Harvard Professor Ricardo Hausmann : The Open Drains of Latin America

Stories are most believable when they reaffirm our prior beliefs and assumptions. If not, we tend to find them implausible.

 A case in point is Eduardo Galeano’s much-admired 1971 book The Open Veins of Latin America, which has sold more than one million copies in 12 languages and defined a generation’s view of the region’s tortured history. The late Hugo Chávez gave US President Barack Obama a copy when they met in 2009 in Trinidad.

The book is commendable for its ability to describe five centuries of Latin American history with great coherence, something that only a work of fiction can achieve. History, unfortunately, is a bit more complex. A few weeks ago, Galeano, to the astonishment of many, distanced himself from his own book. He said he could no longer bear reading it, and that when he wrote it, he “lacked sufficient knowledge of economics and politics.”

Why was the book so well received, and what accounts for its author’s second thoughts?

Galeano’s book interprets Latin America’s history as the consequence of foreign plunder. Over the centuries, bad guys change nationality – say, from Spanish to American – but their intentions remain the same. Current problems are the result of evil deeds committed by foreign powers that came only to exploit. The poor are poor because they are victims of the powerful.

Even the most distorted myths contain a kernel of truth. Throughout human history, those with superior technology have tended to displace or even annihilate their neighbors. That is why the Welsh and the Pygmies live in remote places, and why English, Spanish, and Portuguese are spoken in the Americas. In fact, recent scientific evidence indicates that the Neolithic Revolution – the transition from hunting and gathering to agriculture – spread mostly because farmers displaced hunters, not because hunters learned from them.

But, while technological superiority and confrontation can wipe out the weak side, technological diffusion across cultures can be mutually beneficial. It allows all to do more with less, thereby generating a surplus that can be distributed.

As in any such relationship, all parties want to get the lion’s share of the gain, but some get the short end of the stick. Yet, without the relationship, there would be no stick. The real challenge for a patriot is to obtain the largest amount of pie, not a large share of a small pie.

Alas, those inspired by Open Veins, like Chávez (and Fidel Castro before him), are bound to create very small pies. For example, while Chávez’s intention was to double Venezuela’s oil production to six million barrels per day by 2012 – a feasible goal, given that the country has the world’s largest oil reserves – his penchant for expropriation and for firing able dissenters caused output to fall by one-fifth. While Venezuela remains mired in economic malaise, its allies – China, Russia, Brazil, and OPEC – have raised output by 14 million barrels per day, laughing all the way to the bank.

But to tell the story of Latin America as one of foreign pillage is to ignore the benefits that the region has gained from foreign efforts, especially in Venezuela. So here is an alternative story.

Once upon a time, in ancient Mesopotamia, oil was known to exist and it was peddled by some quacks for its medicinal powers. Around 1870, John D. Rockefeller spearheaded the development of the modern oil industry to produce kerosene for lighting. Later, while he was in a ferocious confrontation with Thomas Edison, who was threatening Rockefeller’s business with the electric bulb, unrelated technological developments led to the gasoline-powered internal combustion engine and to the idea of putting it on wheels. This soon made oil the preferred energy source for transportation, not lighting, and even for electricity generation.

But to develop the oil industry, many more technological advances needed to occur. First, oil had to be found. Then it had to be extracted, refined into more useful products, and transported cheaply. All of that required a plethora of breakthroughs in geology, metallurgy, material science, chemical engineering, cars, roads, cities, rules, and other areas.

It was this extraordinary technological revolution that made oil valuable. While this was happening, many of today’s large oil producers – including Venezuela, Saudi Arabia, Iran, and Nigeria – were missing in action. For the most part, they did not know that they had oil or where it was. They did not know how to get it out. They did not know about seismic lines, drilling, pipelines, refineries, or tankers. More important, they did not do much to construct the complex ecosystem that makes oil valuable.

They did, however, have the right to restrict access to their underground resources in order to extract rents, just as the despised agricultural landowners have done for centuries. They could become rentiers and live off the work and ingenuity of others. The chutzpah of Open Veins and Chávez is to describe their situation as victimhood, not good fortune.

Similar stories can be told of other industries, even those that do not require natural resources but rely on global value chains instead. In developing countries, economic progress requires absorbing and adapting technology that exists in other places, which necessitates engaging with those that have it. By characterizing these interactions as pure exploitation, rather than as value-creating opportunities, the Open Veins mentality has been a real drain on the possibilities of so many in Latin America and elsewhere.

Ricardo Hausmann, a former minister of planning of Venezuela and former Chief Economist of the Inter-American Development Bank, is a professor of economics at Harvard University, where he is also Director of the Center for International Development.

Copyright: Project Syndicate, 2014.
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