The Venezuelan Petro State and Foreign Policy Oil Rents and Soft Balancing Strategies

Master thesis Political Science: International Relations

Student: Remi Lehmann (s6190596)

Supervisor: Dr. Reinoud Leenders

Second reader: Dr. Antonio Carmona Baez

Date: July 31st, 2010

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Table of Contents

Abstract ------------------------------------------------------------------------------------------------------------ 5

Introduction ------------------------------------------------------------------------------------------------------- 6

A balance of power ------------------------------------------------------------------------------------------- 6

The Natural Resource Curse -------------------------------------------------------------------------------- 8

Relevancy for theory and policy --------------------------------------------------------------------------- 9

Methodological considerations and case study -------------------------------------------------------- 9

Case selection: Venezuela --------------------------------------------------------------------------------- 10

Structure of the thesis ------------------------------------------------------------------------------------- 11

1 | Theoretical framework ----------------------------------------------------------------------------------- 12

1.1 The post-Cold War balance of power -------------------------------------------------------------- 12

1.1.1 The Absence of balancing behavior ----------------------------------------------------------- 13

1.1.2 The Soft Balancing Alternative ----------------------------------------------------------------- 15

1.1.3 Conceptualizing Soft Balancing ---------------------------------------------------------------- 16

1.1.4 Critics of soft balancing -------------------------------------------------------------------------- 18

1.1.5 Soft Balancing as an integral part of foreign policy --------------------------------------- 20

1.2 The Natural Resource Curse ------------------------------------------------------------------------- 21

1.2.1 The Rentier state ---------------------------------------------------------------------------------- 23

1.2.1.2 A Political-Economic dimension ---------------------------------------------------------- 24

1.3 The Petro State ----------------------------------------------------------------------------------------- 25

1.3.1 The Political Economy of the Petro State ---------------------------------------------------- 26

1.3.2 An International dimension? ------------------------------------------------------------------- 27

1.4 Methodological considerations --------------------------------------------------------------------- 30

1.4.1 Methods of research ----------------------------------------------------------------------------- 31

1.5 Case Selection: Venezuela ---------------------------------------------------------------------------- 33

1.6 Use of sources ------------------------------------------------------------------------------------------- 33

2 | The Venezuelan Petro State ----------------------------------------------------------------------------- 35

2.1 From Colonial Outpost to Independent Nation (1498 – 1900) ------------------------------ 35

2.2 The birth of the Petro State (1901 – 1942) ------------------------------------------------------- 36

2.3 The Developmental Petro State (1943 – 1988) -------------------------------------------------- 37

2.3.1 Experiments with democracy and PuntoFijismo ------------------------------------------- 38

2.3.2 Nationalization, boom and bust --------------------------------------------------------------- 40

2.4 The Oil Opening and Neoliberal reforms (1989 – 1999) --------------------------------------- 42

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2.4.1 Pérez: The Shock Doctrine ---------------------------------------------------------------------- 42

2.4.2 Caldera: gradual reforms and PDVSA privatization --------------------------------------- 45

2.5 The Chavista Petro State (1998 – present day) -------------------------------------------------- 46

2.5.1 Reversing neoliberalism ------------------------------------------------------------------------- 47

2.5.2 Petro-boom and deepening the process ---------------------------------------------------- 52

2.5.3 Ten Years of Chávez ------------------------------------------------------------------------------ 54

3 | Venezuelan Foreign Policy ------------------------------------------------------------------------------- 56

3.1 The 4th Republic and the World ------------------------------------------------------------------ 56

3.1.2 Traditional balancing behavior -------------------------------------------------------------- 59

3.1.3 Carlos Andres Pérez --------------------------------------------------------------------------- 62

3.1.4 Rafael Caldera (feb ’94 – feb’99) ----------------------------------------------------------- 63

3.2 Bolivarian foreign policy --------------------------------------------------------------------------- 66

3.2.1 Signs of hard balancing? ---------------------------------------------------------------------- 68

3.2.2 Spreading the oil wealth: petro dollar diplomacy -------------------------------------- 70

3.2.3 UNASUR: Defending Latin-American sovereignty -------------------------------------- 74

3.2.4 ALBA and the Banco del Sur: Alternative models for economic integration ----- 77

3.2.5 The role of International Financial Institutions ------------------------------------------ 80

3.2.6 OPEC: Multilateral oil diplomacy ----------------------------------------------------------- 81

3.2.7 Eschewing cooperation and promoting sovereignty ----------------------------------- 86

3.2.8 The Obama administration and Chávez --------------------------------------------------- 87

4 | Analysis ------------------------------------------------------------------------------------------------------ 88

4.1 Near absence of traditional balancing ------------------------------------------------------------- 88

4.2 Soft balancing ------------------------------------------------------------------------------------------- 90

4.2.1 OPEC and the Oil Weapon revisited ---------------------------------------------------------- 91

4.2.2 Economic Integration Alternatives ------------------------------------------------------------ 93

4.3 The role of domestic institutions and petrodollars --------------------------------------------- 94

4.4 Soft Balancing a success? ----------------------------------------------------------------------------- 96

Conclusion ------------------------------------------------------------------------------------------------------- 98

Research Question ------------------------------------------------------------------------------------------ 98

The Venezuelan case --------------------------------------------------------------------------------------- 98

Main Findings ------------------------------------------------------------------------------------------------ 99

Theoretical implications --------------------------------------------------------------------------------- 100

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Implications for policymakers -------------------------------------------------------------------------- 101

Methodological and theoretical remarks ------------------------------------------------------------ 103

Suggestions for further research ---------------------------------------------------------------------- 104

Cited Works ------------------------------------------------------------------------------------------------ 106

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Abstract

Het onvermogen van het Neorealisme om het gedrag van staten te verklaren binnen de

context van een unipolair statensysteem heeft het debat over de verklaringskracht van het

neorealisme aangewakkerd. De theorie kan niet aannemelijk maken waarom staten zich niet

tegen de enige overgebleven supermacht – de VS – keren. Deze thesis richt zich op een

theorie die aangeeft dat staten wel degelijk balancen, maar in kiezen voor minder risicovolle

en minder kostbaardere non-militaire middelen, ook wel ‘soft balancing’ genoemd. Er is

echter nog veel onduidelijkheid over omstandigheden en oorzaken van soft balancing, en

welke rol de kosten van een dergelijke politiek spelen. Oliestaten, staten die voor hun

inkomsten grotendeels afhankelijk zijn van het exporteren van olie, hebben een grillig

verlopend inkomstenpatroon.

Aan de hand van de casus Venezuela (1989-heden) wordt nagegaan of de verandering van

de hoogte van olie-inkomsten ook daadwerkelijk tot veranderingen in buitenlands beleid

hebben geleid. Immers, met een dusdanig grillig inkomstenpatroon zou men een dito beleid

verwachten. Omdat Venezuela de afgelopen twintig jaar vele politieke- en economische

ontwikkelingen ondergaan, kan er gecontroleerd worden voor andere variabelen. De

belangrijkste bevindingen van het onderzoek zijn: Venezuela heeft verscheidene vormen van

soft balancing toegepast. De intensiteit, schaal en duur van deze initiatieven verschilt echter

sterk en lijkt samen te vallen met verloop van olie-inkomsten tussen 1991 – 2008. In tijden

van (relatief) lage olieprijzen gedurende de jaren ’90 was soft balancing beperkt. Dit geldt

ook voor de eerste jaren van het Chávez regime. Sinds de ‘olieboom’ (2004-2008) nam soft

balancing in intensiteit, schaal en duur toe tot ongekende hoogten.

Echter, van een duidelijk causaal verband lijkt geen sprake te zijn vanwege drie redenen. Ten

eerste heeft de Chávez regering in verscheidene beleidsdocumenten soft balancing

initiatieven aangekondigd, ruim voor de olieboom. De wil om te ‘soft balancen’ was al sinds

2001 aanwezig. Dit hangt mogelijk samen met het de agressieve, imperialistische

buitenlandpolitiek van de regering van G.W. Bush, zoals enkele proponenten van de soft

balancing theorie al aangaven. Ten tweede gaat de regering Chávez door met de soft

balancing initiatieven, ook al zijn de olieprijzen (en dus inkomsten voor de Venezolaanse

staat) aanzienlijk teruggelopen sinds mid-2008. Het lijkt er dan ook ten sterkste op dat olie-

inkomsten an sich geen oorzaak van soft balancing zijn, maar dit gedrag slechts faciliteren in

materiële zin. Enkele kanttekeningen dienen bij de conclusies geplaatst te worden: 1) de

bevindingen slechts in beperkte mate te generaliseren naar andere oliestaten vanwege het

ontbreken van een vergelijking van verscheidene oliestaten. 2) De soft balancing theorie nog

niet voldoende ontwikkeld om wezenlijke verschillen tussen strategieën te kunnen duiden.

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Introduction

A balance of power Since the end of the Cold War, the United States of America has been the undisputed world

power. Since the fall of the Soviet Union it has surpassed any other power in economic,

political and military capabilities. Since George W. Bush assumed office in 2001, in many

countries concern has grown over American foreign policy. The aggressive, unilateral,

national security strategy of Bush’s administration has attracted widespread criticism from

traditional allies and criticasters alike. Why did the US change its foreign policy course so

profoundly? For over more than a century, International Relations scholars have been trying

to determine why states act the way they do in this seemingly anarchic world system.

Especially Realist thinkers have been explaining state behavior by referring to the balance of

power: whenever a certain state is becoming (too) powerful, other states will invest in their

military apparatus or forge military alliances to counter the power of the hegemon, for the

sake of their own security.1 This type of behavior is generally referred to as balancing (Waltz,

1979). Indeed, there is some evidence that states have enhanced their military capabilities:

after a global decrease that started in 1985 and lasted till the late 1990s (Schiff & Clements,

1996), global military spending has grown over 45% since 1999 (Stockholm International

Peace Research Institute, 2009, p. 10). However, spending varies greatly per country and the

US defense budget is still much larger than that of all other nations combined. Even more

importantly: we are yet to witness the formation of military alliances against US hegemony.

There seem to be various reasons why states have not resorted to balancing: some states

see the US as a close ally and do not fear its foreign policy. Others argue that balancing could

spur an arms race they are unlikely to win. However, most states simply do not possess

sufficient means to increase military spending let alone to match the military power of the

US.

1 The core tenant of the Realist school of International Relations theory argues that the state is the most

important actor in world politics, and that other actors are of lesser relevance. The primary objective of a state is survival. This is the supreme national interest to which all political leaders must adhere. Since no other state or institution can be relied upon to guarantee the survival of the state, nations can only rely on self-help (Dunne & Schmidt, 2008, p. 103).

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Although at first glance it seems that other countries have little opportunity to directly

balance the hegemon, this does not mean that other countries have given the US a carte

blanche. According to various authors (Pape, 2005) (Paul, 2005) (Corrales) (Hurrell, 2006),

several countries have pursued non-military alternative strategies to block or hamper

foreign policy initiatives by the US which are deemed hurtful to other nations. These

strategies are aptly dubbed ‘soft balancing’ (Paul, 2005, pp. 58-59). Examples of soft

balancing include giving (financial) support to political actors in other countries that oppose

the hegemon, blocking policy-making by the hegemon in international organizations or

providing developing nations with development aid under very favorable (or simply no)

conditions (Corrales).

This new explanation for state behavior in the current unipolar context has sparked a debate

among both defenders and skeptics of the soft balancing approach. Brooks and Wohlforth

(2005, p. 74). argued that the main analytical flaw in the soft balancing argument is the little

attention for alternative explanations of state behavior: even if states act contrary to US

interests, it might be simply to achieve their own foreign policy goals instead of intentionally

balancing US power. Even among proponents of the approach there remain important

differences of opinion. Most authors (Paul, 2005) (Pape, 2005) argue that soft balancing

policies are primarily the result of the behavior of the hegemon and have little to do with

state-specific characteristics. Soft balancing behavior then seems to be a product of the

anarchic international system instead of conscious foreign policy choices by nations. Other

authors, such as Andrew Hurrell leave more room for the idiosyncrasy of the state involved:

states that soft balance typically believe they are entitled to a more influential role in world

politics (2006, p. 2).

Irrespective of beliefs or values that a state may hold, the majority of IR scholars argue that

foreign policy options are heavily dependent on the capabilities of a state. For example:

richer states can invest more in military personnel and equipment than poorer nations

because they dispose over more financial capabilities. Within the soft balancing debate so

far, (too) little attention has been paid to the sources of these capabilities.

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The Natural Resource Curse One possible, and potentially significant source of income, is the rent that natural resources

generate. Much has been written about the supposed (negative) impact that significant

resource rents have on the domestic characteristics of politics, the economy and society in

resource-rich nations. Yet, less has been written on possible implications of natural resource

(rent)s for foreign policy within the current unipolar context. I think such a debate is long

overdue and justified because these rents may be argued to influence foreign policy,

whether they be soft- or traditional balancing initiatives. Like any other type of (foreign)

policy, costs are involved. Resource abundant countries, and especially petro states dispose

over significant rents which usually can be used discretely by the executive.2 More than in

resource-poor countries these rents can be used to fund soft balancing strategies. Going

beyond the rent generated, lowering oil production or threatening to close the tap (which

happened in 1973 when several Arab petro states refused to sell oil to the US and the

Netherlands because of their support for Israel) can function as instruments for soft

balancing too. What is unknown, however, is whether this access to oil rents simply

functions as an enabler for certain policies (altering the cost/benefit analysis of said policies)

or whether alleged intrinsic characteristics of oil production actually encourage (or perhaps

discourage) soft balancing policy initiatives. Only very few authors, such as Michael T. Klare

(2001) seem to have ventured in the foreign policy dimension of resource abundance. His

work on natural resources and conflict paints a rather grim picture; the world’s powers need

oil to maintain their economic and military power and will therefore resort to force to secure

these energy sources when necessary. Klare clearly focuses on the needs of the oil-

consuming countries and to some extent seems to justify conflict in order to meet these

needs. Susanne Peters (2005) shares similar concerns about oil-consuming countries

resorting to violence (especially within the context of ever shrinking oil reserves), but sees

the relation as less deterministic: In her view, a more equitable distribution of oil and

international energy regimes may mitigate hostile behavior by the oil consuming countries.

Another scholar that studied natural resources and international conflicts is Helga

Haftendorn (2000). Her study on water conflicts argues that water as a resource structures

2 A Petro state in short is a nation heavily dependent on oil rents, generated by the export of this commodity.

The state’s institutions and its relations to the citizenry and the economy for a large part have been shaped through the development of the oil industry (Karl, The Perils of the Petro-State: Reflections on the Paradox of Plenty, 1999, p. 34). For a more detailed description of the Petro state, see section 1.3

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conflicts between states in such a way that it generates an asymmetric relationship between

upstream and downstream countries, which makes it very hard to resolve conflicts among

them. Oil may then also structure conflicts between states in a certain way, as oil is traded

internationally. All in all, the works by these authors hint that there may be a domestic

dimension of natural resource rents to foreign policy which cannot be captured in the

systemic approach of the anarchic international state system. As such, this dimension

deserves closer attention. This led to the following research question: To what extent and

how does access to significant oil rents generate incentives for soft balancing behavior?

Relevancy for theory and policy The debate on the effects of abundance of natural resources has mainly focused on the

political and economic dimension of the state. Less attention has been paid to possible

consequences for foreign policy. This thesis explores this largely ignored field of study.

Furthermore, I think this thesis could also make a contribution to the soft balancing debate

as to whether incentives for such policies should be viewed as largely systemic in the context

of the international system or whether they can also be caused by domestic factors. The

thesis nevertheless has the potential to go beyond the theoretical dimension and could help

policy makers in resource abundant countries to develop (soft) balancing strategies when a

super power seems to excessively use its privileged position in the international anarchic

system to prey upon other countries’ resources. It may also instruct the hegemon in how to

deal with such soft balancing strategies.

Methodological considerations and case study It is very hard to determine the existence of a causal link between access to significant oil

rents and the application of soft balancing strategies. The limited amount of time and means

available for the realization of this thesis greatly hampers answering the ambitious research

question in full depth. However, since this thesis ventures into relatively unexplored

territory I see great value in exploring the possibilities of such a link, which further research

may (or may not) qualify and specify. I deem a case study to be the most useful way to

investigate such a matter. To investigate the possibility of a causal link, it is very important

that many different processes (decision-making, flow of oil rents to governments,

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distribution and allocation of rents etcetera) are being studied instead of a mere

quantitative approach involving calculating alleged correlation between the variables ‘soft

balancing initiatives’ and ‘access to significant oil rents’. An in-depth case study also allows

for close attention to possible intervening variables (which are much harder to discover in

quantitative research). That being said, following the logic of the research question, some

expectations are warranted: if oil rents enable or actually give incentives to soft balancing

behavior we should see nations with significant oil rents embarking on soft balancing

initiatives more than countries that do not have access to such rents. Another expectation

would be that higher rents entail more intense soft balancing behavior. Nevertheless, before

such claims can be proven, it is necessary to dive deeper into the logic of the argument than

simply demonstrating a correlation between the aforementioned variables.

Case selection: Venezuela The majority of literature on soft balancing is framed within the (Realist) logic of the anarchic

state system, which currently is unipolar. As rules of the balance of power change according

to the number of major powers within the international system (Waltz, 1979), to ensure

comparable results it is necessary to study foreign policy initiatives since 1991 (the collapse

of the Soviet Union) onwards. It goes without saying that a case study should at least involve

a country that has access to significant oil rents if one wants to study the alleged effects of

oil rents on foreign policy.

The Bolivarian Republic of Venezuela is a textbook example of a country which has access to

significant oil rents. According to the latest figures on the share of oil in the Venezuelan

economy, in 2008: oil accounted for 90% of all export income (about 30 billion USD), 50% of

fiscal revenue and 23% of GDP (Banco Mercantil, 2009). Furthermore, Venezuela has seen

many changes taking place over the past 20 years: high and low oil prices, socialist and

market-oriented regimes, high and low economic growth. Therefore it seems the ideal

candidate to control for different variables when trying to measure the alleged impact of

significant oil-rents in soft balancing strategies of foreign policy. Another reason why

Venezuela is an excellent candidate for this case study, is that it has been an active player

(with differing roles over time) in world politics. It is co-founder of the OPEC oil cartel, was a

close ally of the US for many years, and now strives for the construction of a multipolar

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world order (Ministerio del Poder Popular para La Comunicación y la Información, 2007, p.

46). The current government furthermore sees the interests of the United States as a threat

to political stability, peace and human rights in the region (Buxton, 2009, pp. 61-72). Limited

time and means strongly discourage an in-depth comparison of the foreign policies of

multiple countries. Therefore I will compare Venezuelan foreign policy under two strikingly

different regimes: the neoliberal-oriented governments of the 1990s and the successive

governments of Hugo Chávez Frías. This allows me to control for the ‘Chávez factor’. This

refers to the idea that Venezuela’s foreign policy might simply be an anomaly, explained by

the idiosyncrasy of current president Chávez Frías.

Structure of the thesis Chapter 1 will be dedicated to a thorough analysis of the debates on soft balancing and the

foreign policy dimension of the natural resource curse. Special attention will be paid to the

conceptualization of key concepts such as soft balancing strategies and the petro state. Also,

the methodological design of the thesis will be explained and justified. Chapter 2 will consist

of a description of the Venezuelan petro state, followed by a close look on its foreign policy

in Chapter 3. In Chapter 4 the data found in the previous chapters will be analyzed by means

of the theoretical framework. In the Conclusion I will present the main findings of the thesis,

the implications of the thesis for both the academic community and policy makers. Finally,

suggestions for further research will be given, based upon the findings of the thesis.

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1 | Theoretical framework

This chapter will provide the theoretical framework for the thesis. First, a brief overview of

Neorealist International Relations theory will be compared with developments in the

international state system since the end of the Cold War. We then proceed with an analysis

of the role of natural resources in rentier states, and discuss a special type of rentier state:

the petro state. Finally we return the discussion of how foreign policy of petro states may be

(partly) shaped by its dependence on oil rents and how to research this subject.

1.1 The post-Cold War balance of power

The soft balancing argument is best explained when framed into the post-Cold War context

and the challenges this situation poses on traditional IR theories. One of the most influential

theories on International Relations was developed during the Cold War by Kenneth N. Waltz.

In his seminal work, Theory of International Politics (1979), he described state behavior in

the international system. He accepted the realist premises that states are primarily

interested in their own survival, constantly fear losing their sovereignty and are

predominantly reliant on self-help in realizing the aforementioned goals. The innovation of

Waltz’ theory was that he deduced state behavior from the logic of the international system.

According to Waltz, the international system is ordered in an anarchic fashion. Unlike within

nation states, there is no supreme authority. Second, the international system is comprised

of ‘like’ units: nation states. Every nation state is alike in the sense that it is a sovereign

political entity. This is not to say that all states are equal in all aspects, but states perform

similar functions. States however differ greatly in their power capabilities. This distribution

of power capabilities determines the structure of the international system. When three or

more states have much more capabilities than other states, such a system is categorized as a

multipolar system. When two states have much more capabilities than the other states, it is

called a bipolar system. When one country has far greater capabilities than all other states it

is called a unipolar system. As stated before, according to Waltz this structure largely

determines the behavior of states and what outcomes are produced. Waltz argues that a

multipolar system is more unstable than a bipolar system. First, because powers have a hard

time drawing a clear line between friends and foes. Second, because of this uncertainty, it

needs to monitor multiple powers, which leaves room for misinterpretations of risk-

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assessment. Even when alliances are formed to counter this problem, the defection of one

state can alter the balance of power and thus elevate tensions among the other states

(Waltz, 1979, pp. 168-169). In a bipolar system, states suffer less from these problems.

Because there are only two significant powers, monitoring problems are less common.

Second, even though the powers form alliances with other states, defection is less of a

problem because the powerful state itself does not depend on other states for its own

security. Using Waltz’ theory to identify the structure of the international system during the

Cold War era, we can conclude that it was a typical example of a bipolar international

system. Both the United States and the Soviet Union had far greater military capabilities

than the other nations. During the Cold War, both powers constantly tried to enhance their

military might through investments in military power (for example the nuclear arms race)

and the formation of military alliances (such as the NATO and the Warsaw Pact) in order to

prevent the other pole from becoming too powerful. In that sense the behavior of both the

US and the SU form a perfect example of traditional balancing. Many secondary states chose

to side with either the US or the SU to safeguard their sovereignty and assure the survival of

their state.3

1.1.1 The Absence of balancing behavior

The collapse of the Soviet Union radically transformed the structure of the international

system and reduced the number of world powers to one: the United States. As Waltz had

argued, this changed structure of the international system would change expectations about

state behavior within the system (1979, p. 97). Neorealists predicted that the situation of

unipolarity would not last very long. An ever more powerful United States would mean that

secondary states would have growing fears of losing their sovereignty and ultimately would

jeopardize the survival of the state. Within this context, the logical thing to do for secondary

states was to invest heavily in military capabilities (internal balancing) and form military

alliances with other states (external balancing) to counter the US. Yet since the end of the

Cold War very little balancing among nations has taken place. Although there has been a

significant increase in military expenditure (Stockholm International Peace Research

3 It is important to notice that not every state had the same degree of liberty in choosing its side, especially in

the ‘Global South’. This was due to imperialist policies by both the US and the Soviet Union. Furthermore, a great number of countries (among which Venezuela) chose not to side formally with one of the powers and formed the Non-Aligned Movement. Nowadays it is comprised of Latin-American countries, almost all African nations and various countries in the Middle East and Asia .

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Institute, 2009), we are yet to witness a military alliance of lesser powers to balance the US.

This led authors such as Thaza Varkey Paul, Robert Pape and Andrew Hurrell to question the

explanatory power of neorealist theory concerning the longevity of the post-Cold War

unipolarity and the seemingly irrational behavior of states within the system.

Paul argues that the most important incentive to balance has been absent since the US has

become the hegemon: the majority of the states do not fear that the US will threaten their

existence as a nation state or erode the national sovereignty of other states.4 They perceive

that the US is constrained by various factors, and Paul identifies three of them as being the

most important ones (2005, p. 53). First, because of the proliferation of nuclear weapons,

many lesser powers now possess nuclear arms. These arms more or less guarantee the

prevention of a direct attack of the hegemon because it would trigger the use of nuclear

weapons and would thus render the enterprise by the US pointless. Second, the US have

largely abstained from direct intervention in secessionist movements in the main other

powers such as China, Russia and India. Third, the powerful force of nationalism and the

asymmetric strategies of (nationalist) groups make permanent occupation of another state

infeasible (Paul, 2005, p. 56). The problems the US and its partners encounter in Iraq and

Afghanistan are vivid examples of these contemporary challenges.

Both Paul and Pape (2005, p. 10) agree that the unilateral, quasi imperialist and aggressive

US security policy implemented during the GW Bush administration has deeply worried a

number of smaller powers. Especially the invasion of Iraq in 2003 in spite of fierce resistance

within the most important international organization to preserve peace – The UN –, has

made these states question whether the US is largely respectful of territorial integrity and

national sovereignty. Now, according to realists these doubts would mean the return of

balancing behavior. However, there is little evidence for such behavior.

4Paul and Pape state that the vast majority of nations do not view the US as a threat to their sovereignty and

but mention certain exceptions such as Iran. I think they underestimate anti-US sentiments in Latin America. In many Latin-American countries the US have intervened (in)directly in domestic affairs. Although interference by the US seems to have diminished in scale and intensity since the Cold War, it has caused a deep sense of mistrust of US foreign policy among Latin-American policy makers and citizens alike (Livingstone, 2009). Recent examples of – at least alleged – US interference in domestic issues in Latin America are financial support for the political opposition and support for the de facto regime in Venezuela in 2002 (Buxton, 2009, pp. 69-70) and support of autonomist movements in East-Bolivia (Golinger, 2009).

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1.1.2 The Soft Balancing Alternative

What has been missing (especially) in realist works, is the option of alternative strategies for

lesser powers when traditional balancing is either impossible, unfeasible or unwanted. This

need not surprise us as a majority of neorealist writers only deem military build-ups and

alliances (which enhance the capability of the state) as relevant in international relations

among states. Paul and Pope have analyzed the behavior of a number of lesser great powers

and came to the following conclusion (Paul, 2005, p. 58):

In the post-Cold War era, second-tier states have been pursuing limited, tacit, or indirect

balancing strategies largely through coalition building and diplomatic bargaining within

international institutions short of formal bilateral and multilateral military alliances. These

institutional and diplomatic strategies which are intended to constrain US power, constitute

forms of soft balancing.

However, soft balancing strategies do not simply emerge when traditional balancing is not a

policy option. Paul identifies several conditions which need to be met: First, the power

position of the hegemon and its military behavior are of growing concern but do not yet

pose a serious challenge to the sovereignty of second-tier powers. Second, the hegemon is a

major source of public goods in both the economic and security areas that cannot simply be

replaced. Finally, the hegemon cannot easily retaliate because the balancing efforts are not

overt or because they do not directly challenge its power position with military means. This

makes soft balancing such an attractive option for lesser powers since it poses less risks, has

lower costs and – in most cases - is easier to realize.

Although both Paul and Pape agree that the perception that countries hold of the intentions

of the hegemon matter, Pape has a slightly different explanation as why states do not

balance, but soft balance: it is extremely difficult to balance a hegemon in a unipolar system.

Internal balancing is not a viable option because no increase in military might and economic

strength by just one state is sufficient to balance the hegemon. A state that undertakes such

an enterprise would most certainly be met with a harsh response by the hegemon. Within

this context only external balancing has a promising perspective. Nevertheless, as external

balancing implies joint effort by multiple actors, collective action problems are just around

the corner. Even though each nation is better off cooperating with other nations to balance

the unipolar power, each nation’s decisions on whether to balance or not, depends highly on

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the expectation that others will cooperate (which in turn depends on whether those states

expectations about other states commitment to cooperation). As states do not wish to

confront the unipolar power before the coalition is complete, only when expectations about

cooperation have converged, will there be the possibility to balance. This means that

balancing will take place abruptly or not at all (Pape, 2005, pp. 16-17).

This is a gloomy perspective for states wishing to balance. They therefore might turn to soft

balancing as a second-best policy option. Because soft balancing strategies do not confront

the unipolar power directly and do not involve the military, both risks and costs are lower.

Although this will not greatly alter the power relations directly (benefits are lower as well), it

can delay, complicate or generate substantial costs for the unipolar power to use its power.

Furthermore, it can serve as a basis for future military balancing efforts by generating

converging expectations (Pape, 2005, p. 17).

1.1.3 Conceptualizing Soft Balancing

There seems to be little discussion among the protagonists of the soft balancing debate as to

what constitutes soft balancing. Yet, the abstract formulation of the concept of soft

balancing might be confusing to outsiders. It might therefore be hard to identify typical

examples of soft balancing strategies in foreign policy of countries. Discussing some

examples of such behavior can prove helpful in clarifying the concept of soft balancing. One

example of soft balancing strategy is to entangle the more powerful nation in a diplomatic

context. Even strong states cannot completely ignore the rules and procedures of important

international organizations or accepted diplomatic practices without losing substantial

support for their objectives (Pape, 2005, p. 36). As states bind themselves to certain

international regimes to solve problems they cannot tackle alone, they effectively limit their

policy options because of the aforementioned reasons. At the same time they also enhance

their policy options because certain international regimes give legitimacy to actions (by the

hegemon) which otherwise would not have been acceptable.5

5 For example, if the US was to –unilateraly- invade a certain country, it would be heavily criticized by other

states. Yet if this invasion would be according to the procedures and rules of international law and the UN Security Council, it would gain legitimacy as almost all states have voluntarily committed themselves to these rules and procedures.

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The United Nations Security Council (UNSC) is an institution of the international peace

regime. Several major powers have a vote within the council, and acting on behalf of the

UNSC requires unanimous support of these major powers. This gives permanent members

China, Russia, France, the United Kingdom and the United States an effective veto.

Another soft balancing option is to invest in certain international regimes to the detriment of

others (Corrales). In Latin America, regional security issues were usually either addressed by

the UN or the Organization of American States (Livingstone, 2009, p. 24).6 However, the role

of these organizations had come under increasing criticism of the predominantly left-wing

governments in the region. First, the dominant role of the US in these organizations

(especially the OAS) had damaged the neutrality of these institutions. Second, both

organizations have a poor track-record in the region. This spurred leaders in South America

to found the UNASUR in 2008 as a regional organization to secure peace and foment political

and economic integration in the region. In several occasions the UNASUR proved to be the

dominant international platform were crisis were discussed by the stakeholders, sidelining

the UN, OAS and the influence of the US.

A further example of soft balancing is social power policy projection (Corrales), which

involves the use of heavy investments abroad, usually in the form of donations and/or loans

to – supposedly – provide poverty relief or promote development. In practice, Corrales views

them as instruments to buy political support abroad. This could be donations to the political

campaigns of allied political actors in other countries or providing credit lines for

governments experiencing financial difficulties. Another option is offering developmental aid

with very low conditionality. This aid competes with aid by the US which comes with very

high conditionality. The former form of development aid is very attractive to the receiving

party as it means access to significant sums of money which can be spent in a highly discrete

manner, whereas the second form of development aid cannot be spent that way.

Territorial denial is yet another way to soft balance. A secondary power can deny the super

power access to its territory for (quasi) military purposes. By denying access, it makes it

harder for the unipolar power to act in that region, complicate its logistical processes and

6 The OAS is a regional multilateral international organization, founded in 1948 to promote solidarity and

cooperation among members and to defend their territorial integrity and sovereignty (OAS, 2010).

18

thus make the employment of the military more costly and thus less attractive. Although

Pape (2005, p. 36) sees this strategy very useful when the unipolar is in war with yet another

weaker state, this tactic could also apply to anti-terrorist or drug enforcement policies of the

hegemon outside its territory. For example, the American military used an Ecuadorian

military base to conduct routine flights to monitor drug-trafficking in the region for over ten

years. However, when a new president was elected on a strong anti-imperialist platform, the

lease of the airbase was not renewed, and so hampered US drug-trafficking monitoring and

forced the US to intensify cooperation with other states in the region (Solano, 2009).

All the aforementioned soft balancing strategies correspond to the description of soft

balancing strategies by Pape (2005, p. 17): what these soft balancing strategies have in

common, is that they do not directly challenge the military supremacy of the unipolar

power, but can delay, complicate or increase the cost of using its extraordinary power. Even

though they are non-military measures, they have an (in)direct effect on the military

prospects of the unipolar power.

1.1.4 Critics of soft balancing

Although the introduction of soft balancing as an analytical tool to account for state

behavior in a unipolar context was generally seen as a welcome critique of neorealism, there

has also been criticism. Critics can be divided in two categories: the first category denies the

existence of soft balancing as a description for certain foreign policy strategies by weaker

states and do not see its analytical relevance. Other critics do accept soft balancing as a

strategy, but argue that its context is not limited to the current unipolar world order.

One of the most important criticisms belonging to the first category has been put forward by

Brooks & Wohlforth (2005, p. 74): they argue that although weaker states adopt foreign

policies that hurt US (military) interests, this might be a mere coincidence and not so much a

specific desire to balance US foreign policy. The main analytical flaw of the theory according

to these academics is the lack of attention for competing explanations such as economic

interests, regional security concerns, policy disputes and domestic political incentives.

Another argument that goes against the soft balancing theory is that the concept of soft

balancing is not distinguishable from normal diplomatic friction, and therefore has little

analytical value (Lieber & Alexander, 2005, p. 125). A third important critique, coming from

19

the second strand, argues that it is unnecessary to place soft balancing within the current

unipolar context. He & Feng (2006) argue that soft balancing is a rational foreign policy

choice for weaker states that are to a certain extent economically dependent on the

hegemon. The greater the power disparities and economic interdependence, the more

attractive soft balancing policies become.

The first category of criticism has been party redressed by academics of the second strand.

He & Feng argue that it is important to distinguish between short term tactics and long term

strategies. Although certain actions by weaker states can (also) be explained by economic

interest, domestic political incentives or policy disputes, they are tactics that in general

should amount to the objective of long term strategies. In a unipolar context the long term

strategy would be the reduction of the power of the hegemon (He & Feng, 2006, pp. 7-9).

They also strongly criticize the notion that soft balancing is just another term for diplomatic

friction. Whereas in a situation of diplomatic friction, two parties seek to achieve the best

possible outcome on a basis of certain different policy options, the soft balancing strategy

actually broadens (future) policy options for the weaker state. The example of soft balancing

strategies I gave earlier illustrates this difference: in the situation of the Bolivian crisis,

normal diplomatic friction would have let to a clash of interests in the OAS, where regional

political disputes were normally discussed. However, the unanimous decision of South-

American heads of state to discuss the matter within the framework of the UNASUR gave the

leaders of this country the possibility to condemn the violence of the autonomist movement

in Bolivia, which the US allegedly supported. By investing in one international regime to the

detriment of another, they broadened their policy options to produce an outcome which

would have been very unlikely within the OAS.

The second category of criticism argues that soft balancing does not only take place within a

unipolar context, and should therefore not be solely linked to the rational logic of states in

such a context. I agree with He & Feng that soft balancing could also take place within a bi-

or multipolar context. Although it would probably make soft balancing less likely as there are

other (perhaps more effective) strategies such as bandwagoning or traditional balancing

instead. I also agree that disparities in military power are an important predictor of soft

balancing power, irrespective of structure the international state system. Yet I do not agree

20

that a higher level of economic dependence on the unipolar power means a higher

possibility for soft balancing. I argue that higher levels of economic interdependence also

makes soft balancing harder and less feasible for weaker states. The exact reasoning behind

this argument has to do with the type of economic interdependence, and especially that of

petro states. If a weaker state is heavily dependent on oil exports for its income, it makes it

harder to soft balance the hegemon, if this hegemon is the most important and non-

replaceable costumer of this commodity. I will dive in to this argument more deeper in the

section on oil as a commodity that structures relations between states in section 1.3.2

1.1.5 Soft Balancing as an integral part of foreign policy

In the ongoing debate it seems as if soft balancing simply is an alternative strategy for

traditional balancing. However, in practice often simultaneous traditional and soft balancing

policies are pursued. It is perfectly possible to spend on the enhancement of military

capabilities of a country, while at the same time trying to block foreign policy initiatives by

the hegemon in international organizations. For example, both China and Russia have

invested heavily in their military apparatus the past ten years. At the same time, both

countries have consistently vetoed US initiatives within the UNSC, that call for actions

against countries that the US deems dangerous for the stability of the international system,

such as Iran and North Korea.7 That being said, every country’s policy mix is different. Some

states may invest heavily in military capabilities while at the same time refraining from too

overt soft balancing initiatives. Other countries might play a lead role in soft balancing

initiatives while at the same time spending moderately on military capabilities.

Here we stumble upon a fascinating paradox. Although Paul and Pape are highly critical of

the systemic and deterministic nature of neorealism, they do to a great extent argue that

soft balancing behavior is caused by the behavior of the hegemon (Pape, 2005, p. 38) and as

such has less to do with the domestic characteristics of the weaker country. I find this

assumption somewhat problematic for various reasons: first, the perception of whether an

act of the hegemon is deemed dangerous for the country at hand may depend heavily on the

7 A fairly recent example of Russia and China blocking US foreign policy took place in the UNSC. In 2008 North-

Korea launched a long-range rocket. According to The United States the launch of such a missile was a clear violation of a Security Council resolution and called for a Security Council meeting to discuss the topic (and to take measures against North Korea). Although all members of the Security Council expressed their concern over the launch of the Rocket, China and Russia called for restraint in the council’s response and effectively blocked the possibility of sanctions as the Security Council can only act unanimously (The Australian, 2009).

21

existing relations with the hegemon, something which Pape acknowledges (2005, p. 14).

Stationing American military personnel in Colombian military bases to fight terrorism and

combat drug-traffickers is seen as very welcome by the Colombian government, while at the

same time it can be considered a threat to regional peace and sovereignty by neighboring

countries Ecuador and Venezuela. Second, every foreign policy initiative has its calculated

costs and benefits. Dependent on for instance financial capabilities, certain foreign policy

initiatives are more viable for some governments than for others. Third, even if two states

have the same view on a certain action of a government, and have roughly equal economic

capabilities, the viability of certain foreign policy options might depend on the type of

economic relation the country has with the hegemon: a state with diverse trade relations

and a diversified economy can afford to damage relations with the hegemon. A state that is

dependent on the export of a single commodity with the hegemon being its important (and

non-replaceable) client cannot afford to damage relations too much. Therefore I think it is

necessary to look into the sources of the very capabilities neorealists argue are so important

in determining the role a state can play within the international anarchic system.

1.2 The Natural Resource Curse

As noted in the previous chapter, states differ greatly in capabilities. These capabilities are

very important to neorealists as they determine a state’s power position vis-à-vis other

states, including the hegemon. In this sense, a state’s capabilities shapes its foreign policy

options. Although neorealists are predominantly interested in a state’s military capabilities,

neorealists all too often seem to forget that these capabilities stem from different sources,

such as a country’s demographics, geographical location, strength of the economy and

access to certain natural resources. Although neorealists emphasize the importance of

capabilities, the sources of these very capabilities are not considered relevant because the

sources of capabilities themselves do not determine the power position of the state in

relation to other states, they are only instrumental to the development of capabilities. This

stands in stark contrast with the academic works by Economists, Political Scientists and

Social Geography scholars alike who have studied the implications of natural resources for

22

the economy, polity, civil society and the environment of the nation state.8 The ongoing

academic debate on this topic is usually referred to as the natural resource curse.

At first sight, large amounts of natural resources seem a blessing for states as they provide a

significant source of income, which the government can use for development policies and

the acquisition of wealth. Especially for less developed countries, the revenues of these

natural resources would allow the governments to ‘buy’ the status of a developed country.

This would also empower the state within the international system, as the enhanced

capabilities of these type of states would better their power position vis-à-vis other states.

Until the late 1980s, this was the generally accepted discourse on the role of natural

resources (Rosser, 2006, p. 7). However at the end of the 20th century the vast majority of

less developed resource abundant countries had still not acquired the level of development

associated with most of the Western world. Several studies have shown that economic

growth in resource abundant countries was actually lower than countries that did not

possess many natural resources (Sachs & Warner, 2001), that states dependent on mineral

exports had worsened living conditions for the poor (Ross, 2003) and that per capita incomes

of resource-poor countries grew much faster than resource abundant countries (Auty, 2001).

So, at least in economic terms these countries had not lived up to expectations associated

with resource abundance.

Yet, the curse does not seem to be limited to a state’s economy. It is also associated with

political instability and civil war. Especially the works by Paul Collier and Anke Hoeffler have

shed light on the link between natural resource wealth and the onset of civil war. They found

(2000, pp. 26-27) that natural resource wealth increased the risk of civil war because it

provides an opportunity for predation of these resources by rebel groups. These groups,

predominantly acting out of greed would generate (further) grievance among other groups.

This, combined with the possibility to finance the conflict through the export of the

resources prolongs the conflict. However, Collier and Hoeffler also conclude that after a

certain level of exports, chances at civil war are actually reduced. Other authors have argued

that natural resources prolong conflicts (Doyle & Sambanis, 2000) or worsen the intensity

(number of casualties) of the violent conflicts in those countries (Ross, 2004).

8 See Rosser (2006) for an interesting overview of literature on the political economy of the Natural Resource

Curse.

23

Besides these domestic dimensions of the natural resource curse, there is an international

dimension to the natural resource curse. The dependence of the West on natural resources

relevant to the growth and maintenance of their economies and military power, has

generated interest of these countries in the states that provide these natural resources

(Klare, 2001). Because the Western states want to secure their access to energy, and these

states are quintessential to that goal, the use of (indirect) military power makes inter-state

conflict more likely (Peters, 2005). The US military intervention in Iraq in 2003 is a often cited

example of an aggressive energy security policy of resource-consuming states versus oil

producing states.

So, instead of being a blessing, natural resources seem to condemn states to slow economic

growth, worsening development indicators for the poor and increased risks of prolonged

and intense civil wars. As if these resources do not spell enough trouble, they also seem to

make these countries easy targets for military intervention by Western, resource-consuming

countries. This is not to say that there is a consensus that the exploitation of natural

resources causes economic underperformance, erosion of the quality of state institutions

and/or (violent) political conflict. Yet the correlation of natural resource abundance and

dependence in less developed countries and economic underperformance, diminished

stateness and the prominence of violent conflicts has puzzled many academics. In the

literature on the Natural Resource Curse various types of resource-abundant countries are

described. In the next section I will present a special variety of such a state: the rentier state.

1.2.1 The Rentier state

Natural resources are not evenly distributed across the world. Some states possess

significant oil and gas reserves, while other countries do not even possess the smallest

amount of fertile land. Often, these natural resources are traded abroad and thus provide

the exporting state with external income. In the literature on natural resources a distinction

is made between states that have a diversified economy and where the rents of some of

these resources is one source of income for the state (but less significant than domestic

taxes and revenues), and states whose economies are practically dominated by such rents.

The former are then classified as diversified economies (Karl, The Paradox of Plenty: Oil

booms and petro-states, 1997, p. 12) or esoteric states (Luciani, 1987, p. 69), while the latter

are referred to as rentier states. The term was first coined by Hossein Mahdavy to refer to

24

the oil economy of Iran prior to the Revolution (Yates, 1996) and has since then been used

by various authors to refer to countries that receive significant amounts of external rents on

a regular base (Mahdavy, 1970, p. 428). Since then, the concept has been refined and one of

the most accepted conceptualizations of the rentier state has been put forward by Hezam

Beblawi. According to Beblawi (1987, pp. 51-52), rentier states share four characteristics that

set them apart from other states with access to natural resource rents. First, in a rentier

economy, rents over natural resources dominate the economy. Second, the economy relies

heavily on external rents. These external rents sustain a non-productive economy and the

state. Only a small group is actually involved in rent-generation. Third, the majority of the

population is engaged in rent-seeking behavior: the distribution and utilization of the

aforementioned rents. Fourth, the government is the most important beneficiary of these

rents.

1.2.1.2 A Political-Economic dimension

A very useful conceptual approach to the differences in the role of the state in rentier

economies compared to diversified economies is the production state versus the allocation

state, a concept developed by Giacomo Luciani. He sees the source of income of states as a

determinant for the role the state plays vis-à-vis its population. In states where the main

source of income of the state is taxation of the local economy and its residents, there is a

mutually dependent relation between the state and its population. For the state to perform

its allocative functions (in providing health care, infrastructure and education) it needs the

revenues generated by the local economy. Strengthening the local economy therefore is an

important task (if not the most important) for the survival of the state. How tax money is

being spent is subject to political debate. Although at times the population does not agree

with the spending politics of a certain government, the system of taxation can only be

maintained if it is being considered legitimate by the population (hence the saying “no

taxation without representation”). This is the main relation between the population and the

state in a production state (Luciani, 1987, p. 73).

In rentier states, the state is predominantly dependent on income earned abroad: the rents

proceeding from exploitation of natural resources are received when traded on the world

market. This world market largely determines how rentable a specific natural resource is. As

Jacks et al. (2009, pp. 3-4) demonstrate, the market for commodities (under which natural

25

resources fall) is characterized by a higher price volatility than for services or manufactures.

The very rent these rentier states rely upon is highly volatile. As these rents accrue directly

to the government, it is the main source of income for the state. The challenge for an

allocation state is to gain as much revenue from the rest of the world. The only link to the

domestic economy is the spending of state revenues and therefore the local economy has no

priority. Even though strengthening the local economy can be one of the goals for which the

rents are used, as long as the domestic economy is not tapped to raise the income of the

state (through taxation), the strengthening of the economy does not entail growing income

for the state. The state therefore has a predominantly allocative function. Since there is little

or no taxation, there is little incentive for the local population to demand a change in

political institutions.

What is typical for these kind of rentier economies, is a different kind of economic behavior

in comparison to productive states. In conventional economies, effort and reward are closely

connected: income and wealth are linked to work and/or risk-bearing entrepreneurship.

Rewards are thus seen as the end result of a (long, systematic, organized) production circuit.

In rentier states such a link hardly exists and the acquisition of income and wealth is more

related to chance or situation instead of work and risk-bearing (Beblawi, 1987, pp. 51-52).

The context of the rentier economy radically changes what is considered to be rational

behavior in an economy. In ‘normal’ economies the rational approach for gaining income

and/or wealth would be investing and/or participating in a productive process as this yields

the best results. In a rentier economy however, trying to tap in to government distribution of

rents yields better results and is less risky than participating or investing in a productive

process or changing the political system. This deviant behavior is called the rentier mentality.

Now, whether such behavior is deemed virtuous or not, is a more philosophical debate and

need not interest us now.9

1.3 The Petro State Now the difference between a rentier state and a ‘tax and spend’ or production state is

clear, a new problem surges: the definition of the rentier state by Beblawi does not specify

nor places much relevance on the kind of natural resource that is being exploited. Yet,

9 For an interesting (historical) overview on rentier behavior and whether it is judged as virtuous or not, see

Yates (1996).

26

looking at some of the general arguments presented by the various strands in the debate on

natural resources, there are reasons to believe that this may matter. States that are

compliant with the rentier state model, and are mostly dependent on oil for their income

are called petro states. This section will explore the notion of the petro state, and why it is

different from other rentier states, and what consequences this has for the political

economy of petro states. An insightful approach to the petro state is presented by Terry

Lynn Karl. According to Karl, Petro states, share a set of properties arising from the

exploitation of petroleum (1999, p. 34): first, the petro state is dependent on a single

commodity, oil. Second, the exploitation of petroleum is more depletable, more capital-

intensive, more enclave-oriented, more centralized in the state and more rent producing

than any other commodity. These characteristics influence the political economy of such

states to a great extent. According to Karl, the overreliance on petrodollars to support

virtually all other economic activities tends to make the needs of the oil industry a top-

priority for governments above all else; a lack of productive linkages and the dominance of

fiscal ones; the perceived mentality to accelerate development before the oil reserves are

depleted and the primacy of the state in the oil industry (1999, pp. 34-35). But perhaps more

interesting is that the political and economic institutions of petro states have been shaped

by the main source of income and that these political and economic institutions tend to be

highly dysfunctional.

1.3.1 The Political Economy of the Petro State

After a comparison of several petro states (Venezuela, Iran, Nigeria and Algeria), Karl

identifies similar political and economic developments in those states. First, the process of

modern state formation and exploitation of oil by international oil companies coincided:

international oil companies moved into countries with significant oil reserves and limited

stateness. This means that none of the aforementioned countries had administrative

structures capable of resisting the petrolization of the state. Executive power became linked

to the fate of the oil industry and the dynamic process of both state centralization and

expansion were thus propelled by oil (Karl, The Paradox of Plenty: Oil booms and petro-

states, 1997, p. 196).

Second, the imposition of income taxes as a prime source of a state’s fiscal revenues and

regime changes that either reinforce or counteract reliance on oil rents (Karl, The Paradox of

27

Plenty: Oil booms and petro-states, 1997, p. 197). With the growing importance of the oil-

sector for the export economy, state decision-making frameworks were molded to facilitate

oil-led development. The outcome of this process is the dependence on petrodollars. Almost

all states that developed oil industries in the past century were characterized by the same

economic policy pattern: maximizing oil extraction rents for domestic distribution through

public spending (according to certain political preferences). The structure of taxation in oil

countries is strikingly different from developed countries with similar GNP per capita: non-oil

taxes are significantly lower and corporate taxes are higher than in developed countries

(Karl, The Paradox of Plenty: Oil booms and petro-states, 1997, p. 198). This access to easy

money radically altered the mentality of both the public and private sector. The public sector

had little incentive for a fiscal discipline, while for the private sector it lowered incentives for

entrepreneurship and work ethics. This then creates an ever greater dependence on oil

income (Karl, The Perils of the Petro-State: Reflections on the Paradox of Plenty, 1999, p.

35), because the oil industry can sustain the rest of the non-productive economy. This

illustrates the typical relation that the state has in a rentier economy: the capacity to extract

the external rents and then distribute this rent internally. According to Karl, in petro states

this principle is taken to the next level. The high rentability of oil compared to other natural

resources, provides the state a exceptional amount of income which is spent in an inefficient

and rather discrete manner: an ever expanding state bureaucracy and white elephant

projects place a heavy burden on the state’s income - a burden still bearable when oil prices

are high. When oil prices are somewhat lower, future oil rents can be used as collateral to

borrow on the international market to maintain government spending even when there is a

budgetary deficit. This makes it very hard for petro states make policy adjustments and

improve fiscal discipline, compared to tax and spend states. This inability to adjust to new

circumstances and lack of sustainable development policies leads to the piling up of

problems which in the long run leads to political and economic crises (Karl, The Perils of the

Petro-State: Reflections on the Paradox of Plenty, 1999, pp. 35-37).

1.3.2 An International dimension?

As much as Karl’s approach tells us about the exceptional characteristics of oil in shaping a

countries economy and political institutions, it tells us little about the foreign policy of a

rentier state. Other authors have shed some light on this issue. Luciani (1987, p. 78) argues

28

that the foreign policy of allocation states are similar to its domestic policies. As allocation

states feel vulnerable because of their abundance of natural resources and the uncertainty

about intentions of other states, governments of allocation states tend to give neighboring

production states a share of the income to appease them, making the allocation state less

vulnerable to military threats from its neighbors.

Now the question surges if it matters what kind natural resources a state possesses, for its

relations with other states. Helga Haftendorn (2000) studied several international conflicts

about freshwater and came to the conclusion that – irrespective of the cause of the conflict

– all water conflicts shared the same asymmetric structure. In such a conflict, one country is

(geographically) the source of freshwater. This state, dubbed ‘upper-lying riparian’, can

control the quantity and quality of the water flow to the other country. When not willing to

wage war, the lower lying state is completely dependent on how the upper-riparian

manages the freshwater source. Haftendorn translates this situation in a game model and

concludes that there is little chance for a satisfactory resolution of the conflict, because

there is little incentive for the upper-riparian state to solve the conflict: it has a privileged

position in terms of freshwater access, and thus has a source of power in hands it will not

likely yield, unless it will be compensated in the form of economic and/or political benefits.

However, for the disadvantaged state it is of the utmost importance that such a conflict will

be resolved, but the aforementioned compensation can put a heavy burden on the

disadvantaged state. Nonetheless, Haftendorn argues that conflicts can be mitigated when

the water conflict is balanced by other factors. For example, the lower riparian may dispose

over resources on which the upper-riparian is dependent. In this mutually dependent

relationship states have an actual interest to provide access to the resource, because when it

fails to do so, the other state can retaliate by withholding their natural resource as well

(2000, pp. 62-63).

For some time, it was believed that oil conflicts were structured asymmetrically too. Because

oil is an irreplaceable commodity to ensure economic and military power of oil consuming

countries, oil producing countries could cripple these states by lowering production quota or

refusing to sell oil to certain countries. In the literature this is referred to as ‘the oil weapon’.

This would then render the oil consuming countries (and especially the US) powerless vis-à-

29

vis the oil producing states in the Middle East (Paust & Blaustein, 1974). Often, the 1973-

1974 oil crisis is used to illustrate the use of the oil weapon to influence the foreign policy of

oil-consuming countries. In 1973 a coalition of Arab states attacked Israel to re-occupy

territory that had been lost during the Six-Day War of 1967. However, several Western

countries supported Israel. To pressure these Western countries to stop selling weapons to

Israel and make Israel respect the borders as they were drawn prior to the 1967 war, the

Organization of Arab Petroleum Exporting Countries (OAPEC) threatened with 5% production

cutbacks as long as these demands were not met. Also, an embargo was imposed on the

sale of oil to Israel’s most staunch supporters: the US and The Netherlands. As a result of the

lower oil production and the political instability of the world’s most important oil-producing

region, oil prices skyrocketed to the detriment of the economic position of the oil-consuming

countries (Stern, 2006). However, the debate about the oil weapon progressed as the 1973-

1974 oil crisis was repeatedly studied by academics. Serious doubts were cast on the

effectiveness of the oil weapon and the alleged dependency of the West on oil from the

Middle-East (Blair, Yali, & Hagt, 2006) (Licklider, 1988) (Stern, 2006). The weapon was

ineffective because it did not produce the desired results: the United States did not change,

and the Netherlands hardly changed their foreign policy concerning the Arab-Israeli conflict

after the oil weapon had been applied (Licklider, 1988, pp. 216-217). It was also ineffective

because – although production cuts were actually made – supply contraction may have been

as little as 4% (Adelman, 1995, pp. 89-140) because of third countries reselling oil and the

availability of non-AOPEC sellers.

Translating this knowledge in the structure-model as proposed by Haftendorn it seems like

oil-producing and oil-consuming countries have a more symmetric relation. The oil-

producing country may have an advantage because it can close the tap or acting through

cartels it can artificially raise the prices. However, this power position is balanced by the fact

that these countries are overly dependent on the rents that petroleum exports generate for

the survival of the regime – and ultimately the state. Therefore the advantaged states will

have an interest in resolving the conflict because they need to sell oil for their survival.

The discussion on the oil weapon had a predominantly oil-consuming country perspective as

oil is the single most important resource for economic growth and military power of the oil-

30

consuming countries (Klare, 2001). As balanced as this relation might be, it does not mean

that petro states need not fear about their survival in the international system. As Susan

Peters (2005) points out, the growing demand and declining reserves will lead to an oil crisis

in the near future. This will lead to growing tensions between oil-consuming states and oil-

producing states, as some oil-consuming states (such as the United States) will probably not

abstain from the use of force to obtain the resources they need for maintaining their

economic and military power. From the perspective of the oil-producing country, this places

extra importance on a cautious foreign policy which reduces tensions with oil-consuming

states while at the same time investing in achieving greater military capabilities (a form of

internal balancing) or forming international military alliances (external balancing) or put use

funds for soft balancing strategies. Because financial means are indispensable when trying to

implement foreign policy, and rents from natural resources can be a big source of

government income, I think it pays to study more closely the alleged relation between

resource rents and foreign policy

1.4 Methodological considerations The starting point of the thesis was the failure of neorealist theory to explain the absence of

balancing behavior by secondary states against the current world power, the US. According

to neorealists, this balancing behavior is almost law-like and prevents states from becoming

too powerful. This is necessary, because ultimately a too powerful state will threaten the

sovereignty and existence of secondary states. Yet instead of outright balancing behavior we

have been witnessing soft balancing strategies: the use of non-military strategies to hamper

US foreign policy that is perceived as threatening to secondary states. There seems to be a

consensus (Pape, 2005) (Paul, 2005) that these strategies were caused by a more aggressive

US policy and have little to do with the characteristics of the secondary state itself. Only

Andrew Hurrell (2006) thinks that beliefs about what role a certain state should play in the

international system can be an important factor for the type of foreign policy.

However, there is something missing in these analyses: in order to realize a certain foreign

policy, a state needs capabilities to do so. These capabilities stem from different resources

and these resources are frequently overlooked when analyzing inter-state relations. Singling

out natural resources seems justified for analysis as they 1) generate rents that can be used

31

to enhance capabilities of a state and 2) there seems to be some evidence that natural

resources structure relations with other nations.

When talking about the relevance of natural resource for a state (and not just foreign policy)

I made a distinction between states with a diversified economy and rentier states. In the

former natural resource rents are just a part of the states income and domestic taxation and

revenues are the most important source of income for the government, while in rentier

states the government is highly dependent on external rents generated by natural resources.

Whilst discussing the relevancy of natural resources in generating both rents and structuring

international relations, I remarked that oil seems to have certain characteristics (its high

rentability, and its tendency to structure foreign relations in a symmetric way). Therefore I

have chosen to focus on a very specific kind of rentier state: the petro state. Studying the

relevancy of oil for foreign policy of the petro state has been done to some extent before

(especially the earlier mentioned oil weapon), but usually from the perspective of the oil-

consuming nation and not the oil-producing state. Studying the role of oil in foreign policy of

petro states can be a small step into answering more general questions of the soft balancing

debate (such as if foreign policy is largely determined by systemic features or characteristics

of specific states) but at the same time can shed new light on questions of the relevancy of

the type of resources for the generation of capabilities – which are essential to a state’s

position in the international system. This resulted in the following preliminary research

question:

To what extent and how does access to significant oil rents generate incentives for soft

balancing behavior?

1.4.1 Methods of research

As I stated before it is very hard to determine the existence of a causal link between the

access to significant oil rents and the use of soft balancing strategies in foreign policy. Since

the specific subject covered in this thesis is relatively unknown territory, both the research

design and the thesis itself will have a largely explorative character. However, for the

purpose of theory testing it is necessary to formulate some sound hypotheses that will help

us answer the research question. First, we need to know whether petro states actually soft

balance. If significant oil rents enable or give incentives to soft balancing behavior, petro

32

states should be involved in soft balancing efforts. The second hypothesis has to do with the

volatility of oil rents: if the capability to soft balance depends heavily on the level of oil rents,

petro states should demonstrate more soft balancing behavior when oil prices are high, than

when prices are low. As the main source of generating the capabilities of the state, oil is

traded on a very volatile market, so the amount of petrodollars available for soft balancing

efforts varies greatly.

It would be tempting to simply quantify soft balancing behavior and oil rents and try to

determine whether those two hypotheses hold in the real world. Quantitative research with

statistical analysis will just show correlation of the variables, but tell us next to nothing about

the alleged processes at work. While these processes are the main reason for designing this

research. This is not to say there is no merit in using quantitative data at all: it has been

exactly the extensive quantitative research on natural resource dependence that has

identified possible relations between oil rents and certain policy behavior.

However, gathering and analyzing this data is not the sole goal of this thesis. The data is a

mere instrument in trying to identify the aforementioned causal link. An in-depth case study

of the foreign policy of a petro state may help us out here. It allows me to dive deeper into

questions of foreign policy decision making, soft balancing initiatives, and the characteristics

of the petro state.

Both hypotheses can be tested by analyzing the characteristics of the petro state and the

foreign policy of an oil dependent country. What do official policy documents and

statements tell us about the role a government sees for its nation in the international

system? How does it think its policy can be implemented? And what role does oil (if any)

play in these plans? At the same time we should look beyond words. What is the foreign-

policy track record of said state? How does traditional balancing and soft balancing relate to

each other in the foreign ‘policy mix’ of state and (how) do they change over time as oil rents

go up and down? This is the somewhat more qualitative part of the research. But to see how

both variables connect, the theories about the petro state need to guide us in the research.

Having added the hypotheses, the research question has become more specific:

33

To what extent and how does access to significant oil rents generate incentives for soft

balancing behavior by the Venezuelan petro state?

1.5 Case Selection: Venezuela The majority of literature on soft balancing is framed within the (realist logic) of the anarchic

state system, which currently is unipolar. As rules of the balance of power change according

to the number of major powers within the international system, to ensure comparable

results it is necessary to study foreign policy initiatives since 1991 (collapse of the Soviet

Union) onwards. It goes without saying that a case study should at least involve a country

that has access to significant oil rents if one wants to study the alleged effects of oil rents on

foreign policy.

The Bolivarian Republic of Venezuela is a textbook example of a country which has access to

significant oil rents. According to the latest figures on the share of oil in the Venezuelan

economy, in 2008: oil accounted for 90% of all export income (about 30 billion USD), 50% of

fiscal revenue and 23% of GDP (Banco Mercantil, 2009). Furthermore, Venezuela has seen

many changes taking place over the past 20 years: high and low oil prices, socialist and

market-oriented regimes, high and low economic growth. Therefore it seems the ideal

candidate to control for different variables when trying to measure the alleged impact of

significant oil-rents in soft balancing strategies of foreign policy. Another reason why

Venezuela is an excellent candidate for this case study, is that Venezuela has been an active

player (with differing roles over time) in world politics (Corrales). It is co-founder of the

OPEC-cartel, was a close ally of the US for many years, and now strives for the construction

of a multipolar world order (Ministerio del Poder Popular para La Comunicación y la

Información, 2007, p. 46). The current government furthermore sees the interests of the

United States as a threat to political stability, peace and human rights in Latin America

(Buxton, 2009, pp. 61-72).

1.6 Use of sources In order to answer the research question, a case study is constructed by means of a wide

range of different sources from different academic disciplines (Political Science, Economy,

History), government documents, interviews with policy makers and reports by international

34

(governmental) organizations. The vast and rich literature on Venezuelan politics and its

petro economy provides very detailed and useful information, yet it poses challenges too:

First, there are very different narratives of the past twenty years in Venezuelan history. Even

the academic debate is so polarized to the extent that there exists disagreement about

certain factual events and statistics. The controversy of the person of Hugo Chávez also

contributes to this situation. Whenever there is great disparity in the narrative of the case

study, this will be explicitly mentioned. Second, a significant amount of the authors of the

aforementioned works are (or have been) stakeholders. For instance Bernard Mommer, a

well respected academic expert on economics and oil, has worked for as vice-president for

PDVSA and vice-minister of the Ministry of Mines and Energy during Chávez’ regimes, but

also supported Caldera’s presidential candidature in 1994. Another example is Gregory

Wilpert, who is married to a high-ranking PSUV member which is currently Consul of

Venezuela in New York. Another source that should be interpreted with care is US

SOUTHCOM (which is responsible for all military activities in Latin America and thus acts in

US interests). Nevertheless, all these various viewpoints shed a bright light on the existing

literature and help highlight the different dimensions (which are frequently obscured or

omitted from other academic analyses) of the Venezuelan economy, politics and

international relations.

Another problem is the lack of reliable statistics and consistent time series of relevant data.

Even though some institutions like the World Bank or United Nations provide vast amounts

of information, often the data they use is provided by national governments. Unfortunately

the Venezuelan bureaucracy has a cumbersome reputation when it comes to providing data,

especially since Hugo Chávez assumed power.

35

2 | The Venezuelan Petro State

This chapter provides an extensive description of Venezuela’s development into a petro

state. Although the thesis is focused on oil and foreign policy since the 1990s, it is important

to have a general idea of how Venezuelan history has shaped contemporary developments.

Therefore this chapter starts with a brief overview of Venezuelan history which sets out the

context in which political and economic institutions were built and oil-policies have been

developed.

2.1 From Colonial Outpost to Independent Nation (1498 – 1900) Like many other Latin American nations, Venezuela was ‘discovered’ at the turn of the 16th

century. The Spanish conquerors showed little interest in the territory that nowadays

comprises Venezuela as there were no precious metals to be found. After the conquest of

the territory, exploitation of natural resources started at a modest scale (Lombardi, 1982,

pp. 59-66). By the beginning of the 18th century Venezuela as a colony had achieved some

prosperity thanks to the growing cacao trade with Mexico and Spain. Trade turned the city

of Caracas into the country’s most modern, dynamic economic and political center

(Lombardi, 1982, pp. 83-85). The economic development gave rise to a local elite and

bourgeoisie with interests increasingly diverging from those of the Spanish Crown. This

proved to be a fertile ground for the growing independence movement in the early 19th

century. This movement, led by Simón Bolívar, would – after a long, arduous battle that

lasted more than 12 years - achieve Venezuelan independence (Lombardi, 1982, pp. 115-

156). With the common enemy gone, battles ensued on how to shape the country, along a

centralist/federalist cleavage. The federalist faction won in the Civil War (1858-1863) and

the country would be led by local strongmen until 1935. In this era two figures stand out.

First, Antonio Guzman Blanco, whose regimes left a heritage of a technically competent

bureaucracy to administer Venezuela’s import-export economy and large national revenues

from foreign contracts and loans (Lombardi, 1982, p. 197). Second, Juan Vicente Gómez

(1908-1935). Modernization of the army allowed him to check the power of the Caracas

bureaucracy which he needed to administer Venezuela’s economic and political affairs while

it could also be used to intimidate, imprison and kill political opposition. Yet his rule

36

provided political stability and a framework for economic growth (Lombardi, 1982, pp. 206-

208).

2.2 The birth of the Petro State (1901 – 1942)

Between 1920 and 1960 Venezuela transformed from an isolated, rural society dependent

on agricultural exports to an industrializing, urban, extractive society with close ties to

North-Atlantic politics and economics (Lombardi, 1982, p. 211). The transformation of

Venezuela into a petro state started in the early 20th century. The order and political stability

that dictator Juan Vicente Gómez achieved, enabled the petroleum industry to develop

(Lombardi, 1982, pp. 205-206). Although minor concessions had been granted during the

second half of the 19th century, president Cipriano Castro enacted the first Mining Law that

would develop into the legal ground for oil concessions (PDVSA, 2005).10 Lacking funds and

knowledge to develop an oil industry, governments were dependent on foreign companies

to develop the industry. Therefore a system of concessions was applied: foreign companies

could exploit the oil reserves under certain conditions (usually including a lease fee) but

could not own the oil riches themselves (Randall, 1987, pp. 19-20). It would not take long for

the first commercial oil concessions to be awarded, and international oil companies such as

Royal Dutch Shell and Standard Oil soon became the most important producers of oil in

Venezuela. These companies – and the oil industry in general - demanded a basic

infrastructure in telecommunications, roads and ports to export the oil. Also, they

demanded more sophisticated, technical and government services (Lombardi, 1982, p. 244).

This proved to be the kick-start for the modernization of Venezuela. Between 1920 and 1935

(the end of Vicente Gómez’ reign), oil exports as share of total exports rose from 1.9% to

91.2% (Tugwell, 1975). It had become the world’s second largest oil producer (290,000

barrels per day), and most important oil exporter (PDVSA, 2005).

Although Venezuela’s administrative capacity as a state was very weak when the first

concessions were awarded, Venezuelan oil politics advanced through a series of reforms:

after World War I, the state saw to enhance its income from petro-related activities and to

10

Under Hispanic law, all mineral deposits belonged to the Crown. After gaining independence, ownership was transferred to the newly established governments and these rights formed part of the inalienable patrimony of the nation.

37

renegotiate its concessions, which resulted in the 1920 Hydrocarbons Law. The law was

characterized by higher tax and royalty rates. Yet, the foreign oil companies exerted great

influence over the Venezuelan state apparatus and managed to get the Minister responsible

for the 1920 law to be removed from office and the tax and royalty rates were reduced again

(PDVSA, 2005). By 1935 the oil industry had grown so rapidly that Venezuela’s per capita

GDP had grown from one of the region’s lowest to the region’s highest (Crow, 1980, pp. 616-

617).

2.3 The Developmental Petro State (1943 – 1988) The petroleum reform of 1943 marked both change and continuity in Venezuelan oil policy:

the new Hydrocarbons Law was the first law to especially cover all the oil concessions in the

country. These concessions were updated according to new terms, in which the principle of

rents and royalties were maintained but higher tariffs would be applied.11 Even though the

concession system as such was maintained, the new terms would give the government a

bigger slice of the petro cake. One of the most important instruments in achieving this

objective was a new income tax, applicable to all the concessions. The level of the tax rate

on profits had become the sole prerogative of the Venezuelan government (Mommer, 1996,

p. 133). Another important aspect of the 1943 Hydrocarbons Law was that foreign oil

companies could not make greater profits than the amount paid to the Venezuelan state in

taxes and royalties (Wilpert, 2003).

The 1943 Hydrocarbons Law greatly improved the power position of the Venezuelan

government vis-à-vis the foreign oil companies. Nevertheless, national policymakers were

less than satisfied with the results of the legislation as they believed that foreign oil

companies and major consumer companies kept oil prices artificially low. This way they

would lower their profits and minimize their fiscal contributions to the Venezuelan state.

Applying this logic, increasing the fiscal share of the government in the oil economy would

yield meager results. Therefore a new strategy was adopted by the government, aimed at

controlling supply and prices as means to better secure state income from the oil sector

(Mommer, 1996, p. 133). Whether or not these assumptions were true is still open to

11

Royalty payments which averaged 9% in the era preceding the 1943 Hydrocarbons Law, would be set at a minimum of 16.66% under the new concessions (PDVSA, 2005).

38

discussion. What is not open to discussion however, is the effect of the development of the

petro-industry on the Venezuelan economy: Venezuela’s GDP grew by more than 10% per

year during the 1940s (Faria, 2008, pp. 520-521).

2.3.1 Experiments with democracy and PuntoFijismo

It was within this context of high economic growth that a short-lived experiment with

democracy took place: In October 1945 Acción Democrática (AD) and a group of young

military officers staged a coup d’état to reform Venezuela’s political system. Presidential

elections were held by the new junta and AD icon Rómulo Gallegos was elected president.

What followed was a radical transformation of the political economy of Venezuela: land

reform benefitted poor peasants and organized labor movements were legalized. Oil

reforms were quite modest: no new requests for concessions would be granted (Tugwell,

1975, p. 45). AD strategists saw these measures as natural steps towards a modern social-

democratic Venezuela. However, according to Lombardi, the radical agenda and the solistic

approach to reform by AD distanced the party from the more moderate political parties

COPEI and URD, the military and the Catholic Church. In 1948 the military took over

government again, and a 9-year dictatorship by Márcos Pérez Jiménez would follow (1982,

pp. 223-225).

From the 1950s onwards world oil prices declined because of overproduction, mainly caused

by growing production in the Middle East (Wilpert, 2003). Under Jiménez the moratorium on

new oil concessions was lifted whilst the regime profited from the oil income generated by

earlier enacted laws. The Venezuelan economy boomed: real per capita output grew by 5.4%

per year during 1950-1957, resulting in an astonishing 87% increase in real per capita output

in the same time span (Faria, 2008, pp. 520-521). A significant amount of oil income was

invested in infrastructure works – mainly in the Greater Caracas region. The creation of state

enterprises in the steel, petrochemical, hydroelectric and telecommunications sector. In

spite of economic successes, ruthless repression by the regime helped galvanize the political

opposition to form a broad front (the Junta Patriótica) against the dictator, consisting of PCV

(the communist party), the outlawed AD, COPEI and URD. In January 1958 Pérez Jiménez was

finally ousted by a military coup, backed by the Junta Patriótica (Ellner, 2008, pp. 48-49).

39

For the return to democracy to be sustainable, key actors in Venezuela realized that an

equilibrium needed to be found to balance the interests of different sectors. Although AD

was by far the most popular party and in theory could rule Venezuela without support from

the other parties, its alleged radicalism was not acceptable for the more conservative

sectors. Therefore a political pact was signed between AD, COPEI and URD in which the

parties promised to form coalition governments irrespective of the winner of the elections

effectively making it a power-sharing pact. This inter-party agreement came to be known as

the Punto Fijo Pact. Sharing power would also mean shared access to the oil wealth which

accrued to the government. The rules established in the pact would dominate Venezuelan

political life until the 1990s. Concerning government policies, a minimum program was

concluded. The program called for an economic policy that would allow for state

intervention within a capitalist framework, respecting the spheres of influence of the Church

and the Army and including them in debates about the role of these institutions within

Venezuelan society, and negotiations concerning economic policy with organized labor and

business organization FEDECAMERAS (Ellner, 2008, pp. 58-59). Now, as much as this pact

generated political stability hitherto unknown in Venezuela, it also effectively depoliticized

politics and excluded more radical (leftwing) segments of society, of which some would take

up an armed struggle during the 1960s.

Concerning oil policy, several legal steps were taken to work towards more state

involvement in the oil sector. In 1960 the first Venezuelan state oil company was founded,

the Corporación Venezolana de Petróleo (CVP) (Mommer, 1996, p. 133). The goal of CVP was

to (ultimately) perform all the tasks that the foreign oil companies had hitherto performed,

clearing the way for direct participation in the oil industry. This is a clear hint towards a

future nationalization of the oil sector (Novoa Monreal, 1979, p. 28). This was by all means a

challenging task, given the fact that by the 1970s about 20 predominantly British, North-

American and Dutch companies had monopolized the technology, production, processing,

transport and commercialization of oil products (Novoa Monreal, 1979, p. 22). The 1971

Reversion Act made sure that all terrains and goods belonging to the concessionaries made

under the 1943 Hydrocarbons Law (which would expire in 1983) would be transferred to the

state upon non-renewal (Novoa Monreal, 1979, p. 22). The nationalization of the gas

industry by law in 1971 ensured state control over production and pricing of natural gas. In

40

1973 a law was passed that reserved the exploitation of hydrocarbon products for the

domestic market to the state. Policy makers however were well aware that – to able to

receive better prices for exported petroleum, world market prices needed to rise. The

foundation of the Organization Of Petroleum Exporting Countries (OPEC) in 1960 (in effect

an oil cartel) was a foreign policy tool to introduce production quotas and to secure ‘just’ oil

prices for the oil exporting countries.12

2.3.2 Nationalization, boom and bust

The biggest push towards the realization of the petro state took place under the government

of Carlos Andres Pérez. In 1975 (Mommer, 1996, p. 133) the Ley Orgánica que Reserva al

estado la Industria y el Comercio de los Hidrocarburos effectively nationalized the oil

industry. The concessionaries received rather generous compensations for the expropriation

given the fact that their concessions would expire in 1983. This however, did not mean that

the role for foreign companies was played out. The law reserved the possibility of joint-

ventures in oil exploration (as long as the state had a majority share) and special

commercialization and technical assistance contracts were signed with the previous

concessionaries (Ellner, 2008, p. 74). The new state entity that would assure that the oil

industry would be ran in an orderly, modern and efficient manner was Petróleos de

Venezuela, Sociedad Anónima (PDVSA), replacing CVP. PDVSA inherited an internal

management culture that was above all technocratic and corporate, like the management of

the previously owned private companies. Not only was managerial autonomy an important

demand of the foreign company managers (who were going to work in PDVSA), but it was

also a wish of the government to secure efficient management. This resulted in a special

relation between PDVSA and the government: PDVSA and affiliates would run the oil

industry as efficient as possible and would pay due taxes. The government in turn, would

collect the taxes and spend them according to political preferences, like before the

nationalization (Philip, 1999, p. 366).

Under the Carlos Andres Pérez regime, these political preferences advocated bigger state

involvement in the economy to sow the petroleum. More than any other president before

him, Pérez saw the oil industry as key to the development of Venezuela into a modern

12

See Chapter 4 for an in depth analysis of OPEC as a foreign policy tool of the Venezuelan state.

41

country. The sharp rise of oil prices that coincided with his presidency enabled him to invest

in social programs, full employment and the steel, aluminum and electricity sectors (Ellner,

2008, pp. 71-72). As a consequence, since 1958 per capita GDP had risen gradually from

5400 USD to 6500 USD at the end of Pérez’ term, which represents a 20% rise in real terms.

Graphic 1 illustrates the development of Venezuelan GDP per capita from 1959 to 1998.

Source: World Bank Catalog (2010)

However, the oil boom also resulted in relaxed financial policies. Even though fiscal revenues

tripled under Pérez, the government borrowed heavily to finance the government

enterprises (Faria, 2008, p. 523). Several developments in the 1980s led to the unraveling of

the carefully constructed Punto Fijo pact: 1) Oil rents declined dramatically: crude oil prices

had skyrocketed in the late 1970s, but halved during the 1980s. As oil export were the

government’s primary source of income, less and less petrodollars were available. 2) From

Pérez’ government onwards, Venezuela had heavily indebted itself. This was not a problem

when oil prices were high and interest rates were low, but with plummeting oil prices and

the debt crisis, this became a serious problem: Venezuela’s external debt skyrocketed from

less than 10% of GNI in 1975 to 81% of GNI in 1989 (World Bank, 2010). So a significant part

of the already diminished state income had to be used for debt-servicing. Of the remaining

available funds the majority was grossly misspent due to erratic economic policies by the

governments of Luis Herrera Campins (1979-1984) and Jaime Lusinchi (1984-1989), further

aggravating the economic crisis. These developments had a detrimental effect on

$ 0

$ 1.000

$ 2.000

$ 3.000

$ 4.000

$ 5.000

$ 6.000

$ 7.000

Chart 1. Venezuelan GDP Per Capita

Venezuelan GDP Per Capita

42

government spending on social services, which greatly disillusioned the Venezuelan

population which was already heavily hit by the economic recession. But also within the

pact, the declining amount of money available to distribute according to the clientelist

distribution scheme angered the sectors that were cut out. As the spoils of the pact were

distributed under an ever smaller part of society, and widespread disillusion with the

political system was met by rising authoritarianism, tensions grew to unpreceded levels

(Buxton, 2009, p. 59).

2.4 The Oil Opening and Neoliberal reforms (1989 – 1999) The Punto Fijo Pact functioned relatively well in preserving political stability during the 1960s

and 1970s when many Latin American states fell prey to ruthless dictatorships. It led many

authors, such as Lombardi to believe that Venezuela was a model democracy, achieving

political stability, economic growth at little cost. A growing number of academics (Buxton,

2009) (Ellner, 2008) (Karl, The Paradox of Plenty: Oil booms and petro-states, 1997) have

questioned this romanticized notion of Venezuelan democracy and see the aforementioned

developments in the 1980s as witness to the malfunctioning of the system. In the 1990s, two

presidents were entrusted by the Venezuelan people to reform the Venezuelan economy,

the political system and the oil industry: Carlos Andres Pérez (1989 – 1993) and Rafael

Caldera (1994 – 1999). As both had been presidents before and in the past had vehemently

supported the Punto-Fijo regime, it is remarkable that they were to lead the reform process.

What is even more interesting is that although both had campaigned on an anti-neoliberal

platform, once in office, they embraced neoliberalism (Ellner, 2008, pp. 89-90).

2.4.1 Pérez: The Shock Doctrine

Just weeks after assuming office, Andres Pérez presented his neoliberal economic plans for

his presidency. Pérez apparently had signed a letter of intent with the IMF, promising

neoliberal reforms in return for a multi-billion dollar loan to restructure the Venezuelan

economy. The proposal, along the lines of the ‘Washington Consensus’, meant a departure

from the Import Substitution Industrialization model (funded by oil rents) which had been

Venezuela’s lead development strategy since the 1940s. Instead of investing in the national

industry, key state companies were privatized. Instead of protecting local producers, import

tariffs were slashed and the country was opened to foreign investment. Also, price controls

43

on many basic commodities were reduced and/or lifted, exposing the population to rapid

decreases in purchasing power (Ellner, 2008, pp. 91-92). Although these economic reforms

were unprecedented in Venezuelan history, the reforms were far less drastic than in other

neoliberal champions in Latin America, such as Argentina, Chile or Peru (CGD Task Force,

2009, p. 44).

Yet the economic reform plans triggered widespread popular protest. There are several

reasons for these protests which seem to align closely with Javier Corrales’ (2003, pp. 82-85)

approach on resistance to market reforms: first, there was a credibility gap: the state had

underperformed and not delivered during the 1980s, making it difficult for the population to

believe the promises of the government. Especially Pérez’ credibility was at stake as he

made a 180 degree turn on economic policies within weeks in office. Second, the

asymmetrical distributive consequences of the reforms: the lifting of price controls, state

subsidies, labor market flexibilization and rapid price increases hit the poorest sectors of

society most. This was unacceptable to most Venezuelans as they now had to pay for

mismanagement by the elite who were left relatively untouched by the reforms. Third,

although it is generally believed that political and economic crises raises tolerance for

reforms under the population, in Venezuela this was obviously not the case: as subsidies on

petrol were lifted, petro prices increased over 100% resulting in huge increases in

transportation costs. Infuriated by the neoliberal policies the protests devolved into riots

and looting all over the country. The government’s response was heavy handed and during

the looting some 270 up to 2000 are believed to have been killed (Ellner, 2008, p. 94).

However, protest to Pérez´ policies were not limited to the people in the streets: the leaders

of his very own party (AD) had supported another candidate from the 1987 primaries

onwards. After winning the presidential elections, Pérez appointed mainly technocrats

instead of important AD members. He had also failed to inform the party of the letter of

intent of the IMF. This greatly angered a large part of the orthodox faction of the party,

which were not at all fond of Pérez’ neoliberal turn. During the 1991 internal elections for

party leadership, the orthodox social democratic faction gained all but complete control over

the party. As the party leadership determined the voting behavior of the AD faction in

parliament, Pérez reform plans were under heavy attack from his own party which resulted

44

in the abandoning of several reform projects (Ellner, 1996, pp. 94-95). Unwilling to moderate

his reform projects, Pérez had alienated AD from his government.

A third key actor in resistance to Pérez’ reform project was the military. In 1992, two failed

coup attempts took place: in February military officers linked to Lieutenant Colonel Hugo

Chávez clandestine MBR-200 movement took key points in several major cities – but vainly

waited for popular and air-support. Later that year, in November, Navy and Air Force officers

rose up and could count upon substantial – yet not sufficient popular support. However, the

coup attempts did catalyze support for a more legitimate way to remove Pérez from office.

An investigation into corruption charges of the Pérez government took shape, and the

President stepped down in May 1993 (Ellner, 2008, pp. 95-97).

It is tempting to think of the protests against neoliberal policies as being purely based on an

ideational perspective. This might well be the case, but it is nevertheless useful to look at

Pérez’ economic track record: although the Venezuelan economy GDP shrank 8.6% in 1989,

overall growth during Pérez’ term was 2.8%, outperforming the 1980-1988 period were

growth was 0,8%. Poverty had slightly augmented from 1989–1993 rising from 9,2 to

10.9%.13 Income inequality had diminished somewhat, reflected in a GINI-index of 44.1 in

1989 to 41.7 in 1993. Unemployment rose to 10,3% in 1990 but fell to 6.7% in 1993. Inflation

reached a staggering 84% in 1989, then falling back to 30-40% in 1991-1993. Yet average

inflation from 1980 – 1988 had been 16.2%. State tax-revenues as percentage of GDP fell

from 18.1% in 1990 to 13.4% in 1993. Tax levels on income, profits and capital gains fell

from 86% in 1989 to 68% in 1993. With hindsight Pérez’ economic reforms do not seem to

have delivered what was promised, but with the exception of inflation, the Venezuelan

economy performed better during his presidency than during the ‘lost’ decade of the 1980s.

In contrast to the neoliberal economic reform program, Pérez oil policy was less ambitious.

Calls for changes in the industry came mostly from PDVSA management. During the 1980s,

PDVSA had experienced rising production costs, lower oil prices, OPEC quotas and

governments unwilling to ease PDVSA taxation. To cope with these problems, PDVSA had

plans to increase production (2,8 million b/d to 3,5 million b/d in 1996), refinery and

petrochemicals. Although the government initially accepted these plans, two anti-PDVSA

13

Measured as percentage of the population living off of less than 2 USD per day.

45

positions within the government resisted: first, old style politicians who did not have a

problem who did not want to alter the status quo and second, Pérez market-oriented

reforming ministers aiming at opening the oil market to private investment and future

privatization of PDVSA instead of committing public funds of the already heavily indebted

state for PDVSA projects. PDVSA in turn thought that allowing for too much foreign

investment would weaken PDVSA’s position in the oil industry and vis-à-vis the government.

Effectively, during the Pérez’ years in office little changed in the oil industry because both

reforming forces (PDVSA management and Pérez’ technocrats) could not come to terms to

form an alliance against those satisfied with the status quo. A remarkable exception to the

lack of new policy was the progress made on opening up the oil sector for foreign

investment. Arguing that PDVSA did not have the funds nor the technological skills to

develop heavy crude oil fields, Congress approved of foreign investment in joint venture

projects which where to exploit these fields (Philip, 1999, pp. 367-369). This legislation

would prove to be the backdoor entrance for further privatization during Caldera’s second

term in office.

2.4.2 Caldera: gradual reforms and PDVSA privatization

The winner of the 1994 presidential elections, Rafael Caldera, had opposed Pérez’ neoliberal

policies and campaigned on a centre-left platform. During the first 18 months of his term he

pursued an economic policy that promoted state intervention in the economy. However, the

results of this policy were disappointing (for example, real wages declined fast), and he was

confronted with the collapse of the privatized banking sector. 1996 saw the introduction of

the Agenda Venezuela, a package of neoliberal reforms, granting access to IMF loans. The

state’s telephone and steel companies were privatized, demands on foreign capital were

relaxed and the 1997 reform of the Labor Law opened the door to privatization of the health

and retirement branches of the social security system (Ellner, 2008, pp. 99-102).

Caldera’s oil policy however, had been more neoliberal oriented from the start, also allowing

for strategic associations with PDVSA minority shares. National Congress was only able to

stiffen the terms, but could not prevent the privatization process nor start a public debate

on the issue (Ellner, 2008, pp. 102-103). PDVSA’s new plans consisted of increasing

production while allowing for foreign investment in the sector, thus bridging the gap that

had existed during the previous administration. The government backed these plans by

46

approving various oil production contracts involving foreign capital, also for non-heavy oil. It

did mean defying the OPEC-production quota, but PDVSA returned the favor by publicly

backing all government decisions, creating a strong political alliance with key power groups

in the government and society. The opening had mixed results: on the one hand, the

increased sales income by PDVSA facilitated investments by the company and resulted in

increased tax revenues which reduced the effect of the collapse of the Venezuelan banking

system and boosted the local economy somewhat (Philip, 1999, pp. 370-372). On the other

hand, the legislation and decision-making procedures had been rather dubious, negatively

affecting the legitimacy of the privatization process. Furthermore, some of the joint ventures

were highly unprofitable for PDVSA under low oil prices while guaranteeing profits for their

foreign counterparts (Buxton, 2009, pp. 61-62). Finally, creative accounting by PDVSA meant

that although the company contributions in tax revenues were significant in absolute terms,

PDVSA contributed less and less in relative terms.14

2.5 The Chavista Petro State (1998 – present day) During the 1998 presidential elections, Hugo Chávez Frías campaigned under the umbrella of

the polo patriótico, a multiparty anti-establishment and anti-neoliberal platform consisting

of various left-of-centre parties. Having been involved in the February 1992 coup, he had

gained a lot of support under part of the population that was fed up with the Punto-Fijo

regime. He campaigned for an overhaul of the political system to make it more democratic

and transparent. A second key issue of the campaign was the reversal of neoliberal policies

of the 1990s. A third issue was the corruption of the establishment, who had enriched

themselves over the past 30 years while the vast majority of the Venezuelan population

were living in poverty. Chávez provided an attractive alternative to the – by that time heavily

discredited – political class of the ancién régime. The 1998 presidential elections resulted in

a landslide victory for Hugo Chávez, gaining 56% of the votes, versus 40% for Henrique Salas

Römer, the main candidate of the traditional parties (CNE, 1998).

The first years of the Chávez regime were geared towards the restructuring of the

Venezuelan political institutions and the relation between the state, society, and its natural

14

From 1976 to 1989, PDVSA’s tax contributions and operating costs had a 80/20 proportion. From 1990 to 1996 this had changed into 67/33, mounting to 20/80 in 2000: a complete reversal the 1989 situation (PDVSA, 2006).

47

resources. One of the first acts of Chávez was to decree a consultative referendum to

establish a National Constituent Assembly (ANC) to rewrite the Constitution. The members

of the ANC were elected by the people of Venezuela (but the ANC-elections were boycotted

by the opposition), and Chavistas obtained 125 out of the 133 seats (Ellner, 2008, p. 111).15

In December 1999 the new Constitution was ratified by a popular referendum.16 Regarding

the content of the Bolivarian Constitution, it combined centralization of power in the

executive with some remarkably democratic characteristics.17 Furthermore it explicitly

stated that activities in the oil industry are reserved for the state (Article 302) and that all

PDVSA stocks should be in hands of the state (Article 303). The articles effectively rendered

privatization of PDVSA impossible and clearly defined the role of the state in the oil sector.

Because of the new Constitution, all democratically elected positions within the states

representative institutions had to be legitimized again. The Megaelections held in the year

2000 were to serve this purpose: Venezuelans could once again choose their own

representation; local councils, mayor’s, governors, national deputies and President. Chávez

was reelected by a comfortable majority, his party MVR won 91 seats in the National

Assembly and opposition parties Proyecto Venezuela, AD and COPEI combined obtained 45

out of 165 in the National Assembly (CNE, 2000).18

2.5.1 Reversing neoliberalism

The comfortable majority in the National Assembly paved the way for further reforms: the

assembly passed the Ley Habilitante (Enabling Law), which gave the executive power the

possibility to rule by decree on certain policy terrains during one year.19 Exactly one year

later, Chávez issued 49 decrees, the majority of them reversing the neoliberal socio-

economic policies of the 1990s, and thus jeopardizing the interests of those privileged under

15

A Chavista is a person that identifies him/herself with the Bolivarian Revolution and its leader Hugo Chávez. 16

71.8% voted in favor of the new constitution. 55.6% of the electorate did not participate (CNE, 1999) 17

Most important changes were: 1) The expansion of the presidential term from five to six years (including the possibility of a onetime immediate reelection). 2) Complete presidential control over promotions within the Armed Forces. 3) Disbandment of the Senate. 4) Presidential discretion in activating a referendum without authorization by the legislature. 5) No more public financing for political parties. 6) The possibility of recalling the mandate of mayors, governors and the president under certain conditions (Monaldi & Penfold, 2006). 18

Hugo Chávez Frías won the presidential election with 59.8% of the vote, runner-up Francisco Arias Cárdenas obtained 37,5% of the vote and abstention reached 43.7% (CNE, 2000). 19

The ‘enabling law’ authorized the president to rule by decree (but with the judicial status of law) in some – in the law itself agreed upon – subject matters such as finance, social and economic reforms, infrastructure and the functioning of the state (Gaceta Oficial N. 370076, 2000)

48

the Punto Fijo regime (Ellner, 2008, pp. 112-113). The two most controversial laws were the

Ley de Tierras (Law of the Lands), which concerned expropriation and redistribution of idle

lands, and the Ley Orgánica de Hidrocarburos (Organic Hydrocarbons Law), reforming the oil

industry. The new Hydrocarbons Law stipulated that all primary oil activities are either

reserved by the state, or by a joint venture with a minimum of 51% state ownership (Gaceta

Oficial N. 37323, 2001). From the perspective of the Venezuelan government, these oil

reforms were badly needed: oil production had fallen steeply since 1998, oil exports were

down as well, and oil prices (although climbing slowly) were relatively low as well (Santos,

2009). The oil income was badly needed for Chávez socio-economic plans for a more equal

and just society. Therefore privatizing PDVSA was not a policy option.

However, the new hydrocarbon legislation was not welcomed by PDVSA management, oil-

expert politicians and certain other sectors of society, because of their pro-privatization

stance. What angered many Venezuelans that did not have a direct stake in the reforms, was

the way in which these new laws were passed: without much public debate and by decree.

This put anti-government forces (and especially the PDVSA management) head to head with

the government and led to the firing of several managers of PDVSA by Chávez (Ellner, 2008,

p. 114).

The sectors opposed to the new legislation were poorly represented within parliament and

took their protests to the streets. Political polarization led to massive street protests and

(violent) clashes between Chavistas and anti-Chavistas. On April 11th 2002, after months of

protests, strikes and rising political tension a military coup removed Chávez from office.

Chairman of FEDECAMARAS, Pedro Carmona, presided the de facto government.20 21

However, the provisional government was weak from the start as it suffered from internal

dissent. Only the most reactionary forces within the political opposition were well

represented within the new government. Its first measures were to temporarily abolish

democratic institutions, to reverse the 49 decrees and to reinstate the 1961 Constitution.

The more moderate forces (such as the labor union CTV) by that time had already decided

20

This thesis does not permit sufficient space to extensively clarify all the motives, actors and consequences of the coup, so its description is limited to the most essential aspects of coup and its implications for Chávez policy. However, it still is not clear what the actual motives of the key actors were as investigation into the matter by Venezuelan authorities, private media outlets and academics is heavily biased. 21

FEDECÁMARAS represents the Venezuelan business community.

49

not to support the new government. As public discontent with the new regime grew, the

provisional government became more and more isolated: a civic-military alliance brought

Chávez back in power just 48 hours after removal (Ellner, 2008, pp. 114-115). The coup also

had an international dimension: the Bush administration had supported the coup in various

ways: it had financially supported various opposition organizations, met various opposition

leaders without discouraging them from taking power by force, justified the coup by blaming

Chávez for the political tension and rallied support for the Carmona regime directly after

taking office (Ellner, 2008, pp. 198-199).

After the coup, in order to appease the opposition and to depolarize the political climate,

Chávez called for a time of reflection and consensus. One of the most symbolic gestures of

the government was re-hiring the previously fired PDVSA managers and the appointment of

OPEC secretary-general (and political moderate) Alí Rodríguez Araque as head of PDVSA.

However, this did not prevent the company’s management from continuing their political

agenda. In December 2002 PDVSA management, FEDECÁMARAS, CTV and the political

opposition parties called for a national strike. The idea was simple: a lock-out of the national

economy would foster widespread discontent with the government which would lead to the

ousting of Chávez (Ellner, 2008, pp. 118-119). The results of the strike were mixed and an

analogy can be drawn from the situation in PDVSA. Where senior- and middle management

favored the strike, most petro-unions did not support the strike. Nevertheless, oil production

came to a virtual standstill because of the lock-out. In the rest of the economy a similar

pattern was visible: the economic elite and a majority of white collar workers supported the

strike, whereas blue collar workers and those working in the informal economy needed and

wanted to work, but could not because business owners would temporarily shut down their

businesses. Yet, for the national economy the outcome was disastrous: plummeting oil

production catalyzed a deep economic recession (GDP fell by 7.8% in 2003) and resulted in

mounting tensions between the government and PDVSA (Buxton, 2009, p. 67). Although the

economic lock-out heavily weakened the Venezuelan economy, the preceding years the

economy’s performance had been weak as well: economic growth had been mainly

negative, GDP per capita had not grown since 1998 and had shrunk by 2003 and inflation

was hovering around 15-25% per year (Santos, 2009).

50

The coup and the subsequent strikes had made Chávez realize that he could not count upon

sufficient support from the business community, labor unions, the infrastructure of the state

bureaucracy and other political parties to realize his project. Starting in 2003, Chávez started

to invest in parallel government programs, Missions, designed to bypass the bureaucracy

and power of the existing government structures, lower dependence on private actors and

deliver much needed goods (food) and services (health care and education) to the country’s

poorest sectors (Panizza, 2009, p. 206). However, for the missions to really make an impact,

funds were needed – and PDVSA was to provide them. As the post-coup appeasement

politics of the government had not yielded the desired results, the government fired an

estimated 18,000 PDVSA employees (predominantly higher- and middle management staff)

for supporting the strike and jeopardizing national interests (Economides, Martínez, & Puky,

2007). This gave the government the opportunity to restructure PDVSA’s organization and

redefine its relation with the company. The most important changes have been that 1)

management and workers are now predominantly Chavista.22 2) PDVSA lost virtually all of its

autonomy as it is now once again under control of The Ministry of Energy and Petroleum and

3) PDVSA has expanded its role into non-petroleum business; the majority of the

aforementioned missions is directly funded by the company and/or is partly executed by

PDVSA itself.23 Some argue that this central role that PDVSA plays in financing the missions is

detrimental to the investments in the oil sector raising the possibility of lower oil production

levels in the future (Buxton, 2009, p. 73). According to PVDSA from 2004-2006, it contributed

to the state over 80 billion USD, of which 29% was directly destined for social programs,

among which the missions. In the three preceding years it had in total contributed 31.5

billion of which a mere 0.4% was destined for social programs. Graph2 illustrates the

changes in PDVSA contributions to the state under the Chávez government.

22

In November 2006, president of PDVSA and Minister of Energy and Petroleum Rafael Ramírez declared that all PDVSA workers and managers should be committed to the Bolivarian revolutionary project and that the company should be roja-rojita (the colors of the Bolivarian movement) (Panizza, 2009, pp. 209-210) 23

A prime example of such a non-core business initiative is Producción y Distribución Venezolana de Alimentos (PDVAL), which provides subsidized food articles.

51

Source: PODES (2006)

After losing the Megaelections in 2000, the disastrous coup in 2002, and the failed economic

lock-out in 2002 and 2003, the opposition tried yet another strategy to remove Chávez from

office: the recall referendum.24 For months, different polls showed a clear win for the

opposition, but in August 2004, 59% of those that went to the polls (70% of the electorate)

voted against the recall (CNE, 2004). Although there seems to be disagreement about what

caused the change in attitude towards the Chávez government, there is reason to believe

that improving social and economic indicators favored the government: poverty went down

from 62.1% (2nd semester 2003) to 53.9% (2nd semester 2004), extreme poverty went down

from 29.8% (2nd semester 2003) to 22.5% (2nd semester 2004), unemployment shrunk from

19% (January 2004) to 13.9% (2nd semester 2004) and of those employed a growing number

participated in the formal economy. Also, the Chávez government had improved its UN

Human Development Indicator score from 0.8- (2000) to 0.82 (2005) (Institutio Nacional de

Estadística, 2010). Whether these indicators merely reflect the rebound of the economy

after the oil strike or are the first tangible results of the missions: the indicators all favored

the government. Another reason why Chávez might have won the recall vote, is the lack of a

clear socio-economic policy alternative of the opposition: the main goal had been to oust

Chávez and not to present policy alternatives. While that might have been enough for anti-

Chavistas to support the recall, it probably did not convince the swing vote and helped

Chávez win the referendum by a comfortable margin (Ellner, 2008, p. 120).

24

Article 72 of the Constitution stipulates that every elected official can be subjugated to a referendum and is subject to removal when a majority of voters think the powers of the elected official should be revoked.

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1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

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Chart 2. PDVSA (Social) Contributions

PDVSA Contributions to the State

PDVSA Contributions for Social Development

52

2.5.2 Petro-boom and deepening the process

2005 marked the start of the latest petro-boom in Venezuelan history. Although prices had

gradually climbed since Chávez assumed office (the price of one barrel of Venezuelan crude

– 10,57 USD - was at a 17 year low at the time), reaching 40 USD in 2005, oil prices exploded

in the following years, topping 129 USD in July of 2008. Although production would decline

in 2005, 2006 and 2007, this was compensated by the additional income for the Venezuelan

state due to higher oil prices and a bigger share in profits of the PDVSA joint ventures. This is

also reflected in public and private consumption.

Table1 / Year Private Cons. growth Public Cons. growth Total Cons. growth

2005 – 2006 18.32% 6.8% 15.78%

2006 – 2007 196% 5.29% 16.69%

2007 - 2008 1.69% 6.03% 2.48%

Source: Banco Central de Venezuela

As Table 1 clearly demonstrates, private consumption grew much faster than public

consumption and came to a virtual standstill in 2008 (with oil prices falling in the second

semester), while government spending kept growing irrespective of the falling oil prices.

The additional income worked in favor of Chávez in two ways: he could increase social

spending and expand the missions, while high oil prices also facilitated the payment imports

which grew at an annual rate of 44% from 2003 – 2007 (Santos, 2009)

Source: PODE (2006) and OPEC Annual Bulletin (2010)

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Chart 3. Ven. Oil Price (Spot Market)

Price Venezuelan Basket

53

Concerning the oil industry, in 2005 the government published the Plan Siembra Petrolera

2005-2030 (Sowing the Oil Plan, a policy document containing the governments strategic

vision on the quintessential sector for Venezuela’s development strategy. The first phase

(2005 – 2012) consists of 56 billion USD investments in upgrading and expanding refinery

capacity in Venezuela, opening 27 blocks for oil exploitation, investing in off-shore gas

exploitation, investments in (industry) infrastructure, international cooperation to assure

Latin America’s energy security and integration through PETROCARIBE and PETROSUR and

studying the reserves of the Orinoco Belt (Ministerio del Poder Popular para la Comunicación

y la Información, 2006). In the same year the Hydrocarbons Law was reformed (Gaceta

Oficial N. 38443, 2006) raising royalty tariffs for the heavy crude projects in the Orinoco belt,

which had previously been shielded from some of the tax-norms established in the 2001

Hydrocarbons Law. Also foreign interests were forced to accept the Venezuelan state’s 60%

ownership of mixed companies (founded in the 1990s) and employees were transferred to

PDVSA’s payroll (Ellner, 2008, p. 127). In 2008, when oil prices peaked a windfall oil tax was

levied.25 However, when oil prices fell, the tax was quickly lifted again. The latest move of

the Chávez government has been the nationalization of service companies and their assets in

the primary sector and the transfer of personnel to PDVSA (Gaceta Oficial N. 39173, 2009).

Chart 4 illustrates Venezuela’s crude oil production level and export earnings under Chávez.

Several elections were held during the boom years. In December 2006, Chávez was elected

once again as president of Venezuela (CNE, 2006) winning by the highest percentage of vote

in democratic Venezuela (62.9%). With the Missions in full effect, skyrocketing oil prices and

windfall oil income this need not surprise us. In 2007, the government’s attempt to change

some articles in the 1999 Constitution (the most controversial one removing term limits for

the presidency) lost by a narrow margin. Yet in 2009 succeeded in passing the reforms,

extending the removal of term limits for all democratically elected positions.

25

The windfall oil tax was levied over marginal income resulting from oil prices surpassing 70 U$ and 100 U$ per barrel, applying tax rates of 50% and 60% respectively (Gaceta Oficial N. 38910, 2008).

54

Source: OPEC Annual Statistics Bulletin 2007 & 2008

2.5.3 Ten Years of Chávez

It has been 10 years since Chávez assumed office, and since then gradual but profound

changes have been made in state, society and the oil sector in particular. The institutional

changes made in the 1999 Constitution and the subsequent Hydrocarbon Laws of 2001 and

2006 have resulted in bringing PDVSA under state control again – and more specifically the

Ministry of Energy and Oil. This has transformed the role of PDVSA from a highly

autonomous state agency with its own goals and interests to a state company whose goals

and interests are aligned with those of the state. This is reflected in the characteristics of the

new PDVSA, which has become increasingly participative in the domestic economy,

functioning as an executive state agency both inside and outside the oil sector, serving the

economic and social interests of the nation. The institutional changes have also led to a

relative reduction of foreign participation in the oil sector and new contracts have been

concluded mainly with foreign state oil companies that share Venezuela’s geostrategic

interests. Furthermore, the changes have led to increased state income from Venezuela’s

natural reserves, reversing the neoliberal high production, low prices strategy of the 1990s.

Oil production however, has varied greatly under Chávez’ rule (see Figure 1: Crude Oil

Production Venezuela 1998 – 2008), thanks to multiple strikes in from 2000 – 2003,

subsequent changes in PDVSA’s organizational and operational structure (and the brain

$ 0

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sChart 4 Ven. Petroleum Exports and Production

Value Petroleum Exports in U$

Crude Oil Production Venezuela (barrels/day)

55

drain associated with this process), and alleged underinvestment. Both the fluctuation of

production levels and the world oil market prices have influenced Venezuela’s export

earnings. However it has become clear that the rise in income which in 2004 reached 1998

levels, is mainly due to windfall oil prices in 2008.

56

3 | Venezuelan Foreign Policy

In the introductory chapter, the notion that state behavior is exclusively determined by the

international anarchic system was criticized on various grounds. Then, the Natural Resource

Curse and possible effects of oil rents on foreign policy were introduced and made

reasonable. After the provision of the Venezuelan political and economic context since 1958

(and especially the regimes during unipolarity). Now the reader should be familiar with the

characteristics of the Venezuelan petro state, we can direct our attention to the foreign

policy to see whether these initiatives correspond more to policies expected on basis of the

international system or the characteristics of the petro state, or whether intervening

variables apply. This chapter starts with an overview of Venezuelan foreign policy since

1958. This context is very useful in measuring how much policies have actually changed since

the surge of the unipolar world system (which neorealist theory predicts). We then fast-

forward to the Venezuelan governments of 1989 and the Chávez era, comparing the policies

of the different governments. Measurement of alleged changes in foreign policy will be

made through assessment of policy along the lines of various concepts used by the different

theories on state behavior. Within the neorealist school of thought, what matters is whether

states are involved in traditional balancing behavior, that is: investing in military capabilities

or the construction of military alliances. For the soft balancing school of thought what

matters is to what extent soft balancing strategies such as diplomatic entanglement,

territorial denial and social power policy projection. Key to both theories are Venezuelan –

US relations, so special attention will be given to this relation. Given Venezuela’s remarkable

characteristic of being a petro state, special attention will be paid to international oil-related

policies, as various theories in the theoretical framework hinted that the relations of the

petro state might be structured by them.

3.1 The 4th Republic and the World

Although the governments of the 4th Republic (1958–1998) usually have been portrayed by

the current regime as close allies (or even subjected to the interests) of the US, empirical

evidence suggests a more nuanced assessment. A brief historical context of Venezuelan

foreign policy antecedents is offered to better compare and understand foreign policy

57

choices by the administrations of Carlos Andrés Pérez and Rafael Caldera in the 1990s and

Hugo Chávez’ governments from 1998 onwards.

After the conclusion of the 1958 Punto Fijo Pact, which served as the basis of democratic

rule in Venezuela, the subsequent Minimum Program stated the basic values which should

underlie Venezuelan (foreign) policy, on what international platforms it should act and in

what manner it should promote national interests in the international system. First,

Venezuelan policy should be based on the values of peace and cooperation. Second,

Venezuela condemns every act against the right to self-determination of any people –

especially concerning the countries of the Americas. Third, international problems should be

solved in a peaceful manner by international institutions deemed competent for the task.

The Program therefore called on the ratification of UN and OAS membership. Fourth,

Venezuela should honor its international obligations. Fifth, Venezuela should play an active

role within the America’s, revising its relations to make sure that these are based upon

democratic principles and economic cooperation. Sixth, Venezuela should promote

commercial trade by means of bilateral agreements using petroleum and other natural

resources as trade instruments (Aveledo, 2007, p. 264).

Like many other foreign policy documents, the goals are rather vague and ambiguous.

Therefore actual foreign policy initiatives need to be studied. A short assessment already

shows that the above stated principles were not always respected to the same degree. In

line with a strict interpretation the Betancourt Doctrine Venezuela did not recognize the

Castro regime in Cuba during the 1960s (Aveledo, 2007, p. 266).26 Yet Venezuela also

condemned the 1965 US military intervention in the Dominican Republic (Kelly & Romero,

2005, p. 37). At the same time Betancourt’s government condemned Soviet interference in

the hemisphere and usually voted in line with the US in the OAS (Kelly & Romero, 2002, p.

29). In the 1970s Venezuelan governments did not automatically back US foreign policy

decisions either. The oil bonanza flooded the Venezuelan state with income, providing for a

more active foreign policy: Venezuela pursued more equality in international trade, transfer

of technology and UN reform trough the Non-Aligned Movement and the G77 (Aveledo,

26

The doctrine stated that Venezuela should not have diplomatic relations with governments which had come to power by undemocratic means, such as a coup d’états or rigged elections (Kelly & Romero, 2005, p. 137).

58

2007, pp. 270-271).27 It also restored formal relations with Cuba, defying the Betancourt

Doctrine. Concerning international oil policy, the Venezuelan government did not want to

jeopardize its special relation with the US. Facing growing competition from petro states in

the Middle East, such as Iran and Saudi-Arabia, the Venezuelan government wanted to

present itself as a stable oil supplier for the US. It had already sought preferential access to

the US market for its oil products, yet with no success. Furthermore, the nationalization

process in Venezuela had worried the US as it saw the interests of some of its petroleum

companies jeopardized. In this context it need not surprise us that Venezuela did not join the

Arab OPEC member’s production cuts during the Arab-Israeli War of 1973. Abstaining from

the use of the oil weapon worked in two ways: 1) Venezuela could take over market share at

the cost of those involved in the boycott. 2) Venezuela could prove its reputation as a stable

oil provider. The US took notice of Venezuelan protagonism and its more autonomous line, it

valued Venezuelan as a stable oil provider and a beacon of democracy and political stability

in the hemisphere (Kelly & Romero, 2002, p. 22) (Tugwell, 1975, pp. 140-141). Given the US

support of non-democratic regime in that very time span, one could well argue that the US

valued stability over democracy. Nevertheless, the Venezuelan regime provided both and

therefore was an interesting ally for the US in a continent which lacked both stability and

democracy in the 1970s.

In the previous Chapter, the dwindling oil prices and their influence on domestic state

finances has already been discussed. Yet there were also international consequences: as the

state apparatus could not adapt itself to the new reality of low oil prices and high interest

rates, Venezuela’s foreign debt skyrocketed in the early 80s and the international activism of

its government waned. The government’s posture itself changed little. Caracas continued to

share Washington’s strategic vision that Soviet and Cuban influence in the region was

unwanted. Yet the Venezuelan government was very critical of US intervention and

considered them undue meddling in internal affairs. The various armed conflicts in Central

America during the 1980s illustrates this point: while the US supported and armed the

27

The Non-Aligned Movement, born in the mid 1950s, represented those countries that did not want to get involved in the Cold War and therefore refused to align with either the US or the Soviet Union. The Movement also had a strong socio-economic agenda: one of the main objectives was to create conditions for sustainable development of the NAM-members. This, stemming from the perception that the more developed nations dominated world politics and this jeopardized the safety and socio-economic development of the non-aligned (Non-Aligned Movement, 2010).

59

Nicaraguan contras, Venezuela supported moderates and tried to mediate in the conflict

(Kelly & Romero, 2002, p. 24). During the Malvinas/Falklands War it supported Argentina’s

cause against one of the last vestiges of colonialism although Argentina was led by a

dictatorial regime. In that case Latin-American solidarity took priority over notions of

democracy. These examples serve to show that 1) the goals stated in the Minimum Program

of 1958 were not always respected and broadly interpreted. 2) Venezuela’s foreign policy

does not seem to have been a mere copy of US foreign policy.

Venezuelan foreign policy formulation during the 4th republic took place within the following

institutional context. Although, like in most countries foreign policy formulation is

concentrated in the executive and the ministry of Foreign Affairs (Hill, 2003, p. 53), in the 4th

Republic various other actors were heavily involved in policy formulation and the

distribution of their mutual power relations: 1) The Punto Fijo Pact assured domination of

parties AD and COPEI over the political system. 2) The relatively well developed internal

organization of COPEI – but especially AD – gave the parties independent authority and

power to challenge the executive, even if office was held by a party member (Levitsky, 2001,

pp. 50-51). 3) PDVSA had obtained significant autonomy from the rest of the state apparatus

and had developed its own vision on what role the company and state should play in the

international system (Trinkunas H. , 2009, pp. 17-18). 4) The ever presence of the Armed

Forces, which role is further discussed in the next section.

3.1.2 Traditional balancing behavior

Within the realist notion of international relations traditional balancing consists of investing

in the military articles and services, or concluding military alliances with other nations. In this

section, expenses and civil-military relations are studied (according to the relevance of the

institutional setup discussed earlier).

In Chapter 2, the tense relation between the military and the democratic governments of

the 80s and 90s has already been discussed. The growing discontent of especially younger

officers with the regime (because of corruption, mismanagement and neoliberal economic

policies) distanced these groups with the senior officers and the government. The military’s

heavy handed response to the 1989 riots proved to the young officers that they were serving

an illegitimate government and corrupt senior officers. These junior officers identified

60

themselves more with the people than the establishment: like the vast majority of

Venezuelan society their economic situation had increasingly deteriorated during the 1980s.

Although military spending as such had been left relatively untouched in spite of the

economic crisis, spending patterns within the military had changed: more money was spent

on the high command and arms, while less was destined for salaries and other social needs

of these junior officers (Trinkunas H. A., 2002, pp. 51-53). The Pérez government itself had

been unaware of the schisms within the military as - because of the autonomous position of

the military - the executive branch could only oversee total spending of the military

apparatus. Discontent with Pérez neoliberal policies and the inept army leadership triggered

the two 1992 coups which – ultimately – signaled the end of Pérez presidency. The coups

also triggered increasing US-Venezuelan cooperation by intensifying Venezuelan training

missions by the US military (Trinkunas H. A., 2002, p. 58).

Returning to the topic of military expenditure, Chart X.X demonstrates the level of military

spending during the second administrations of both Pérez and Caldera.28 Venezuela’s

military spending as percentage of GDP remained stable during the 1990s, with few

exceptions. Starting at 1.9% in 1991, spending declined in 1992 and peaked at 2.2% in 1993.

The 1993 spending boom needs to placed in the context of the two subsequent coups in

1992. Acknowledging the rather precarious situation of the Venezuelan democracy after the

two failed coups of 1992, Caldera radically altered military-civic relations and restored civil

supremacy over the armed forces.29 Even taking into account these ‘appeasement’ expenses,

Venezuela’s military spending during the 1990s remained modest comparing to the growing

expenses of neighboring Colombia. Like in many other Latin-American countries, Venezuela’s

spending remained at the same levels or fell modestly (see Chart 6 below).

Although military spending in absolute dollar terms fell during the Caldera administration,

internal shifts in spending appeased the military: the social needs of the officer corps which

had been ignored for a long time, were addressed by generous pay raises (Trinkunas H. A.,

28

Reliable data for 1989 and 1990 are not available and therefore are not included in the graph. 29

Caldera reestablished himself as chief of the armed forces by firing his defense minister and replacing him by a junior officer, effectively forcing out various senior generals who would rather resign than server under a junior officer. Soldiers involved in the 1992 coups (amongst others Hugo Chávez) received a presidential pardon under the condition that they would resign from the military. By expelling both the military high command and the MBR- 200, Caldera purged the officer corps of its two most politicized extremes and allowed the rest to return to their professional duties (Trinkunas H. A., 2002, p. 62).

61

2002, p. 63). This seems to indicate that spending on defense articles and services had to be

lowered to realize the pay raises.

Source: World Bank Data Catalog (2010)

Statistics on arms and services agreements and sales with Venezuela’s hitherto most

important military trading partner (the US) seems to confirm this suspicion. 1996 – 1999

figures on Venezuelan military agreements and defense articles and services from the US are

relatively modest: 101 million USD was spent on military agreements, while another 156

million USD was spent on US defense articles and services. Although this places Venezuela in

the top 5 of US’ most important clients within the America’s, the actual amounts pale in

comparison to other purchasers in the region.30 The aforementioned figures total a 257

Million USD expense, representing a mere 3.7% of total Venezuelan military expenditure.

However, the data mentioned above does not cover all military expenses. According to the

IISS, the Venezuelan armed forces have historically received funding from the Ley Paraguas

(Umbrella Law) fund up to 500 USD million per year (IISS, 2010, p. 60).31

30

Leading purchasers of US Defense agreements of the Americas (in Millions): 1) Canada 397 USD 2) Colombia 196 USD 3) Brazil 109 USD 4) Venezuela 101 USD 5) Argentina 47 USD. Leading purchasers of US defense articles and services of the Americas (in Millions): 1) Canada 451 USD 2) Colombia 242 USD 3) Brazil 204 USD 4) Venezuela 156 USD 5) Mexico 52 USD. 31

The Ley Paraguas was originally used as a savings fund for newly contracted debts or the repayment of old debts (Ministerio de Finanzas, 2005).

0,0%

1,0%

2,0%

3,0%

4,0%

5,0%

6,0%

1991 1992 1993 1994 1995 1996 1997 1998

Chart 6 Mil. Expenditure as %GDP

Argentina

Brazil

Chile

Colombia

Mexico

United States

Venezuela, R.B. de

62

Based on the limited data provided in the preceding sections and the spending pattern of

the neoliberal governments of the 1990s (especially Caldera), military spending seems to

have been geared towards appeasement of the military vis-à-vis the government rather than

bolstering Venezuela’s military might. Traditional balancing efforts thus seem to have been

completely absent during the governments of both Pérez and Caldera.

3.1.3 Carlos Andres Pérez

The demise of the Soviet Union and the transformation of the international system from a

bipolar to a unipolar structure largely coincided with Carlos Andrés Pérez second term in

office. An important pillar of Pérez’ foreign policy strategy was the strengthening of the

Organization of American States. He saw the organization as key to promoting democracy,

economic growth (along neoliberal lines), security issues and resolving the US – Cuban

conflict. However, giving a new impulse to the OAS was only possible getting rid of the old

vices of the OAS: its anticommunist bias, tolerance of right-wing dictatorships and inaction

against aggressive US unilateralism (Pérez, 1990). Proof of Pérez dedication to uphold and

maintain democratic regimes in the region can be found in his efforts to guide the

Nicaraguan transformation to democracy after a bloody civil war in the 1980s and to prevent

Haiti fragile democracy from descending into chaos after the overthrow of Aristide’s

government in 1991 (Kelly & Romero, 2005, pp. 202-203). There also seems to be evidence

that Pérez actively lobbied within the OAS to create a mechanism against coup d’états, not

in the last place because he increasingly feared a coup in Venezuela during his presidency,

because of his unpopular – neoliberal - policies (Bloomfield, 1994, pp. 181-182).

3.1.3.1 OPEC

Although production increases were not stimulated by the Pérez government due to reasons

discussed in Chapter 2, Venezuela raised its production under Pérez by 28.3%. Under Pérez,

OPEC quota discipline was weak, in spite of the significantly higher assigned quota because

of the Gulf War and the associated instability of OPEC Middle East oil producers.

Table 2 Venezuela OPEC Quota Discipline under Carlos Andrés Pérez32 (in 1000 barrels /p day) Jan89 –

Jun89 Jul89 – Sep89

Oct89-Dec89

Jan90-Jul90

Aug90 Apr91-Sep91

Feb92-Sep92

Jan93-Feb93

Mar93-Sep93

Quota 1636 1724 1812 1945 1945 2235 2147 2360 2257

32

There were country-specific production allocation agreements from September 1990 – March 1991, October 1991 – January 1992 and October 1992 – December 1992.

63

Production 1910 1910 1910 2140 2140 2380 2370 2450 2450

Overproduction 16.7% 10.8% 5.4% 10% 10% 6.5% 10.4% 3.8% 8.6%

Source: Energy Information Agency, OPEC and own calculations

3.1.3.2 Credit lines by International Financial Institutions

In the previous chapter the domestic consequences of Pérez’ deal with the IMF have been

briefly mentioned. In this very paragraph the international ramifications of the deal are

scrutinized. The 1989 IMF was part of the so called ‘Brady Plan’ which was intended to

restructure the economies of states that had large foreign debts to service. The Extended

Fund Facility of the IMF offered approximately 3.9 Billion USD (of which 2.3 billion was

actually used by the Pérez government) (IMF, 2010).33 The funds were conditional upon

neoliberal restructuring of the Venezuelan economy. The Pérez government tied itself to the

US-dominated IFI and reduced its sovereignty in economic policy making. It also legitimized

the position of the fund and the neoliberal Washington Agenda. The government’s was even

more orthodox than the fund in repaying its IMF debt: the 4,5 year grace period was not

used and repayments started as soon as 1991 (Ibid.).

3.1.4 Rafael Caldera (feb ’94 – feb’99)

Like his predecessor, Rafael Caldera had campaigned on a anti-neoliberal platform,

consisting of various left of centre political parties like the Movimiento Al Socialsmo (MAS –

Movement towards Socialism) promising the Venezuelan electorate a return to the golden

days of the 4th Republic. Statist intervention in the economy and a nationalist approach

where the cornerstones of Caldera’s campaign. However, also Caldera would eventually turn

to neoliberalist policies.

3.1.4.1 Caldera’s oil policies

Caldera’s new oil policy, consisting of opening up the oil sector for private companies and

raising production levels had important ramifications for Venezuela’s behavior within OPEC.

As the organization had been assigning production quota per country since 1982 by means

of production quota agreements, Venezuela was bound by these rules. Table XX.XX clearly

shows that in spite of being granted higher production levels, the Venezuelan government

preferred the realization of higher production levels over abiding the OPEC treaties and

33

The Extended Fund Facility is a facility of the IMF to assist member countries in overcoming balance of payments problems that stem largely from structural problems and require a longer period of adjustment than is possible under a Stand-By Arrangement. Countries must repay EFF resources over a period of four and a half to 10 years (IMF, 2003).

64

became a notorious quota buster. The voluntary production cuts were agreed to during the

March 1998 Extraordinary Meeting of the OPEC Conference and were due to earlier market

misreading, when OPEC raised total production quota by 10% while the Asian economic

crisis raged. While demand dwindled, production had been raised, causing the price of crude

oil to fall by 40% (Kohl, 2002, p. 211). It is safe to say that for the Caldera administration,

OPEC had little relevance.

Table 3 Venezuela OPEC Quota Discipline under the Caldera administration (in 1000 barrels /p day) Mar93 –

Jun93 Jul93 – Sep93

Oct93 – Jun96

Jul96 – Dec97

Jan98 – Mar98

Apr98 – Jun98

Jul98 – Mar99

Quota 2257 2257 2359 2359 2583 [-200] 2845

Production 2450 2450 2699 3166 3170 [3170] 3057

Overproduction 8.6% 8.6% 14.4% 34,2% 22,7% 7.5%

Source: Energy Information Agency, OPEC and own calculations

3.1.4.2 International Financial Institutions and the Caldera government

Caldera had highly criticized Pérez’ government’s policy of effectively handing monetary and

economic policy to international financial institutions such as the IMF and the World Bank.

Yet as Venezuela faced the collapse of the national banking system, the Caldera government

changed its rhetoric and switched to the same neoliberal discourse of its predecessor. In

1996 Caldera solicited IMF financial assistance. A Standby Agreement was reached and the

IMF disbursed 350 million USD (IMF, 2010).34 The IMF provided the funds under the

conditions that state-owned companies would be privatized and the public sector would be

reformed. Nevertheless, the Caldera government hardly implemented the reforms. To a

certain extent Caldera faced the same problems as Pérez: the position of his government vis-

á-vis the opposition was weak, and even within the government Caldera had many

opponents. In civil society neoliberal reforms were highly unpopular too. In other words,

Caldera’s government was too weak to realize most of the reforms (Lupia & McCubbins,

1998, pp. 37-38).35 Somewhat ironically one could conclude that the only part of the Standby

Agreement that was actually honored by the Caldera administration were the imposed

repayment conditions.

34

Stand-By Arrangements enable IMF member states to use IMF financing up to a specified amount to overcome short-term or cyclical balance of payments difficulties typically cover a period of one to two years (although they can extend up to three years). Repayments are to be made over a period of three and a quarter to 5 years (IMF, 2003). 35

Chapter 2 provides a more detailed overview of the reform efforts of the second Caldera administration.

65

3.1.4.3 Towards a Free Trade regime

Perhaps the most significant hemispheric economic foreign policy initiative by the US during

the 1990s was the desire to create a free trade area that would extent over the entire

Americas. In 1994 the US had already concluded such an agreement with Canada and

Mexico, the North American Free Trade Area (NAFTA). As most Latin American countries

were ruled by governments that were convinced of pro-market arguments, the US seized the

opportunity to extend the agreements southwards and to construct a Free Trade Area of the

Americas (FTAA). In the ambitious 1994 Declaration of Principles the 34 countries, among

which Venezuela committed themselves:

to [..] to construct the "Free Trade Area of the Americas" (FTAA), in which barriers to trade and investment will

be progressively eliminated. We […] conclude the negotiation of the "Free Trade Area of the Americas" no later

than 2005, and agree that concrete progress […] will be made by the end of this century (1st Summit of the

Americas, 1994).

This is not to say that there were no reservations amongst government in Latin America:

many feared that the US would reap most of the benefits of the agreement, because of its

privileged economic position, while benefits for Latin-American countries would be more

uncertain and varied per country. The vast majority of nations in the region therefore chose

to negotiate in blocks. Venezuela joined forces with the other members of the Andean

Community to have a stronger position in negotiating the terms for the FTAA vis-à-vis the

United States. Yet by 1998 it had become clear that only modest progress had been made in

negotiations. Nevertheless, during the second Summit of the Americas in Chile, Venezuela

and the other nations nevertheless reiterated their support for the realization of the FTAA by

2005 (Kelly & Romero, 2002, pp. 115-116).

This is not to say that Venezuela did not clash with the US during Caldera’s regime,

concerning the conditions on free trade. In 1993 Venezuela summoned the US because of a

breach of the GATT Article 3 by discriminatory treatment of Venezuelan gasoline exports to

the US. In 1994 the US summoned the Venezuelan government because of alleged dumping

of steel tubes (Aveledo, 2007, p. 279). These incidents hint that although the Venezuelan

government agreed with the free trade doctrine (actively promoted by the US), they did try

to constrain the US by effectively using the rules of the game against its major player, even

though Venezuela itself did not always respect the rules of the game either.

66

3.1.4.4 Drug trafficking and environmental issues: clashes with the US.

It must be clear by now that various economic issues have both divided and united foreign

policy goals of Venezuela and the US. However, narcotrafficking obtained an increasingly

important place on the US foreign policy agenda. Although Venezuela has never been a

major drug producing country (unlike its neighbor Colombia), the country is considered a

major narcotics transit country since the mid-90s by the US Government (USGAO, 2009, p.

5). As far back as 1978 a Memorandum of Understanding was signed between the US and

Venezuela to fight trafficking. But by the mid 90s the problems had gotten out of control, at

least from a US-perspective. The US increasingly started to monitor and certify anti-narcotics

policy in the region and Washington considered Caracas’ efforts half-hearted. This greatly

worried US Government which sought closer cooperation with Caracas. Although a modest

Memorandum of Understanding was concluded in September 1994 on the matter, the

Caldera government felt little for allowing US radar stations to be placed on Venezuelan

territory or far reaching cooperation with the US Drug Enforcement Agency because of

sovereignty issues (DEA) (Kelly & Romero, 2002, p. 105).

Another dimension of international relations which has slowly but surely emerged on the

international agenda was the environment. Especially carbon-dioxide emissions have proven

to be an important topic. In 1997 the Kyoto Protocol was signed in order to lower the

emission of greenhouse gasses, and the Caldera government supported the initiative, in

spite of the fact that Venezuela belongs to the top-5 greenhouse emitters in Latin America

and has a share of about 0.5% of worldwide emissions. However, it would be during Chávez’

second term that the Bolivarian government actually ratified the Kyoto protocol (Gaceta

Oficial N. 38081, 2004).

3.2 Bolivarian foreign policy

As the preceding sections show, since its rise as a petro state Venezuela became an ever

active player in Latin America. However, through both style and content, Chávez has

managed to put Venezuela in the limelight of world politics. Concerning style, the

flamboyant discourse of the president and his frequent clashes with world leaders such as

George W. Bush and Spanish King Juan Carlos attracted a lot of media attention. Concerning

content, what the Bolivarian government is trying to achieve in terms of foreign policy is

67

radically different from its predecessors. Furthermore the lead role Venezuela plays in the

surge of the New Left in Latin America has few precedents.36

The Venezuelan government is very clear about its foreign policy objectives, which are

explicitly mentioned in the policy document General Lines of the Plan for the Economic and

Social Development of the Nation.37 In the document the Bolivarian government explicitly

states it seeks to accomplish is the construction of a new multipolar world order, to replace

the current unipolar order which is dominated by the United States as the hegemon. This

goal is to be achieved by the creation of various counter-hegemonic power blocks (Gobierno

Bolivariano de Venezuela, 2007, pp. 42,45-46). The principles on which these blocks are

founded are social justice, solidarity, and sovereignty of the people. These terms are to be

interpreted as anti-imperialist, anti-neoliberal and anti-globalization. In terms of defense, its

goals are to protect the Bolivarian revolution in Venezuela and to minimize the influence of

domestic and foreign actors that disagree with the ideals and the manner in which the

revolution is carried out (Trinkunas H. , 2009, p. 19). Venezuela’s foreign policy documents

go beyond mere statements on goals, it also addresses the issue on how to realize the

aforementioned goals. They also address how to realize the aforementioned goals.

Concerning Venezuela-US relations, Venezuela seeks to better relations at the grassroots

level (such as social movements) rather than fomenting bilateral diplomatic relations.

Improving information about Venezuela through alternative media is another instrument.

Venezuela even promises help for and solidarity with the excluded sectors of US society

(Gobierno Bolivariano de Venezuela, 2007, p. 49).

Venezuela’s agenda for Latin America and the Caribbean is both straightforward and

challenging: the most important goals are the political, economic and cultural integration of

Latin America and the Caribbean through international organizations such as MERCOSUR

and UNASUR. Another important goal is improving relations with Cuba and Bolivia to

36

The ‘New (Latin-American) Left’ is an umbrella term used to describe the various left of center governments that have governed various nations in Latin-America, usually characterized by the following features: 1) Plurality of strategies and articulation of decentralized forms of organization. 2) Multiplicity of social bases and political agendas. 3) Prominence of Civil Society. 4) Reformism 5) Deepening democracy (Barrett, Chávez, & Rodríguez-Garavito, 2008, pp. 12-17). 37

The most important ones being the Líneas Generales del Plan de Desarollo Económico y Social de la Nación 2001 – 2006 & 2007 – 2013.

68

develop the ALBA as a viable economic integration alternative to the neoliberal FTAA.

Diminishing the relative importance of the US for Central America is key to the integration

efforts (2007, p. 48).

Regarding international oil policy, Venezuela prioritizes creating tighter relations with OPEC

member states and other petroleum-exporting countries (such as Russia). Increasing

commercial trade of technological and scientific knowledge, services and goods with

countries in the Middle-East is another important goal (2007, p. 49). Relations with countries

such as Iran, Syria and China the government’s goals concentrate in creating a political anti-

imperialist alliance against the US. Coordinating a common position within international

organizations is a key instrument in this strategy (2007, pp. 48-49).

Although policy document analysis is an important instrument to determine a country’s

foreign policy (goals), what really interests us here is actual state behavior. The virtue of

including actual state behavior is that it can be contrasted with theory to assess hypotheses

concerning state behavior in the international system. Another virtue is that including actual

state behavior and comparing it to discourse, makes it easier to distinguish between mere

diplomatic courtesy and actual goals of states. Earlier in this Chapter we have already been

witness to the rather ambiguous foreign policy of various governments of the 4th Republic,

when contrasted to its original foreign policy guidelines as presented in the Minimum

Program. The same approach will be used in the next few sections, in which Venezuelan the

aforementioned guidelines of foreign policy are contrasted with the behavior of the

subsequent Bolivarian governments, headed by Hugo Chávez, in the international system.

3.2.1 Signs of hard balancing?

According to the Stockholm International Peace Research Institute (2009), worldwide

military expenditure has risen some 45% in real terms since 1999. In the same time span,

military consumption by the Chávez government, has remained relatively stable.

Government military expenses have been hovering between 1.2% and 1.7% of GDP. Except

for the 2003-2007 interval, a slight negative trend is identifiable resulting in a mere 1% of

GDP expenditure in 2008 (World Bank, 2010). The table below clearly shows that Venezuelan

military spending as percentage of GDP is modest compared to other big countries in the

region such as Brazil, Colombia and Mexico. Venezuela under Chávez has stayed well below

69

the regional average of 1,7% and the US (4%) (World Bank, 2010).

Bron enzo.

Because of the volatility of Venezuela’s GDP (caused by dependence on oil rents), the

aforementioned data tells us too little about real military expenditure. After carefully

examining statistics provided by the World Bank, a downward trend is identifiable from 1999

(about 2 billion USD) to 2003 (about 1.2 billion USD). Between 2003 and 2006 Venezuela’s

military budget almost doubled to 2.4 billion USD. After that, military spending plummeted

and hit 1,8 billion USD. While worldwide military expenditure rose some 45% in real terms

between 1999 and 2008, Venezuelan expenditure rose a mere 8.5%. Venezuelan military

consumption therefore does adhere to the overall trend, except for the 2003 – 2006

interval. Some reservations need to be made concerning the official data. Various analysts

(Nueva Mayoria, 2008) suggest that additional military spending has taken place in recent

years through extra budgetary funds as the FONDEN (National Development Fund), up to

over 3 billion USD in total (IISS, 2010, p. 60). This form of extra budgetary spending seems

similar to the aforementioned Paraguas fund of the 4th Republic. Other analysts claim that

there is little reason to believe significant amounts of money are unaccounted for (Sánchez,

2009).

What has changed under Chávez however, are Venezuela’s main providers of military

training and defense equipment. Traditionally, Venezuelan military officers had the

0,0%

0,5%

1,0%

1,5%

2,0%

2,5%

3,0%

3,5%

4,0%

4,5%

5,0%

Argentina

Brazil

Chile

Colombia

Mexico

United States

Venezuela, R.B. de

70

possibility to get an education in the US or Europe. In 2004, Chávez ordered to cease training

of Venezuelan soldiers at the ‘School of the Americas’. Some of the key military figures in the

2002 coup were graduates of the School (Catholic New Times, 2004).38 Since 2005, Cuban

military personnel is increasingly involved in training Venezuelan soldiers and participates in

Venezuelan defense, intelligence and communication systems (James, 2010). Besides

military training cooperation, arms purchases have shifted from the US to countries such as

Russia, China, Cuba, Iran and Spain (Trinkunas H. , 2009, p. 15) (IISS, 2010, p. 61). This is

partly the result of the 2006 US embargo on the sale of defense materials to Venezuela,

because it deemed Venezuelan anti-narcotics and terrorism efforts half-hearted (National

Archives and Records Administration, 2006).

Source: World Bank Data Catalog (2010)

3.2.2 Spreading the oil wealth: petro dollar diplomacy

The vast majority of Venezuela’s oil exports are traded on the world oil market and traded

against market prices. In this framework, the export of oil functions as the prime source of

income for the state. However, over the past few years Venezuela has greatly expanded the

number of oil barrels traded under preferential conditions and against discounted prices. A

38

The School of the America’s (now renamed to Western Hemisphere Institute for Security Cooperation) is a training school for Latin-American soldiers. It has the rather dubious reputation of training some of the region’s most notorious dictators and human rights abusers. Several training manuals used by the institute advocate the use of torture, illegal executions and the use of coercion against civilians (Livingstone, 2009, pp. 40-42).

$ -

$ 0,5

$ 1,0

$ 1,5

$ 2,0

$ 2,5

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Bill

ion

s

Reeks1

71

key example of such an initiative is PETROCARIBE.39 About 198,000 barrels of oil are traded

daily within the framework of the program (Ellner, 2008, p. 203), which represents about a

quarter of all the Venezuelan oil exports to Latin-American countries. The PETROCARIBE

member states buy Venezuelan oil against generous terms: 1) the Venezuelan government

offers credit lines for the acquisition of the oil (the higher the oil price, the larger the share

to be financed) and annual interest-rates as low as 1%.40 2), there is a two-year grace period

on repaying the loans. 3) the agreement allows for the repayment of the debt in services or

goods against preferential tariffs (PETROCARIBE, 2005). For the predominantly poor

countries of the Caribbean, the Venezuelan oil is attractive for several reasons: since the

Caribbean countries themselves do not possess big oil reserves nor refining capacity, their

economies are very dependent on oil imports. Since price on the oil market fluctuate heavily,

their economies are vulnerable to high oil prices. The generous financing possibilities

mediate oil shocks for these countries. The option to repay debt over many years and in

goods and services relieves the stress on the scarce foreign currency reserves of these

countries.

The institutional structure of the PETROCARIBE can be classified as highly intergovernmental

and underdeveloped: as Venezuela is the sole provider of the commodity distributed

through the organization it is by far the most important player within the organization.41 It is

therefore very unlikely that the member state would vote against Venezuela within the

organization as this would probably threaten the very existence of the organization (and

thus the cheap access to oil of the member states).

Since the foundation of PETROCARIBE, several political decisions were made regarding

(aspiring) members of PETROCARIBE. In 2005 Haiti was not invited to the summit where the

original framework agreement was signed because Venezuela did not recognize the Haitian

government as president Jean-Bertrand Aristide was removed from office by the US and

39

Similar agreements have also been concluded with countries in the South of Latin-America such as Argentina and Uruguay, creating the PETROSUR. 40

Antigua and Barbuda, the Bahamas, Belize, Cuba, Dominica, the Dominican Republic, Grenada, Guyana, Jamaica, Nicaragua, Suriname, St Lucia, St Kitts and Nevis, Guatemala, and Saint Vincent and the Grenadines 41

The statutes of the organization identify two organs within the organization. The Ministerial Council (comprised by all the Ministers of Energy of the participating countries), which is the highest advisory organ and decides by unanimous vote. The executive branch of the organization is the Secretariat and is ascribed to the Venezuelan Ministry of Energy and Oil (PETROCARIBE, 2005)

72

France (Ishmael, 2005). Haiti was able to join the PETROCARIBE only after the restoration of

democracy. Also in July 2009 the Venezuelan government halted PETROCARIBE oil supplies

to Honduras (20,000 b/d). The Honduran president Manuel Zelaya had been ousted by a

military coup because he allegedly had breached the country’s constitution. Caracas did not

acknowledge the legitimacy of the new de facto government, which it labeled a dictatorship

(EFE, 2009). As Zelaya had brought Honduras into PETROCARIBE and ALBA, he had become a

close ally of Venezuela. The new de facto regime on the other hand was distinctively pro-US

and anti-Chávez. Venezuela therefore used PETROCARIBE as a pressure tool for the de facto

government to step down and reinstate Zelaya as the legitimate ruler of the country.

However, Caracas’ attempts failed as new elections were held and a new right-wing

president was sworn in. Over more, several countries have reinstated (or promised to

restore) diplomatic ties with Honduras, among which the US (Associated Press, 2010).

One might ask why Venezuela so generously hands out one of the world’s most valuable

commodities when the country itself is still classified only as an upper-middle income

country by the World Bank. And in spite of this status, its lopsided income distribution has

left the overwhelming majority of society without access the country’s own oil wealth.

Given the abundance of oil in Venezuela, it is anything but scarce (domestically) and thus

less risky to donate than more scarcer good and services. In literature regarding Chávez’

foreign oil policy two sets of views dominate: the first perspective lauds Venezuela’s

commitment to economic, social and humanitarian development of other states in the

region creating political goodwill. Also, these cooperation agreements could provide the

base for further political and economic integration of Latin America. Such development

would greatly enhance the power of Latin American countries vis-à-vis the US and would

contribute to the realization of a multipolar world order, effectively reducing US control over

the region (Ellner, 2008, p. 203). In such a framework oil is a means to an end, and the costs

can be justified. A more cynical approach to agreements of PETROCARIBE views the social,

economic and humanitarian ideals as a simple smokescreen to divert from the real goal of

Chávez policy: gain influence in the region by buying support of local allies in international

organizations such as the OAS by means of practically ‘giving away’ oil (Ishmael, 2005)

(Corrales).

73

However, these international handouts are not limited to crude oil. Media outlets have

repeatedly reported on Venezuelan investments or developmental aid in countries as

diverse as Argentina and the US. For example, in the US, the Venezuelan state owned CITGO

oil company provided tens of thousands of low-income families in New York with low-cost

heating oil (King, 2010). In Argentina, the Venezuelan Socio-economic Development Bank

(BANDES) provided a 135 million USD loan to dairy cooperative Sancor (Quixote Center,

2007). Javier Corrales has extensively studied this kind of Venezuelan foreign policy. Two

characteristics stand out in this context: 1) Venezuela’s investments are predominantly

carried out by the state, and 2) the investment projects include large sums for development

projects (Corrales, 2009, p. 99). The numbers are impressive: bolstered by oil windfall profits

since 2007 Venezuela has surpassed the US in direct funding for the region, pledging some

8.8 billion USD in the fiscal year 2005. The majority of the funds tend to benefit left-leaning

governments which are sympathetic to Venezuela’s main foreign policy goal: diminishing US

influence over the region. For example, Venezuela helped Argentina pay off its IMF debt by

buying 5.1 billion USD in Argentine bonds, sponsored 20 million USD worth on eye-clinics in

Bolivia and promised 772 USD million on developmental aid for Nicaragua, the Dominican

Republic and Haiti (Obiko Pearson & James, 2007). A third – but very important – feature is

the almost non-existent conditionality of the funds. The high discretional nature of the funds

makes the funds hard to track down, and the governments receiving them prone to

corruption, which endangers the (supposedly laudable) goals of the funds (Corrales, 2009, p.

107)

Venezuelan funds are not limited to aid funds. There is reason to believe that Chávez’

government has provided (im)material support for political allies in Latin America. The most

striking example thus far has been Valijagate. In September 2007 a Venezuelan was

apprehended while trying to smuggle 800.000 USD (out of 4.000.000 USD) into Argentina in

the wake of presidential elections. According to the suspect, the money was destined for the

campaign of Cristina Fernández (wife of close ally and former Argentine president Nestor

Kirchner).42 Previously, Chávez had publicly stated his support for particular candidates in

42

Both the Venezuelan and Argentine government deny any involvement in the matter. However, the suspect traveled from Venezuela to Argentina in an airplane rented by both governments and accompanied by PDVSA officials. Furthermore, the suspect was later seen during the ceremony of an oil deal signing between Chávez and the Argentine government in the presidential palace (Alconada Mon, 2008).

74

Peru and Bolivia (Ollanta Humala and Evo Morales respectively), and some argue even

financial support – although strong evidence is missing to back up these claims. In both cases

however, the public support of Chávez was perceived as meddling with domestic affairs and

actually benefitted other presidential candidates (Corrales, 2009, p. 109). Yet, this conclusion

needs to be nuanced as both Morales and Fernández won their respective elections with

comfortable majorities.

3.2.3 UNASUR: Defending Latin-American sovereignty

The Chávez government sees political cooperation and integration of the South-American

nations as an important step towards the construction of a multipolar world order. Inspired

by the legacy of Venezuela’s liberator Simón Bolivar (who envisioned Latin-America as one

continent inhabited by a brotherhood of people, and strived to make it a single political

unit), Venezuela has been one of the protagonists in the construction of UNASUR (Unión de

Naciones Suramericanas). Although UNASUR was recently founded, it was used as a

decision-making platform during two recent political crises in South-America.

Rising tensions political and civil tensions in Bolivia in 2008 provided the first challenge for

UNASUR. Bolivia’s political unity had come under threat due to a growing divide between

the political center of power (La Paz) and concentration of economic prosperity in Santa Cruz

province. The divide roughly coincides with an ethnic cleavage (predominantly indigenous in

the Highlands and La Paz versus predominantly mestizo and white in the Eastern Lowlands)

and the geographical distribution of natural gas reserves (which are concentrated in the

Eastern Lowlands) (Segura & Bellamy, 2009, p. 1). 43 In an attempt to address the grave racial

and socioeconomic inequality in Bolivian society, the socialist-oriented government of Evo

Morales, sought to redistribute (natural gas) wealth, which is concentrated in the Eastern

Lowlands and reassert the power of the federal government. The political opposition on the

other hand, wanted to secure regional autonomy in order to maintain access to the natural

gas rents. Since 2005 the writing of a new constitution and the organization of referenda had

been characterized by disrespect for rules and procedures by both camps, further

aggravating the political tension. When violent protests erupted and the US government

held an ambiguous attitude towards the protesters, the Bolivian government accused that

43

The term ‘mestizo’ refers to a mix of European and autochthonous ethnicity.

75

the American Embassy in La Paz had played a key role in fomenting separatist sentiments

and thus was conspiring against Bolivian unity and democracy. Morales’ party MAS even

went as far as claiming that the US Ambassador, Mr. Goldberg had been involved in secret

meetings with “right-wing political and business leaders and was also responsible for a

media-war against the Morales government to incite the violent takeover of government

institutions to force Morales out of office” (Friedman-Rudovsky, 2008).44 In solidarity with

Evo Morales, Chávez also expelled the US ambassador from Venezuela and recalled his

ambassador in Venezuela.

During the crisis, various international organizations, such as the UN, the OAS and UNASUR,

had expressed their concern and willingness to mediate in the conflict between the

government and the opposition. Morales however rejected mediation by the UN (as

relations had lukewarm ever since Morales’ assumed office). Because of US involvement in

the autonomist movement, the US-dominated OAS too could not function as a neutral

platform for mediation.45 This proved to be an excellent opportunity for the UNASUR to

function as an alternative platform for mediation without US intervention. The platform was

also attractive because it provided Venezuela and Brazil the opportunity to consolidate

themselves as regional powers (Segura & Bellamy, 2009, p. 3), while for other nations like

Argentina a quick resolution was of utmost importance because gas-exports from Bolivia had

halted since the outbreak of the conflict. All South-American leaders followed suit and called

for an extraordinary of meeting of UNASUR to resolve the political crisis (Philips, 2008).

The members of UNASUR unanimously decided to back Evo Morales’ government and issued

the Declaración de la Moneda (UNASUR, 2008). The document stated that the UNASUR-

members will not recognize any Bolivian authority but Morales’ government, condemn the

actions of “destabilizing groups which jeopardize Bolivian democracy” and call for the

preservation of the unity of Bolivia. It was a clear message to the political opposition in

Bolivia, but even clearer to the US: foreign meddling in domestic affairs by the US is not

44

After extensive research, Eva Golinger and Jim Bigwood indeed conclude that US government and US semi-governmental bureaus such as USAID, had been spending more than 97 U$ million on decentralization and regional autonomy projects, training for opposition politicians and have been the principal funders of the political opposition to Evo Morales’ government (Golinger, 2009, pp. 1-6) 45

The US has historically used its weight as the hegemonic power to shape the policy and actions of the OAS – even if these were contrary to the interests of the member nations as stated in its Charter. US endorsement of the invasion of the Dominican Republic in 1965 was a clear breach of the promotion of territorial integrity and sovereignty of the member state. The expulsion of Cuba from the OAS in 1962 is another example.

76

tolerated by the Bolivian government nor the other UNASUR member states. When political

stability in the region is at risk, these events will be discussed among South-American

nations and not on platforms which are dominated by the US, such as the OAS. Or to put it in

the words of Bolivian President Evo Morales: “Now we don’t have to go to the United States

for solving conflicts in Latin America, because political leaders who before meddled are

extinct” (Segura & Bellamy, 2009, p. 3).

Another important issue within UNASUR is US military presence in the Andean and

Caribbean region. Their presence sits uneasy with the majority of the governments in Latin

America, given the dubious track record of military and political intervention of the US in

Latin American countries. The US rents Forward Operating Locations (FOLs) in El Salvador,

Aruba & Curaçao (since 2000) and Ecuador (2000 – 2009) (SOUTHCOM, 2009).46 Yet US

military presence is most visible in Colombia, where the US heavily finances the government

to fight left-wing insurgents from the FARC and ELN and to diminish coca and poppy

cultivation, the basic ingredients of cocaine and heroin production.47

The non-renewal of the FOL lease in Ecuador by the government of Rafael Correa urged the

US government to find an alternative host country. A secret Defense Cooperation

Agreement (DCA) was signed with Colombia, which went beyond the mere transfer of the

FOLs to Colombian territory.48 This triggered widespread protests from various Latin

American governments. These bases have been the subject of controversy from the start for

several reasons: first, although SOUTHCOM claims that only drug-trafficking activities are

monitored, critics say that the bases are also used to protect the host nation against threats

from neighboring countries. Second, the uncertainty over the intentions of US military

presence in Latin America is certainly not helped by the rather dubious track record of US

(military) interventions in domestic affairs. Third, many Latin-American governments view

the FOLs as unnecessary as long as drug consumption in the US itself is not reduced.

46

FOLs are existing airports which are used to carry out surveillance missions to detect illicit drug trafficking 47

Colombia has received over 5,5 U$ billion from 1997 – 2008 (over 70 % of all military aid to Latin America). Half of that sum is spent on training the Colombian military, but the US has also provided military equipment. Furthermore, there are about 800 US soldiers permanently stationed in Colombia and 600 private US Contractors who carry out several functions such as operating radar sites, reconnaissance and intelligence sharing (Livingstone, 2009, pp. 162-163). 48

The DCA consists of giving US military personnel access to 7 Colombian military bases, will facilitate effective bilateral cooperation on security matters in Colombia, including narcotics production and trafficking, terrorism, illicit smuggling of all types, and humanitarian and natural disasters (US Department of State, 2009)

77

Given the deep concerns among many South-American heads of state and an extraordinary

meeting of the UNASUR was held to address the issue. A clear division was visible among

South American leaders: Chávez, Correa and Morales were the most vociferous critics of US

military presence in Colombia, arguing that the bases threaten the sovereignty of Latin

American nations. This fear is especially present in the highest echelons of Venezuelan

government, given the US-backed coup of 2002, the only moderately less hostile current US

government and the virtual surrounding of Venezuelan territory by FOLs. Chávez found

himself backed by regional allies Morales and Correa who share similar ideas about US

presence in Latin America. However, they were unable to convince the ‘moderate left’ in

Latin America such as Chile’s Bachelet en Brazil’s Lula da Silva. The 12 heads of state

concluded a joint declaration which called for the preservation of the continent as a peace-

zone, mutual respect of the sovereignty of member states and that foreign military presence

cannot threaten the sovereignty and integrity of any South-American nation and thus the

peace and security of the region (UNASUR, 2009). Chávez and allies have thus far not been

able to stop the implementation of the DCA.

3.2.4 ALBA and the Banco del Sur: Alternative models for economic integration

For many Latin-American countries, the US is an important trading partner. Since the 1990s,

one of the main goals of the US has been the creation of a Free Trade Area of the Americas

(FTAA), spanning from Canada to Argentina. In 1994, at the zenith of neoliberal thought

hegemony, an agreement was reached among 36 American states (including Venezuela) to

progressively reduce trade and investment barriers, fomenting privatization and reducing

state intervention in the economy (Vivas-Eugui, 2003). However, by Hugo Chávez, the FTAA

is seen as an imperialist organization which primarily benefits the US and has little economic

advantages for the less developed countries. During the 4th Summit of the Americas in Mar

del Plata (Argentina), Venezuela and the MERCOSUR member states stated their opposition

to the FTAA, effectively burying the neoliberal project (Fischer-Hoffman, 2005).

Chávez did not only challenge Washington’s FTAA, but constructed an alternative by creating

an alternative economic integration platform, the ALBA. The ALBA has radically different

notions of economic integration, prioritizing the reduction of poverty and social exclusion,

unequal exchange in international relations and renewed attention for state intervention in

the economy and political participation in the integration process. In 2005 Venezuela and

78

Cuba founded the ALBA by means of a bilateral agreement which was later joined by Bolivia

(2006), Nicaragua (2007) and Dominica and Honduras (2008) (Lievesley & Ludlam, 2009, p.

6). What is typical for ALBA’s approach to economic integration is that it is clearly anti-US,

anti-capitalist, not mercantile based and a revolutionary and political tool of member states

which prioritizes political criteria over economic interests (Bossi, 2009). This is reflected in

the ‘success’ of the ALBA: although economic merits for members of the organization are

doubtful, some political goals have been achieved. First, a start has been made with the

normalization of relations with Cuba, promoting the reintegration of Cuba into Latin

America: under the ALBA umbrella many projects for Cuba have been developed, such as the

restoration of oil refineries on the island, the sale of discounted oil (through PETROCARIBE)

and the construction of undersea cables for better telecommunication services on Cuba.

Other non-ALBA members have also intensified their trade with Cuba, such as Brazil (now

the second most important trade partner for Cuba) (Ludlam, 2009, p. 124). The ALBA

member states also coordinate their common position within other international institutions

such as the OAS and the UN, functioning as an anti-hegemonic block in these organizations.

A recent example of such behavior was Chávez speech at the Copenhagen Climate Summit,

where he stated ALBA’s position on the follow-up to the Kyoto protocol, saying capitalism

was to blame for destroying the ecological balance of the world (Cuban News Agency, 2009).

However, confronted with the setback in FTAA negotiations, the US has started to negotiate

with countries individually in order to conclude free trade agreements. The strong anti-US,

anti-capitalist and non-mercantilist characteristics of ALBA has not proven to be an attractive

alternative for other Latin-American countries that have a more moderate attitude towards

the US. Some of these countries have entered into negotiations with the US. This hurts

Chávez’ interests in two ways: the US bargaining position versus other Latin America is much

stronger when negotiating with individual countries instead of blocks of countries.

Furthermore, countries that accept the terms of the bilateral FTA will not support Chávez’

counter-hegemonic block. To date, three South-American countries have entered in such

agreements: Chile in 2004, Peru in 2009 and Colombia’s FTA is currently pending approval in

US Congress. When Colombia’s FTA will enter into force, the US will have FTA with three out

of six biggest economies of South America, measured by GDP (CIA, 2009). The signing of the

FTAs prompted Venezuela to leave the Andean Community (a customs unions) of which it

79

had been a member for 33 years. Peru and Colombia had failed to notify other members

(which they were obligated to do so). Steve Ellner (2008, pp. 201-211), in this context, places

emphasis on the potentially disastrous economic consequences for the Venezuelan economy

if Venezuela would have stayed in the Community.49

In the light of the attitude of the Bolivarian government towards economic integration along

neoliberal lines such as the FTAA or the CAN, its April 2006 declaration to join MERCOSUR

might be somewhat surprising. Because it was exactly the MERCOSUR that had risen in the

1990s to become the most successful example of neoliberal oriented economic integration,

lowering tariff barriers and spurring free trade among its members. Yet upon close

inspection it seems to make sense. MERCOSUR had been envisioned as a trading block to

withstand economic pressure by the US and the EU, South America’s most important trading

partners. Operating as a block they would improve their economic and power positions vis-

à-vis economic giants the US and the EU. Although it abided the WTO/GATT free trade

regime (which corresponds to US interests according to Venezuela), it used special

arrangements which allowed for exceptions to the regime: the regional trading blocs (Bouzas

& Soltz, 2000). The MERCOSUR countries were able to block progress in the Doha

Development round of the WTO since 2003, the 2005 FTAA agreement and are still

negotiating for a better deal on a EU-MERCOSUR free trade agreement (EU Council, 2006).

One can imagine that for Venezuela, joining MERCOSUR has some distinct advantages: 1) it

could function as a gateway for improving relations with the more moderate governments of

Brazil, Argentina, Paraguay and Uruguay for which association within the ALBA is unfeasible

because of ideological differences. 2) Being a MERCOSUR member it can enjoy economic

advantages of the trading block. 3) It can stall MERCOSUR-EU negotiations or negotiate fairer

terms instead of becoming isolated within Latin America. For the existing MERCOSUR

members, Venezuela’s accession is a mixed blessing: access to cheap oil is very welcome for

countries like Paraguay, Uruguay which have no significant oil industry, but also for

Argentina en Brazil where although significant oil production capacity exists, it does not keep

49

US products would enter the Community easily and would then be re-imported to Venezuela through Colombia or Peru and flood the Venezuelan market. Yet this argument is not very convincing as Venezuela produces virtually next to nothing and the US already has a steady 26-27 % share in Venezuelan imports (INE, 2010)

80

up with demand.50 Also, Venezuela’s internal market is an interesting market for producers

Argentina and Brazil, especially since Chávez actively seeks to replace US and Colombian

imports. On the other hand, Venezuela could be a Trojan horse blocking any proposal

towards further free trade arrangements with the US/EU or within the WTO as Venezuela is

ideologically opposed to such treaties. In fact, Chávez has already confirmed that although

MERCOSUR started out as an economic project, it should now become a distinctly political

project prioritizing social issues (Baribeau, 2005). The left-of-centre governments of Brazil

and Argentina acknowledge that the social dimension of FTAs and that of MERCOSUR have

been ignored too long, but are willing to sign FTAs when conditions are sufficiently favorable

for the member states (Klonsky & Hanson, 2009). These worries are reflected in the tedious

ratification process of the Venezuelan adherence: the Argentine and Uruguayan parliaments

do not need to ratify international agreements according to their respective constitutions,

but the Brazilian and Paraguayan Senate have repeatedly expressed their concern over the

possible accession of Venezuela to MERCOSUR.51 Thus, Venezuela still is not a full-fledged

member of MERCOSUR.

3.2.5 The role of International Financial Institutions

Aside from trade agreements and international organizations designed to foment regional

economic integration, several international financial institutions (IFIs) and especially the

International Monetary Fund and the World Bank have assisted the restructuring of many

Latin-American economies along the lines of the Washington Agenda. Chávez sees these IFIs

as agents of imperialist policies by the US and thus represent interests that contrast with

those of Venezuela and the region.

Under governments of the 4th Republic, Venezuela had contracted significant amounts of

foreign debts with various IFIs such as the IMF and the World Bank. Under Pérez 2.3 Billion

USD was borrowed from the IMF, and under Caldera an additional 350 Million USD was

disbursed. Another 3.3 billion USD was owed to the World Bank. In line with Chávez criticism

of these IFIs, the Bolivarian government sought to repay all outstanding debts as soon as

possible. By 2001 all IMF debts had been repaid and the local IMF branch closed (IMF, 2010).

50

According to statistics provided by the US Energy Information Administration (EIA, 2010) 51

In December 2009 the Brazilian Senate ratified the accession of Venezuela, yet the Paraguayan Senate still has not ratified the Protocolo de adhesión de Venezuela al Mercosur (El Universal, 2009).

81

In 2007 the entire World Bank debt was returned – five years ahead of schedule. Chávez has

even announced (but not acted) to withdraw from all US dominated IFIs such as the IMF and

the World Bank (World Bank, 2010) (World Bank, 2009) (Tran, 2007).

A striking feature of Chávez’ foreign policy has been that it not only sought to liberate

Venezuela from IFIs, but that it has actively helped and encouraged friendly nations in the

region to do the same: Chávez bought Argentine state bonds (approximately worth 5 billion

USD) to help repay their IMF debts by 2006. Argentina currently has no outstanding loans

with the IMF (IMF, 2010). Chávez efforts however have not been limited to bilateral efforts:

one of the initiatives in the context of UNASUR (but formally not yet part of the

organization), in which Venezuela has played an important role, is the creation of the Banco

del Sur (Bank of the South). This institution is supposed to become a viable alternative to the

IMF and the Inter-American Development Bank as a source of loans for the states of South

America. Countries that have joined the Bank so far are Argentina, Bolivia, Brazil, Paraguay,

Uruguay and Venezuela. Its aim is to raise 7 billion USD on the short term, but the Bank’s

funds should finally amount to 20 billion USD. Venezuela would be the largest contributor,

having promised 1.4 Billion USD to the bank’s funds. The seven billion are much more than

Latin-American countries contribute on a yearly base to the Inter-American Development

Bank (IDB), and comes close to the ten billion USD available for members of the Andean

Development Corporation (CAF), it is still a far cry from the more than 100 billion available

for Latin-American states through the IDB, IMF or World Bank funds (Bank Information

Center, 2008). Yet the Banco del Sur would be the sole multilateral lender without US

presence and capital and when its reserves will augment, it can prove to be a viable

alternative for South American nations, reducing the power of the US in the region.

3.2.6 OPEC: Multilateral oil diplomacy

Venezuelan policy makers soon realized that domestic government policies aimed at

maintaining and increasing state income from the petro-industry were severely limited

within the framework of the world oil market. The rise (of production output) by the petro-

states of the Middle East had lowered crude oil prices, and competition among oil producing

states increasingly favored the oil companies’ power over the market. This provided an

important challenge for the Venezuelan government: for the developmental policies to

continue, state income needed to be increased. Venezuela could increase output of the oil

82

industry, but this would eventually drive down prices (because total supply for the oil market

would grow). An alternative policy option would be to raise taxes and royalties. However, if

the tax regime would strain oil companies too much compared to other petro states, the

badly needed investments in the oil industry would not materialize (Randall, 1987, p. 35).

In the late 1950s, Pérez Alfonso, Minister of Mines and Hydrocarbons during the

government of Rómulo Betancourt, saw to address this problem by the creation of an

international organization of oil exporting countries. This organization was to limit and

proration the supply of oil entering the world market. If a significant percentage of oil supply

could be administered by the organization, it would give Venezuela and other oil exporting

countries the possibility to influence oil prices (Tugwell, 1975, p. 60). Venezuela lobbied

intensively to realize the formation of such an organization. It was the 1960 slump in oil

prices that convinced many of the Middle-Eastern countries to join the organization. In

September Iraq, Iran, Kuwait, Saudi Arabia and Venezuela founded the Organization of

Petroleum Exporting Countries (OPEC) (Tugwell, 1975, pp. 61-62). The main goals of the

organization are: 1) Coordination and unification of petroleum policies of member countries

and determination of the best means to safeguard their interests. 2) Ensuring the

stabilization of oil prices in the world market to eliminate harmful and unnecessary

fluctuations. 3) Securing steady income for the producing countries, providing an efficient,

economic and steady supply for oil consuming nations and a fair return on capital to those

investing in the petroleum industry (OPEC, 1961). OPEC’s influence as an oil cartel had

dwindled steadily since the early 80s: once responsible for about 80% of world crude oil

exports, by the late 90s OPEC’s share had fallen to about 55% (OPEC, 2008, p. 8). Several

reasons can be found for the diminished relevance of OPEC: 1) The increased use of nuclear

energy, natural gas and coal had substantially reduced the share of oil in primary energy

demand from 60% in 1973 to little over 41% in 1996. 2) Non-OPEC oil supply has risen

considerably because of investments in countries such as Norway and the United States. 3)

Whereas oil used to be traded on the spot market, now the majority of the transactions are

being handled on the futures market providing more certainty and transparency for both

buyers and sellers.52 4) The revolution in high-tech oil technology had substantially reduced

52

The Futures Oil market has several advantages over the Spot Oil market: 1) It can be used to identify the persistence of oil-price shocks and to provide an indicator of the rate at which the shock will diminish. 2) The

83

the expense and risk of developing oil production in high-cost areas (Chalabi, 1997-1998, pp.

132-136). Besides these external factors, behavior of OPEC-members themselves constitutes

an important internal factor of diminishing relevance of the cartel. In 1982 a production

allocation system was implemented, assigning specific production quota for each member

state to control the total OPEC-supply to the world market, by means of a production

allocation agreement. Whenever prices were either too high or too low, production output

would be heightened or lowered. However, OPEC member states have tended to defy

production quotas (Kaufmann, Dees, Karadeloglou, & Sánchez, 2004). Especially Venezuela

under the second Caldera administration had built up a reputation of cheating on quota

(Kohl, 2002, p. 214). During the 1980s Venezuela had overproduced about 7% of its quota,

being one of the minor offenders within the cartel. At the same time that other notorious

quota busters such as the United Arab Emirates (UAE) and Kuwait significantly reduced their

overproduction, Venezuela became the second biggest quota buster with 10%

overproduction, only being surpassed by Qatar with 14% (Molchanov, 2003, p. 7). The

motivations given by Philip for Venezuelan non-compliance under Caldera seems credible in

the light of other studies that indicate that there is no evidence that real oil prices affect the

degree to which OPEC-Members cheat on the quota (Kaufmann, Dees, Karadeloglou, &

Sánchez, 2004, p. 82).53

As described extensively in Chapter 2, Hugo Chávez had markedly different plans with the

domestic oil industry when compared to his predecessors in office. This policy change was

also reflected in Venezuela’s foreign oil policy strategy: 1) strengthening of the OPEC and 2)

sell crude oil structurally at higher prices. This fits within the overall counter-hegemonic

strategy of Venezuela trying to limit and diminish US military and economic power. A

stronger OPEC could facilitate higher oil prices. As crude oil is an indispensable commodity

for the maintenance of US military and economic power, limiting its availability and raising

its prices weakens US power.

difference between the current futures price of oil and the spot price can be interpreted as an indicator of the precautionary demand for oil. 3) oil-futures prices can be used to a certain extent to forecast spot prices (Alquist & Arbatli, 2010). 53

Funds needed for investment (PDVSA) and public spending (Caldera Government)

Table 3 OPEC Quota Discipline under Hugo Chávez 1st term (in 1000 barrels /p day)

84

However, the previous section clearly demonstrated that OPEC’s track record has been

mixed at best: not only because of the structural non-compliance with production quota and

the dependence on petrodollars, but also because of internal divisions between price-hawks,

intermediate and moderate OPEC members in developing the organization and improving

compliance.54 For Venezuela’s strategy to succeed, it needed to reach consensus within

OPEC to realize higher prices. So, in 1999 when oil was trading at very low prices, Chávez

seized the opportunity to overcome the internal differences in OPEC and formed a coalition

with Iran and Saudi Arabia which led the cartel to withdraw 2.1 million barrels per day from

the world oil market, driving prices up. This is reflected in the April 1999 – March 2000

Production quota, where Venezuela is assigned 125000 barrels per day less than in the

previous production allocation agreement.

In 2000 Chávez visited all fellow OPEC member nations to successfully rally support for a

new proposal to systematically stabilize oil prices at higher oil levels (Ellner, 2008, pp. 206-

207). However, table XX clearly shows, in spite of these initiatives, that overproduction

continued, if to a lesser extent than before.55

Chávez controversial domestic oil policies, implemented during his second term, resulted in

various strikes and negatively influenced production levels, especially in 2003. Also the

brain-drain within the petro industry, caused by the firing of 18000 PDVSA employees and

the alleged underinvestment by the company in the existing oil infrastructure, meant

production would not recover pre-strike levels during Chávez’ second term in office.

However, as oil priced slowly but surely started to climb, the loss in production was offset by

54

Price hawks (Algeria, Nigeria, Indonesia) have small oil reserves and big populations and therefore have an interest in higher prices to address the needs of the population. The moderates (Saudi Arabia, Kuwait and UAE) have enormous oil reserves and (relatively) small populations making these states want to extend the commercial life of oil over a long period of time. Intermediate states (Iran and Venezuela) have both big oil reserves and big populations, making their behavior less predictable (Kohl, 2002, p. 225). 55

The goal of the system was to stabilize the price of crude oil between USD 22 – 28. When oil prices would stabilize under US22, member states would withdraw 500,000 barrels per day. Whenever prices rose steadily to over U$ 28, an equal amount of barrels would be withdrawn from the oil market.

Jul98-Mar99

Apr99 - Mar00

Apr00- Jun00

Jul00 – Sep00

Oct00 Nov00 – Jan01

Feb01 – Mar01

Apr01 – Aug01

Quota 2845 2720 2845 2926 3019 3077 2902 2786

Production 3057 2913 3160 3160 3160 3177 3010 3010

Overproduction 7.5% 7.1% 11.1% 7.9% 4.6% 3.2% 3.7% 8%

85

higher oil prices. It also meant that Venezuela could easily respect the OPEC allocation

quota, without missing out on state income.

With PDVSA under control, Chávez’ had eliminated an important obstacle in pursuing his

foreign oil policy. Within OPEC however, Venezuela still faced Saudi Arabia: being the

world’s biggest producer it plays a pivotal role within the organization. It shares with

Venezuela the interest in wanting to strengthen OPEC, to better control oil prices. Yet it does

not aim at too high prices and does not share Venezuela’s criticism of US hegemony: this

greatly hinders Venezuela’s counter-hegemonic strategy. But even with full OPEC support

Venezuela is not quite there yet. As OPEC’s production share has diminished substantially,

cooperation with non-OPEC producers is necessary to really influence price levels.

Therefore Venezuela has sought closer ties with Russia. Russia is an interesting partner for

two reasons: 1) it is the world’s second largest crude oil exporter, providing about 10% of

total oil export supply. 2) It shares Venezuela’s criticism of the unipolar world system

dominated by the US. For Russia, Venezuela’s oil reserves provide business opportunities to

Russian petroleum enterprises and the Venezuelan arms purchases have proven to be very

lucrative for Russia (Katz, 2006). After little successful efforts from 2001 – 2004 because of

improved US-Russia relations, from 2005 onwards Chávez has intensified relations with

Russia, and has become its most important arms buyer in 2008. Some authors, like Corrales

(2009, pp. 105-106) see this as leverage to get Russia on board of OPEC oil restrictions to

influence oil prices. In spite of repeated pledges of Russia to support OPEC and cut

production, it has done the exact opposite: after OPEC member states reduced output in

2009, Russia actually augmented its production and took advantage of the available market

Table 4 OPEC Quota Discipline under Hugo Chávez 2nd term (in 1000 barrels /p day) Time Sep01-

Dec01 Jan02 – Dec02

Jan03 Feb03 – May03

Jun03 – Oct03

Nov03 – Mar04

Quota 2670 2497 2647 2819 2923 2819

Production 3010 2600 2340 2340 2340 2472

Overproduction 12.7% 4.1% -11.5% -16.7% -19.9% -12.3%

Time Apr 04 – Jun 04

Jul ’04 - Aug 04 – Oct 04

Nov 04 – 16 Mar 05

17 Mar 05 – Jun 05

Jul 05 – Oct 06

Quota 2704 2934 2992 3107 3165 3223

Production 2560 2560 2560 2560 2560 2559

Overproduction -5.3% -12.7% -14.4% -17.1% -19.1% -21.5%

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share (Korosec, 2009). This (at least temporarily) defeated Chávez objectives in

strengthening OPEC and pushing prices up.

3.2.7 Eschewing cooperation and promoting sovereignty

In the very same year Hugo Chávez assumed office, a natural disaster took place in the

coastal area of the state of Vargas. The mudslides, caused by torrential rains, killed an

estimated 30,000 persons and destroyed a large part of the infrastructure and buildings in

the coastal area. Many countries offered humanitarian aid in the form of goods, services and

personnel. The US sent 20 million USD, and ships filled with machinery to rebuild the

infrastructure, goods to offer personal help to victims and 450 military engineers. Yet Chávez

refused entrance of military personnel (claiming that Venezuela’s sovereignty would not

permit American military personnel on Venezuelan soil), even when he did accept the

financial aid and machinery. The ships had to return to the US. Refusing the aid came as a

surprise as – according to the US Department of State – the Venezuelan Minister of Defense

had explicitly solicited military engineers (Naim, 2005, p. 205). It remains unclear whether

this situation was the result of internal communication problems within the Chávez

government, or whether Chávez refused the aid to score a symbolic point.

Although intensive cooperation between Venezuela and the US took place from 2002 –

2005, since then US-Venezuelan anti-narcotics cooperation has diminished. In 2009, the

Government Accountability Office reported to the US Senate that it is deeply concerned

about the unwillingness and inability of the Venezuelan government to actively fight drugs

trafficking. Of the 9 cooperation operations functioning in 2002, only 2 were still functioning

in 2009. From 2004 to 2007, the estimated amount of cocaine being trafficked through

Venezuela increased fivefold from 50 metric tons to 250 metric tons per year, that increasing

corruption of Venezuelan officials hampered anti-drug operations and that since 2005 the

Venezuelan government has structurally failed to meet its counternarcotics obligations

(USGAO, 2009, pp. 6,15,20). Although the Venezuelan government has acknowledged a rise

in trafficking volume, it does not accept that this is due to its unwillingness to cooperate and

refers to anti-drug cooperation agreements with various other nations. Furthermore, it

dismisses the report’s claims on Venezuela’s inability to fight drugs, referring to increased

success of drug seizures, demolition of drug laboratories, detained drug traffickers etcetera.

The statistics used by the GAO are questioned and politicized (because they were produced

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under the GW Bush administration) and the Venezuelan report reiterates that cooperation

with the DEA was halted in 2005 because several officers had been involved in spying

(Venezuela Information Office, 2009, pp. 1-3). Unsatisfied with the lack of cooperation of the

Venezuelan government concerning anti-terrorist and narcotics, the US Government decided

to implement a Defense arms embargo against Venezuela, which effectively means that the

United States will no longer authorize the export of defense articles and defense services to

Venezuela (National Archives and Records Administration, 2006).

3.2.8 The Obama administration and Chávez

Throughout the previous sections and chapters, US-Venezuelan relations have been

described from cordial to outright hostile, especially under the G.W. Bush presidency. When

Barack Obama assumed office in 2009, there was hope for better relations among Venezuela

and the US. And in discourse Obama has delivered change: the administration has sought a

moderate strategy to diminish Chávez’ influence in the political arena. Secretary of State

Hillary Clinton (2009) stated the importance of healthy diplomatic relations with Venezuela:

[W]e’re trying to lower the temperature. We want to make it clear that there are ways for us to have a conversation with

people we don’t agree with on many issues. We don’t want to see interference with other countries’ internal affairs. We

want to see a vibrant democracy that reflects the very best that countries have to offer. We would like very much to see

leaders being effective in helping to create greater economic opportunity for poor people. But we think there are ways that

that can work that are not anti-democratic [..] leaving room for constructive and legitimate criticism.

However, confronting rhetoric with deeds the Obama administration shows a rather poor

track record in implementing discourse: The ban on military exports to Venezuela is still in

place, the military bases deal with Colombia has deteriorated both US-Venezuelan and

Colombian-Venezuelan relations (Radio Netherlands Worldwide, 2010), and the re-activation

of the 4th fleet (although technically a decision taken by the Bush administration) has not

been canceled (US Navy, 2008). Also, apart from a brief encounter during the Summit of the

Americas last year, Obama has yet to invite Chávez for an official meeting to discuss

problematic relations between the two nations. This while Chávez has repeatedly said he

wanted better relations with Obama and the US (Associated Press, 2009). As this gesture has

been consistently ignored by the Obama administration it need not surprise us that there is

little to no evidence that Chávez has ceased or diminished soft balancing behavior.

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4 | Analysis

In this fourth chapter, the findings of the case study are linked to the theories presented in

Chapter 1. First an assessment is made to what extent Venezuelan foreign policy has

included traditional balancing, and how this behavior corresponds to the realist theory on

balancing. Second, a closer look will be taken at Venezuela’s soft balancing initiatives to see

whether they are more in tune with access to oil rents (or maybe other variables that have

been identified in the case study). Third, we evaluate how successful soft balancing

initiatives have been thus far, by assessing to what extent Venezuela’s foreign policy goals

have been achieved.

4.1 Near absence of traditional balancing The case study demonstrates that Venezuela seemingly has not been involved in structural

traditional balancing efforts since 1989: first, no explicit military alliances have been formed

by the governments of Carlos Andrés Pérez, Rafael Caldera nor Hugo Chávez. Second,

according to data provided by the IISS, SIPRI and the World Bank, Venezuelan military

expenditure has declined modestly both as percentage of GDP and in real dollar terms since

1991. During the neoliberal era of Andrés Pérez and Caldera, military spending hovered

around 1.7% of GDP. During the Chávez years, average spending on the military has been

around 1.4%. Because of Venezuela’s volatile GDP, I also looked at real military spending in

constant dollar terms. Expressed in year 2000 USD, military spending from 1991-1998

averaged about 1.9 billion. Since 1999, spending declined to 1.74 billion per year in 2008.

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Some reservations about the data need to be made however. First, because of limited

transparency of the military budget, and extra budgetary spending through the Paraguas

Fund and FONDEN, all the Venezuelan governments have probably spent more on the

military than official statistics suggest. Yet this is not a typical Venezuelan issue as most

states in the region lack the same transparency (IISS, 2010, p. 59). Nevertheless, when

comparing Venezuela’s official spending under Chávez, expenditure in 2008 was 8.4% higher

than in 1999. In 2008 worldwide military spending was up 45% from 1999 . For Venezuela to

be on par with the rest of the world, it should have spent an additional 640 million USD in

2008. Given the aforementioned extra budgetary spending and extraordinary oil income in

2006 and 2007 this is quite possible, but based on this data one cannot draw definitive

conclusions.

The absence of conclusion of military alliances under the governments of Pérez and Caldera

need not surprise us too much. The realist argument that for a state to balance it actually

needs to fear (future) belligerent actions by the hegemon seems to hold for the 1990s. The

Venezuelan governments in this era did not fear use of excessive power by the US that

would jeopardize Venezuelan interests. The case study demonstrates that the Venezuelan

governments thought the very opposite: they sought to maintain their special relation to the

USA as a stable and trustworthy oil supplier. Also, the military spending by these

governments seemed to be geared more towards appeasement of the military

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Chart 6. Ven. Military Expenditure

Military Expenditure in Y2000 U$ Military Expenditure as % of GDP

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(understandable considering the two failed coup d’états of 1992) than investing in military

equipment or defense services as balancing behavior.

Chávez initial stance towards the US government was one of caution, but not outright ‘anti-

American’. The case study indicates that the posture of the US government towards Chávez

became more and more aggressive with each initiative the Venezuelan government took

that would (potentially) hurt US interests, especially the nationalization of the oil sector (in

which many US companies were active). Also the US backed (the failed) coup of 2002, which

radicalized Chávez position towards the US and made the government actively strife for a

multipolar world order. Yet realist theory cannot account for the absence of military

alliances under Chávez, nor the decline in real military spending under his governments, in

spite of growing government income. In the midst of an almost unprecedented oil boom,

military spending has remained modest compared to regional and worldwide military

expenditure (see section 3.1.2.). It thus seems that neorealist theory cannot account for the

absence of balancing behavior.

4.2 Soft balancing According to the proponents of the soft balancing strategy, such as Pape, this need not

surprise us: as much as Venezuela spends on expanding its military or might, the spending

gap with the US is simply too big to become a real threat to US military might. As we saw in

Chapter 3 and the previous section, Venezuela destines a rather modest percentage of its

GDP on military spending compared to the US, and US GDP is about 42 times bigger than

that of Venezuela. Concerning external balancing, the formation of military alliances in a

unipolar world is very hard considering – although each nation individually would be better

of cooperating against the hegemon – there is high uncertainty about the willingness of

other countries to balance. For a single country, like Venezuela, to propose a military alliance

against the US would be very risky as it does not know on how much support it can count,

and retaliation would be just around the corner.

According to Paul, Pape and Hurrell, the soft balancing alternative would be a much more

attractive policy for states like Venezuela. And indeed, Chapter 3 clearly demonstrates the

various soft balancing initiatives that Venezuelan governments have undertaken: from the

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foundation of the OPEC oil cartel in the 1960s, defying US foreign policy by reestablishing

bonds with Cuba in the 1970s, to eschewing anti-narcotics cooperation with the US in the

1990s and the investment in various anti-hegemonic blocks under the Chávez government.

By now it must be clear that Venezuela has been showing soft balancing behavior from the

very start of the 4th Republic and has continued to do so till present-day. Yet, the case study

has also shown us that different soft balancing strategies have been applied over time, and

that the intensity and scale of these initiatives has varied greatly and which will be discussed

in the following sections.

4.2.1 OPEC and the Oil Weapon revisited

In the previous section the case study seems to suggest that the Venezuelan government has

not been involved in traditional balancing efforts. In Chapter 1 we briefly introduced the

notion of the oil weapon, a non military but real threat to consuming countries: by limiting

the amount of oil available to consuming countries they have a hard time to maintain their

economies and armies (which are highly dependent on oil) and/or pay higher prices for oil.

Nonetheless, the weapon could only function when 1) producing countries would cooperate

instead of filling in each other’s market share. 2) oil would not be resold by intermediaries.

In the case of Venezuela one would then expect at the very least, cooperation from the

OPEC member countries.

But apart from the behavior of other OPEC allies, the case study shows clearly that under the

Venezuelan governments of the 1990s there was actually little interest in strengthening

OPEC. Under the Pérez and Caldera governments, 16 production quota agreements were co-

signed by the Venezuelan government, yet none was respected: Venezuela progressively

became known as a notorious quota buster. From day one of the Chávez administration a

different approach to OPEC was chosen: the various efforts by the Bolivarian government to

revitalize OPEC are testimony to this strategy. This is not to say that under Chávez OPEC

production quota agreements were immediately respected: during Chávez first

administration overproduction hovered round 8% (see Chapter 3). Yet it is important to

recall that PDVSA and the Venezuelan government were on increasingly friendly terms

because of Chávez nationalization policy and tougher fiscal regime. Yet, the domestic

policies did seem to work: from 1999 to 2002 onwards production gradually declined yet the

oil industries’ contributions to the state had almost doubled since Chávez assumed office.

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It is true that Venezuelan oil exports to the US have diminished under the Chávez

governments. In 1998 1.7 million barrels a day were destined for the US. By 2008 exports

had dropped to 1.1 million bpd. This 35% reduction in oil exports to the US roughly

corresponds to the 35% reduction in total oil exports. The US thus remains Venezuela’s most

important export market. At the same time Venezuela’s importance as oil supplier for the US

has dwindled: whereas under the government of Rafael Caldera, Venezuela was with 16%

one of the most important suppliers of oil, this share has been reduced to 9% and Canada,

Mexico and Saudi Arabia have larger shares than Venezuela (EIA, 2010).

But in spite of Chávez’ vociferous attacks on the US government, the Bolivarian government

has never voluntarily closed the tap to the US. In the case study the effects of the oil strike

were compared with US consumption. Thanks to production increases in other countries

(including OPEC members), the US strategic reserve had not even been used. In 2002 the US

could do without Venezuelan oil for 450 days (USGAO, 2006, p. 35). Using data from the year

2008, now the US could do without Venezuelan oil for 630 days, greatly reducing its

dependence on Venezuelan oil. In the case study we also saw that in spite generally close

relations, with Russia – which shares Venezuelan anti-hegemonic outlook, Russia decided to

increase production and fill in the OPEC market share lost.

So given the unwillingness of OPEC member states to consequently cooperate, non-OPEC

predatory market share behavior and Venezuela’s progressive irrelevance as a supplier to

the US, the viability of the oil weapon decreases by the day. In Chapter 1, I modified

Haftendorn’s theory, trying to indicate that relations between oil producing and oil

consuming countries might result in mutual dependence: although oil consuming countries

are dependent on oil to maintain their economic and military might, regimes in petro states

need oil income to stay in power.

So even in a (for Venezuelan government notions) perfect world where OPEC and non-OPEC

members would support production cuts, the US as an important oil consumer needs to be

replaced by other buyers. And given today’s technological and logistical challenges – China –

cannot fulfill this role, leaving Venezuela very much dependent on US oil imports. The

Chávez government therefore has very little room for maneuver if it seeks to deploy the oil

weapon. Successful cooperation with (non) OPEC member states to realize higher prices per

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barrel seem more viable than cutting delivery oil delivery to the US and thus Venezuelan

dependence on US imports persist.

4.2.2 Economic Integration Alternatives

Another clear example of the use of different soft balancing strategies are Venezuelan

governments’ positions on economic integration. The case study demonstrates that during

the neoliberal governments of the 1990s, both Carlos Andrés Pérez and Rafael Caldera

embraced neoliberal notions of economic integration once in office. The most striking

example of such a policy was the support of the Caldera government for the construction of

the FTAA and the declarations signed during the First Summit of the Americas in Miami

(1994) and the Second Summit of the Americas in Santiago de Chile (1998). With Chávez in

office since 1999, the Venezuelan position on the FTAA started to change. During the Third

Summit of the Americas in Quebec (2001) the Venezuelan delegation had already expressed

its explicit reservation of FTAA implementation by 2005 as unfeasible because of domestic

developments in Venezuela (read: the reservations of the Chávez government concerning

free-trade). By 2005 developments in many other Latin-American countries (which were now

governed by critics of free trade agreements) had resulted in a strong anti-FTAA coalition.

During the Fourth Summit of the Americas in Mar del Plata (2005) the Venezuelan

delegation all but buried the FTAA.

Where under Caldera, Venezuela sought (in economic terms) to make sure to gather as

much economic rewards within the scheme of the FTAA (but adhering to it nevertheless) it

virtually accepted the scheme of the FTAA as such. The Chávez government however has

rejected the neoliberal notion of economic cooperation and integration but went even

further. By constructing the ALBA and the Banco del Sur it realized completely new platforms

to realize alternative forms of economic integration. Or to put it in more abstract forms:

while previous governments merely used diplomatic friction to secure a somewhat more

favorable outcome within an existing set of outcomes, the Bolivarian government has

increasingly sought to soft balance and create new outcomes in foreign policy which

(potentially) could be more beneficial than any of the pre-existing outcomes.

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4.3 The role of domestic institutions and petrodollars The analysis so far suggests two things: first, traditional balancing against the US is not a

viable policy option for Venezuela given the economic and military disparity between the

countries and the collective action problems related to constructing a military alliance within

a unipolar context. Second, Venezuelan governments have resorted to various soft balancing

strategies, differing in both scale and intensity, in order to better their position in the

international system since 1958. Yet the application of the oil weapon as a soft balancing

strategy is not viable since Venezuela’s dependence on US petrodollars, as the United States

cannot be replaced as Venezuela’s major client.

However, there are two important variables that have not been taken into account so far by

the soft balancing proponents, which have surfaced during the case study. 1) Venezuela’s

particular institutional setup provides more than a context, and might influence decision

making processes concerning foreign policy as well and, 2) Petrodollars have been used to

fund the various soft balancing initiatives. First, as Chapter 2 demonstrated, transformations

in the institutional setup of the country have radically changed power positions within the

state. Venezuela moved from being a formal democracy, dominated by two political parties

and several extra-parliamentary actors such as PDVSA, the Church and the Armed Forces to

a democracy with a weak party system, concentrated power in the executive and very

limited influence of extra-parliamentary actors. It was not just the 1999 Constitution that

changed these power positions, but also the post-2002 coup d’état purges that effectively

removed political opponents from both PDVSA and the military. Now my point is not that

the Venezuelan institutional configuration can better explain foreign policy initiatives than

theories on (soft) balancing. What I am arguing however, is that the institutional

configuration under Chávez has greatly diminished the influence of actors which (at least in

the past) have not favored policies aimed at limiting US power, such as political parties

COPEI and AD, PDVSA management and the military. In the Venezuelan case, foreign policy

decision making has become the sole prerogative of the executive power. The weak position

that both Pérez and Caldera held vis-à-vis their own parties and the other extra-

parliamentary actors limited their policy options does not exist anno 2010.

Now, as I stated before, Venezuelan governments have been soft balancing. So this

argument than would not hold, because according to the logic presented above, under the

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4th Republic soft balancing would not be tolerated by various political actors. However, if we

look carefully at the kind of soft balancing initiatives of the 4th Republic, and compare those

with the soft balancing initiatives of the Bolivarian governments there is a clear difference:

where soft balancing under Pérez and Caldera was incidental, practical and quite limited (in

both scope, scale and resources), soft balancing under Chávez’ government has become

more structural clearly anti-hegemonic in nature and has destined considerable resources

for this kind of foreign policy. A very clear example of these differences are the posture

towards the OAS. Where Pérez sought to better Venezuela’s position within the OAS, Chávez

has tried to sideline the institution all together and construct alternative platforms for

international cooperation without influence of the US.

Second, the role of petrodollars. In Chapter 2 and 3 oil income has been mentioned several

times as an important factor in political economy of the Venezuelan state. Yet its influence

on foreign policy has been less clear. The case study clearly demonstrates that, irrespective

of the fact that Venezuelan government has been using soft balancing strategies, there are

remarkable differences in type, scale and intensity of these strategies. During the 1990s, soft

balancing efferts were quite limited, practical and incidental, this coincided with low oil

prices and (relatively) low oil rents. Under the Chávez government soft balancing has

increased in scale and intensity and practically dominates foreign policy. Yet oil income has

not been high ever since Chávez assumed office. During the first five years in office oil prices

were low and oil income was modest at best. It was not until 2005 that the oil bonanza

flooded the Venezuelan government with additional income, as I demonstrated in section

2.6.1. And it was not until 2005 that Chávez’ soft balancing efforts really materialized:

PETROCARIBE, ALBA, UNASUR, Banco del Sur, and the Argentine bond bailout all took place

after the oil boom took off. It would be tempting to draw the conclusion these more

structured soft balancing initiatives were caused by the sudden rise in oil income. Yet I think

that such a conclusion cannot be drawn that easily for two major reasons. First, since the

early 2000s, the Chávez government policy documents have explicitly mentioned the

construction of such anti-hegemonic regimes in its most important policy document Lineas

Generales... The strategy of the government had thus already been thought out. However, as

construction of these regimes have high initial costs and place a constant burden a state’s

budget, given the weak state of Venezuela’s economy during the late 90s early 2000s, such a

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policy was simply not feasible. The second argument is that in spite of dwindling oil prices

since the second half of 2008, the Venezuelan government has continued to invest in these

regimes or even launched new institutions. Therefore I think that the oil boom has more

than anything, facilitated the switch to more capital intensive, structural soft balancing

strategies, rather than caused soft balancing.

4.4 Soft Balancing a success? Now, the question regarding what causes soft balancing behavior is interesting for both

academics and policy makers alike. But once confronted with soft balancing strategies

employed by an adversary, the policy maker is interested in whether these policies are

actually effective. Given the extensive description of various soft balancing initiatives by the

Venezuelan government, a first assessment is in order. Assessing the success of soft

balancing initiatives can help policy makers in petro states and oil consuming countries

develop a more specific cost-benefit analysis of these strategies.

The great variety of strategies hitherto discussed makes it clear that it is hard to assess soft

balancing as one single category. Therefore I propose two categories, for analytical

purposes.56 The first kind of soft balancing strategies has concrete goals and is applied to

achieve success in the short term. The second type of soft balancing strategies has more

diffuse goals and is to produce results in the medium to long term.

Examples from the first type seem to be very effective on the short term. For example, the 5

billion USD of Argentine debt that Venezuela purchased to enable the Argentine government

to leave the US-dominated IMF. This directly liberated Argentina from IFI-imposed economic

policy making. The social policy projection strategy of offering developmental aid at very low

conditionality can achieve the same effects: it can buy influence from the receiving regimes

within the context of international institutions such as the OAS or UN. Yet, its effectiveness

on the long term can be questioned and is highly uncertain: a simple change of government

in a beneficiary country can mean the immediate loss of support for Venezuelan foreign

policy. Or, as the case of the Venezuelan arms spending spree in Russia demonstrated:

56

I dive deeper into this matter in my recommendations for further research in the Conclusion.

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Russia ignored its promises to Venezuela concerning oil production to take advantage of the

market gap created by lower OPEC production quota.

Examples of the second kind of soft balancing strategies have the following in common: they

offer structural alternatives for the goods, services or platforms that hitherto have been

provided by the hegemon. They requisite high initial investment costs, yield little result in

the short run, but can develop into stable parallel regimes to those of the hegemon in the

long term. Examples from the case study are the Banco del Sur, PETROCARIBE, ALBA

etcetera. The problem is that these regimes have been developed only recently which makes

a premature assessment rather unfair. Yet, for the sake of the argument I will continue the

example of the Argentine debt buy. Although it temporarily cut Argentina loose from the US-

dominated IFIs such as the IMF and the World Bank, it was all but a permanent solution.

Whenever Argentina would run into financial trouble again, it had no choice but to return to

these IFIs and accept the heavy conditionality imposed upon economic and monetary policy

by these organizations.

However, the Banco del Sur initiative was started to offer a South-American alternative for

countries in need of short-, medium or long term financing. In spite of the high initial

investments by Venezuela and the other member states (which placed a heavy burden on

these countries’ budgets), now South-America has its own IFI which is not based on the

neoliberal values of the US, but tuned to the interests and plurality of economic

policymaking in the region. If the Bank is able to help out countries in financial distress it will

prove to be an attractive alternative for South-America and greatly diminish the influence of

the US over economic policy making – even in times of economic hardship. Yet, such a stable

regime can only be created when countries stay committed to investing in these regimes.

This poses an heavy challenge on countries like Venezuela who can invest in times of oil

boom, but have a hard time investing when oil prices are low. And even when a regime is

function, political changes in one of the member states can prompt them to leave the

international regime, as the case of Honduras in PETROCARIBE (section 3.2.2) has

demonstrated.

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Conclusion

In the introductory chapter I reminded the reader of the exploratory character of the thesis.

Venezuela has proven to be a compelling case study at the junction of International

Relations theory and the Natural Resource Curse. In this section, we first return to the

original research question, highlight the usefulness of the Venezuelan case, present the main

findings of the thesis and review the theoretical and practical implications these findings

have. Then several methodological and theoretical remarks are made to better fit the thesis

in the ongoing debates on soft balancing and the Natural Resource Curse. Finally, several

suggestions for further research will be made.

Research Question Puzzled by the lack of explanatory power of neorealist theory of contemporary international

relations, the various soft balancing approaches promised an intelligent approach because it

seemed to more accurately describe state behavior in the current unipolar world system.

However the arguments why and when states balance needed further development, as

especially the economic dimension of (soft) balancing had received little attention. There

was little clarity about the costs of soft balancing. The debate on the Natural Resource Curse

on the other hand, has extensively studied the income for countries with natural resources

such (and petro states in particular), but had largely ignored the foreign policy of such

countries. While combining the two approaches, the (research) surged:

To what extent and how does access to significant oil rents generate incentives for soft

balancing behavior?

The Venezuelan case Given the limited time and means, a single case study seemed the best approach to study

the processes at work in the alleged relation between external income from oil extraction

and foreign policy. Various reasons favored the choice of Venezuela as the main case study

for the thesis: first, because the country is a petro state, highly dependent on oil rents. The

thesis seeks to explore whether there is a relation between oil rents and foreign policy

behavior. If there is such a relation, they should be most visible in a petro state as their oil

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rents are higher and more volatile than tax and spend or production states. Second, as the

debate on petro state characteristics and its alleged relation to foreign policy is still in its

infancy it would be unwise to rule out other explanation for foreign policy outcomes (such as

neorealist theory or explanations based on domestic economic and institutional variables). It

is within this context that Venezuela as a case becomes very interesting. Venezuela’s

political economy has undergone many changes over the past twenty years. It has had both

neoliberal and socialist-oriented regimes and the country has been governed under various

institutional arrangement. Last but not least, as oil prices have fluctuated heavily, oil income

has varied significantly during the past two decades. At first glance, variation in the

aforementioned variables did not seem to take simultaneously but rather sequentially. This

makes the Venezuelan case very useful for controlling for these variables. Last but not least,

as Venezuela has been an active international player since its transformation into a

democratic state, changes in foreign policy are easier to compare than in states that have

never shown much interest in participating in the international system.

Main Findings In order to answer the research question, two important subquestions had to be answered:

first, do petro states (like Venezuela) actually soft balance? The case study clearly showed

that Venezuela has indeed applied soft balancing since the inception of democracy in 1958,

be it in differing intensity, scope and scale. Second, for oil income to actually be related to

foreign policy (and soft balancing in particular) one would expect more soft balancing when

oil prices are high and the state has more funds to use for foreign policy. The case

demonstrated that soft balancing was modest under Pérez and Caldera and pre-oil boom

Chávez, and heavily increased in both scale, scope and intensity during and post-oil boom

Chávez. Yet, for various reasons I cannot conclude that there is a simple causal relation

between the level of oil rents and scale, scope and intensity of soft balancing: first, even

though oil prices and income were low during Chávez’ first few years in office, policy

documents laid out plans and guidelines for intense soft balancing, striving for the

construction of anti-hegemonic blocks to diminish US power and influence over the rest of

the world and Latin America in particular. Second, (and this will more extensively be

commented on in the next section) the role of the hegemon within this scheme has been left

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out of the picture: a state like Venezuela may have huge oil income during a boom period,

but does not necessarily use it to soft balance when it does not see the hegemon as a threat

(as was the case in the 1960s and 1970s in Venezuela). This very point was made by Andrew

Hurrell in Chapter 2 and seems to be confirmed by the case study. Third, during the case

study, and especially Chapter 2, the relevance of transformations in power positions within

Venezuela’s political system seems to have made foreign policy options available for the

government that hitherto had not been available. Removing various actors with quasi veto

points in the foreign policy decision making process, a more aggressive soft balancing

approach was a viable policy option for the Chávez government, while it would have been

unthinkable for Paz and Pérez. Not so much because of their relatively pro-US stance, but

because of the weak position of the President within the Venezuelan political system in the

4th Republic.

So, to answer the question as to how and to what extent oil rents have given incentives for

soft balancing behavior by the Venezuelan petro state, it seems that oil rents have merely

facilitated the application of intensive soft balancing. The costs associated with this form of

soft balancing could be paid for by the rents proceeding from the post 2004 oil-boom.

However, the use of oil rents for this cause seems to have been possible thanks to a specific

domestic institutional structure in which traditional actors that were against soft balancing

were cut out of the decision making process.

Theoretical implications Although the reason(s) why states soft balance (apart from the alleged economic incentive in

the form of oil rents) was not an explicit part of the subject of this thesis, the topic has been

touched upon in the theoretical framework, and surfaced as well in the case study. The idea

that aggressive unilateral behavior is a ‘sine qua non’ for soft balancing behavior as such, as

most of the soft balancing proponents argue, cannot simply be confirmed by the case study.

Venezuela has been soft balancing when facing a unipolar world power governed by either

more moderate or hostile regimes. However, there seems to be a difference in the type of

soft balancing initiatives employed by Venezuela during the 1990s and the first Chávez

government on the one hand, and post-coup Chávez governments on the other hand. The

soft balancing initiatives during the 1990s were limited to ad-hoc initiatives and usually did

101

not involve large sums of money. As stated in the analysis: they seem to have been geared

towards blocking very specific US foreign policy goals.

Since the US developed a more aggressive, unilateral foreign policy, the Chávez government

has increasingly been involved in soft balancing. Since the 2004 oil boom the kind of soft

balancing initiatives have become less ad-hoc, more institutionalized an more expensive.

This, as I explained eralier, to work towards the construction of (regional) economic and

political anti-hegemonic blocks.

In assessing how aggressive or unilateral the foreign policy of the hegemon actually is, the

worldview dimension to soft balancing behavior as introduced by Andrew Hurrell helps us

out: the governments of Pérez and Caldera actively sought to maintain the special US-

Venezuelan relation which they deemed symbiotic: Venezuela as a stable oil provider for the

US, and Venezuela as an important democratic partner in the region. Chávez however has

typified the relation as one of mutual caution (during the first years in office) and since 2002

one of opposed interests. Within such a context, what constitutes ‘aggressive unilateral

foreign policy’ can be assessed differently depending on the view Hurrell discussed.

Nonetheless, the 2002 coup against Chávez which was backed by the US government at the

time radically altered Chávez vision on US-Venezuelan relations.

Implications for policymakers Having assessed the finding of the thesis for theory building, it now is time to shift to policy

making. What foreign policy lessons can be drawn from the Venezuelan case by

policymakers of the hegemon and policymakers of petro states?

The case study seems to confirm the difficult position petro state policy makers face: the

very same oil that underpins the survival of the regime also facilitates the maintenance of

military and economic supremacy of the unipolar power. Even more so when the petro

state’s most important (and irreplaceable) client is the unipolar power itself, as is the case in

Venezuela. This is not to say that policy makers have no options at all. The oil rents can be

used to try to diminish the power of the hegemon or greater the influence of the petro state

itself. The case seems to demonstrate that choosing these strategies carefully is of utmost

importance. In spite of the several billion USD that have been invest by the Chávez regime,

102

Venezuela’s military budget pales in comparison to that of the US. By no means has

Venezuela been able to better its power-position vis-à-vis the US. There is little reason to

believe other petro states might be able to close the gap (except for development of military

nuclear capabilities). Now, the soft balancing strategies that the Venezuelan government has

applied over time have produced mixed results and should be a warning to policy makers in

other petro states that soft balancing in itself does not guarantee success. Ad-hoc

cooperation, offering low-conditional developmental aid and negating access to territories

can work on the short term might block concrete foreign policy initiatives by the hegemon.

However, the case has not shown convincing evidence that these strategies will facilitate the

formation of sustainable anti-hegemonic regimes which are to realize a multipolar world

order. In all fairness, this need not surprise us as the majority of these initiatives are

relatively recent and only time can tell whether these strategies work out. However,

continuous cooperation and funding is necessary to construct these regimes and this is very

hard for policy makers in petro states as the policy continuity is threatened by the high

volatility of oil income. Given the unpopularity of foreign policy among voters, at least in oil

democracies such as Venezuela, this is a challenging task.

As access to affordable oil is one of the most important conditions for a unipolar world

power to maintain its influence over world affairs, for policy makers it is of the utmost

importance to secure this access. Now within a context of oil dependency (besides looking

for oil alternatives), oil-consuming country policy makers should ask themselves what the

most effective and efficient means to this end are: do they lie in an aggressive foreign policy,

not shunning violence to secure access to these resources? Or is a more moderate approach,

which gives petro states more room for policy maneuvers that might be against US interests,

a more sensible approach?

Several proponents of the soft balancing theory had already warned that an aggressive

foreign policy seems counterproductive for the maintenance of hegemony in the long term:

first, because of the aforementioned mutual dependency on oil, there is little need to secure

access to oil through aggressive means. These petro states need to sell oil for their own

survival in the international system. Second, this aggressive foreign policy will – even if this

persuades oil producing nations to sell oil – give incentives for (soft) balancing behavior

103

which is ultimately funded by the unipolar power itself. Third, it takes a long time for a state

to change its reputation on the international arena when switching back to a more relaxed

foreign policy. In the case we have seen all three factors at work: in spite of US hostility

towards the Chávez regime, the US continued to be Venezuela’s most important client.

Second, as the US aggressive policy coincided with radicalization of Chávez’ (foreign) policy,

the very same dollars used to pay for the oil, started being spent on anti-hegemonic

initiatives such as the Banco del Sur and PETROCARIBE, diminishing US influence in the

region. Finally, in spite of the Obama administration’s more moderate tone and seemingly

less aggressive foreign policy, the Venezuelan government has been weary of US intentions

and will not likely abandon its counter-hegemonic strategies anytime soon. A more

moderate, multilateral strategy can reassure petro states like Venezuela that they are not

about to fall prey to the empire. This will probably limit their balancing initiatives to

acceptable levels (for the hegemon) and lessen the costs of foreign policy whenever the

unipolar power feels it needs to act. The other side of the coin is that policy makers will

perhaps have to accept less favorable terms when it comes to acquiring oil.

Methodological and theoretical remarks Despite the merits of the thesis in further exploring the alleged relation between an

overdependence on oil income and foreign policy and giving a detailed account of

Venezuelan foreign and oil policy of the past twenty years, the thesis has several

shortcomings which may have a detrimental effect on both the validity and reliability of the

analysis, findings and conclusions.

First, because only one single case study has been undertaken it is hard to generalize the

findings of the thesis. Since there is no comparison made with other petro states, on the

basis of this thesis alone we cannot draw conclusions about the behavior of all petro states –

or claim that all petro states behave like Venezuela does. Just to name one example:

Venezuela is highly dependent on oil exports to the US, while other petro states have a more

diversified clientele. So Venezuela is not only dependent on oil rents for its survival, but

more specially dependent on the hegemon for its oil income which arguably alters the

power relation Venezuela and the US have. Second, the thesis does not offer extensive

theory testing. Instead, it compares various perspectives on state behavior in the

104

international system. An attractive method because it can highlight the explanatory power

of one theory versus another. However, because the soft balancing argument and theories

on the international dimension of the natural resource are still in its infancy, it creates

challenges in actually testing the respective theories as its core concept and variables are

under debate. In the next section I will pay more attention to this problem as a suggestion

for further research. A third problem is the reliability and validity of the data. Official

government and private sector data about the same subject often differ greatly in both

defining certain concepts (what do they actually measure) and even when they agree in

concepts, the actual figures are vastly different. Both the government and private sector

actors have an interest in ‘juking the stats’.57 Even the data offered by international

organizations offer no avail as they often simply use the data provided by governments. And

then there is the problem of discontinued time series: one of the most comprehensive and

reliable collection of statistics on the Venezuelan (oil) economy, PODE, was discontinued as

of 2007. The use of actual data therefore is quite limited in the thesis and no rock-hard

conclusions have been based upon this data.

Also, it would have been helpful if several interviews with present and former Venezuelan

(oil) policy makers could have been conducted. In the first place to verify statements in the

literature and second to see what motives policy makers actually had in choosing certain

foreign policy options instead of attributing them motives that have been deducted from

reality. Lastly, as the thesis progressed it became rather clear that foreign policy options

available to the Chávez government hinted that internal decision making procedures can

influence the range of policy options a government has which has only been briefly

mentioned in the theoretical chapter. Therefore it might appear to be an afterthought, while

it is no such thing in any matter, but highly relevant – as I explained in the previous chapter.

Suggestions for further research When discussing the thesis design, I mentioned its explorative character. I see the findings

presented after the case study and discussed the challenges that surfaced during the process

of writing the thesis as valuable incentives for further research. Given the findings of the

57

Better statistics can be used as propaganda to make the current regime more popular to secure maintenance of power, while the political opposition can deliberately spread misinformation to vilify the government to improve their chances for a (extra-) political victory.

105

thesis I propose a two-track approach to better understand and predict behavior by petro

states in the international anarchic system. First, more qualitative research needs to be done

on what soft balancing actually entails. I think the umbrella term does not adequately cover

the theoretical differences that exist between ad-hoc cooperation to block certain concrete

foreign policy initiatives by a hegemon and the construction of non-military anti-hegemonic

regimes. A clarification on soft balancing does not only have academic merit. Also for policy

makers the differences in time span, costs, risks and rewards involved in the various soft

balancing efforts warrant further attention to guide policy makers in both petro states and

the hegemon.

Second, having a better idea of what soft balancing actually is, one can better compare

behavior of petro states vis-à-vis the hegemon over time in comparative perspective,

enabling academics to draw more general conclusions about the relation between oil rents,

soft balancing behavior and petro state – hegemon relations. This way, researchers can

control for outlier cases - an ever present risk when single case studies are undertaken. This

seems especially relevant as during the process of writing this theses the institutional

configuration seems to have changed the relative influence of various actors in foreign (oil)

policy formulation, thus changing the range of policy options available to the executive in

the Venezuelan case.

106

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