This paper develops a long run growth model for a major oil exporting economy and derives conditions under which oil revenues are likely to have a lasting impact. This approach contrasts with the standard literature on the "Dutch disease" and the "resource curse," which primarily focus on short run implications of a temporary resource discovery. Under certain regularity conditions and assuming a Cobb Douglas production function, it is shown that (log) oil exports enter the long run output equation with a coefficient equal to the share of capital. The long run theory is tested using a new quarterly data set on the Iranian economy over the period 1979Q1-2006Q4. Building an error correction specification in real output, real money balances, inflation, real exchange rate, oil exports, and foreign real output, the paper finds clear evidence for two long run relations: an output equation as predicted by the theory and a standard real money demand equation with inflation acting as a proxy for the (missing) market interest rate. Real output in the long run is shaped by oil exports through their impact on capital accumulation, and the foreign output as the main channel of technological transfer. The results also show a significant negative long run association between inflation and real GDP, which is suggestive of economic inefficiencies. Once the effects of oil exports are taken into account, the estimates support output growth convergence between Iran and the rest of the world. We also find that the Iranian economy adjusts quite quickly to the shocks in foreign output and oil exports, which could be partly due to the relatively underdeveloped nature of Iran's financial markets. Finally, we consider the experience of other major oil exporting economies and show that the long-run output equation derived in the paper applies equally to Saudi Arabia and Norway, two oil exporters with very different development experiences and political systems.

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Oil Exports and the Iranian Economy

https://www.econstor.eu/bitstream/10419/36322/1/615085288.pdf

Oil exports and the Iranian economy

This study deals with the subject of development planning in the oil-based economy of Saudi Arabia. The main objective was to explore optimal strategies for the development of the Saudi economy. That was done through the development of a two-sector planning model. The model is a long-run optimal planning model using the technique of dynamic linear programming. The structure of the model involves an objective function and a set of constraints. The objective function reflects the main goal of the development planning of Saudi Arabia, which emphasizes the development of the nonoil sector, and the constraints are specified through a two-sector macroeconomic model. The results of solving the model give optimal values of the endogenous variables at the beginning of different discrete intervals. Each interval is five years. The base year is 1980 and the terminal year is 2014. The model assumes a lifetime of the oil resource extraction which is compatible with the long-term strategy of developing the nonoil sector;The results of the optimization indicated the possibility of developing a nonoil sector in the oil-based economy, but that requires a high level of investment compared with production in the nonoil sector for a long time. It also indicated the continuous dependence of the nonoil sector on expatriate labor in the future. This conclusion emphasizes how careful the country should be when designing any policy to limit foreign labor, and the urgency of increasing the participation in the labor force of Saudi citizens, including women. The two-sector model developed could be a helpful tool to explore the long-run perspective of intertemporal investment strategies of the Saudi economy given the lifetime of the oil resource.

https://lib.dr.iastate.edu/cgi/viewcontent.cgi?article=13123&context=rtd

Exploration of optimal strategies for the development of an oil-based economy: the case of Saudi Arabia

A general equilibrium framework for optimal planning in an oil-producing economy

Fluctuating and declining oil revenues after 1982 have meant that Saudi Arabian planners have had to revise their long running development strategy. Instead of high growth, industrial diversification, and rapidly increasing standards of living, the government's main concerns now center on how best to utilize the country's dwindling oil revenues to generate positive overall rates of economic growth while at the same time meeting to the fullest extent possible the basic needs of the majority of the population. The purpose of this paper is to examine the fiscal dilemmas that volatile and declining oil revenues are likely to pose over the remaining part of the 1980s, and up to 1992. In particular an assessment is made of the magnitude of the tradeoff between increased government expenditure (and thus growth) and the size of the country's outstanding portfolio of foreign assets. Using an optimal control macroeconomic model of the economy, and likely assumptions concerning oil markets, the economy will be hard pressed to maintain existing standards of living without completely depleting its foreign portfolio by 1992. On the other hand, if the country is willing to accept modest reductions in growth and development, it may be possible to preserve a portion of its portfolio for future contingencies.

Saudi Arabia's fiscal options: 1986–1992

Expenditure of oil revenue: An optimal control approach with application to the Iranian economy : by Homa Motamen 189 pp, £12.50, $27.50, St Martin's Press, New York and Frances Pinter, London, 1979

Derek Chisholm

Papers

Expenditure of oil revenue: An optimal control approach with application to the Iranian economy : by Homa Motamen 189 pp, £12.50, $27.50, St Martin's Press, New York and Frances Pinter, London, 1979