Can a Cartel Fuel the Engine of Economic Development? OPEC and the macroeconomics of oil
AbstractOPEC’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 InfoPaper provided by The Center for Economic Research and Graduate Education - Economic Institute, Prague in its series CERGE-EI Working Papers with number wp280.
Date of creation: Aug 2005
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OPEC; macroeconomic stability; resource curse; economic development.;
Find related papers by JEL classification:
- E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
- F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
- Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
- Q32 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Exhaustible Resources and Economic Development
- O11 - Economic Development, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-02-19 (All new papers)
- NEP-ENE-2006-02-19 (Energy Economics)
- NEP-MAC-2006-02-19 (Macroeconomics)
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