Oil Fund and the Instability of Macro-Economy in Oil-Rich Countries

TLDR: In this article, the authors investigated the relationship between oil funds and macroeconomic instability and found that the effect of fund on instability depend on its quality and just funds with higher ones lead to reduced volatility of prices and lower inflation as macroeconomics instability index.

Abstract: Most of oil exporting countries suffers from macroeconomic instability arising from the volatility of oil revenues. A number of these countries have attempted to address these issues either through savings schemes or oil stabilization funds, or both. This research investigates the relationship between oil funds and macroeconomic instabilities. The econometric estimation results from a 26-year panel data set of 11 countries with oil funds suggest that the effect of fund on instability depend on its quality and just funds with higher ones lead to reduced volatility of prices and lower inflation as macroeconomics instability index. Historical records about oil-rich countries show that bring the government to save part of oil revenues for the large resources of oil and gas as a national wealth future generations. The stabilization fund are expected to have not caused to gain better achievements than institutionalize a range of mechanisms to manage oil countries without plenty of the resources. Many oil-rich revenue that assist decision-makers to decide how much countries have showed very weak and unsatisfactory to save, how much to spend, how to save and when to performance about management and optimum use of their spend. The flow of wealth from natural resources to a natural resources to develop infrastructures and state is not constant; the price of the resource changes, competitive advantages. Therefore a part of economic production output varies and resources are discovered literature during the last three decades was devoted to and exhausted over time. Managing natural resource explaining of reasons what known as resource curse or wealth well takes fluctuations into account so that plenty paradox (1). when there is less natural resource wealth a state can The mineral-dependent states tend to have higher rely on its savings, built up during a boom in natural poverty rates than non-mineral dependent states. resource wealth. They also have more corruption, more civil war, more Although, the recent surge in oil prices has lent military spending, less effective government and more further importance to such oil funds, but they cannot be authoritarianism. In all above mentioned, given these an unconditional solution. The oil dependent countries results, they are far from ideal places to live. Oil and need to find a right balance between financing social and mineral dependence produce a kind of economic growth infrastructure development needs (by spending oil that offers few direct benefits for the poor; moreover, oil revenues), maintaining macroeconomic stability and mineral dependence make pro-poor reforms of growth (by sterilizing oil revenues) and saving part of oil wealth more difficult, due to the Dutch Disease. Actually, those for future generations (by saving oil revenues). economies that have pursued state-led industrialization as Policymakers need to pay close attention to the effects of an attempt to diversify away from raw materials have higher public spending on the real exchange rate and actually had a slower movement into manufactures than macroeconomic stability and should make the best those that pursued open trade policies (2). strategic use of windfall gains for achieving long-term