Can a Cartel Fuel the Engine of Economic Development? Opec and the Macroeconomics of Oil
CERGE-EI Working Paper No. 280
35 Pages Posted: 25 Jun 2008
Date Written: August 2005
OPEC's stated mission is to promote the economic development and growth of its member states while minimizing volatility in the oil markets. But after a promising beginning many member states - economies have declined rather than prospered - a clear indication of OPEC's failure to meet their development goals. Thus, we ask if a resource cartel can achieve the joint goals of development and resource market stability. In a model in which oil producing countries choose whether to join an oil cartel or remain in the fringe, we find that, in a highly elastic oil market, a profit maximizing cartel is inconsistent with oil market stability in the face of demand shocks. Thus, it is inimical to macroeconomic stability, an essential requirement for long-lasting capital investment, and therefore economic development and growth. Consequently, it may not be optimal for an oil-exporting country that cares adequately about macroeconomic stability to join the cartel. But for a country where short-run considerations overwhelm long-run concerns, cartel membership may be the correct choice. Yet the oil rich are ultimately cursed by their excessive reliance on their resource wealth - current profligacy begets future decline.
Keywords: OPEC, macroeconomic stability, resource curse, economic development
JEL Classification: E6, F4, Q43, Q32, O11
Suggested Citation: Suggested Citation