The effects of the recent increases in oil prices on developing countries: The experiences of India, Pakistan and Kenya

Elewa, Mohamed A (1979) The effects of the recent increases in oil prices on developing countries: The experiences of India, Pakistan and Kenya. MLitt(R) thesis, University of Glasgow.

Abstract

This study deals with the impact of the four-fold increase of world oil prices during 1973/74 on the developing countries, taking the developments in India, Pakistan and Kenya in 1974 and 1975 as examples. A review of the literature partaining to the relationship "between oil consumption and economic development supports the hypotheses that (1) with rapid economic growth, involving structural changes in the economy, oil consumption tends to grow faster than aggregate output, and (2) oil demand is determined more by the level of economic activity than by changes in the price of oil. Furthermore, the large sudden rise in the cost of oil was superimposed on an already existing balance of payments deficit in India, Pakistan and Kenya, whose export potential was further detrimentally affected by the severe world recession during 1974/75. The relevant data for this study were obtained primarily from official sources and publications of international institutions. For each of the three countries, the pattern and trends of consumption and imports of oil as well as other sources of energy are analysed by means of ratio, correlation and regression analyses. The effects on the terms of trade, income transfer, and external balances are assessed, and the oil-induced changes in economic activity in the rest of the world are examined in relation to their effects on the growth and variability of the export potential of these countries, and the consequences on their foreign exchange reserves. The significance of oil in total energy consumption varies among the three countries, reflecting the general situation in other low-income developing countries. In India, a coal-orientated economy, it amounted to 25 per cent in 1973, whereas in Pakistan it was 42 per cent; only in Kenya was it predominant, at 92 per cent of total energy consumption. While Kenya has to import all of her oil, the imports of crude and refined oil into Pakistan and India accounted for 91 and 71 per cent, respectively, of their consumption in 1973, reflecting the general, heavy reliance on oil imports of the low-income countries. During 1973-1975, while the absolute amount of energy consumption increased in all the three countries, the share of oil in the total declined to about 23 per cent in India and 40 per cent in Pakistan, counter-balanced by a rise of indigenous non-oil fuels, whereas in Kenya the share of oil actually increased to 93 per cent due to absolute decline in imported coal. The effects of the rise in oil prices on the terms of trade, oil costs and income transfers were substantial. Deterioration of the commodity terms of trade was sharp, declining during 1973-75 from 107 to 70 for India, from 108 to 73 for Pakistan, and from 86 to 72 for Kenya (with 1970 = 100). By 1975, the increase in net oil import bills had risen three and a half times for India, four times for Pakistan and four and a quarter times for Kenya, The resulting income transfer pre-empted a large proportion of the realised growth, especially in the case of Kenya. The deterioration in the current account of the balance of payments and the widening of the foreign exchange gap were larger than can be attributed solely to the rise of the price of oil, because changes in import control policies and non-oil deficits also played a crucial role. Market share analysis shows that decreases in export earnings, caused by the oil-related recession in the OECD market, affected Pakistan and Kenya more severely than India. To some extent, these adverse affects were mitigated, except in the case of Kenya, through additional access to the OPEC market whose demand for imports was greatly boosted by the sudden and large increases of oil revenue, Although the post-1973 events in India, Pakistan and Kenya were different in some important respects, they do suggest that these three countries, and the low-income countries as a whole, had very limited manoeuvrability in the face of the oil crisis, because of their need to secure their minimum oil requirements on the one hand, and the underlying vulnerability of their external balances on the other.

• Item Type: Thesis (MLitt(R))
• Qualification Level: Masters
• Additional Information: Advisers: George C Abbott; Max G Mueller
• Keywords: Economics, Environmental economics, Energy
• Date of Award: 1979
• Depositing User: Enlighten Team
• Unique ID: glathesis:1979-72260
• Copyright: Copyright of this thesis is held by the author.
• Date Deposited: 24 May 2019 15:12
• Last Modified: 24 May 2019 15:12
• URI: https://theses.gla.ac.uk/id/eprint/72260