Transcript STABILIZING EXPENDITURES IN OIL RICH ECONOMIES

Measuring Oil’s Role in Latin American
Economic Growth
Guillermo Perry
Chief Economist for Latin America & Caribbean,
The World Bank
Houston, Texas
November 16, 1999
Jan-98
Jan-96
Jan-94
Jan-92
Jan-90
Jan-88
Jan-86
Jan-84
Jan-82
Jan-80
Jan-78
Jan-76
Jan-74
Jan-72
Jan-70
Jan-68
Jan-66
Jan-64
Jan-62
Jan-60
Relative Price of Oil (Index by Export Unit Value
of OECD Countries)
0.6
0.5
0.4
0.3
0.2
0.1
0
Jan-97
Jan-95
Jan-93
Jan-91
Jan-89
Jan-87
Jan-85
Jan-83
Jan-81
Jan-79
Jan-77
Jan-75
Jan-73
Jan-71
Jan-69
Jan-67
Jan-65
Jan-63
Jan-61
Jan-59
Jan-57
Average Relative Price of Oil
(With Standard Deviations)
0.5
0.4
0.3
0.2
0.1
0
Oil Exports (% of Total Exports)
80
70
60
Group I
Group II
Group III
50
40
30
20
10
Group I = Ecuador, Venezuela and Trinidad & Tobago
Group II = Argentina, Colombia and Mexico
Group III = Bolivia, Brazil, Chile and Peru
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
1960
0
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
25
1968
1966
1964
1962
1960
Non-Oil Exports (% of GDP)
30
Group I
Group II
Group III
20
15
10
5
0
7
Group II
6
Group III
1998
Group I
1996
8
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
1960
GDP Growth (5 Year Moving Average)
9
5
4
3
2
1
0
-1
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
10000
1966
1964
1962
1960
GDP Per Capita PPP Current
12000
Group I
Group II
Group III
8000
6000
4000
2000
0
Correlation Between Short Run Fluctuations in GDP and
the Relative Price of Oil: Venezuela
6
4
2
0
-2
-4
74
76
78
80
82
84
86
88
Recursive C(1) Estimates
90
92
94
96
± 2 S.E.
98
Correlation Between Short Run Fluctuations in GDP and
the Relative Price of Oil: Mexico
0.5
0.4
0.3
0.2
0.1
0.0
76
78
80
82
84
86
88
90
Recursive C(1) Estimates
92
94
96
± 2 S.E.
Correlation Between Short Run Fluctuations in GDP and
the Relative Price of Oil: Argentina
0.4
0.3
0.2
0.1
0.0
-0.1
-0.2
74
76
78
80
82
84
86
88
90
Recursive C(1) Estimates
92
94
96
± 2 S.E.
98
Correlation Between Short Run Fluctuations in GDP and
the Relative Price of Oil: Colombia
0.6
0.4
0.2
0.0
-0.2
74
76
78
80
82
84
86
88
90
Recursive C(1) Estimates
92
94
96
± 2 S.E.
98
Investments (% of GDP, 5 Year Moving Average)
35
Group I
Group II
Group III
30
25
20
15
10
5
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
1960
0
Savings (% of GDP, 5 Year Moving Average)
40
Group I
Group II
Group III
35
30
25
20
15
10
5
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
1960
0
NFPSB (% of GDP)
5
0
-5
-10
-15
Group I
Group II
Group III
-20
-25
Note: Trinidad & Tobago is not included in Group I.
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
-30
Government Expenditures (% of GDP)
18.0
16.0
14.0
12.0
10.0
8.0
6.0
Group I
Group II
Group III
4.0
2.0
Note: Argentina not included in Group II.
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
1960
0.0
Tax Revenue (% of GDP)
30.0
25.0
Group I
Group II
Group III
20.0
15.0
10.0
5.0
Notes: Trinidad is not included in Group I. Brazil is not included in Group III.
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980.0
1978.0
1976
1974
1972
1970
1968
1966
1964
1962
1960
0.0
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
4
1972
6
1970
8
1968
1966
1964
1962
1960
CAB (% of GDP)
10
Group I
Group II
Group III
2
0
-2
-4
-6
-8
-10
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
50
1968
60
1966
70
1964
1962
1960
External Debt (% of GDP)
100
90
80
Group I
Group II
Group III
40
30
20
10
0
Latin America: External Factors and Growth
Argentina
Brazil
Chile
Colombia
Ecuador
Mexico
Peru
Venezuela
Weighted
Avg.
Deceleration,
1999-1997
-11.5%
-3.0%
-8.6%
-6.6%
-10.4%
-3.5%
-4.5%
-11.9%
Due to external
factors A
-4.0%
-5.5%
-4.7%
-4.7%
-5.2%
-1.5%
-3.2%
-5.2%
Due to external
factors B
-1.6%
-2.6%
-2.4%
-2.7%
-3.1%
-1.1%
-2.4%
-3.6%
-5.5%
-4.3%
-2.2%
External Factors = U.S. Federal Funds Rate, terms of trade, “Non-Latin” Spreads, El Niño.
Weighted Avg. based on 1997 GDPs.
External Factors A = Estimated using 1998 and 1999 projections under 1997 external conditions.
External Factors B = Using 1997 external conditions for 1998 projection; 1998 conditions for 1999 projections
STABILIZING EXPENDITURES IN
OIL RICH ECONOMIES:
THE PROBLEM
• OVERSPENDING DURING BOOM
• Inefficient Spending
• Appreciation of RER (Dutch Disease) / low non-oil
exports
• Maintenance of high external indebtedness
• CRISIS AFTER BOOM
• Fiscal crisis (no access to foreign credit)
• Balance of Payments crisis
• Devaluation, inflation, recession
OPTIONS
• Hedge in the futures market
• Short term markets
• Markets not deep enough
• High transaction costs; subject to effective
speculation
• Do not stabilize revenues (just price)
OPTIONS
• Stabilization Fund
• To insulate from political pressures during
boom
• Credibility for investors
Issues in the Design of
Stabilization Funds
•
•
•
•
Savings and withdrawal rules
Reference price
Fund can not be used as collateral
Stabilization Fund is not enough to
guarantee fiscal soundness
• Require coordination with exchange rate
and monetary policies
THE CHILEAN COPPER
STABILIZATION FUND
•
•
•
•
COPPER IN THE CHILEAN ECONOMY
42% of exports in 1997 (35% in 93/94)
3.6% of GDP in fiscal revenues in 1997
Will continue to be crucial: 28% of world
reserves and 34% of world production (25%
in 1990)
THE CHILEAN COPPER
STABILIZATION FUND
• Initial Design 1981
• Revenues above a “reference” price to be used
only on servicing public debt (released ordinary
revenues to finance additional expenditures)
• Reference price could not exceed six years
moving average in London Metal Market
(adjusted by US CPI)
• Incorporated into Central Bank reserves
• Stabilizes only with respect to price changes
THE CHILEAN COPPER
STABILIZATION FUND
• Modifications
• 1985: CSF created as a separate Fund under
WB Structural Adjustment Loan
• 1988: Proceeds can be used only for
“extraordinary amortizations” of public debt
THE CHILEAN COPPER
STABILIZATION FUND
• EVALUATION
• Copper price cycles influence fiscal balance, but
less in last decade (Spilimbergo, IMF, April 1999)
• Chile is one of the few LAC countries that has
achieved anticyclical fiscal policies (IDB)
• Chile’s business cycle associated with copper
prices (3 out of 4 cycles since 1998), though last
one less pronounced. Effect mainly through
variations in investment
THE CHILEAN COPPER
STABILIZATION FUND
• The CSF was crucial to contain political pressures
for spending at beginning of democracy (Foxley)
• Recent downturn due to both sharp drop in copper
prices and monetary overkill (Perry and Herrera see graph-)
• About 640mUS$ (1%GDP), from accumulated
1500, used to ease fiscal adjustment in 1998 and
1999.
The Chilean Copper Stabilization
Fund.
• Overall, it has contributed to Chile’s strong fiscal
stance and anticyclical fiscal policy, and may have
moderated but has not completely avoided effects
of price on business cycle
THE COLOMBIAN OIL
STABILIZATION FUND
• EVALUATION
• The OSF has been less important than expected
due to delays in increased production and fall in
oil prices (It accumulated around 200mUS against
expected 600mUS$ -end 1998-)
• Fiscal balance deteriorated (in spite of it), due to
deficits in social security and increased transfers
to subnational governments
THE VENEZUELAN FUND FOR
MACROECONOMIC
STABILIZATION
• Created in 1998
• Savings rule: 80% of revenues from price in
excess of five-year moving average.
• Uses: 40% to Social Investment Fund
(expenditure!); 30% for public debt
reduction; 30% for “Venezuelan Investment
Fund” (abroad).
• Present Government may amend legislation.