Macroeconomic effects of terms - of - trade shocks : the case of oil - exporting countries

The experience of 18 oil exporting countries (from 1973 to 1989) suggests that permanent terms of trade shocks have a significant positive effect on consumption, investment, and output, particularly of non tradables. There is almost no effect on savings, and an adverse effect on the trade balance. There is no evidence of Dutch disease effects.

Spatafora and Warner investigate the impact on economic growth and development of long run movements in the external terms of trade, with special reference to the experience of 18 oil exporting countries between 1973 and 1989.

They argue that this sample approximates a controlled experiment for examining the impact of unanticipated --- but permanent --- shocks to the terms of trade. They analyze the sample econometrically using panel data techniques.

They find that permanent terms of trade shocks have a strongly significant positive effect on investment, which they justify theoretically on the grounds that countries in the sample import much of their capital equipment.

The shocks also have a significant positive effect on consumption. Government consumption responds almost twice as strongly as private consumption.

The shocks have no effect on savings and adversely affect the trade and current account balances.

There is a significant positive effect on the output of all main categories of non tradables. But Dutch disease effects are strikingly absent. Agriculture and manufacturing do not contract in reaction to an oil price increase. Dutch disease effects may be absent in part because of policy induced output restraints in the oil sector, or because of the "enclave" nature of the oil sector, which does not participate in domestic factor markets.

This paper --- a product of the International Economic Analysis and Prospects Division, International Economics Department --- is one in a series of background papers prepared in support of the analyses and scenarios in Global Economic Prospects 1994. Copies of this paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Jackie Queen, room S8216, extension 33740 (37 pages)