actually in the Persian Gulf. In 1997 it was actually producing more petroleum than either Kuwait or the United Arab Emirates, and almost as much as Iran. Its position in the Gulf of Mexico and its role as a Western Hemisphere producer made it a bulwark of U.S. energy security, as it had been going back to World War II. But Venezuela had also become the very embodiment of what is called a petro-state.
The term “petro-state” is often used in an abstract way, applying to nations that differ widely in everything—political systems, social organization, economy, culture, religion, population—except for one thing: they all export oil and natural gas. Yet certain common features do make the petro-state a useful lens. The common challenge for these exporters is to ensure that the opportunities for longer-term economic development are not lost to economic distortion and the ensuing political and social pathologies. That means having the right institutions in place. It is very challenging.
Venezuela’s national saga illuminates the difficulties.
“The Venezuelan economy since 1920 can be summed up in a word: oil,” the economist Moises Naim has written. Prior to that, it had been an impoverished, underpopulated, agricultural nation—a “cocoa-state” and then a “coffeestate” and “sugar state”—highly dependent on those commodities for its national income, such as it was. Local caudillos ran their little fiefdoms as if they were their own countries. Of the 184 members of the legislature in the mid-1890s, at least 112 claimed the rank of general. Afflicted by innumerable military coups, Venezuela was ruled by a series of dictators, such as General Cipriano Castro, who after taking power in 1900, proclaimed that he was “the man raised by God to fulfill the dreams of Bolivar” and reunite Venezuela, Colombia, and Ecuador as a single country. He was soon pushed aside by another general, Vicente Gómez, who ruled the country as his “personal hacienda” from 1908 until his death in 1935.1
The decisive event for Venezuela’s fortunes came in 1922. The giant Barroso well in the Maracaibo basin blew out with an uncontrolled flow of 100,000 barrels a day. (It was discovered by the same engineer, George Reynolds, who in 1908 brought in the first oil well in Iran.) With the Barroso gusher, Venezuela’s oil age had begun. Thereafter, increasing wealth poured into the country as more and more oil flowed out of the ground.
Yet why did Juan Pablo Pérez Alfonso, the influential energy minister after the restoration of democracy in 1958, and one of the founders of OPEC, decry petroleum in his retirement years as “the excrement of the devil”? It was because he saw the impact of the influx of revenues on the state, the economy, and society, and the psychology and motivations of the people. The oil wealth could be wasted; it could distort the nation’s life. In his view, Venezuela was already becoming a petro-state, a victim of the alluring and malevolent “resource curse.”2
THE “REVERSED MIDAS TOUCH”
In the 1980s and 1990s, oil could generate more than 70 percent of Venezuela’s central government’s revenues. In a petro-state, the competition for these revenues and the struggle over their distribution becomes the central drama of the nation’s economy, engendering patronage and clientelism and what is called “rent-seeking behavior.” That means that the most important “business” in the country (aside from oil production itself) is focused on getting some of the “rents” from oil—that is, some share of the government’s revenues. Entrepreneurship, innovation, hard work, and the development of a competitively oriented growth economy—all these are casualties of the system. The economy becomes inflexible, losing its ability to adapt and change. Instead, as the edifice of the state-controlled economy grows, so do subsidies, controls, regulations, bureaucracy, grand projects, micromanagement—and corruption. Indeed, the vast amounts of revenues connected with oil and gas create a very rich brew for corruption and rent seeking.
A group of Venezuelan academics summed up the problem this way: “By the middle of the twentieth century, there was already a deeply rooted conviction that Venezuela was rich because of oil, because of that natural gift that does not depend on productivity or the enterprising spirit of the Venezuelan people.” They added: “Political activity revolved around the struggle to distribute the wealth, rather than the creation of a sustainable source of wealth that would depend upon the commercial initiatives and the productivity of the majority of the Venezuelan people.”3
The petro-state and its attendant resource curse have two further characteristics. One is called the Dutch disease. The term describes an ailment that the