oil prices and economic growth in oil

advertisement
OIL PRICES AND ECONOMIC GROWTH IN OIL-EXPORTING
COUNTRIES
Amany El Anshasy, Collage of Business and Economics, UAE university, Phone: +971 05 6603536, E-mail: Aelanshasy@UAEU.ac.ae
Overview
Oil-exporting countries face large fluctuations in the prices of their oil. Such fluctuations are typically
manifested in similar movements in the countries’ terms of trade. In addition, oil price shocks affect the
fiscal balance because a large proportion of government revenues are derived from the oil sector. The
resulting swings in government revenues and the often pro-cyclical government expenditures would
contribute to higher output volatility and lower long-run growth rates. Therefore, the effects of oil price
shocks on long run growth via the fiscal channel could be quite significant in oil-exporting countries.
During the period 1960 to 2002, oil-exporters had an average savings rate higher than developing and other
non-oil exporters, yet they experienced the lowest average annual growth rate. Moreover, those countries
did exceptionally well and had the highest average growth in real per capita income during periods of stable
or rising oil prices. To the contrary, the decline in oil prices in the 1980s and 1990s coincided with a huge
collapse in oil-exporters’ growth rates compared to non-oil exporters. This paper is an attempt to study the
impact of the highly volatile oil prices on economic growth, controlling for fiscal policy effects, in a panel
of 15 oil-exporters, covering the period 1972-2003. In particular, it aims to shed some light on the
following questions. (i) Do oil price shocks slow economic growth in oil-exporting countries? (ii) Does oil
price volatility hamper long-run growth? (iii) Do the composition of government spending and the
financing method matter for economic performance and long-run growth in shock-prone economies?
The paper is organized as follows: Section II is a review of the role fiscal policy plays in growth in
theoretical models and empirical literature. A special reference is made to the specific nature of fiscal
policy in oil-exporting countries. In section III and IV present the empirical model and estimation
methodology, respectively. Estimation results are interpreted in section V. Section VI concludes.
Methods
The study employs dynamic panel estimation techniques, namely, the Generalized-Method-of-Moment
(GMM) system estimator suggested by Arellano and Bover (1995) and later developed by Blundell and
Bond (1998), and Blundell, Bond, and Windmeijer (2000). This estimator has the potential advantages of
minimizing the bias resulting from estimating dynamic panel models, exploiting the dynamic and time
series properties of the data, controlling for the unobserved country-specific effects, and correcting for the
bias resulting from the possible endogeneity of the explanatory variables. The use of annual observations
allows exploiting the dynamic nature of the data and distinguishing between the long run and short run
effects.
Results
The evidence suggests the following:
(i)oil price shocks- rather than oil price volatility- could have long run growth effects. The unanticipated
increases in oil prices trigger higher growth rates in the long as well as the short run. However, the
magnitude of that direct effect is relatively small. Also, there is no evidence of asymmetric growth effects
of oil price shocks.
(ii) Fiscal policy does play an important role in transmitting oil revenue shocks to the economy. The study
finds that accumulating budget surpluses resulting from oil booms has a depressive effect on growth. In that
sense, government revenue windfalls are harmful for growth. In addition, the structure of public
expenditures plays an important role in determining the net impact of the shock on long-run growth.
Countries with a higher initial share of public investment in GDP can better cope with adverse oil shocks.
However, those countries tend to reap a smaller benefit from positive oil price shocks due to low return on
capital spending during booms.
Conclusions
The unanticipated increases in oil prices triggers higher growth rates in the long run as well as the short
run. However, the magnitude of the direct effect cannot explain much of the collapse in growth in many oil
exporters during the 1980s and 1990s. In addition, fiscal policy plays an important role in transmitting oil
price shocks to the economy. The composition and structure of public expenditure seems to determine the
net impact of the shock on long-run growth. In addition, the structure of the fiscal adjustments at times of
booms or busts could also affect long-run growth.
The main policy implications of the paper’s findings are:
(i) reducing the fiscal dependency on oil and expanding the non-oil tax base is growth-improving, (ii)
Adjusting to a negative shock by cutting capital expenditures deepens the negative effect of the shock and
severely hurts growth, (iii) at times of plenty, the government should allocate more resources to productive
expenditures such as infrastructure as well as improving the public services. In addition, eliminating the
surplus by transferring excess revenues to a stabilization fund that is independent from the budget and its
resources are not readily available at the fiscal authorities’ discretion would alleviate competitive rent
seeking pressures, and finally (iv) at times of scarcity, higher social spending can help stimulate growth.
References
Barro, R., 1990, “Government Spending in a Simple Model of Endogenous Growth”, J. Political Economy, 98(1),
s103-s117.
Blundell, R. and Bond, S., and Windmeijer, F., 2000, “Estimation in Dynamic Panel Data Models: Improving on the
Performance of the Standard GMM Estimator”, Advances in Econometrics: Nonstationary Panels, Panel
Cointegration, and Dynamic Panels, 15, 53-91.
Davarajan, S., Swaroop, V. and Zou, H., 1996, “The Composition of Public Expenditure and Economic Growth”, J.
Monetary Economics, 37(3), 313-344.
Easterly, W. and Rebelo, S., 1993, “Fiscal Policy and Economic Growth: an Empirical Investigation”, J. Monetary
Economics, 32 (3), 417-458.
Easterly, W., Kremer, M., Pritchett, L. and Summers, H., 1993, “Good Policy or Good Luck? Country Growth
Performance and Temporary Shocks”, J. Monetary Economics, 32 (3), 459-48.
El Anshasy, A., Bradley, M., and Joutz, F., 2005. “Evidence on the Role of Oil Prices in Venezuela’s Economic
performance,” The 25th Annual North American Conference of the International Association of Energy
Economics, September 18-21, 2005, Denver, Colorado-USA.
Kneller, R., Bleaney, M. and Gemmell, N., 1999, “Fiscal Policy and Growth: Evidence from OECD Countries”, J.
Public Economics, 74, 171-190.
Levine, R. and Renlet, D., 1992, “A Sensitivity Analysis of Cross- Country Growth Regressions”, American Economic
Review, 82(4), 942-963.
Mendoza, E., 1997, “Terms-of-Trade Uncertainty and Economic Growth”, J. Development Economics, 54 (2), 323-356.
Miller, S. and Russek, F., 1997, “Fiscal Structures and Economic Growth: International Evidence”, Economic Inquiry,
35, 603-613.
Rodriguez, F. and Sachs, J., 1999, “Why Do Resource Abundant Economies Grow More Slowly? A New Explanation
and an Application to Venezuela”, J. Economic Growth, 4(3), 277-303.
Rodrik, D., 1998, “Where Did All the Growth Go? External Shocks, Social Conflicts, and Growth Collapses”, NBER
Working Paper No. 6350.
________ , 1998b, “Why Do Open Economies Have Bigger Governments”, J. Political Economy, 106 (5), 997-1032.
Download