International solidarity turned on its head…


Chavez supporters tend to applaud his moves to stick it to the gringos by raising the price of oil. The argument ignores a basic, but seldom-acknowledged fact: as this International Energy Agency study (PDF format) finds rising oil prices hurt poorer countries more than richer ones.

The adverse economic impact of higher oil prices on oil-importing developing countries is generally more severe than for OECD (developed) countries. This is because their economies are more dependent on imported oil and more energy-intensive, and because energy is used less efficiently. On average, oil-importing developing countries use more than twice as much oil to produce a unit of economic output as do OECD countries. Developing countries are also less able to weather the financial turmoil wrought by higher oil-import costs.

The economic impact on the poorest and most indebted countries is most severe. On the basis of IMF estimates, the reduction in GDP in the sustained $10 oil-price increase case would amount to more than 1.5% after one year in those countries. It is estimated that the loss of GDP averages 0.8% in Asia and 1.6% in very poor highly indebted countries in the year following a $10 oil-price increase. The loss of GDP in the Sub-Saharan African countries would be more than 3%.

Asia as a whole, which imports the bulk of its oil, would experience a 0.8% fall in economic output and a one percentage point deterioration in its current account balance (expressed as a share of GDP) one year after the price increase. Some countries would suffer much more: the Philippines would lose 1.6% of its GDP in the year following the price increase, and India 1%. China’s GDP would drop 0.8% and its current account surplus, which amounted to around $35 billion in 2002, would decline by $6 billion in the

Other East Asian countries would see deterioration in their aggregate current account balance of more than $8 billion. Asia would also experience the largest increase in inflation in the first year, on the assumption that the increase in international oil price would be quickly passed through into domestic prices. The inflation rate in China and Thailand would increase by almost one percentage point in 2004.

Latin America in general would suffer less from the increase in oil prices than Asia because net oil imports into the region are much smaller. Economic growth in Latin America would be reduced by only 0.2 percentage points.

The cost of fuel imports relative to GDP is particularly high in Africa. In 2000, Sub-Saharan African countries spent 14% of their GDP on fuel imports. As a consequence, sharp fluctuations in oil prices can lead to big shifts in their current account balance, often amounting to more than 1% of GDP. This generally leads to a rapid economic adjustment involving a sharp contraction in domestic consumption, because these countries have very limited access to international capital market to finance a temporary increase in the current account deficit.

By working to jack up oil prices, Chavez exports poverty rather than abating it.

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