Cover image for From Windfall to Curse?: Oil and Industrialization in Venezuela, 1920 to the Present By Jonathan Di John

From Windfall to Curse?

Oil and Industrialization in Venezuela, 1920 to the Present

Jonathan Di John

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$72.95 | Hardcover Edition
ISBN: 978-0-271-03553-6

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ISBN: 978-0-271-03554-3

360 pages
6" × 9"
2009

From Windfall to Curse?

Oil and Industrialization in Venezuela, 1920 to the Present

Jonathan Di John

“This is an original, lucid, and stimulating work, one that will force economists, political scientists, and historians to rethink the economic history of Venezuela, the validity of the ‘resource curse,’ and the political economy of growth more generally. It is a book that embodies the best tradition of interdisciplinary analysis. This is an outstanding contribution to the political economy of development in Latin America and should be required reading for those interested in understanding long-run economic performance and the political economy of economic reform.”

 

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Since the discovery of abundant oil resources in the 1920s, Venezuela has had an economically privileged position among the nations of Latin America, which has led to its being treated by economic and political analysts as an exceptional case. In her well-known study of Venezuela’s political economy, The Paradox of Plenty (1997), Stanford political scientist Terry Karl argued that this oil wealth induced extraordinary corruption, rent-seeking, and centralized intervention that resulted in restricting productivity and growth. What this and other studies of Venezuela’s economy fail to explain, however, is how such conditions have accompanied both growth and stagnation at different periods of Venezuela’s history and why countries experiencing similar levels of corruption and rent-seeking produce divergent developmental outcomes.

By investigating the record of economic development in Venezuela from 1920 to the present, Jonathan Di John shows that the key to explaining why the economy performed much better between 1920 and 1980 than in the post-1980 period is to understand how political strategies interacted with economic strategies—specifically, how politics determined state capacity at any given time and how the stage of development and development strategies affected the nature of political conflicts. In emphasizing the importance of an approach that looks at the political economy, not just at the economy alone, Di John advances the field methodologically while he contributes to a long-needed history of Venezuela’s economic performance in the twentieth century.

“This is an original, lucid, and stimulating work, one that will force economists, political scientists, and historians to rethink the economic history of Venezuela, the validity of the ‘resource curse,’ and the political economy of growth more generally. It is a book that embodies the best tradition of interdisciplinary analysis. This is an outstanding contribution to the political economy of development in Latin America and should be required reading for those interested in understanding long-run economic performance and the political economy of economic reform.”
“This book addresses the key puzzle of Venezuela’s political economy in the twentieth century—the rapid and spectacular rise of Venezuela’s economic development from 1920 to 1965, followed by its precipitous collapse, arguably to this day. If you think the answer is oil, this book will make you think again. Marshalling hard-to-find data, Di John shows how import substitution and export diversification each depend, for their success, on the nature of a country’s political institutions.”
“There are few economic and political histories as enigmatic as Venezuela’s. Until now, little has been written that captures the complexity of its economic and political trajectory. This fascinating book fills an important gap in the most original way and is a brilliant example of interdisciplinary analysis. It provides a convincing critique of the ‘resource curse’ and will force policy makers and scholars to rethink how and why industrial policy succeeds or fails in Latin America.”
“Di John’s book presents a thorough and carefully researched account of Venezuela’s late development process in the twentieth century.”
“This is a timely, well-written, clear, and rigorous book that will likely become a model for scholars studying the political economy of oil-exporting countries plagued by problems of poverty and political instability. Additionally, it may help to shed light on a number of problems by providing answers to some of Venezuela’s economic and foreign policy difficulties, and to the destabilizing internal threats faced by Middle Eastern oil-producing countries.”

Jonathan Di John is Lecturer in Political Economy of Development at the School of Oriental and African Studies, University of London, and a Research Fellow at the London School of Economics.

Contents

Preface and Acknowledgments

List of Abbreviations

Part One: Introduction

1 Accounting for Growth and Decline in Venezuela, 1920–2005

2 Trends and Cycles in the Venezuelan Economy, 1920–2005

Part Two: A Critical Survey of the “Resource Curse” Literature

3 Economic Explanations of the Growth Collapse in Venezuela, 1973–2005

4 Political Economy Explanations of the Growth Collapse in Venezuela

5 Economic Liberalization, Political Instability, and State Capacity in Venezuela, 1989–1998

Part Three: An Alternative Political Economy of Venezuelan Growth and Decline, 1920–2005

6 Toward a New Political Economy of Late Industrialization

7 Periodization of Industrialization Stages and Strategies in Venezuela, 1920–2005

8 The Structure of and Changes in Political Settlements in Venezuela, 1920–2005

9 A New View on the Political Economy of Growth in Venezuela, 1920–2005

Part Four: Beyond the Venezuelan Case

10 The Political Economy of Growth in Malaysia and Venezuela

11 Conclusion: Rethinking the Political Economy of Growth

References

Index

Introduction

Accounting for Growth and Decline in Venezuela, 1920–2005

This work examines the political economy of industrial policy and economic growth in Venezuela in the period 1920–2005. Soon after the discovery of oil in Venezuela during the 1920s, the idea of “sowing the oil,” that is, diversifying the production and export structure, was an important organizing concept among economic and political elites (Baptista and Mommer 1987). Since the early 1950s, the industrialization process became increasingly state led. The role of the state was marked by a purposeful policy of import substitution that coincided with the transition to democracy in 1958. Moreover, political leaders set Venezuela on a path of a more pronounced state-led, “big-push” natural-resource-based heavy industrialization that focused on the development of state-owned enterprises in steel, aluminum, petrochemicals, oil refining, and hydroelectric power. The Venezuelan state-led, big-push heavy industrialization strategy was not dissimilar in intent, ambition, and scope from state-led industrialization strategies in South Korea, Taiwan, Malaysia, and Brazil, as well as some other oil-exporting developing economies.

Venezuela’s growth trends have, however, several distinguishing and perplexing characteristics. On the one hand, Venezuela was among the fastest growing economies in Latin America from 1920 to 1965, and its manufacturing growth rate was among the most rapid until the mid-1970s. However, from the mid-1960s the non-oil economy, and particularly the manufacturing sector, experienced a dramatic decline in total factor productivity growth and labor productivity growth. Then, output growth in the manufacturing sector (and the non-oil economy more generally) collapsed in the period 1980–2003. The only factor that kept growth rates afloat in the 1970s was the reflationary impact of high government spending as a result of two oil booms. Even so, after 1980 Venezuela’s growth was among lowest of all late-developing economies.

A profound political crisis accompanied this decline. From the early 1990s to 2005, the Venezuelan polity was characterized by deteriorating political order, growing instability, and legitimacy crises, characterized by increasingly frequent coup attempts, alarming increases in voter absenteeism, the growing use of corruption scandals as instruments of political competition, and the virtual disappearance of the traditional political parties that were central to a country that was once considered a model of democratic stability. In contrast to the literature that studies crises in authoritarian rule (e.g., Malloy 1977), or in transitions to democracy (e.g., Przeworski 1991), this book examines the tensions and processes of late development within a long-standing democracy.

Such dramatic changes in long-run growth rates are not well understood in mainstream economic theory. This is because growth theory is concerned with linear trajectories among late-developing economies. “Old” neoclassical growth theories (Solow 1956) predicted convergence in income levels across countries, arguing that given the potentially greater returns to capital in less developed areas, late developers would “catch up.” “New” theories of endogenous growth (Romer 1986; Lucas 1988) argue that because investments generate greater externalities in the context of larger stocks of human and physical capital, divergence in income levels across the world will persist or even grow. However, neither the old nor the new growth theories predict the actually observed relationship that the fastest growing countries are never the countries with the highest per capita incomes, but always a subset of lower-income countries (Olson [1996] 2000, 57). Thus, economic theories of growth are of limited use in explaining the wide and persistent divergence of performance among late-developing countries. Indeed, neoclassical growth theories, on their own, cannot explain why some countries sustain rapid growth for long periods only to fade into long periods of stagnation and even downward spiral and disintegration.

The dramatic slowdown in growth was paradoxical, since Venezuela seemed to be a likely candidate to maintain its rapid growth. First, in the period 1974–85, Venezuela received an enormous increase in resource availability as a result of oil windfalls. Second, Venezuela maintained relatively high levels of physical and human capital investment in the context of a relatively accountable long-standing democratic polity. The dominant literature on governance and institutions asserts that greater democratic competition is central to checking the potentially ineffective use of discretion and authority by state leaders, thus assuring effective governance (North 1990; Olson 1993; World Bank 1997a; Sen 1999). Third, the Venezuelan state has not had to contend with ethnic, regional, caste, or religious conflicts, which make governance and the maintenance of social order particularly difficult in many parts of the developing world, including such long-standing democracies as India and Sri Lanka (Clague et al. 1997). In the Latin American context, Venezuela also maintained among the least inequitable distributions of income. In sum, Venezuela appeared to possess many favorable “initial conditions” and “social capabilities” (Abramowitz 1986) for rapid catch-up.

Despite massive resource availability in the 1970s and 1980s, the state became increasingly ineffective in channeling oil revenues in productivity-enhancing and growth-enhancing ways. The failure of the state and other actors within the economy to provide policies and institutions to maintain historically high growth rates, especially in comparison with other similarly endowed middle-income economies, such as Malaysia or South Korea, who were following similar types of industrial policies, is therefore interesting in providing insights into the political economy of growth in Venezuela. Was the failure due to policy errors or inappropriate institutions, or did oil windfalls themselves become a “curse” by crowding out the development of non-oil sectors such as manufacturing, or were there other factors that explain the slowdown in growth?

The structure of the book is as follows. Chapter 2 examines the main trends in output growth, productivity growth, and investment in the non-oil sector in general, and the manufacturing sector in particular. There are two main points that emerge from the long-run growth trends in Venezuela. The first is that worsening economic performance since 1968 cannot be attributed to poor “initial conditions.” Indeed, I demonstrate that the growth slowdown and later implosion coincided with historically and comparatively high levels of physical and human capital investment in the context of a political economy with relatively equal income distribution and a competitive democratic system. The second main trend uncovered is the reversal in the efficiency of the economy in managing oil abundance. This is done through simple statistical analysis. The period 1920–65 is characterized by a positive correlation of non-oil growth and real oil prices, while the subsequent period 1965–98 is characterized by a significantly negative relationship between these two variables. This underlying pattern suggests a decline in the efficiency of the fiscal linkage in Venezuela and forms an important organizing trend from which to test competing theories about economic growth and industrial policy in twentieth-century Venezuela.

Part Two (Chapters 3–5) critically examines the reigning explanations of the output and productivity growth slowdown in the post-1968 period. Chapters 3 and 4 present a detailed examination of the reigning economic and political economy explanations of decline in Venezuelan non-oil and manufacturing productivity growth and output growth in the post-1968 period and assess the extent to which such explanations are defensible in light of the comparative and historical evidence. These two chapters provide an intellectual history of the political economy of Venezuelan development and bring together a disparate but influential set of ideas that have permeated economic and political discourse in the country for some time. Moreover, many of the explanations treated in these chapters are similar to explanations of economic failure in many other Latin American countries, as well as other developing countries that export oil, and thus have a wider relevance beyond the Venezuelan case.

The first three sections of Chapter 3 explore different versions of the “resource paradox,” particularly “Dutch Disease” models, and related open economy macro models. These models focus on the effects of rigid and high wages, and suggest that oil booms likely lead to overambitious and inefficient state spending. One of the main threads of these models is that oil booms produce exchange rate revaluations, which reduce the incentives to invest in manufacturing and generally makes manufacturing production uncompetitive. While economic models of the “resource curse” are consistent with the coexistence of the slowdown in manufacturing growth in Venezuela with the oil booms in the 1970s and early 1980s, the longer-run correlation of oil resource availability and manufacturing investment and growth in twentieth-century Venezuela is not found to be robust. Oil abundance has coincided with both rapid growth (1930–80) and stagnation (1980–2005). Moreover, these models do not explain why output and productivity growth rates slowed down generally in the Venezuelan non-oil economy or why some manufacturing sectors remained more dynamic than other sectors over time. The fourth section examines neoliberal arguments that claim that growing inefficiency of investment was due to an overly interventionist and centralized state that promoted too many inefficient state enterprises and supported too many inefficient infant industries in the private sector. The comparative evidence on growth, however, suggests that the quality rather than the level of state intervention is what matters for sustained economic development. One common lacuna in the neoliberal explanations is the failure to explain why policy failures in managing investment funds have persisted in Venezuela from the 1970s until the early years of the twenty-first century.

Chapter 4 explores the rentier state models and the theories that have influenced such models, notably the theories of rent-seeking and corruption. The main thrust of this literature claims that oil abundance induces centralized public authority and excessive state interventionism and discretion, which, in turn, causes growth-restricting and productivity-restricting corruption and rent-seeking. The value of this “paradox of plenty” argument is that it attempts to move beyond identifying possible problems with policy and institutional design. The rentier state argument attempts to explain why ineffective policies and institutions are pursued and, more important, persist. However, the proposition that oil abundance induces extraordinary corruption, rent-seeking, and centralized interventionism and that these processes necessarily restrict productivity growth and output growth is not supported by the comparative evidence or the historical evidence in Venezuela. Similar levels/degrees of state centralization and corruption have coincided with cycles of growth and stagnation in Venezuela and elsewhere.

The second part of Chapter 4 critically reviews the literature on rent-seeking and corruption. The literature on rent-seeking and corruption aims to demonstrate why centralized public authority and state-led centralized rent deployment generates waste and growth-restricting incentives among economic agents. It is argued that the mainstream literature on rent-seeking fails to explain why countries with similar levels of corruption can produce divergent developmental outcomes over long periods. Mainstream analysts of rent-seeking focus on the costs of the rent-seeking process. The focus on costs is incomplete and misleading. As with any institution or social process such as production, a complete evaluation of the rent-seeking process needs to address not only the inputs or costs of the process (which include both legal and illegal attempts to influence the state), but also the outputs, or outcomes of the rent-seeking process (which include economic rights created, maintained, destroyed, or transferred to create specific economic rents and the policy conditions under which such rights can be maintained).

The outcomes of the rent-seeking process can vary substantially. For instance, two entrepreneurs in the same industry in two different countries may successfully offer the same bribe amount to a government official to obtain subsidized credit, with the first using the credit to reinvest in his or her business and the other using it to purchase dollars to enhance his or her capital flight portfolio. The first case is likely to contribute to a more favorable developmental outcome than the second. To take another example, two entrepreneurs offer a similar bribe to obtain an import license to produce steel. In the first case, the rent associated with the import license is tied to some performance criterion such as productivity growth or export targets. In the second case, the rent associated with the import license is not subject to performance criteria of any sort. The former is likely to contribute to economic development much more than the latter despite the level of corruption being the same in the two cases. In the end, my examination suggests that outcomes associated with the institution of centralized rent deployment in Venezuela (or anywhere else) over time depend on other conditions that are not specified in mainstream models of rent-seeking and corruption.

On methodological grounds, neoclassical models of rent-seeking and corruption (which tend to support large-scale economic liberalization policies), as well as the more dirigiste approaches to state intervention and governance, have focused on defining the “right” institutions and the “right” incentives. These approaches (whether supporting laissez-faire or more statist solutions) suggest that ineffective institutions result from incorrect mental models or knowledge gaps on the part of leaders and decision-makers, which, in turn, generate growth-restricting incentives and policy failures. One main premise of this study is that institutions such as property rights are not only an incentive structure but also simultaneously reflect power relations. As such, it is not possible to separate issues of incentives and efficiency from issues of distribution and equity, nor is it possible to know, a priori, the dynamic efficiency consequences of a given institution. This means that the actual distribution and use of rents requires political analysis, which is neglected in mainstream approaches.

I also establish that policymakers were well aware of the problems of corruption and the inadequacies of the state in imposing performance criteria on the infant industries. This suggests that if policy errors persisted, they were not due to a lack of knowledge, as many mainstream analysts maintain. Finally, I examine in Chapter 5 the results of economic liberalization reforms initiated in 1989. I find, in contrast to what rent-seeking theory would predict, reductions in state-created rents have not led to either noticeable improvements in state capacity, reductions in corruption, or an increase in investment and growth.

Part Three (Chapters 6–9) develops an alternative explanation for explaining why oil abundance has coincided with long periods of both growth and decline in productivity and output in the non-oil and, particularly, manufacturing sector in Venezuela. Chapter 6 presents the core ideas of this explanation of why centralized state rent deployment and management, in general, and industrial policy, in particular, became increasingly more inefficient in Venezuela over time. The framework incorporates the historical interaction of economic and political processes.

I suggest that the technologies that accompany different development strategies require different levels of selectivity and discipline in the deployment of subsidies and infant industry protection, coordination of investment, and concentrations of economic and political power to be initiated and consolidated. If this is a reasonable proposition, the possibility then arises that the historically specific nature of political settlements may not be compatible with the successful implementation of a given development strategy. This implies that variations and changes in state capacity may be a function of the type of economic challenges facing the state and the extent to which state-led strategies generate resistance and legitimacy problems among powerful actors excluded from the distributional benefits of those strategies.

I argue that the effective implementation of the easy, small-scale stage of import substitution (which is generally characterized by promoting small-scale, technologically simple technologies) poses fewer economic and political challenges than the more advanced stage of ISI, including big-push industrialization strategies. In particular, the possibility of rapid growth during early ISI strategies depends much less on the state to impose stringent levels of selectivity in the subsidy deployment process, monitor the performance of subsidy recipients, and coordinate investment compared with advanced ISI and big-push industrialization strategies. This is because more advanced ISI and big-push industrialization strategies involve the creation of firms where scale economies, technological upgrading and learning, and export performance are generally more binding constraints for such firms to become competitive and maintain rapid productivity growth. Imposing selectivity and discipline in the subsidy deployment process is as much a political challenge as it is an economic one. When a state is selective in, say, granting import licenses for steel production, this means excluding many potentially powerful business groups from state patronage. It also means limiting employment creation, which in the context of significant levels of underemployment, is politically difficult to justify. Thus different development strategies and stages of development affect the types of politics that are compatible with growth. The developmental state, the rent-seeking, and the rentier state literature do not take into account the extent to which different stages of development or development strategies may affect the nature of political conflicts.

In this chapter, the main propositions of the argument are presented. Having argued on theoretical grounds that early ISI strategies present fewer economic and political challenges than more advanced ISI strategies, it is then imperative to consider the extent to which different political organizations and contests are likely to be compatible with the two broad development strategies and stages that were previously identified. Drawing on the rich political science literature on Venezuela, it is possible to distinguish two broad types of polities that have been salient in Venezuela over the period 1920–2005. In the twentieth century, Venezuela can reasonably be characterized as a consolidated state in the sense that it maintained a monopoly over the means of violence and was able to maintain political and social order for most of the period under study. However, the nature of political organization and competition changed substantially in Venezuela over the course of the twentieth century. A consolidated state, as the literature on Venezuela corroborates, has coincided with two very different types of political organization and contestations: a consolidated state with centralized political organizations, and a consolidated state with fragmented (and increasingly polarized) political organizations (see more on this distinction below).

The first set of propositions considers the growth prospects of polities that are generally characterized by a consolidated state with centralized political organizations. In such polities, patronage structures are controlled by the executive in a centralized fashion. The deployment of patronage in such polities can take place under a cohesive military regime, a centralized one-party state, or through a high degree of cooperation between two contending political parties. The Venezuelan polity, I argue, was of this type during most of the period 1920–68. These type polities, I argue, are most likely to promote economic growth through the early stage of ISI and most likely to be able to meet the political and economic challenges of big-push / advanced ISI development strategies.

The second set of propositions concerns the growth prospects of a consolidated state with fragmented political organizations, a common polity type in many less developed countries (and the type Venezuela more closely approximated in the period 1968–2005). In such polities, patronage structures are less predictable and coherent because there is either less political party cooperation, or new factions either within the dominant party system or from outside successfully capture part of the state. I argue that polities of this type may be capable of generating relatively rapid growth when attempting to implement early stage ISI strategies, but are much less likely to successfully manage the more difficult economic and political challenges of big-push / advanced ISI development strategies. This section spells out the logic of these propositions and provides brief examples from other less developed countries.

In order to assess the propositions made concerning compatibility and incompatibility, it is necessary to first trace the evolution of development strategies and political settlements. Then it becomes necessary to map or identify periods when compatibilities and incompatibilities between development strategies and political settlements are salient. Once periods of compatibility and incompatibility are identified, it is then possible to examine the extent to which the evidence on economic growth and productivity growth are consistent with the propositions made. The first step of this mapping exercise is undertaken in Chapter 7, where I demonstrate empirically that the development strategy and stage of ISI switched from the easy to the more advanced big-push stage in the period 1960–73. The political and economic implications of this periodization are explored.

Chapter 8 then traces the transformations in the nature of political settlements and state-society relations in Venezuela over the period 1920–2005. Drawing on a vast political science literature, I argue that, in the period 1920–68, the Venezuelan polity can be viewed as a consolidated state with centralized political organizations. This type of polity was maintained under both authoritarian rule (1920–58) and the period of democratic transition and consolidation (1958–68). The chapter then traces how and why the Venezuelan polity transformed from a consolidated state with centralized political organizations to a consolidated state characterized by fragmented political organizations where political contestation becomes progressively more clientelist, populist, and polarized, particularly after 1973. This chapter enables us to map the changing nature of political settlements and political organizations onto the periodization of the development strategies and stages of ISI identified in Chapter 7.

Chapter 9 presents the main results of the historical mapping of development strategies and political settlements presented in the previous two chapters and provides an alterative explanation of Venezuelan growth and productivity trends to those provided by the reigning economic and political economy arguments. I argue that the period 1920–68 is characterized by rapid manufacturing output growth and respectable productivity growth because there was basic compatibility between the development strategy (early ISI strategies) and politics (a consolidated state with centralized political organizations). I further argue that the period 1968–2005 was characterized by rapid declines in non-oil and manufacturing productivity growth and a collapse in non-oil and manufacturing output growth from 1980 to 2003 because there was a basic incompatibility between the development strategy (more advanced ISI strategies and a big-push, natural-resource-based heavy industrialization strategy) and politics (a consolidated state with increasingly fragmented and eventually polarized political organizations and contests).

In the period 1968–2005, the political science literature establishes that the Venezuelan political system became increasingly populist, clientelist, and factionalized. The basic incompatibility I identify is that politics became increasingly more factionalized and accommodating precisely at a time when the development strategy and stage of import substitution required a more unified and exclusionary rent/subsidy deployment pattern. I incorporate the economic consequences of the increasingly factionalized political contests between and within political parties attempting to build political clienteles and accommodate urban middle-class groups, emerging family conglomerates, and labor unions competing for access to centrally allocated state resources. Much of this accommodation was closely related to efforts on the part of the dominant political parties to preserve democratic rule, and by implication, prevent a return to the authoritarianism of most of the first half of the twentieth century. The coordination failures of the big-push industrialization strategy were manifested in the low monitoring of state-created rents and subsidies, excessive entry of private sector firms into protected sectors, massive proliferation of public sector employment, and state-owned enterprises in the decentralized public sector.

The chapter provides detailed empirical evidence on macroeconomic coordination failures (especially during the big-push industrialization strategies of the 1970s and 1980s) as well as microeconomic evidence to support the claim that growing political fragmentation and populist clientelist patronage were salient features of the polity, particularly after 1968. I also discuss how the explanation put forward complements or advances recent political science and economic explanations of Venezuela’s decline, particularly since 1980. It is argued that the alternative framework developed is more defensible in light of both historical and comparative evidence.

The chapters in Part Three contribute to institutional and political economy approaches to growth theory in general and advance our understanding of the historical political economy of development in twentieth-century Venezuela in particular. Explaining the growth slowdown in Venezuela as a mismatch of economic strategy and historically specific political strategies contributes to recent analytical narratives on economic growth (Rodrik 2003). Analytical growth narratives attempt to “draw the connections between specific country experiences, on the one side, and growth theory and cross country empirics, on the other . . . in order to extend our understanding of economic growth using country narratives as a back drop” .

Given the diversity of growth experiences among developing countries and the large variation of growth rates within countries over time, it is likely that a collection of growth models will be required to understand economic performance at different stages of development and under different political institutional regimes (Pritchett 2003). In comparing the growth trajectories of Vietnam and the Philippines, Lant Pritchett suggests that the processes of escaping from low-level poverty traps may be fundamentally different from the processes of igniting or sustaining growth in middle-income countries. In middle-income countries, the obstacles to growth, Pritchett argues, often lie not in insufficient human and capital stocks, but in increasing uncertainties concerning institutions (that is, the “rules of the game”). Pritchett posits that the institutional requirements of re-igniting growth in a middle-income country may be significantly more demanding than in low-income contexts. However, the analytical growth narratives explored by Pritchett and other authors in Rodrik 2003 have not explained either why or how transitions in development strategy or stage of development may generate more contentious sets of political conflicts (and therefore, uncertainties in the “rules of the game”) and more difficult institutional challenges for both the state and private sector decision-makers.

Part Four (Chapters 10 and 11) takes the analysis beyond the Venezuelan context. Chapter 10 provides a brief comparison with the Malaysian case in order to illustrate the importance of how different political settlements and the nature of threat can affect the efficiency of centralized rent deployment in two mineral-abundant, middle-income countries. The concluding chapter considers the methodological and empirical implications of a comparative, historical, and interactive approach to understanding variations and changes in state capacity and long-run growth. In particular, it addresses the failure of both neoliberal and developmental state theorists to incorporate politics into an understanding of state capacity. It argues that a more fruitful approach to growth lies in exploring institutional performance as a historically specific interactive process between political and economic development strategies. It also addresses the need to focus on bringing production (and particularly the different stages of late development) and politics (in particular the shifting grounds of legitimate rules) into analyses of governance and economic growth.

This book does not offer a universal theory. It is not likely that a general theory of growth will ever emerge precisely because the political institutions and coalitions underlying the state are historically contingent and often fragile. Rather, it is argued that such a historical and integrative political economy approach will enable a more adequate account of growth cycles and explain more adequately why well-intentioned policymakers fail to change inefficient regulatory and institutional arrangements even when they have knowledge about the problem.

Suggestions for further research are also discussed as well as a brief policy proposal for reviving sustained growth in Venezuela. The revival of economic growth in recent years (2004–7) has indeed been impressive. But this recent growth spurt has been the product of a dramatic boom in oil revenues and an economic rebound in the wake of the greatest growth collapse in contemporary Venezuelan history, in the period 1999–2003. This recent growth spurt is not, the evidence suggests, the result of a coherent production strategy; nor has it led to the transformation or diversification of non-oil exports. The historical evidence presented in this book suggests that without a substantial transformation of the non-oil economy, particularly the manufacturing sector, this growth acceleration is likely to be ephemeral and reproduce what many Venezuelan policymakers have tried for decades to overcome, namely the dependence on the vagaries of oil.