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There was a time when a large and relatively
sudden increase in the price of petroleum in world markets could bring
the world economy to its knees, throwing the developed industrial centres
into disarray and severely affecting macroeconomic stability in oil-importing
developing countries. Indeed, the stagflation of the world economy in
the 1970s was widely attributed to the cost-push inflationary pressures
released by the OPEC price hikes of 1973-74.
Even the subsequent oil price hike of 1979
was powerful in terms of its negative effects on output growth and inflation
across most regions of the world economy, and for a long time thereafter
oil price increases became identified in the public imagination with
upward pressure on the general price level as well as recessionary implications
for output.
However, recent trends indicate that the world
economy currently is rather different, and that oil price increases
need not have quite the same impact that they have had in the past.
Between the beginning of 1999 and May 2000, suddenly and unexpectedly,
international prices of petrol more than doubled. Despite this, the
world economy - which was not exactly performing spectacularly before
then - did not show any significant deviation from trend in terms of
the low to moderate economic growth rates which were evident in that
year.
In fact, to the extent that various regions
- such as Western Europe and East Asia - were showing recovery from
the earlier slump, such recovery was not affected by the rise in oil
prices. The US economy remained as buoyant as it has been for a remarkable
eight years, fuelled by apparently endlessly bullish investor sentiment
and the inflow of savings from the rest of the world. And, perhaps even
more surprisingly, world trade prices were only minimally affected,
and the rise in petrol prices did not lead to a cost-push spiral in
other sectors, so overall inflation remained low.
This is not just qualitatively different from
the experience of the 1970s and early 1980s. It also suggests processes
that may appear counterintuitive to an understanding of the mechanisms
of the world economy which is informed by that earlier experience. So
it is worth investigating what exactly has changed, and whether it would
be accurate to conclude that oil prices no longer matter very much to
the major players in the world economy, or to world trade and output
in general.
One response to this particular tendency has
been the celebratory one of seeing this as confirming the focus on monetarist
macroeconomic policies in many countries. Thus, the attempts to regulate
domestic credit and tighten interest rates, as well as so-called "prudent"
fiscal policies which inhibit spending by the state, have been cited
as reasons why economies have been better able to handle sudden shocks
such as oil price increases.
Also, the technological changes which induced
substitution away from oil in OECD countries over the 1980s are supposed
to have reduced dependence on oil as a crucial input in most material
production. These factors are supposed to explain why there has been
no inflationary consequence and why real trends in output and employment
appear to be generally unaffected by the price shock. Such trends in
output and world trade growth are indicated in Chart 2.
Chart 1 >>
Chart 2 >> |
