Global Imbalances: Petrodollars in the Lead
1990s and 2000s witnessed the emergence and substantial growth of large and
persistent current account surpluses in some countries and large current
account deficits in others, often referred to as global imbalances. Not even the
global financial crisis of 2008 has managed to do away with these imbalances.
While the crisis initially shrank the imbalances as global output and trade collapsed
in 2009, global imbalances started widening once again following the recovery
in 2010. These, as well as the debate on their origins and ways to resolve them,
are now back on the international finance agenda.
So far, the discussion
about global imbalances has chiefly focused on Asia and the United States. While
Europe’s current account has been broadly in balance, the cumulative current
account surplus in China has amounted to about 2.3 trillion dollars while the
rest of emerging Asia has accumulated another 1.5 trillion dollars in surpluses
since 1990. Japan, outpaced by China, has run substantial current account
surpluses as well, about 3 trillion dollars. When taken together the surplus of
all emerging Asia, including China, does not measure up against the US’s accumulated
current account deficit of about 8.3 trillion dollars. Another major player has
taken a center stage, the oil exporters. In fact, oil-exporting countries have contributed more to global imbalances than China or all of emerging Asia (Figure
1). As discussed in a recent article “Petrodollar Confusion” in the Economist, the cumulative current
account surplus in oil-exporting countries since 1990 has amounted to about 4.6
trillion dollars, twice as large as China’s surplus.
exporters’ current account surplus has skyrocketed from the early 2000s until
the global financial crisis of 2008, but has picked up
substantially after the crisis. The annual surplus tripled to about 600 billion
dollars in four years by 2008, whereas China’s current account surplus has shot
up at a higher rate from about 70 billion dollars in 2004 to a still lower
total of about 400 billion dollars in 2008. Current account surpluses declined
substantially during the global output collapse of 2009 but have since
recovered. China’s current account has increased to about one-half of its
pre-crisis level, but oil exporters have witnessed their surpluses go back
essentially to the previous level (Figure 1). Whether current account surpluses
will persist into the future depends on many factors, but understanding what
drives these surpluses (and current account deficits of large deficit
countries) can assist our thinking in resolving global imbalances.
Figure 1. The Evolution
of Current Account (1990-2012)
been a lot of discussion among policymakers about the causes and consequences
of global imbalances. Chinn, Eichengreen, and Ito
(2011) re-examined the determinants of current account balances and analyzed
potential explanations such as the “saving glut” hypothesis, the effect of
fiscal deficits, self-insurance motives, distortions in financial markets, and
the lack of financial development in emerging markets. The authors found that the
“saving glut” cannot explain the bulk of the current account movements and
pre-crisis patterns are due to stock market and house price booms in late 2000s
as well as a rise in household leverage. In addition, fiscal deficits matter,
but they cannot reduce current account balances substantially for deficit
countries. For China, financial development coupled with capital account liberalization
may help reduce its large current account surplus. The authors conclude that
global imbalances may be here to stay unless there is a shift in policy by the major players.
Milesi-Ferretti (2010) examine the rise in global
imbalances since the mid-1990s and suggest that a variety of factors played
different roles over time. External demand for the US assets, a declining US
saving rate, asset price booms, high oil prices and high saving in oil
exporters, large saving rate in China, and an investment decline in emerging
Asia have all contributed to global imbalances. The authors conclude that
global imbalances could be lower in the future if domestic and international
distortions, which increased in the 2000s, are tackled. These include an
increase in public and private US saving rates, a switch from export-led to
domestic demand-led growth in some emerging market economies, and provision of
global liquidity to reduce self-insurance motives. Without easy access to global
liquidity, the financial crisis of 2008 may yet encourage a further
accumulation of foreign currency reserves and may result in widening of global
imbalances. Indeed the Asian crisis of 1997-1998 contributed to policy shifts
and accumulation of foreign reserves in many Asian countries to self-insure against potential external
As in the
Asian countries, high saving by oil exporters is an important factor driving
global imbalances. High oil prices, especially in the 2000s, mostly due to high
global growth, resulted in a huge influx of oil money into oil-exporting
economies. A lot of oil income was saved while investment stayed flat (Figure
2). Yet oil prices alone do not explain large current account surpluses of oil
exporters. Why would oil exporters save so much? Why would they not invest a
lot? Oil exporters’ saving and investment policies would determine the current
account dynamics. In particular, fiscal policy and exchange rate policy of oil
exporters and the destination of petrodollars accumulated in sovereign wealth
funds (SWFs) would have implications on the evolution of global imbalances.
Figure 2. Average
Saving and Investment Rate in Oil Exporters and Real Oil Price (deflated by the US CPI)
There are several explanations why oil windfalls are
not and should not be invested en masse.
One of them is limited absorptive capacity, which can simply result from the reduced
domestic investment opportunities in oil-exporting countries. Limited
absorptive capacity may also arise from weak administrative capacity, which
leads to overrun costs and misallocation of capital. The propensity to waste is
higher in oil exporters as revenues from oil exports go directly to the
government’s coffers and can thus be more easily captured and misallocated in the
absence of strong checks and balances (Arezki and Brueckner, 2011). Optimally, a weaker administrative capacity calls for a smaller increase in public capital following an oil windfall (Arezki, Dupuy and Gelb, 2012). The absorptive capacity can be improved but in practice it tends to be
quite a pervasive factor. While oil-exporting countries significantly ramped up
their public spending programs during the 2000s, the increase was smaller than
in the previous oil booms of the 1970s. The lessons of the wasteful investment
and a subsequent collapse in the oil price were learned well.
Another reason behind the high saving of oil exporters
and their relatively low investment rate is oil price volatility. Oil accounts
for a large share of export revenue in many oil-exporting countries. With high
volatility of oil price, therefore, the income received by oil exporters is
much more volatile than that of other countries. In addition, a drop in oil
price could persist for a long time as in the 1980s-90s. As a result, the
saving rate would be high and the investment rate would be low (Cherif and Hasanov, 2012a). In
particular, with export volatility of an average oil exporter, and a horizon of
50 years and no initial assets, optimal precautionary saving in safe assets
would be 30 percent of GDP while the investment rate would be about 15 percent
of GDP. With initial assets of about 100 percent of GDP, similarly to some
Middle Eastern producers, the optimal precautionary saving would be 20 percent
of GDP, still relatively high saving in the safe assets. The high saving rate
of oil exporters observed could then be explained by a large uncertainty about
oil price dynamics. Since 2000, the average saving rate of oil-exporting
countries has been 35 percent of GDP similar to the model’s prediction (total
saving is the sum of precautionary saving in the safe asset and investment).
Other saving motives such as intergenerational equity concerns could further
contribute to high saving.
exporters have invested on average about 25 percent of GDP since 2000, and
investing more requires high productivity of the tradable sector. Cherif and Hasanov (2012a) show
that a low productivity of the tradable sector in oil-exporting countries implies
a low optimal investment rate, about 15 percent of GDP. The observed investment
rate already exceeds that predicted by the model. The IMF (2011) shows that in Gulf
Cooperation Council (GCC) countries, total factor productivity growth has been about
zero for the past 40 years. Oil exporters have been investing a lot in the
past, especially in the 1970s-early 1980s, but high investment has not
materialized into the development of the tradable sector, and has not resulted
in high total productivity. Perhaps even the current investment rates are too
high given the productivity observed thus far.
relatively low investment, and thus high current account surpluses of oil
exporters seem optimal, but whether this is desirable from the global
perspective remains debatable. High oil prices driven by high global growth have
resulted in a huge inflow of petrodollars to oil economies, transferring wealth
from oil importers. Despite the wealth redistribution, the outcome is not
necessarily “bad” for the world economy. If the accumulation of oil money is a
concern, a similar argument can be made about oil companies that earned
substantial sums of income in the 2000s. Five big oil companies collected a
trillion dollars in profits from 2001 to 2011 (Weiss, Weidman, and Leber, 2012). When oil prices peaked in 2008, ExxonMobil’s
annual profit was about 45 billion dollars with revenues of about 500 billion
dollars. It seems oil companies can rival some of the oil producers in terms of
the accumulation of petrodollars.
exporters save most of the oil income, recycling of petrodollars, however, may
have different implications on global imbalances and world or regional
economies. A precautionary saving motive and high volatility of oil prices
suggest parking petrodollars in safe and liquid assets (e.g. Treasury bills).
Eventually, the banking system of the destination country would make use of the
excess funds. SWFs could also park a fraction of the oil wealth in risky assets
such as foreign direct investment, real estate, or equity portfolio in other
parts of the world. In either case, the global imbalances evolution and global
or regional economies may be affected by the recycling of petrodollars. If the
recycling results in asset booms and bubbles, the global imbalances could
further widen and global growth may not be sustainable. However, if the
recycling is used for productive purposes (e.g. foreign direct investment), it
can increase production and the export potential of recipient countries and
help shrink global imbalances and improve global growth prospects. Where
petrodollars flow does matter, therefore.
contribute to the reduction of global imbalances, fiscal policy is a more
potent tool for many oil exporters than the exchange rate policy. Arezki and Hasanov (2009) show
that a 10 percent of GDP decrease in the fiscal balance reduces current account
by about 10-15 percent of GDP on average for a group of oil exporters, which is
a much larger effect than that for oil-importing
countries, about 3-4 percent of GDP. In contrast, an appreciation of the real
exchange rate by a whopping 100 percent would only reduce current account
balance by 2.5 percent of GDP. This result is quite intuitive since oil exports are priced in US dollars and thus may not
be affected by changes in the exchange rate. Thus, increasing
public spending could be an effective option to reduce the current account
surplus. However, it is important to stress that fiscal expansion during an oil
boom could exacerbate volatility, increase inflation, and merely waste money on
unproductive projects or transfers. Focusing spending on developing the
tradable sector, improving productivity, relieving supply bottlenecks, and
promoting economic diversification would mitigate concerns about higher
spending (Arezki, Gylfason
and Sy, 2012).
to induce oil exporters to reduce high current account surpluses is to decrease
the volatility of oil income received by oil exporters. With lower income
volatility, precautionary saving is minimal and investment is relatively high (Cherif and Hasanov, 2012b). The
model in Cherif and Hasanov
(2012a) suggests that a floor on the oil price would provide a hedge against
low oil prices for oil exporters. It would require commitment on the part of major
oil importers or an international agency. If oil importers could commit to a floor,
oil exporters would not need to build up large reserves in case oil price plummets
and does not recover for a long time. Both oil exporters and importers would
benefit from oil exporters’ reduced saving and increased investment, reducing
current account surpluses and shrinking global imbalances.
exporters are important players on the global economic imbalances stage. These
countries have amassed large amount of petrodollars, much larger than China’s
export surpluses and even larger than all of emerging Asia. Oil exporters will stay
in the lead, accumulating huge reserves if oil prices remain high and current
policies continue. A high volatility of oil income explains to some extent why
oil exporters save a lot and invest relatively little. Although a high oil
price has contributed to a substantial rise in current account surpluses, oil
exporters’ policies also play a role in affecting the size and distribution of global
imbalances. Fiscal policy has a strong effect on the current account in oil-exporting
countries while exchange rate appreciation is less effective. Engineering a
floor on the oil price might also reduce the need for precautionary saving. In
addition, the flow of petrodollars to other countries and various asset classes
could affect how global imbalances might evolve. The recycling of petrodollars
for productive uses rather than consumption or speculation would be beneficial
for both world long-run growth and global imbalances dynamics.
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Economic Review 55(7), 955-963.
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Sy, (eds.), 2012. Beyond the Curse: Policies to Harness the Power of Natural Resources,
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working paper 12/134.
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