178] Id.

[179] The most important reason was the IRA’s tax incentives.

[180] Barry, supra  note __, at 203.

[181] Id.

[182] Id at 205.

[183] Id. at 208.

[184] Id. at 210.

[185] Id. 

[186] Internet World Stats, World Internet User Stats,

[187] Susan Finquelievich, The Meaning of E-Politics for Civil Society in Latin America, 2 (University of Buenos Aires, Instituto de Investigaciones Gino Germani, Draft Memo, 2003).

[188] Internet World Stats, supra note __.

[189] International Market Research Reports, Venezuela, supra note __.

[190] Id.

[191] Id.

[192] Id.

[193] Id.

[194] Dorta, supra note __,  at 3.

[195] Guevara, supara note __, at 18-19.

[196] Pablo Navarrete, Venezuela’s Chavez Announces a New National Science Program, Venezuelaanalysis, December 15, 2005,

[197] Dalia Dorta, Venezuela: Internet Market Overview, U.S. Commercial Service, United States Department of Commerce (August 2006).


[199] Industry Canada, International Market Research Report: Venezuela,,

[200] Dorta, supra note __.

[201] As of 2006, the average internet usage rate at an infocentre was $0.75USD/hour.

[202] Internet cards work just like phone cards.

[203] Dorta, supra note __..

[204] International Market Research Report: Venezuela, supra note __.

[205] Leopoldo Brandt Graterol, Internet Law-Venezuelan recently Enacted Law: The Innovation, Technology & Sciences Act,

[206] Id.

[207] Dorta, supra note __.

[208] International Market Research Report: Venezuela, supra note __.

[209] George Wilpert, Chavez Announces that Venezuelan State Will Switch to “Free Software,, September 29, 2004,

[210], 50% of Government Software will be Open Source by 2007, March 5, 2005,

[211] International Market Research Report: Venezuela, supra note __

[212] Id.

[213] Humberto Marquez, “Venezuela: State-Financed in the Solidarity Economy,” Inter Press Service News Agency, 2005,

[214] Id.

[215] Betsy Bowman & Bob Stone, “Venezuela’s Cooperative Revolution,” Dollars & Sense: Magazine of Economic Justice,

[216] Parker, supra note __, at 68.

[217] 66.

[218] Id.

[219] Id..

[220] 67.

[221] Simon Romero, “Chavez Rattles Takeover Saber at Steel Companies and Banks,” The N.Y. Times, (May 7, 2007).

[222] Id.

[223] Watts S. Humphprey, news@sei,

[224] MAIT, The Netherlands ICT Industry,

[225] The Federation of International Trade Associations (FITA), Venezuela,

[226] Venezuela Export, Venezuela Industry Directory,

[227] Id.

[228] FITA, supra note __.

[229] Ellner & Salas, supra note __, at 3.

[230] Thomas Muhr & Antoni Verger, Venezuela: Higher Education for All, Journal for Critical Education Studies, (March 2006),

[231] Id.

[232] Id.

[233] Patricia Marquez, Ph.D., A Global Guide to Management Education 278 (2005),

[234] Muhr & Verger, supra note __.

[235] Id.

[236] Id.

[237] Id.

[238] Id.

[239] McCaughan, supra note __, at 25.

[240] Guevara, supra note 7, at __.

[241] Muhr & Verger, supra note 230.