Published by EH.NET (November 2004)

Jorge Salazar-Carrillo and Bernadette West, Oil and Development in Venezuela during the 20th Century. Westport, CT: Praeger, 2004. xiii + 280 pp. $75 (hardcover), ISBN: 0-275-97262-3.

Reviewed for EH.NET by M. del Mar Rubio, Department of Economics and Business, Universitat Pompeu Fabra (Barcelona).

This book examines whether exports of primary products should be trusted as leading sectors of economic development. It uses the experience of a major oil exporter, such as Venezuela over the twentieth century, as a test case. After the introduction, the second chapter of the book presents a brief summary of the theoretical propositions made in the literature about the relation of an external demand expansion with the internal growth of an economy: the classical and neoclassical affirmative position, the development economists’ negative approach, the staple theory and the regional economists’ mixed propositions (the effectiveness of the transmission mechanism depends on the characteristics of the exported product), plus the qualifications of North and Meier to these three basic views. The authors advance here their own view on the matter. According to them there are four main factors determining the success or failure of the main export line in transmitting its growth to the rest of the economy: (1) the size of the expanding primary export line relative to the rest of the economy, (2) its rate of expansion, (3) its direct and indirect contribution to the development of the other sectors of the economy, and (4) the effectiveness with which this contribution is used. The authors also consider the existence of negative effects of the expansion of a primary export line, these are: the unfavorable demonstration effects that result from external contacts; the resulting short-run increase in population growth; external diseconomies; and monopsony-monopoly market environment as well as other enclave characteristics that are sometimes present in primary export lines. The hypothesis made by the authors is that the positive contributions will generally overshadow the negative effects of a primary export expansion. Thus, a potential leading export sector of the primary type usually will be successful in inducing growth in the rest of the economy regardless of the type of primary product. Though, they recognise, some products may be more successful than others. Whenever export expansion fails to induce growth in the rest of the economy it is probably due to the absence or inappropriateness of government policies.

The rest of the book is devoted to the empirical analysis. The analysis is divided intro nine periods. 1910-1922, 1923-1929, 1930-1936, 1937-1942, 1943-1957, 1958-1973, 1974-1985, 1986-1990 and 1991-2000. Each period corresponds to a different chapter. According to the authors the turning points correspond to periods where the behavior of the industry and the government has been significantly different. For each and every period several calculations are presented with a varying degree of detail: foreign exchange proceeds (the contribution of oil to the economy through the external sector), oil tax revenues (the contribution through the fiscal revenues), petroleum investment, income expenditure generation and the contribution of oil investment and oil GDP to the nonpetroleum part of the economy. Finally the retained value of total expenditures is taken to measure the overall positive contributions of the oil sector to the economy. The retained value of total expenditures is calculated by subtracting the following elements from the total expenditures of the industry: payments to foreign factors (profits after taxes and interest), remittances abroad by foreign industry workers, imports of goods and services, and depreciation and amortization charges.

After the nine chapters (periods), the authors conclude that in Venezuela the oil sector contributed directly and indirectly to the development of the country’s overall economy, particularly from 1936 to 1973, when that sector met the criteria of a leading sector, i.e., one that expands rapidly and obtains a large specific size relative to the economy as a whole. Oil investment in Venezuela contributed to the fiscal sector, the foreign sector, GDP, income, backward and forward linkages, and the multiplier and accelerator effects. Generally its overall contribution through the retained value of total expenditures was well utilized by the Venezuelan government, although there was plenty of room for improvement. Finally in spite of recent efforts to diversify the production and export mix, the Venezuelan economy continues to remain heavily dependent on oil production for export.

Several criticisms can be made to the book. In the first place this new version of the book merely extends to the present the work done in two previous publications by the main author: Jorge Salazar-Carrillo, Oil in the Economic Development of Venezuela (1976) and particularly Jorge Salazar-Carrillo with the assistance of Robert D. Cruz, Oil and Development in Venezuela during the Twentieth Century (1994). In fact, the new book apparently reproduces the exact words of the latter except for three newly written sections: the theoretical framework, the 1991-2000 chapter and the conclusions. It does not seem to revise in any form any of the previously published materials even though recent literature on the Venezuelan experience makes a more critical assessment of the apparently most successful years of the Venezuelan economy from the 1940s to the mid 1970s. In addition the new sections exhibit a few editorial errors of importance: Table 12.5 replicates exactly the data in table 12.4 despite different headings and contents according to the description in the text; in the conclusions the summary of the period 1900-1935 is misplaced in between the summary of the main period of 1936-1973 and the last period of 1974-2000. (Also, where is the period 1900-1910 in the book? Why 1936-1973 rather than 1937-1973 as marked by the earlier choice of turning points by the authors?) In addition, it is generally difficult to understand how the theoretical exposition of the second chapter relates to the empirical calculations of the rest of the book. On the one hand, there is not a direct match of the positive contributions specified up front with the calculations made later on, and on the other hand the negative effects are mostly ignored in the empirical part of the book. Finally, as in the earlier versions, the extremely compartmentalized structure of the book makes it very difficult to have a century-long view of either the oil industry or the economic development of the country. The book lacks a table or a graph of the main indicators over the whole century. Having to compare table after table, when the consistency of the data presented in the tables through the book is not guaranteed, excessively complicates the reader’s comprehension. Despite these shortcomings, those interested in specific periods of Venezuelan economic and oil industry history may find this a useful book.

(Jorge Salazar-Carrillo is Professor of Economics at Florida International University and Director of FIU’s Center of Economic Research. He is also a former non-resident Senior Fellow at the Brookings Institution. Bernardette West is a Lecturer in Economics at the University of Miami and Florida International University.)

M. del Mar Rubio is currently Visiting Assistant Professor at the Economics and Business Department of the Universitat Pompeu Fabra (Barcelona, Spain). She obtained her Ph.D. from the London School of Economics in 2002. Her research focuses on environmental and energy economics in historical terms, mostly but not exclusively, of the Latin American countries. Her most recent publication is “The Capital Gains from Trade are Not Enough: Evidence from the Environmental Accounts of Mexico and Venezuela,” Journal of Environmental Economics and Management 48 (2004): 1175-91.