Development Patterns Exporting Countries

of Oil

Mohammad Khalil and Ali H. Mansour

ABSTRACT

This study analyzes empirically the impact of rising income levels on the economic structure of several oil producing and exporting countries during the 1970s and early 1980s. The results indicate that the agricultural sector showed declining rates of growth, and negative growth elasticities were indicated by nine of the ten countries included in this study. On the other hand, the industrial sector in all countries showed positive growth to varying degrees. However, this growth may be more policy-induced than real growth. Disparity and inequality ratios were highest in Middle East and North African countries.

Introduction

This study investigates the relationship between rising income levels and structural changes in several oil producing and exporting countries. Previous research indicates that similarities exist among nations with regard to the impact of rising income levels on the economic structure of the nation (Kuznets 1957). National economies are made up of various sectors that include manufacturing, agriculture, service and other specialized sectors such as energy or oil. A nation experiences economic structural change when the share of one or more existing sectors becomes either larger or smaller in comparison to the other sectors of the economy. For example, the United States experienced a structural change in its economy during the 1980s when the service sector became larger relatively to the manufacturing sector. Economic structural change is an inevitable result of changing relationships between supply and demand conditions.

Empirical research dealing with the relationship between structural change and rising levels of income in the oil producing and exporting countries can provide policymakers with an additional tool to formulate policies in these countries. Policy formulation and planning in areas such as labor laws, training, arbitration, and safety

Mohammad Khalil is Associate Professor of Commerce, Fairmont State College, Fairmont, WV 26554. Ali H. Mansour is Professor of Management, West Virginia University, Morgantown, WV 26506. z

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will be needed as the industrial sector becomes larger and more important in a nation. As a result of industrialization, infrastructure planning will be required. Roads, telecommunications, housing, hospitals, schools, etc., will have to be constructed as a result of the increasing sectoral share of manufacturing.

Thus, this study analyzes the impact of rising income levels on the economic structure of ten oil producing and exporting countries between 1970 and 1983. This period was selected because income levels of the countries included in the study experienced steady increases. After 1983, the sample countries experienced a decline in income levels. Ten Organization of Petroleum Exporting Countries (OPEC) are included in this study: Algeria, Ecuador, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Saudi Arabia, and Venezuela.

Time-series analysis is used in this study because the technique is suitable for the data collected. Time-series was chosen because the road to economic development is not a "universal" one. The development experience of each country depends on the availability of resources, the size of the domestic market, trade opportunities, and other variables. Time-series analysis has yielded good statistical results when employed by others using similar data in the past.

Oil Exports in the Economy of the Sample Countries

The estimated oil resources of the sample countries was 574 billion barrels in 1990. This is about 65.7 percent of total world oil resources and 85 percent of OPEC resources. In that year, they produced more than 19 million barrels a day.

The oil-sector contribution to the aggregate Gross Domestic Product (GDP) of the sample countries is substantial. Oil continues to be the primary source of foreign currency and government revenue in these countries. Oil export revenues had a large impact on the growth rate of aggregate income as well as per capita income in all of the OPEC countries from 1970 to 1980.

Significant economic structural changes have occurred in most of the oil exporting countries since 1970. The changes were toward the industrial and service sectors from the agricultural sector. Although oil is the backbone of their economies, its production continues to generate a limited number of jobs. Thus, employment in the oil-production sector is minimal in all oil exporting countries (United Nations 1987; Petroleum Industry Statistics 1990).

The Model

The following models were proposed by Chenery and Taylor (1968) to measure the relationship between levels of income and sectoral shares of the GDP:

Model I: log (yi/y) = a + B log (Q/N) + C log N (cross-section)

Model II: log (yi/y) = a + B log (Q/N) (time-series)

Where:

Yi/Y Q/N

N

= share of sector i in the GDP (percentage)

= per capita income

= population size

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Development Patterns of Oil Exporting Countries

Y = total GDP Q = total GNP a = constant B = sector share elasticity C = population growth elasticity.

As indicated earlier, the time-series model will be employed because it has features that other models may not have. First, the logarithmic and reciprocal functional forms of the proposed time-series are consistent with theoretical predictions and can allow for the industry/agriculture relationship to be both positively and negatively sloped for different ranges of income. Second, time-series is more suitable to the data in this study than cross-sectional data where the countries in the sample have one commodity (oil) in common and different development opportunities.

The GDP of the ten countries in the sample is divided into three major sectors: (I) the primary sector, which includes agriculture; (2) the secondary sector, which includes oil production, manufacturing, construction, and public utilities; and (3) the service sector (residual).

Empirical Results

The results of estimating the sectoral growth elasticities relative to per capita income are presented in Tables 1 and 2 and discussed below.

Growth Elasticity of the Primary Sector

The growth elasticity of per capita income for the primary sector could be influenced by interpretation of the meaning of the primary sector. If the primary sector includes agriculture, mining, and quarrying output as suggested by Chenery and Taylor (1968), then the sign of growth elasticity would be mixed. Algeria, Indonesia, Iraq, and Venezuela would have negative growth rates while the rest of the sample countries would experience a positive growth rate. However, if the primary sector includes only agricultural output as suggested by Eden (1979), then growth elasticity would be negative for all countries except Iran and Kuwait (see Table 1).

During the period of study, all countries with negative signs had experienced either a negative growth rate in agricultural production and had become more dependent on foreign food (which was the case in Nigeria and Iraq), or the growth rate of non-agricultural sectors grew faster than that of the agricultural sector (which happened in Saudi Arabia, Ecuador, Algeria, and Indonesia). All elasticities are statistically significant at the .05 level except for Kuwait, which had a positive but insignificant relationship.

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TABLE1

SECTOR SHARE ELASTICITIES AT CONSTANT PRICES

Country Primary a Secondary b Services c

Algeria -0.961 1.897 -0.246 Ecuador 0.416 0.131 -0.282 Indonesia -0.575 1.132 0.339 Iran 0.439 -0.175 -0.409 Iraq -0.130 0.278 0.288 Kuwait 0.270 0.187 -0.725 Libya 0.672 -1.224 -0.963 Nigeria 0.174 0.034 -0.172 Saudi Arabia 0.444 -0.518 -0.666 Venezuela -0.667 0.380 0.391

Level of significance (a) = 0.05. *includes farming, forestry, hunting, fishing, mining, and quarrying. bincludes manufacturing, construction, and public utilities. "includes wholesale and retail trade, storage, communications, finance, public administration, and personal services. Source: United Nations. Yearbook of National Account Statistic. New York, various issues.

T A B L E 2

SECTOR SHARE ELASTICITIES AT CONSTANT PRICES

(Mining Share Included in Secondary Sector)

CouaUy primary" S~condary b

Algeria - 1.079 0.413 Ecuador - 1.067 1.140 Indonesia -0.641 0.292 Iran 0.867 0.423 Iraq -1.488 0.124 Kuwait 0.067* 0.215 Libya -1.305 0.373 Nigeria -0.323 0.561 Saudi Arabia -1.413 0.301 Venezuela -0.460 -0.254

Level of significance (a) = 0.05. *Not significant at 10 percent level. Nnclndes agricultural sector, farming, forestry, hunting, and fishing. bincludes oil section, mining, quarrying, manufacturing, construction, and public utilities. Source: See Table 1.

Growth Elasticity o f the Secondary Sector

The secondary sector includes manufactur ing, construction, and public utilities. Results in Table 1 indicate that Iran, Libya, and Saudi Arabia had negative growth elasticities, while the rest o f the sample countries experienced posit ive growth rates. The declining growth rates in Saudi Arabia and Libya are believed to be affected by the limited absorption capacity to invest (Bridge 1974, EI-Jehaimi 1975, and Jones 1981). In Iran, the industrial sector was affected badly by the Islamic revolut ion and the war with Iraq in the 1980s (Europa 1988). However , when mining and quarrying (mainly oil product ion for export) were included in the industrial sector, all elasticities o f the sampled countries except Venezuela changed to positive. Such behavior is consistent with economic development theory. For Venezuela, the growth elasticity was negative because the mining share experienced a negative growth rate o f 4.8 percent a year which outweighed the growth rate o f the other components o f the industrial sector.

Growth Elasticity o f the Service Sector

Theoretically, the growth rate o f the service sector is dependent on other growing sectors, and it is not possible for the service sector to be the growth leader for a long period (Stanback 1979). Thus, the growth elasticity o f the service sector could take

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either direction, negative or positive, regardless of the level of income. This is evidenced from worldwide studies done by Kuznets (1957) and Taylor (1969). Kuznets found the growth elasticity to be negative while Taylor found it to be positive. However, both researchers agreed that the relationship is weak and insignificant. In our sample, the results indicated negative elasticities in all countries except Indonesia, Iraq, and Venezuela. All coefficients are statistically significant at the .05 level regardless of the sign. However, low absorption capacity countries such as Saudi Arabia, Kuwait, and Libya experienced the lowest growth rate among all countries in the sample (see Table 1).

Implication of the Findings

The findings in Tables 1 and 2 suggest that substantial structural change did occur in favor of secondary (industrial) sector output. However, in most of the countries, the drop in the primary (agricultural) share in GDP is not substantiated by reason of demand conditions as the theory suggests but rather by reason of the supply condition in agricultural products. The sampled countries imported food for final consumption or for intermediate use at a value of $21.2 billion in 1984 (United Nations 1986), and the bill for food imports is growing.

The failure of agricultural policy, marketing problems, lack of technology, and weather conditions (Melachian 1985) in these countries contributed to lower productivity per worker and lower wage payments relative to other sectors of the economy. This situation has encouraged the migration of labor from agriculture to the expanding industrial and services sectors. In all countries, the output per worker was lower than the output per worker in other sectors. For example, in Algeria, output per worker in the secondary sector was about eight times that of the agricultural output; seven times for Ecuador; five times for Indonesia; and 115 times for Saudi Arabia.

The low sectoral productivity of the agricultural sector relative to the other sectors has increased the income disparity between farms and cities. The ratio of the secondary-plus-service sector to the agricultural sector, which measures the intersectoral disparity, shows that the ratio is highest among Middle Eastern and North African countries in the sample. It also shows that the highest ratios are among the countries that depend most on the oil sector, such as Kuwait (49.8 percent of the GDP), Libya (48.2 percent of the GDP), and Saudi Arabia (37.5 percent of the GDP). However, the disparity ratio shows a declining trend over time. In 1970, the ratio averaged 13.97, then declined to 10.62 by 1980. The ratio declined in five countries and increased in the remaining five. The overall declining ratio indicates some improvements in the productivity of the agricultural sector during the second period.

Nevertheless, if the disparity ratio between the economic sectors persists into the future, economic and societal problems will be difficult to remedy or even contain. Further, since the agricultural sector has by far the largest number of workers, failure to develop long-term strategies to rectify the disparity in these countries will be a drain on the countries' foreign exchange or hard currency, thereby creating

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more social problems and possibly having a detrimental impact on other sectors of the economy in the long run.

Conclusion and Policy Recommendation

The economic structure of the major oil exporting countries during 1970 through 1983 was investigated and analyzed. The findings suggest that the agricultural sector showed declining rates of growth. In fact, negative growth elasticities were found for nine countries included in the study. This declining growth elasticity in the agricultural sector deserves serious attention by the authorities in the countries under study. The persistent drop in the agricultural sector share of GDP is not due to demand conditions, as the theory suggests, but rather to supply conditions. This is evident by the increasing rate of imported foods in these countries as well as the influx of unskilled farm workers migrating to urban centers where the relative wage rates are higher than in rural areas. The industrial sector in all countries showed positive growth with varying degrees, but industrial growth may be more policy- induced than real. In countries where most of the oil produced is exported and not processed locally--such as Saudi Arabia, Iran, and Libya--the inclusion of oil in the industrial sector inflates the industrial sector growth rate.

The results of the study clearly indicate that having a more productive industrial sector co-existing with a less productive agricultural sector will have negative societal implications. Income inequality and occupational careers between towns and villages became wider than ever before. Massive migrations to cities and towns left good agricultural land unattended which, in turn, made the agricultural sector weaker than before.

As the analysis reveals, oil exports in the sampled countries constitute the backbone of their economies. Any decline in oil exports would have severe economic impacts resulting in a reduction of national output and the stock of foreign exchange. Therefore, it is very important for these countries to adopt a national economic policy which is less dependent on oil. For such a policy to be potent, it must be based on a careful assessment of potential growth of the endogenous components of the national economy, especially the agricultural and manufacturing sectors.

In those countries where fertile lands are scarce, such as the Gulf states and Libya, oil can be sold for manufactured products and capital goods which in turn can be employed to expand the industrial base of the oil sector as well as creating other industries. In countries with more fertile lands, such as Iraq, development of both the agricultural and the industrial sectors simultaneously is not only possible but achievable within one decade. Oil can be sold for manufactured products and capital goods. Capital goods can be employed to expand the oil industrial base, and then massive funds should be targeted to the agricultural sector to improve and expand it. As the agricultural sector becomes more productive and capable of providing food and employment to a large segment of society, social pressures in urban areas could be substantially lowered, and the quality of life and standard of living could improve in both urban and rural areas of these countries.

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REFERENCES

Bridge, John N. "Absorptive Capacity and Investment Policies in the Arab World." In Energy and Development, ed. by Rasuei Elmallakh and Carl McGurire. Boulder, CO: The International Research Center for Energy and Economic Development, 1974.

Chenery, Hoilis, and Lance Taylor. "Development Patterns: Among Countries and Over Time." Review of Economic and Statistics 50, no. 4 (1968): 391-416.

Eden, David G. oil and Development in the Middle East. New York: Praeger Publishers, 1979.

EI-Jehahni, Taher. Absorptive Capacity and Alternative Investment Policies. Unpublished dissertation, University of Colorado, Boulder, CO, 1975.

Europa World Year Book. London: Europa Publications Limited, 1988.

Jones, Aubrey. The Missed Opportunity or Naft and Shaft. London: Andre Deutseh Limited, 1981.

Kuznets, Simon. "Quantitative Aspects of the Economic Growth of Nations: H-Industrial Distribution of National Product and Labor Force." Economic Development and Cultural Change 5, no. 4 (1957): 3-111.

Melachian, Keith. "The Agricultural Development of the Middle East: An Overview." In Peter Beaumont and Keith Melachian, Agricultural Development in the Middle East. New York: John Wiley and Sons, 1985.

Petroleum Industry Statistics. Basic Petroleum Data Book. Washington, D.C.: American Petroleum Institute, 1990.

Stanback, Thomas M. Understanding the Service Economy. Baltimore, MD: Johns Hopkins University Press, 1979.

Taylor, Lance. "Development Patterns: A Simulation Study." Quarterly Journal of Economics 83, no. 2 (1969): 220-241.

United Nations. Yearbook of Labor Statistics, International Labor Office. Geneva: United Nations, 1987.

United Nations. Various issues, Yearbook of National Account Statistics. New York: United Nations.

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