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Can a Cartel Fuel the Engine of Economic Development? OPEC and the macroeconomics of oil

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  • Jose Noguera
  • Rowena A. Pecchenino

Abstract

OPEC’s stated mission is to promote the economic development and growth of its member states while minimizing volatility in the oil markets. But after a promising beginning many member states’ economies have declined rather than prospered—a clear indication of OPEC’s failure to meet their development goals. Thus, we ask if a resource cartel can achieve the joint goals of development and resource market stability. In a model in which oil producing countries choose whether to join an oil cartel or remain in the fringe, we find that, in a highly elastic oil market, a profit maximizing cartel is inconsistent with oil market stability in the face of demand shocks. Thus, it is inimical to macroeconomic stability, an essential requirement for long-lasting capital investment, and therefore economic development and growth. Consequently, it may not be optimal for an oil-exporting country that cares adequately about macroeconomic stability to join the cartel. But for a country where short-run considerations overwhelm long-run concerns, cartel membership may be the correct choice. Yet the oil rich are ultimately cursed by their excessive reliance on their resource wealth—current profligacy begets future decline.

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Bibliographic Info

Paper provided by The Center for Economic Research and Graduate Education - Economic Institute, Prague in its series CERGE-EI Working Papers with number wp280.

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Date of creation: Aug 2005
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Handle: RePEc:cer:papers:wp280

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Keywords: OPEC; macroeconomic stability; resource curse; economic development.;

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  1. Ahmad R. Jalali-Naini & Mehdi Asali, 2004. "Cyclical behaviour and shock-persistence: crude oil prices," OPEC Energy Review, Organization of the Petroleum Exporting Countries, vol. 28(2), pages 107-131, 06.
  2. Stéphan Marette & John Crespi, 2003. "Can Quality Certification Lead to Stable Cartels?," Review of Industrial Organization, Springer, vol. 23(1), pages 43-64, August.
  3. Sy, Amadou N.R., 2004. "Rating the rating agencies: Anticipating currency crises or debt crises?," Journal of Banking & Finance, Elsevier, vol. 28(11), pages 2845-2867, November.
  4. A. Michael Spence, 1979. "Investment Strategy and Growth in a New Market," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 1-19, Spring.
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