V World Payments Imbalances and the International Adjustment Process


Chapter III discussed the policy options and directions of the domestic investment strategy of the oil exporting developing countries and their individual country performances. The discussion showed that the issue of the medium-term management of oil revenues is closely related to the long-term considerations of how the oil reserves are managed. These two issues, in turn, are intertwined with the way the countries handle their financial relationships with the rest of the world. The main concern of this chapter is with the management of external payments imbalances that result from the decisions on oil production and pricing by the oil exporting developing countries, their internal economic development, and their trade and aid relations with the rest of the world.

Chapter III discussed the policy options and directions of the domestic investment strategy of the oil exporting developing countries and their individual country performances. The discussion showed that the issue of the medium-term management of oil revenues is closely related to the long-term considerations of how the oil reserves are managed. These two issues, in turn, are intertwined with the way the countries handle their financial relationships with the rest of the world. The main concern of this chapter is with the management of external payments imbalances that result from the decisions on oil production and pricing by the oil exporting developing countries, their internal economic development, and their trade and aid relations with the rest of the world.

The discussion assumes the continuity of payments imbalances, the presumed reluctance, or inability, of private financial institutions to deal with these imbalances in the same way that they did in the 1970s, and the possibility of devising new instruments and mechanisms for the oil exporting developing countries’ choice of investment outlay. Attention will focus on OPEC members, although the analysis applies to other major oil exporting developing countries.

The Problem

The two large oil price increases in 1973–74 and 1979–80 were followed by sudden and substantial imbalances in world external payments. Table 25 shows the surpluses and deficits for major groups of countries. As can be seen from the table, the current account surplus of the oil exporting countries rose from $6.7 billion in 1973 to $68.3 billion in 1974, and gradually declined to $2.2 billion in 1978. By contrast, the current account of the non-oil developing countries (excluding the People’s Republic of China) deteriorated further, from a deficit of $11.3 billion in 1973 to a deficit of $39.2 billion in 1978, with some fluctuations in the intervening years. The industrial countries had a mixed experience with surpluses and deficits, both collectively and individually.

Table 25.

Summary of Global Payments Balances on Current Account, 1973–83 1

(In billions of U.S. dollars)

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Source: Fund staff estimates.

On goods, services, and private transfers.

Figures are revised according to latest information.

Excludes data for the People’s Republic of China prior to 1977.

Excluding South Africa.

Reflects errors, omissions, and asymmetries in reported balance of payments statistics on current account, plus balance of listed groups with other countries (mainly the U.S.S.R. and other nonmember countries of Eastern Europe and, for years prior to 1977, the People’s Republic of China).

The combined current account deficit of the industrial countries for the four-year period 1979–82 is estimated to be over $51 billion. For the non-oil developing countries, the situation is considerably worse, owing to an unfavorable combination of the low world demand for exports caused by recession, a deterioration in the terms of trade, import limits by industrial countries, reduced development aid, and a substantial increase in external borrowing at abnormally high interest rates. Their combined current account deficit for the same four-year period is estimated to be in excess of $343 billion. By contrast, OPEC’s estimated combined current account balance of the major oil exporting countries for 1979–82 shows a surplus of $249 billion, partly reflecting a rise in oil prices of about 140 per cent and an improvement in the terms of trade of some 80 per cent in 1979–80.

Clearly substantial by any standard, the truly dis-equilibrating feature of these imbalances is more the difficulty of redress than size. In relative terms, the increase in the OPEC surplus in 1979–80 was the same as that in 1973–74. In both periods, the incremental surplus was equal to 1.3 per cent of the non-OPEC gross world product.99 OPEC’s current account surplus of $115 billion in 1980 was only about 6 per cent of gross world savings (assumed to be 20 per cent of gross world product), again almost the same relative magnitude as in 1974. Measured against the size of the world’s total financial markets (about $12,000 billion in 1982), OPEC’s estimated cumulative surplus of $432 billion in 1973–82 is less than 4 per cent. What makes the 1979–82 surpluses and deficits a global issue is, thus, not so much their actual magnitude, but the need for appropriate adjustment, with less adverse effect on world economic growth and equity than in the first round, 1973–78.

There are in particular three aspects of OPEC’s external surplus that distinguish it from the past situation. First, their financial transactions seem large compared with total international transactions. The 1980 surplus of $115 billion, for example, was equivalent to 77 per cent of the global current account deficit in that year. For the 1974–81 period, their cumulative surplus was equal to 53 per cent of the global deficit. (See Table 26.) If the market for oil should continue to be sluggish in the next few years, this aspect of the problem may lose its significance.

Table 26.

Selected Oil Exporting Developing Countries: Surplus and Related International Financial Flows, 1974–81

(In billions of U.S. dollars)

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Sources: International Monetary Fund, World Economic Outlook: A Survey by the Staff of the International Monetary Fund, Occasional Paper No. 9 (Washington, April 1982), and International Capital Markets: Recent Developments and Short-Term Prospects, 1981, Occasional Paper No. 7 (Washington, August 1981).


The second characteristic of the oil surplus is that it is not expected to finance global deficits through normal market adjustment in the medium run. The surplus generated by the 1979–80 oil price increase is likely to decline over the coming years, but imbalances among various groups of countries are likely to persist. By Fund staff estimates, OPEC may, by the end of 1982, have left behind ten years of uninterrupted surpluses.100 With the possible exception of the United States during the 1950s and 1960s, no other country or group of countries has maintained such a persistently positive current account in the postwar period.

Third, the financial relationship between the surplus OPEC countries and the deficit non-oil developing countries is largely indirect; that is, they deal with each other largely through the financial institutions of certain developed countries rather than directly. This is in marked contrast to the surplus developed countries, which regularly finance their trade partners’ deficits directly. At present, however, the developed countries’ financial institutions often act as third-party intermediaries between OPEC members and the other developing countries. This change in the relationship has important implications for the international adjustment process, which is discussed below.

Recycling in the First Round

As can be seen from Table 27, the first round of payments imbalances (1973–78) was redressed rather quickly and effectively, although the process was neither painless nor was its “burden” shared equally by all countries. The industrial nations as a whole managed to reverse their balance of payments from initial deficit to subsequent surplus within a short time after 1973; they accepted lower income growth, higher unemployment, decreased foreign trade, higher inflation, and reduced energy consumption. For the 1973–78 period, they had a combined surplus of about $64 billion, while the non-oil developing countries incurred a deficit of about $197 billion.

Table 27.

Selected Oil Exporting Developing Countries: Estimated Disposition of Current Account Surplus, 1974–81

(In billions of U.S. dollars)

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Source: International Monetary Fund, World Economic Outlook: A Survey by the Staff of the International Monetary Fund, Occasional Paper No. 9 (Washington, April 1982).

Comprise (1) changes in accounts receivable or imported credits arising from timing differences between oil exports and receipts of payments for them and (2) compensation payments to oil companies for full or partial nationalization of oil facilities, together with other changes in direct investment capital of such oil companies.

Total net external borrowing by the public and private sectors (including banks). Includes small amounts of official transfer receipts, inward non-oil direct investment capital, and other miscellaneous capital (e.g., changes in short-term liabilities and positions under bilateral payments agreements).

Mainly placements in treasury bills in the United States and the United Kingdom.

Includes net acquisitions of long-term government securities, corporate stocks and bonds, bilateral lending (mainly to governments), real estate and other direct investments, and prepayments for imports. Also includes relatively small amounts of placements in non-Fund members, as well as statistical discrepancies.

Table 28.

Selected Oil Exporting Developing Countries: Estimated Disposition of Cash Surpluses, 1974–81

(In per cent)

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Source: International Monetary Fund, World Economic Outlook: A Survey by the Staff of the International Monetary Fund, Occasional Paper No. 9 (Washington, April 1982).

Mainly placements in treasury bills in the United States and the United Kingdom.

Includes net acquisitions of long-term government securities, corporate stocks and bonds, bilateral lending (mainly to governments), real estate and other direct investments, and prepayments for imports. Also includes relatively small amounts of placements in non-Fund members, as well as statistical discrepancies.

Includes investments in the Fund oil facility and supplementary financing facility, together with other changes in the reserve position in the Fund and direct purchases of World Bank bonds.

Includes bilateral grants and loans as well as contributions and capital subscriptions to regional and international development agencies (other than Fund and World Bank). Also includes relatively small amounts of other capital flows to developing countries. Estimates are based on highly uncertain information.

The oil exporting countries’ $183 billion current account surplus for the same period101 was subsequently spent on foreign aid and investment and on claims on foreign assets, mostly in the West.

By 1978, the combined surplus of the oil exporting developing countries was reduced to a mere $2.2 billion—less than half the size in 1973—owing to a reduction in the real price of oil and the adverse change in their terms of trade with the rest of the world. The trend and sources of energy use were also drastically altered.102 The 1973–74 oil shortage was transformed to an oil glut in 1981–82.

The first oil shock was thus almost totally absorbed, albeit unevenly, by the world economy.103 A recent analysis of the world energy situation identifies four distinct adjustment mechanisms through which countries accommodated their increased oil costs: (a) a physical adjustment through shifts in demand and supply for energy in response to higher energy prices; (b) a trade adjustment through increased exports or reduced imports in order to pay the oil bill; (c) a financial adjustment through recycling of oil revenues from surplus oil exporters to deficit oil importers; and (d) a growth adjustment through lower demand for energy by reducing national economic growth.104

A combination of the four adjustment processes during 1974–78 had the following effects. Energy use in the industrial countries was reduced through slower economic growth and energy conservation. The bulk of accumulated surpluses were recycled back to the oil importing countries, both developed and developing, through substantially larger imports (which grew by 25 per cent a year), mostly from the industrial countries; increased concessional aid to poorer nations (averaging about 4 per cent of the GNP of the capital surplus group); and increased international lending by the oil exporters, directly or through private and multinational intermediaries. While OECD exports to OPEC rose by some 20 per cent a year between 1974 and 1978, the industrial countries’ imports from the rest of the world (including oil) declined substantially; the non-oil developing countries tried to cope with the situation by expanding their exports and limiting imports. There was a slower economic growth in much of the world outside OPEC: the industrial countries’ annual growth during 1973–78 was reduced to 2.5 per cent from 5.1 per cent in 1960–73; the annual growth of the non-oil developing countries as a group was down from 5.8 per cent to 4.6 per cent; and many of the poorer developing countries had to slow, or halt, their per capita income growth.

The actual disposition of the surplus took place under four main considerations: safety and liquidity of invested assets; preservation of the assets’ purchasing power; placement of the surplus under the oil exporting developing countries’ limited human and institutional resources; and the need to help other non-oil developing countries. Tables 27 and 28 show how the surplus was disposed of during this period. Nearly 85 per cent was invested in the developed countries’ capital markets, about 13 per cent was directed to the other developing countries, and the remainder went to international organizations.

The channels through which these funds flowed varied over time. At first the funds were placed in Eurocurrency deposits and in short-term government securities. Once the countries adjusted to the new levels of flows, the portfolio became more diversified, and most of the subsequent surplus was put into capital assets with longer maturities. Thus, in 1974, the total surplus was split between bank deposits (52 per cent) and other capital flows (19 per cent). By 1978, the split became 25–50 in favor of other capital flows. With the 1979 price increases, the disposition was once again reversed, with 56 per cent going to banks and only 25 per cent going to other capital flows. By 1980, however, the magnitude of the surplus had been anticipated, and 54 per cent of it went to other capital flows, with only 34 per cent to the banks. For the 1974–82 period as a whole, the aggregate portfolio was divided between bank deposits, other financial instruments, and aid to other developing countries.105

In sum, while the recycling during 1974–78 took place with greater ease than had been anticipated, the costs of the adjustment were not meager. Coming on top of highly expansionary policies by the industrial countries in the late 1960s, accelerating worldwide inflation in the aftermath of the 1971 currency realignment, and a global food crisis, the 1973–74 oil price rise confounded economic policymakers as never before. A host of cautious and deflationary economic policies pursued by the industrial countries aggravated a recession already underway and unduly reduced output not only in OECD countries but also in the developing countries. Highly ambitious and overly confident development policies pursued by the major oil exporting countries resulted in lower-than-expected returns (and occasionally sheer waste). Most adversely affected in the adjustment process were the least developed countries—particularly in Sub-Saharan Africa—where per capita income failed to keep up with population growth. In the absence of appropriate policies to deal with the post-1971 developments in food, energy, and raw materials, the global adjustment required in the 1974–78 period was perhaps several times larger than OPEC’s actual receipts from oil exports.106

Assuming, as most recent studies and projections do, that petroleum cannot be totally replaced by other fuels in the next decade or so, and that the world economy will be dependent on OPEC (and especially Middle East) sources at least throughout the 1980s,107 it would seem likely that some oil-related external payments imbalances may be around for some years. The reasons are not obscure. First, much of the world’s stock of cheap and exportable oil is still concentrated in a relatively small area with possibilities of major oil supply interruptions. Second, in a delicately balanced and volatile oil market, any interruptions in crude exports are likely to result in disproportionately higher spot market prices, which invariably affect the official OPEC crude price. Third, unlike the situation in the 1970s, when some “swing” producers were willing and able to adjust their output levels in the direction of moderating oil price rises, there seems to be less such flexibility in the 1980s. Fourth, in the absence of a unified and predictable price strategy, successive and sharp fluctuations in the oil terms of trade, following periods of economic recovery and recession in the major oil importing countries, may not be easily preventable. Finally, erratic fluctuations in the price of oil often play havoc with normal trade relations between oil exporters and their trading partners.

The cumulative effects of the first and the second oil shocks thus pose a continued challenge to the effective operation of the international financial system. The deficit counterpart of future surpluses will thus have to be managed through a combination of adjustment and financing if a reasonable growth in the world economy and reasonable stability of the world monetary order are to be maintained.

Issues in Recycling

In the context of the oil exporting developing countries’ relations with the rest of the world, recycling means the process of using surpluses to help deficit countries through a mixture of financing and adjustment.108 Financing of oil deficits is considered necessary as a temporary device to allow the affected countries to adjust to changes in the global cost/price structure caused by energy developments. Financing involves the reflow of the world surplus to oil importing deficit nations through increased imports, purchases of debt and nondebt assets, direct government-to-government lending, participating in direct investment or joint ventures, and foreign aid. Adjustment measures in the deficit countries include reducing oil consumption and imports, enlarging domestic oil production, finding suitable substitutes for imported petroleum, increasing efficiency in fuel use, and taking all other necessary steps to reverse payments deficits. The lending segment of recycling is designed to “buy time” for the necessary domestic structural adjustments; the investment portion is an integral part of the global adjustment process itself.

The modus operandi of petrocurrency recycling, as well as the choice of its instruments, are obviously not totally independent of the size of the cumulative OPEC surplus between 1980 and 1985 (and for the rest of the decade). The size of the surplus will depend on five key variables: (1) the behavior of OPEC oil prices—estimated to be in the range of a 0–3 per cent increase in real terms; (2) OPEC crude oil exports—assumed to range from 18 million to 28 million barrels a day by 1990; (3) OPEC’s import bills—assumed to grow at between 18 and 21 per cent a year; (4) OPEC’s non-oil exports—expected to continue to grow but to remain a relatively small proportion of total exports; and (5) returns on external investments by the surplus countries—unofficially estimated to range between 10 and 20 per cent annually of accumulated reserves.

Under different combinations of these variables, the cumulative OPEC surplus between 1980 and 1985 may range between $210 billion and $250 billion in constant 1980 prices.109 Needless to say, even small changes in the key variables could produce considerably larger or smaller imbalances.110 To these also must be added the familiar uncertainties about political stability in some OPEC regions, the share of surplus of each OPEC member (in view of differences in absorptive capacity), unexpected developments in the world oil market, and last, but not least, the unpredictability of energy technology.111

Need for Adjustment

In the long run, almost any balance of payments deficit or surplus—whether occasional or cyclical—is eventually adjustable. In an open world economy, induced changes in domestic prices, wages, and exchange rates would make the deficit country a good place to buy from, and a difficult place to sell to. Conversely, the surplus country would experience export-depressing changes in prices, wages, and exchange rates that would turn it into a profitable sales outlet and a poor buyers’ market. Even in a not so ideal world, the imbalances should not, as a rule, last long. Deficits could not go on year after year because the deficit country would soon run out of the means to pay its creditors. Surpluses, too, would eventually stop growing, because rational creditors would sooner or later stop selling their real goods and services against increasingly less valuable promissory notes.

In the present world, however, such automatic or self-regulating mechanisms do not always exist. For example, it is argued that the deficit countries whose currencies are coveted by the world at large could almost perpetually finance their import needs as though these were acquired from domestic markets.112 For others, particularly the non-oil developing countries (and especially those that are also not exporters of manufactures), the pressure on external payments for food and fuel may be protracted. Corrective measures to deal with persistent deficits in these countries would mean further belt-tightening, a further reduction in essential imports, and a frustrating inability to maintain a modest rate of growth.

Surpluses, too, may not undergo automatic and consistent adjustment in the real world. For some major oil exporting countries that possess limited real short-term absorptive capacity, surpluses may become perennial because conventional adjustment policies (i.e., reduction in oil production and exports or domestic currency appreciation) are not acceptable to major oil importers. Foreign exchange inflows may keep rising faster than they can be profitably spent or invested at home. The fast-and-ready alternative for some surplus countries may not be expanded consumption and imports, but rather suboptimum outlays.

Oil-related imbalances differ from traditional cyclical or occasional payments deficits or surpluses, as do policy measures designed to cope with them. Oil importing industrial countries, facing larger oil import bills, a deterioration in their terms of trade, and domestic inflationary pressures, can ward off their individual deficits by resorting to deflationary measures, erecting protectionist barriers against non-oil imports, or otherwise exporting their own inflation and unemployment. Such policies, however, are not only internationally harmful but also largely self-defeating if followed by the group as a whole. The catch, therefore, is to find a cluster of measures that can help to maintain a reasonably high growth rate in the industrial world, guaranteeing both the possibilities of high domestic employment and a modest transfer of real resources abroad.

For the oil importing developing countries, the challenge is vastly more formidable. The key lies in striking a balance between internal growth requirements and available external finance. For national growth, both energy and capital goods imports are needed. To acquire these necessities, these countries must achieve appropriate growth in the international purchasing power of their export earnings, improve (or at least stabilize) their terms of trade vis-à-vis the outside world, and enlarge (or at least maintain) the inflow of real resources from both OPEC countries and the oil importing industrial countries in order to pay for needed imports.113 The achievement of these feats, in turn, requires both a generally hospitable external environment and a genuinely sustainable domestic development strategy.

Financing Requirements

In an ideal model, where supply creates its own demand, balance of payments surpluses would find the means of financing the counterpart deficits. An OPEC surplus on current account is initially a credit entry in foreign exchange accounts of OPEC members with some foreign central or private bank. Whether used by the oil exporters immediately for direct loans, foreign investments, or grants-in-aid or left as deposits in the banks for future use, the surplus provides an actual or potential means of financing the oil importers’ deficits. The rationale for deliberate recycling finance arises from three main phenomena.

First, there is the problem of mismatching; that is, in the real world, payments surpluses and deficits for any pair of trading partners are seldom bilaterally matched, and often they are triangular. Nor is the need for oil imports and the opportunities for placement of export proceeds exactly equal: a country may be fuel deficient but offer little attraction for foreign private investment. The same is true of development needs and access to capital markets: countries that offer bright prospects for economic expansion may not always be able to obtain financing at reasonable costs.

Thus, although aggregate surpluses always (by definition) match aggregate deficits, they are seldom automatically or consistently canceled out. The pattern of international trade is presently such that OPEC members incur a surplus with some of their trading partners and a deflicit with others. A rectification of such payments imbalances requires a multilateral route. Furthermore, OPEC members that are in a “perennial” surplus position do not allow the process to reverse itself over time: the rest of the world cannot reduce OPEC’s claims on it until and unless OPEC moves into deficit. While part of OPEC’s surplus is with the non-oil developing countries, the latter often lack adequate financial institutions to manage these funds or are unable to offer sizable lucrative opportunities for OPEC’s long-term needs. As a result, much of the OPEC surplus is routinely deposited in the private capital markets of the major OECD countries, or invested directly in debt instruments issued by borrowers in those nations. Finally, there are often serious mismatchings in the poorer developing countries between actual need for foreign loans, direct investments, and financial help, on the one hand, and attractiveness for such capital flows, on the other. As a result, much of OPEC’s bilateral foreign investment and direct lending take place in deficit countries that are not always the neediest.114

The second reason for deliberate finance lies in the role played by intermediation in the distribution of the surplus. Generally speaking, OPEC surpluses follow a direct route mapped by the surplus countries themselves, and an indirect route that is, as a rule, outside the countries’ control. What is left of OPEC’s surplus after direct intergovernmental grants and loans to deficit countries, direct purchase of industrial countries’ medium-term and long-term public offerings, and longer-term investments abroad usually ends up in international commercial bank accounts. Part of the funds are kept with these banks temporarily before more permanent outlets are found. A significant part, however, although technically held in sight or short-term deposits, is routinely rolled over in such a way that it would be hard to distinguish it from longer-term deposits. The banks’ task is to use these deposits for onlending to countries in current account deficit. This task was fairly effectively performed by the private banking community, as well as by the Fund and the World Bank, during 1974–78.

The need for a continuation of active and even aggressive intermediation arises from both the mis-matchings of surpluses and deficits and the familiar shortcomings of barter and bilateral deals. Sometimes—as is presently the case—the surplus countries may lack adequate markets and institutions and the expertise to deal directly with deficit nations; they have to employ the professional services of international banks. Frequently, also, countries in deficit may have little or no direct access to the international private markets of their trading partners: they have to be “vouchsafed” by financial institutions. Political and other considerations may also make bilateral lending difficult, if not impossible: anonymity, discretion, and even secrecy may be necessary to effect transactions.

Finally, continued substantial imbalances in world payments left alone may pose a threat to sustained world economic growth and international financial stability. Should oil importing deficit countries be unable to secure financing, they would be forced to cut down on their imports through a mixture of deflationary policies, protectionist measures, and exchange controls. Such actions, while temporarily helping to improve their external balances and to reduce OPEC’s surpluses (owing to smaller oil exports), would adversely affect the exports of other countries and OPEC’s own imports (owing to smaller oil revenues). The overall result would be a slower growth of world output and international trade, along with unnecessary idleness of resources and labor.

A debtor country can repay its debt only if it has a surplus in its current account. If all deficit countries attempt to improve their payments positions, and no creditor (and previously surplus) country allows its trade balance to go into deficit, no debt could be repaid. For the countries already heavily in debt—as are many developing countries—the inability to obtain external finance, or to roll over existing loans, may lead to unfortunate consequences for debt repayment. This might subsequently result not only in a further decline in annual global economic growth but also in increased financial instability. Both of these would, in turn, make protectionist pressures irresistible and further depression and defaults inevitable.

Recycling in the Second Round

An examination of the ways and means of coping with the new financing and adjustment issues requires an understanding of the structural changes that have occurred in the world energy balance, and the major lessons from the 1974–78 experience.

To be sure, the virtual elimination of the annual OPEC surplus by 1978 was the result of (a) a decline in the real price of oil between 1975 and 1978, (b) the rapid adjustment of OPEC economies (particularly the low absorbers) through an extremely rapid expansion of defense and development imports, (c) the development of non-OPEC supplies of energy, and (d) related changes in the tempo of economic activity in the industrial countries, as well as the magnitude and pattern of energy consumption (i.e., a reduction in world energy demand and the partial substitution of oil by coal and other fuel sources). Furthermore, while non-oil developing countries managed to finance their huge balance of payments deficits (and in fact increased their foreign exchange reserves), their total debt burden took a sharp turn upward.115 According to OECD estimates, total disbursed medium-term and long-term public and private debt of the developing countries (including oil exporters) reached $337 billion by the end of 1978 from a mere $87 billion at the end of 1971. The service on this debt rose to $57 billion from only $11 billion in the same period, with $20 billion of the 1978 figure consisting of interest alone.116

The new surge of oil prices in 1979–80, although ostensibly spurred by political events in the Middle East, came in the aftermath of the declining real price of oil since 1975, stubborn inflation in the industrial countries, a fall in the external value of the U.S. dollar, and the rising cost of oil substitutes. Part of the reason for the smooth recycling of the 1974–78 OPEC surplus was the greater reliance placed by the deficit developing countries on foreign financing instead of making difficult domestic adjustments, owing to the availability of funds at low (or even negative) rates of interest.

Several factors, in turn, helped to ease the non-oil developing countries’ overall adjustment burden. First, those with easier access to world capital markets took advantage of their high credit standing to tap surplus funds. Second, foreign aid, particularly from OPEC, turned sharply upward, setting new records for many donors. Third, and most important, world foreign trade grew at higher annual rates than the growth of output under a still relatively free trading atmosphere.

The second round of recycling may be somewhat different (and in some ways less worrisome). Capital fund inflows through borrowing and aid seem to have reached a standstill, and external trade (particularly in agriculture) has come under growing protectionist pressures. Except for the as yet unknown requirements of Iran and Iraq for postwar renovation and reconstruction, OPEC’s import capacity is not likely to increase quickly, since many of the urgent projects on infrastructure have already been taken care of. Likewise, in the wake of the events in Iran in 1979, the surplus countries may not wish to follow as fast a tempo of economic activity and imports as in previous years.

The thirty or so international private banks responsible for some 53 per cent of non-OPEC developing country debt (compared with only 36 per cent in 1973), seem no longer willing, or legally able, to widen their exposure in poorer developing countries without substantially wider interest rate spreads or supplemental guarantees, thus further reducing access by deficit countries to the private capital markets.117 While it may be possible to remove or reduce the current constraints facing the private banking system, and to rely on the latter’s resilience to meet felt needs, it is widely believed that surpluses of the 1974–78 magnitude may not be easy to recycle and that the two main recycling mechanisms of the 1970s (massive private bank lending and a rapid reduction of the current account surpluses) may be less effective in the future. Nevertheless, the possibilities of improving existing mechanisms and instruments should by no means be ignored or passed over lightly.

Significantly, non-oil developing countries with protracted deficits might be in a much weaker position to pay for their needed imports, or to service their debts. By OECD estimates, these countries’ debt service payments between 1971 and 1982 have increased by more than thirteenfold (from $11 billion to $131 billion), while the total debt rose by about six and a half times (from $87 billion to $626 billion).118 With an estimated debt service ratio of 21 per cent in 1982 (compared with 9 per cent in 1974), severely depressed commodity prices, and rising protectionism in the industrial world, the borrowing capacity of non-oil developing countries is further diminished. Between 1975 and the end of 1980, there were 16 official renegotiations on $9 billion of debts owed by 9 countries (against 30 renegotiations involving $7 billion loans to 11 countries in the previous 18 years). Similarly, in 1981 some 25 countries were in arrears by nearly $6.5 billion (against 3 countries for $500 million in 1974). With some $597 billion of total non-oil developing country debt, much of it with short maturities and some at floating rates, and two thirds owed by only 13 (out of some 150) countries, the debtors’ ability to service their debts is increasingly strained. There were 15 new reschedulings underway in 1982, and 10 more are likely in 1983.119

Thus, in the event that oil demand should pick up sharply, the oil exporting surplus countries may decide to safeguard the real value of their wealth through the control of oil output unless they can find more convenient, and inflation-proof, recycling options. In this same context, one ought to keep in mind that, while OPEC surpluses may decline to negligible (and thus easily manageable) levels, the end of global imbalances is by no means in sight. The world is faced with a new recycling problem where the names of the surplus countries may have changed but not the names of the deficit countries. The bulk of OPEC surpluses may shift to a small number of industrial countries, but the funds will have to be recycled nevertheless. And the recycling that was expected from OPEC governments and monetary authorities will now have to be performed more directly by the private banking community, or by international organizations such as the Fund.

Given the structural and financial changes that have taken place in the world economy over the past decade (particularly changes in the distribution of global payments surpluses and deficits), the need for purposeful recycling may thus continue for some time—albeit in a particular rather than in a general way. An effective recycling process in the future will depend on the reserve management policies of surplus countries, adequate incentives and risk guarantees for direct investments, ingenuity in devising new transfer instruments, and continued foreign assistance.

Factors Affecting Reserve Management

In discussing the surplus management policies of the oil exporting developing countries, and the factors that enter into national directions and guidelines, it is important to remember at the outset the limited geographical, as well as functional, dimensions of the surplus investable funds. The cumulative 1974–81 cash surplus (and nearly total gross foreign assets) of all OPEC countries is reported by the Fund to be about $433 billion.120 Of this total, some 72 per cent was accounted for by Saudi Arabia, Kuwait, Qatar, and the United Arab Emirates and 81 per cent by those four plus the Libyan Arab Jamahiriya. Some 85 per cent of total assets represents public funds belonging to the government or its public sector agencies.

The concentration of the overall OPEC surplus in a few countries and the largely public ownership of these funds obviously affect the magnitude and distribution of global recycling. The objectives and interests of only a few governments with small constituencies and the judgment and decisions of a few public officials in each government hierarchy will, in the final analysis, give impetus and guidance to recycling. At the same time, because of the still nascent nature of local financial markets, and the limited experience of some local authorities in reserve management, part of the recycling decision is, of necessity, made not by the recipient governments but by their hired portfolio managers, or by the international private banks where foreign exchange reserves are deposited.

The geographical concentration of the OPEC surplus in a few treasuries is further restrained by the limited scope of national investment objectives and policies. Except for the first few months or so after the original oil price rise (1973–74) when surpluses were almost exclusively held in liquid deposits in foreign banks, the pattern of OPEC investments is becoming increasingly similar to that of private institutional investors. The outstanding feature of this investment pattern is the search for a broad-ranged and diversified multiterm portfolio that can yield the best obtainable return on a global scale. The underlying objectives of this basically conservative and businesslike attitude are liquidity, safety, and an attractive return.

Liquidity and short-term accessibility is a foremost consideration for all surplus oil exporting developing countries, even the low absorbers, because they publicly and officially regard their oil revenues not as a dispenable surplus but as funds needed ultimately to finance their domestic economic development.121 Surplus balances are thus to be invested “temporarily” until such time as they must be called upon to help pay rising import bills. For this reason, among others, surplus countries do not seem interested in committing their reserves to long-term obligations unless special incentives or guarantees are offered.

Safety is another major objective. But safety here takes on additional considerations besides the customary assurance of the payment of principal and interest at maturity. These considerations relate to the maintenance of value of financial assets held abroad against erosion through inflation and currency fluctuations. While such risks exist for all nonindexed credits (and presumably for all creditors), they present added significance for those surplus countries whose volume of oil production and exports may be beyond their immediate or short-term development needs. The argument frequently advanced by these countries points to the futility of producing more oil in exchange for assets whose values decline over time.

To satisfy some of these broad safety considerations, the surplus countries are frequently led to relate smaller placement risks to the size of the host country in the world economy, the favorable politico-economic environment, historical record of foreign investment treatment, the range and variety of available securities, the efficiency and sophistication of the money market in the host country, and the independence of the country’s judiciary. For these reasons, the largest portion of surplus funds is invested in a dozen or so industrial countries.

A closely related aspect of safety involves investment immunity from seizure, blockage, or restrictions imposed by the host country on political grounds. OPEC officials have made reference to some recent risks involved in holding foreign balances abroad.122

An attractive return is the third objective of reserve management for the surplus countries. These countries’ portfolio officials believe that oil export proceeds should produce at least the same annual real returns on foreign investments as on domestic outlays (including, theoretically, possible yearly increases in the real value of oil kept underground). Based on this criterion, they are inclined to favor investments that offer them such a competitive return. While this ideal target has not been routinely achieved in the past (owing to higher real increases in petroleum prices), its attractiveness has not diminished. A variant of this ideal norm is the cost of alternative energy sources. Suggestions by some OPEC officials and others for the issuance by borrowing countries of energy bonds whose principal and interests are not valued in monetary terms but in terms of a given volume of oil and oil equivalents are believed to contain a guarantee of “fair” return.

The OPEC’s largely conservative recycling policy based on these three criteria shies away in most cases from two types of transaction. First, surplus OPEC members are understandably mindful of the political sensitivities of host governments to massive foreign direct involvements in certain nationally strategic industries. They try to adopt a low-key, nonaggressive, and somewhat anonymous position in their real estate or equity investments.123 Surplus funds are thus kept mostly in foreign banks in the form of deposits or trusts or held in foreign public bonds and other debt instruments. Second, surplus countries with substantial short-term holdings in foreign currencies (mostly in U.S. dollars) seem to shun sudden shifts of their assets from one currency to another for speculative purposes. Government officials of the surplus countries have expressed their dislike of “aggressive” portfolio management. Movements of dollar assets into gold or other currency speculation is often attributed mainly to private citizens or professional portfolio managers rather than to official monetary authorities.

Investment Potential and Prospects

The role of the oil exporting developing countries’ foreign direct investment124 in the recycling process has been the focus of attention and comment in the past few years. The surplus OPEC members have been repeatedly urged to take more positive steps in risk sharing and equity investment in the oil-deficit countries, and particularly in the non-oil developing countries. It is believed that direct investment by the oil exporting developing countries could play a significant part in helping to finance balance of payments deficits and in expanding the productive base of the oil importing developing countries.

Despite such urgings and presumed benefits, and despite the immense potential claimed for equity investments in both the developed and developing countries, by far the largest part of the OPEC surplus has been placed in bank deposits, short-term financial instruments, top-rated corporate bonds, long-term government securities, government-to-government loans, and loans to international financial institutions (including the World Bank and the Fund). It is believed that only a small portion has gone into equity investment in the industrial countries and a comparatively smaller amount into non-oil developing countries. By some estimates, no more than 20 per cent of the surplus funds is in direct or nonportfolio investments (primarily real estate and shares of over 10 per cent of the voting power in private corporations). Most of the latter has also been concentrated in the U.S. economy and denominated in U.S. dollars, with Japan and the Federal Republic of Germany holding lesser amounts.125

There is, thus, large scope for significant increases in total direct investment by the surplus countries. The reasons advanced for the modest record in the past generally reflect the mutuality of reservations held by both home (the investor) and host (the recipient) countries regarding the advantages and practicality of foreign direct investments. Public and private organizations have dealt with these issues at length. Their conclusions and recommendations are generally applicable to the oil countries as well. Home country policies affecting risk capital commonly relate to the questions of safety, yield, and repatriation of principal and interest. Host country policies concern the behavior and performance of foreign private investors (particularly transnational companies). The surplus oil exporting developing countries are naturally subject to the same considerations and requirements as other countries involved in transferring risk capital.

Posture on Direct Investment

Of the many reasons underlying the scant enthusiasm of OPEC investors for recycling through nondebt instruments, the following are the most familiar.

Although direct investments are more attractive than debt instruments as a hedge against inflation (and investment in the developing countries is said to be three times more profitable than business ventures in the industrial countries), such commitments are normally less liquid and riskier (with elements of both illiquidity and risks disproportionately greater in non-oil developing countries because of the limited knowledge of business opportunities and imperfections of the capital market). One of the oil exporting developing countries’ common complaints is that the areas of interest to their investors, such as manufacturing, banking, insurance, and even agriculture, are often closed to them by statutes or administrative regulations in industrial countries. The “open” fields of real estate, tourism, or small industry are, in turn, limited both in scale and profitability. It is further contended that, if Western industrial countries find it appropriate to deny OPEC investors outlets of their choice, the latter should not be expected to risk their funds in less profitable projects.

Since foreign investment decisions are, as a rule, made by government officials, direct investments are not normally favored over other assets because (i) government authorities, unlike private entrepreneurs, are not quick-profit optimizers but are interested mainly in their citizens’ welfare, feeling an obligation to keep most of their reserves in safe and liquid outlets, and (ii) governments are more publicity-shy than are private investors, and they are sensitive to adverse reactions in the host country to certain direct investment intrusions and activities.

The governments’ penchant for easier and less controversial placement of surplus funds is buttressed by the fact that short-term bank deposits have in recent years offered investors more attractive yields than have other assets. The claimed superior profitability of direct investments, while possibly obtainable in the long run under favorable circumstances, has not been available in the short-to-medium term because of the unusually high real rates of interest in 1974–81.

Of the six traditional ingredients of successful direct investment—capital, technological know-how, managerial skills, ability to protect foreign assets against confiscation, home country need for raw materials and markets, and accommodating financial institutions—OPEC investors are generally only well endowed with one, capital; the others, at least in part, have to be acquired elsewhere under various substitutional arrangements. Furthermore, the benefits commonly available to developed country investors abroad in the form of employing their own nationals, selling their own capital goods and services, and expanding markets are unavailable to OPEC investors.

For these reasons, the analogy of OPEC to surplus countries of the eighteenth and nineteenth centuries, and the willingness in those periods to welcome adventure and take risks in the developing countries, may be somewhat farfetched. In the colonial days, surplus nations were simultaneously military powers, pioneers in technology, and advanced in industrialization; they had a highly developed banking system but were short on raw materials and markets. It was easy, rational, and profitable for them to take direct investment risks. Surplus OPEC members are in no such position. In particular, some of the low absorbers with larger surpluses to invest suffer from insufficient technical human-power and inadequate managerial expertise and institutional backups needed for extensive foreign ventures.

Host Country Incentives and Impediments

Countries that seek to attract foreign direct investment generally follow a twin policy of offering certain incentives to, and expecting certain performance from, foreign investors in order to regulate both the magnitude and the direction of risk capital. Incentives are normally intended to increase the potential rate of return on foreign investment and to reduce potential investment risks. Performance requirements are commonly imposed, largely by developing countries, to ensure that foreign investments contribute to national socioeconomic objectives.126

Host nations’ investment incentives fall into six broad categories: (i) fiscal incentives, including tax holidays, accelerated depreciation, waiver of import duties on capital goods used in production, exemption from property taxes, and financial guarantees; (ii) cash grants; (iii) credit incentives, including preferential access to local capital markets; (iv) public provision of infrastructure for a particular project; (v) protection from imports or local competition; and (vi) capital and operating subsidies to the investor. While these incentives are intended to attract foreign investment, the past record fails to show any major influence on the decisions of foreign investors. It can thus be safely assumed that their role in attracting investment funds will also be rather small.

By contrast, performance requirements and other factors tend to exert a much greater (and often adverse) influence. Performance requirements are normally instituted and imposed by the host nation to regulate the flow and destination of equity portfolio and direct investment. Factors that serve as disincentives or outright obstacles to the attraction of risk capital are not always of the recipient’s own making, and are in some cases external to the process itself. The rationale for these requirements is clearly understandable. Since foreign direct investment, by its very nature, involves some degree of management and control by foreign investors over the conduct of the enterprise, and since such managerial decisions can affect the host country’s economy to a significant extent, host governments cannot remain indifferent or neutral to the intentions and operations of foreign investors. The body of laws and regulations governing the behavior of transnational investors are thus primarily aimed at bringing about a pattern of foreign investment that may contribute to the achievement of the host country’s national objectives and priorities.127 Nevertheless, the host country’s insistence on the use of such measures may under certain circumstances become counterproductive, that is, discourage investment or create economic distortions.

The complex of factors that tend to frustrate the inflow of risk capital (equity portfolio or direct investment)—whether intended as regulations or not, but nonetheless a deterrent—extends over a wide range. It includes political, psychological, economic, legal, institutional, administrative, and operational elements.

One of the most significant deterrents to the international flow of risk capital is the existence, or appearance, of political risk in the host country. Political risk in a generic sense refers to all hazards, real or perceived, involved in the conduct of business under a different political jurisdiction than the investor’s own. Political risks include the old-time risk of nationalization without adequate compensation,128 the risk of being denied due process in adjudicating claims against private or public entities, and the risk of having to face unfavorable new domestic laws and regulations. They also include apprehensions about political instability, civil strife, government changes, and revolution, as well as the politically inspired freezing of assets, embargoes, and other restrictions.

Some of these risks are commercially insurable by the private sector or public entities at relatively small cost; others are not. The political risks that are not insurable are among the most obvious reasons for OPEC’s reluctance to engage in long-term equity investment. To bear such risks, investors from these countries explicitly or implicitly expect a corresponding premium in the form of higher profits and shorter periods of realization—which tend partially to defeat the very purpose of such investments in the Third World.129

Psychologically adverse attitudes on the part of the host country are another major impediment to foreign private investment. In general, a complex set of historical and cultural factors seems to exist universally against foreign investment. Even in industrial countries of much greater experience and sophistication in business matters (and a long history of acting both as a provider and a recipient of risk capital), sentiments regarding foreign direct investment are not always favorable. Foreign investors are sometimes regarded as insensitive to the host country’s interests, local business customs, and social mores. Part of the explanation can probably be found in the annals and allegations of past abuses and inequities involved in bilateral investment relations. Part of it must also be attributed to ignorance, prejudice, and misconception. But a large part still remains to be scrutinized and explained.

OPEC officials have often expressed great astonishment and dismay at the less-than-favorable way their investment decisions have been received in the industrial countries. Reams of newspaper articles are presented to show the extent of inimical reactions in Europe, the United States, and elsewhere to OPEC’s investment intentions. Even in countries where the executive branch of the government has been favorably disposed to the encouragement of risk-capital inflows, the parliament and the public at large have often displayed open opposition to such investments.

OPEC investors at both the public and private level privately complain that, in some parts of the developing world, their equity purchases and directly productive ventures do not enjoy the same treatment as those of the industrial countries. In their view, there is sometimes a measure of aloofness or a patronizing attitude on the part of the more advanced developing countries toward investment by smaller and less technologically advanced oil exporters. They believe there is a reluctance by some older developing country bureaucrats or professionals to accept managerial controls and prerogatives by younger oil-country nationals. They seem to think that some poorer developing countries do not always take OPEC investments seriously, and wish to think of these investments as a form of aid. And, finally, they equate increased possibilities of setbacks and defaults with the small size and poor economic health of the host countries. They believe that some poor developing countries often harbor a confidence in the world’s sympathy with their plight, and an ultimate faith in OPEC “compassion,” should they not abide by their obligations.

Spokesmen for the oil exporting developing countries also privately concede that many developing countries silently bear a combination of fear, respect, and admiration for the large industrial countries’ advanced technology, managerial superiority, and military might—none of which surplus OPEC members can match. Part of the problem may also be traced to the nature of OPEC’s investment objective. In general, OPEC’s role in most foreign investment projects is likely to be largely risk capital; organization, management, and technology are frequently provided by host countries or by industrial country associates. OPEC’s motive in such ventures can thus be readily—although not all too correctly—deduced to be pure profit, and nothing else. OPEC investments are thus often unfavorably affected because, for better or for worse, a large part of the Third World has a different attitude toward profit, and pure profitseekers do not, as a rule, receive a very friendly welcome among some developing countries.

Economically, the obstacles are both pervasive and deep rooted. One category of barriers that is the unintended side effect of performance requirements includes elements that, however rational from the standpoint of the host developing country’s interests, may nevertheless add to production costs and reduce international competitiveness. Among these are (i) “local content” requirements, whereby foreign investors must procure a certain percentage of total inputs from sources within the host country; (ii) export requirements, whereby foreign investors must allocate part of the total output to export; (iii) “technology transfer” requirements, whereby foreign investors are required to bring in new technology and foster local technological research and development; (iv) local management and employment requirements, whereby foreign investors must include a certain number of host country citizens in the managerial positions and also train local nationals for technical and managerial tasks; and (v) “national priority” requirements, whereby foreign investors are asked to concentrate their activities on economically less developed regions of the nation.

Another category of economic hurdle relates to un-insurable “economic risks,” which also act as disincentives. They include (i) exchange controls and other exchange policies that may limit repatriation of profit and principal; (ii) exchange fluctuations and possibilities of currency devaluations; (iii) fiscal policies that may raise the tax burden on equity flows relative to other forms of capital flow; (iv) inflation risks that may reduce international competitiveness of investment output; and, most important, (v) the small size of the local market and the absence of externalities.

Legal requirements are frequently the most evident and the most immediate factors that foreign investors have to contend with. They include (i) outright restrictions which, for reasons of national priority, apply to both portfolio and direct investments in certain “closed” sectors (e.g., defense-related activities, nuclear power, public utilities, radio, television, the press, commercial banking and insurance, and wholesale and retail trade); (ii) the percentage of ownership and managerial control allowed to foreigners in the “open” sectors; (iii) limitations on expatriate employment; (iv) regulation of local and foreign borrowing; and (v) control of takeovers.

Institutional barriers to foreign investment—considered by some observers to be the single most important impediment—are found largely among the developing countries. In particular, inadequate capital and money markets are among the disincentives to attracting foreign equity interests. OPEC officials have stated that the bulk of their surplus funds go to industrial countries simply because of the strength of the infrastructure for investment in these countries—something the Third World has not yet sufficiently developed. Institutional hurdles of this kind are particularly effective in reducing the possibilities of portfolio investment, which is frequently preferred over direct investment.

Operationally, there are scores of hurdles that have to be overcome before a business venture can be established abroad. Language barriers, nonfamiliarity with local laws and regulations, the necessity of having investment applications approved and coordinated by a large number of local agencies, the time and travails involved in obtaining incentive benefits, and the difficulties of strict compliance with the local investment laws often make potential foreign investors reluctant to act.

The state’s dominance over the economic arena in a majority of developing countries and the large size of the public sector, as well as the underdeveloped character of private enterprise (outside the agricultural and local service sectors), are among the administrative barriers to direct investment. This is sometimes referred to as administrative “mismatch.” Private investors in oil exporting developing countries, as a rule, shy away from providing risk capital to state enterprises abroad. The private sector in capital importing countries, too, is naturally reluctant to accept OPEC governments or their state enterprises as part owners or partners. The possibilities are thus frequently limited to the oil exporter governments’ setting up their own enterprises abroad, or investing in foreign state enterprises. While this form of public partnership between OPEC governments and developing country authorities has been established in many instances, both the existing arrangements and future prospects are somewhat restricted.

To be sure, some of the barriers mentioned above are faced by all potential direct investors in developing countries, not just by oil exporting developing countries. Why then do foreign direct investments by the industrial countries take place in some developing countries, and why does the bulk of these private outlays come from industrial country enterprises and transnational corporations—often using a part of OPEC’s surplus deposited in the financial markets? The main reasons for this indirect and circuitous investment route must be sought in the oil exporting developing countries’ relative lack of experience, expertise, and entrepreneurship, as well as their limited interest in obtaining foreign raw materials or capturing part of the foreign market. For these reasons, there is a need for fresh ideas and incentives.

Channels of Surplus Flowback

At the start of the oil money accumulation in the mid-1970s, some soothsayers were overly pessimistic, if not outright alarmist, in their prognostications of an eventual financial crisis. And the dreaded disasters were not solely figments of unsophisticated imagination. An eminent group of international bankers and economists back in 1974 warned the world of a rapidly approaching “denouement” that could lead to national bankruptcies and even political upheavals.130 The ability of the private banking community to deal with the residual surplus was questioned not only by the uninitiated laymen but by the sophisticated practitioners themselves. In the end, however, the oil exporters’ business sense and the private markets’ resilience proved the doomsday prophets wrong. Tens of billions of surplus dollars were recycled in the 1974–78 period, almost without a hitch.

Recycling in the 1980s may turn out to be equally manageable, for two additional reasons. First, the magnitude of the surpluses may be much smaller than the first round’s. Second, the expansion and increasing sophistication of Arab banks and investment corporations may facilitate the channeling of nonconcessional funds to potential users. But the cause for concern is not totally eliminated.131 There are still barriers that will have to be overcome. These mechanisms of potential recycling are usually divided between fixed-obligation “investments” (or direct lending programs by the OPEC countries to governments and multilateral institutions) and joint foreign direct investments, parallel financing, and cofinancing of risk-capital ventures. Since the recycling role of intergovernmental financial institutions will be discussed below, this section will be limited to a discussion of private or semipublic means that have been devised to help the recycling process in the framework of the oil exporting developing countries’ objectives, and the stability and liquidity of the private money markets.

The surplus countries’ concerns focus on (a) the safety and liquidity of investments; (b) positive (i.e., inflation-adjusted) returns and positive yields (i.e., corrected for gains and losses in exchange fluctuations); (c) some management control over invested assets; and (d) indirect assistance to other developing countries to help them to obtain greater access to the capital markets. These concerns can, in turn, be met through different mechanisms and arrangements.132

Safety and Liquidity Considerations

The instruments with the highest measure of financial liquidity and political security are offered almost exclusively by international financial institutions. They will be referred to later. All other debt and nondebt instruments are in varying degrees exposed to risks of delayed repayment or default by the recipients or blockage by national authorities. Private markets, as a rule, can hardly offer risk-free outlets for loans or investments.

Short of ideal liquidity and security, the choices open to surplus countries include, first and foremost, a geographical and functional expansion of depositories. In the past, the largest portion of OPEC investments has been in U.S. dollars (the currency in which oil prices are quoted) and has been placed in the United States or the Eurodollar markets. As experience is gained by surplus country authorities and portfolio managers, other avenues have been opened up. Non-Western countries have recently been able to tap OPEC’s surplus funds on a very small scale. Opportunities for further government-to-government loans or other credits to nonmarket economies may be explored, particularly by some surplus governments that have closer political or other ties with these governments. A vastly more profitable area—and one that has been largely neglected—is intra-OPEC lending. In fact, one of the most baffling aspects of OPEC as a group is the extremely limited scope of bilateral or intragroup lending and borrowing. Except for a few reported cases (for example, the 1980 and 1981 defense loans to Iraq by some Gulf countries, and the Saudi Arabian-Nigerian financial arrangements), deficit countries within OPEC routinely finance their development needs in the international capital markets and through Western intermediaries in which their fellow members have entrusted their surpluses. The Arab Monetary Fund (the so-called Arab IMF) does its share in a small way. But many deficit OPEC members fall outside the purview of its operation, and its loans are small and for only short durations. The possibilities for intra-OPEC banking are indeed immense. In particular, the possibility of an arrangement for OPEC members similar to the original General Arrangements to Borrow in the Fund seems worth exploring.

Inflation-Adjusted Investments

Of the modalities that provide varying degrees of protection against the loss of purchasing power caused by inflation, or decline in value through exchange depreciation, three schemes, each with several variations, have been proposed in the past few years. The first scheme involved “energy bonds,” and two variants of the scheme were offered by Iranian oil authorities in the mid-1970s. One variant was to establish a special energy bank that would issue interest-bearing, long-term energy bonds against surplus dollar deposits. The nominal value of the bonds, and the loans subsequently made to deficit countries (for balance of payments purposes and for development of alternative energy sources), was to be expressed in units of both energy and currency (corresponding to the value of energy at the date of issue). At maturity, the bank would arrange for the return of an equivalent amount of energy, or its prevailing market value, or just the nominal value of the bond—at the depositor’s discretion. The second variant of the scheme was for energy bonds to be issued directly by the deficit governments and payable in equivalent energy units or at the prevailing market value of energy at maturity.133 For obvious reasons, these proposals did not appeal to deficit countries. Under the first proposal, there was zero advantage to the borrowers who had to repay a higher currency amount if energy prices went up but the same currency value if alternative energy costs went down. Under the second proposal, symmetry was allowed, but chances were that energy prices would in all probability not decline.

Under a third version of this scheme, medium-term to long-term nontransferable, noninterest-bearing energy bonds would be issued (by an international agency) for sale to the oil exporting developing countries. As an incentive to oil producers, the bonds would be fully indexed against inflation in terms of a selected basket of goods and services (including oil) to assure a slightly rising real value over time for a barrel of petroleum whether extracted or kept in the ground. It was hoped that the agency would recoup its “inflation liabilities” through reinvestment of the proceeds. Short of reaching this goal, the proposal called on oil importing governments to make up the deficiencies according to a prearranged formula. This proposal was said to contain several advantages for both the surplus and the deficit countries. For surplus countries, there would be a guaranteed bond value against escalating inflation, ease of obtaining an indexation guarantee from an international agency compared with a national treasury that might be reluctant to set a precedent for internal borrowing, added incentive for oil production against a possible future drop in energy prices, and immunity from political freezing of assets. For deficit countries, the advantages would be an assurance of long-term oil supply, access to OPEC funds without political or economic strings attached, a pooling of investment risks through international management (and thus lowering credit costs), and a greater nondiscriminatory mobility of recycled funds.134 The obvious flaws in this proposal, as always, rested with the choice of the indexation basket, the “appropriate” management and “equitable” distribution of reinvestable credit by the international agency, the underwriting liability for maintenance of value, and the method of distribution of (inflation-related) losses among oil importing countries.

Closely associated with these inflation-hedging proposals have been commodity indexed issues—gold-indexed and oil-indexed bonds that have been offered by some countries. These issues have three important characteristics: to the extent that commodities maintain their relative value against other goods, they provide a good inflation hedge; since the coupon of these bonds tends to be much lower than the standard bond, they decrease the carrying costs to the debtor; and, since commodity prices do change over time, they allow international diversification of relative price fluctuations.

The second scheme, which was also designed to provide an inflation hedge, involved the private market intermediation of oil surpluses for the development of the poorer developing countries. National or regional private capital markets would be established in Asia, Latin America, and elsewhere to tap excess petroleum revenues for balance of payments financing as well as for longer-term regional and national development. The surplus oil countries would be offered high-yielding, liquid, secure, and fully indexed assets for investment in the Third World.

Essentially, the scheme envisaged (a) agreements between interested developing countries and oil exporters in each of the oil exporting countries or regions to organize capital markets; (b) auctioning off the surplus reserves of oil exporters to the highest-bidding wholesale commercial banks for onlending to other commercial banks in the form of call margin credit; (c) loan repayments to be adjusted fully for inflation plus a positive interest rate; (d) establishment of an indexing system for debt securities in each country or region; and (e) a crash program to train underwriters and market makers.135 The advantages claimed for this scheme were that it would achieve the full recycling of the oil money, first to the non-oil developing countries in the form of investment capital and then to the industrial countries in payment for exports of capital goods. The evident drawbacks included the problems of reaching intergovernmental agreement for implementing the scheme, the difficulties in establishing full-fledged capital markets in the developing world in a short time, and the guarantee of security and liquidity of oil money lent to private commercial banks.

A related proposal of recycling through nondebt instruments was the establishment of mutual funds in developing countries and the cross-listing of stocks in industrial countries. It was believed that the difficulties in making direct investments in the non-oil developing countries could be partially overcome by the creation of such a scheme. There would also be the possibility of individual companies cross-listing their own stocks.

The third scheme for partially protected placement opportunities for the surplus oil exporting developing countries involves the issuance of SDR-denominated instruments. With the recent change in the quality and transferability of the SDR, there has been increased private interest in SDR-based issues. These issues range from SDR-denominated certificates of deposit to SDR-denominated bonds.136 They allow the oil exporting developing countries to invest in instruments that are less subject to exchange rate volatility; they also give the private market a potential for increased liquidity for its SDR-denominated contributions to international organizations.

A more elaborate, and vastly more sophisticated, variant in this category is the proposed substitution account in the Fund, for which consensus remains to be worked out. Through this account deposit claims denominated in SDRs would be issued in exchange for official U.S. dollar reserve assets. Such a substitution on a routine basis would curtail speculative shifts of dollar holdings into other reserve currencies. As such, not only could the account provide a new and relatively more secure outlet for surplus petrodollars, it also would be expected to contribute to greater exchange stability and an improvement in the international monetary system. And, short of the establishment of a multicurrency reserve scheme, the account could indeed serve as an effective substitute for dollar reserves.137 Factors responsible for the lack of consensus, and for the delay in the establishment of the account (apart from the appreciation of the U.S. dollar in the meantime, and the lessening of a perceived need for such an account), relate to the conditional nature of its liquidity, its limited scope for a secondary market development, and the sharing of costs in the maintenance of asset value over time.

Market Stability and Management Control

The two other important preconditions of effective recycling involve the avoidance of currency instability resulting from shifts of surplus funds from one currency to another and an appropriate allowance for a degree of control by surplus authorities over their investments. These two objectives, however, are not always mutually compatible. A necessary reduction in undue exchange fluctuations requires some “permanency” in the terms of the deposits (as in the Substitution Account). And yet, any such permanence would by its very nature reduce the extent of control by investors over their assets. Nor is a compromise always easy to work out. In general, recycling through SDR-denominated claims with some callability provisions, but without full liquidity, may satisfy both conditions.

However, if full management control over assets should be an overriding consideration for the surplus oil exporting developing countries, one sure way to achieve it would be to continue to expand and strengthen their own national or consortium financial institutions. This will give them the best opportunity to evaluate risks and to further extend direct, medium-term and long-term, credits to international borrowers without the intermediation of the major private banks in industrial countries. These efforts can also be facilitated by lending to national or regional development banks against certain national or regional official guarantees.

Increased Developing Country Access to Capital Markets

Apart from the above suggestions and practices, there may be other mechanisms to help transfer surplus funds to non-oil developing countries. Of particular interest, for example, are mechanisms similar to Japan’s Overseas Economic Cooperation Fund. Under such mechanisms, the aid agency would guarantee non-oil developing countries borrowing liabilities vis-à-vis OPEC members or financial markets of industrial nations; the agency funds would also be used to lighten the debtor countries’ interest burden. Similarly, the secondary banks and financial institutions in the United States and other major industrial countries could be encouraged to make concerted efforts to obtain a wider and more active distribution of OPEC deposits. Such a move would help to reduce the major international banks’ monopoly of being OPEC depositories, and would give smaller but more energetic banks a fresh opportunity to put their talent and connections at the service of foreign depositors, as well as smaller international clients.

Other suggested modes of accelerating nonconcessional transfers from OPEC to non-oil developing countries include placing some OPEC funds on deposit with central banks of the other developing countries, financing Third World capital issues in OPEC-denominated currencies, a more active participation by OPEC in regional financial institutions, and the establishment and expansion of secondary markets for OPEC investments in the non-oil developing countries’ debt instruments.138

Institutional Role in Recycling Process

The private recycling process worked with a good deal of sophistication and efficiency during the 1970s. One can also foresee continued intermediation by the commercial banking system in the future. Yet, there seems still a need for the process to be expanded and improved through official channels. The oil exporting developing countries want the kind of investments that not only produce a positive real rate of return but also allow a larger composition of portfolios; more important, they desire instruments that reduce “sovereign risk.” The private banking system in the industrial countries is becoming increasingly concerned that from now on they may have to take on greater risks than are justifiable by the financial returns involved; in particular, there is the question of whether the recycling in the international markets can disturb national domestic monetary policy and affect exchange rates. Finally, the developing world is most concerned about having access to world capital markets without being charged unduly high premiums.

To accommodate these divergent interests, the international financial institutions may have a large and growing role to play.139 The most crucial task, perhaps, is the promotion of appropriate economic policies as an effective path to national solvency and long-term economic prosperity. To this end, the Fund and the World Bank, as the largest and most active international financial institutions, serve as instruments of promoting proper choice—each in its respective area of responsibility and operation. While offering balance of payments and development finance under carefully laid-out conditions, these institutions may be instrumental in encouraging deficit member countries to adopt economic policies that affect their fundamental structural problems. Some of these problems involve the growing ratio of current account deficit to GDP.140 A partial solution to this payments disequilibrium is, of course, borrowing from international financial centers. But international finance unaccompanied by necessary structural adjustments may result in unsustainable long-term indebtedness. One principal aspect of adjustments is the obligation by borrowing members to take some difficult political decisions in correcting domestic economic distortions. This kind of self-discipline places special emphasis on the adoption of effective energy policies to maximize energy conservation and increase supply. The pursuit of such a discipline by the deficit countries, in turn, can be encouraged only by the official international organizations (to which borrowing members belong). Private banks are neither able nor particularly suited to obtain such commitments from their clients.

The unique capacity of the international organizations to induce deficit countries to adopt economic adjustment programs (i.e., to manage their external imbalances in such a way as ultimately to live in accord with their self-generated income) may be the best guarantee that international loans will be repaid, and that the creditor members’ deposits will best be safeguarded. Furthermore, the very nature of the international agreements under which the organizations are established tends to reduce “sovereign risk.” This risk decreases as the “costs” of default increase. A censure by the international community of a defaulting country would be too costly for any nation to dismiss lightly.

There is not yet a consensus on the exact role to be played by international financial institutions in the recycling process. For example, there are differences among industrial countries with respect to the manner in which Fund resources are to be augmented (i.e., quotas versus borrowing); the nature of Fund intermediation (routine and permanent versus temporary and of last resort); and conditions to be attached to the use of Fund resources. A similar variety of views exists among the developing country members of the Fund.

Nevertheless, there appears to have been renewed interest—at least among some—to use the Fund (and the World Bank) as a vehicle for recycling.141 It should be noted, however, that these countries’ desire to offer credit to international organizations to reduce “sovereign risk” or to avoid other political encumbrances on foreign-held assets is usually accompanied by their interest in having a larger voice in the management of these organizations. But this natural desire to have a more important voice in the organizations which they partly finance is not always achievable without corresponding relative reductions in the decision-making power of other members. Such counterbalancing reductions, in turn, are not easy to implement for a variety of reasons, including the unwillingness of affected countries to reduce their shares.

Another obstacle to a major direct tapping of oil exporting developing country surpluses by the international organizations is that the desire for a multifaceted portfolio works both ways. That is, there will still be a tendency on the part of these countries to have their assets widely distributed both across national boundaries and across financial organizations. For this reason, a very substantial increase in the role of international institutions in the recycling process would require a good deal of new inventiveness, tact, and hard bargaining.

An important alternative to direct contributions is the possibility of indirect recycling through borrowing in the private markets. In this way, while the oil exporting developing countries place their money in the international markets, the funds are captured by official institutions in exchange for their own liabilities. This indirect recycling has the advantage that, although the funds come, either directly or indirectly, from the oil exporting developing countries, there is no need for difficult changes in the nature and operations of the institutions. There may, however, be other considerations against borrowing in the international markets. There has also been interest on the part of the low-absorbing oil exporting developing countries in setting up new joint institutions. Some of these require the formation of a subsidiary agency whose capital would be financed in part by the oil exporting developing countries and by countries that the subsidiary intends to serve. Other proposals would merge the oil exporting developing country capital with the expertise and backing of the international organizations. Some of the major contributions of the new organizations and schemes to the recycling process would be to substitute for the missing ingredients in the foreign direct investment recipe. In other words, oil exporting developing countries’ deficiencies in technology and management know-how, their inability to protect their investments against political risks, and their inadequate financial links with host countries can be significantly made up through collective actions.

In this context, several proposals have been talked about in international circles. One such scheme has been an Algerian-Venezuelan proposal to convert the OPEC Fund from a purely concessional lender to a full-fledged international bank in which the present organization may become simply an “aid window.”142 The bank’s capital would be provided by the oil exporting developing countries and would tap surplus funds at market rates for onlending to deficit-country governments. In poorer developing countries, an interest subsidy would be provided through the “aid window” or other voluntary contributions.

Another associated proposal is for the establishment of a fully commercial, dividend-paying, international finance corporation that would draw its capital subscriptions from surplus oil exporting developing countries and industrial countries and make loans and equity investments in foreign public and private enterprises. The corporations would be controlled and managed according to strict accounting and business principles, and would engage in business-like operations. By pooling capital investment expertise, information, and political neutrality, the corporation would be able to promote foreign direct and portfolio investments that would ensure greater return, better security, and less risk for oil exporting developing country investors. Many of the variegated obstacles to direct investment referred to in a previous section could thus be avoided or mitigated.143 A third related arrangement involves the revival of the multinational guarantee scheme for the protection of direct investment. This proposal, which in the past has failed to attract sufficient support, may, under proper safeguards, provide one of the essential requirements of any successful transfer of risk capital. Objections by both the non-oil developing countries and the industrial countries to some of the main features of the scheme could perhaps be overcome by innovative changes in the original scheme.144

Closely related to these proposals are certain tripartite arrangements that seek to provide for the long-term financing of non-oil developing country deficits while protecting the real value of OPEC assets against inflation, exchange devaluation, and/or political risk. In return, OPEC is expected to agree on long-term assurances of supply and a steady and predictable annual increase in the real price of oil.145 Still another variant of these proposals is a triangular co-management proposal under which individual members of OPEC and the European Economic Community and the non-oil developing countries select and define a series of priority programs (e.g., energy and raw materials) for equity investment under certain mutually agreed codes of behavior.

External Assistance

An effective means of recycling surplus oil funds has been, and continues to be, the oil exporting developing countries’ numerous foreign assistance facilities. Since the early 1960s, with the establishment of the Kuwait Fund for Arab Economic Development, OPEC members have been large donors of direct and indirect aid to other developing countries. OPEC assistance has helped poorer nations to meet part of their external deficits and finance part of their development programs.

OPEC aid takes a variety of forms. Bilateral assistance includes medium-term and long-term balance of payments support grants and loans, project aid, central bank deposits, and bank guarantees of commercial loans to developing countries. Multilateral assistance involves direct contributions to existing international financial agencies and the creation of new multilateral institutions. There has also been “trilateral cooperation” between OPEC, private corporations in industrial countries, and companies in the Third World. Sales of crude oil to needy countries on concessionary terms by Iraq, Algeria, Kuwait, the Libyan Arab Jamahiriya, and Venezuela are examples of another form of aid.

For a variety of reasons, OPEC aid has so far been distributed through a number of diversified channels. These channels include (a) national funds created for the specific purpose of providing external assistance, such as the Abu Dhabi, the Kuwait, the Saudi Arabian, and the Iraqi Development Funds; (b) nationally financed trust funds administered by other institutions, such as Algeria’s Special Fund and Nigeria’s Special Fund administered by the African Development Bank and Venezuela’s Special Fund administered by the Inter-American Development Bank; (c) multilateral institutions established by individual OPEC members and other developing countries, such as the Arab Fund for Economic and Social Development, the Arab Bank for Economic Development in Africa, the Islamic Development Bank, and the Islamic Solidarity Fund; (d) multinational institutions in which OPEC has played a leading role, such as the International Fund for Agricultural Development and the Common Fund for Commodities; (e) OPEC’s own collective aid facility—the OPEC Fund for International Development, which is entrusted both to coordinate OPEC members’ aid policies and to act as an aid donor in its own right; and (f) existing international financial institutions, such as the International Monetary Fund, the World Bank, the International Development Association, the United Nations Development Program, the World Food Program, and others, to which OPEC members have offered loans or grants for onlending to countries in need.146

Other financing proposals include a proposal by Iraq for the establishment of a new fund to be jointly financed by OPEC and the industrial countries to compensate non-oil developing countries for the adverse effects of higher costs of imports from oil exporting and industrial countries. There has been a similar suggestion by Iran for reimbursing poorer developing countries for their additional oil bills resulting from increases in oil prices.

The total size and the distribution of OPEC aid to other developing countries are compiled and reported separately by the OECD and the United Nations Conference on Trade and Development (UNCTAD). The two sets of data display certain important differences in both the aggregates and, particularly, the details of the resource flows. The discrepancies are due largely to differences in the definition of nonconcessional multilateral flows (such as contributions to the Fund’s facilities and to the International Development Association), the time period of disbursement, and access to data. The basic data published by both sources are summarized in Tables 29 and 30. By UNCTAD estimates, between 1974 and 1981 some $55 billion (or 15 per cent of the total OPEC “identified investable surplus”) had been transferred in net disbursements to non-oil developing countries, with 68 per cent of the assistance in the form of grants and the average grant element of concessional loans exceeding 10 per cent. OPEC assistance as a whole has been untied.

Table 29.

Selected Oil Exporting Developing Countries: Concessional Aid, 1973–81 1

(In millions of U.S. dollars)

article image
Sources: Organization for Economic Cooperation and Development, Development Assistance Committee, Development Cooperation, 1982 Review (Paris, 1982).

Net disbursements. Figures in parentheses are as per cent of GNP.

Data supplied by Saudi Arabia to the Fund and published in International Monetary Fund, IMF Survey, Vol. 11, November 15, 1982, pp. 354–56, are larger than these estimates owing to a broader inclusion of “aid” categories.

Table 30.

Selected Oil Exporting Developing Countries: Disbursed Concessional Assistance, 1974–81 1

(In millions of U.S. dollars)

article image
Sources: United Nations Conference on Trade and Development, Trade and Development Report, 1981 and 1982 (New York, 1981 and 1982); and Fund staff estimates.

Including contributions to the International Development Association.

As shown in Tables 29 and 30, the largest donors have been Saudi Arabia, Kuwait, and the United Arab Emirates. These three countries together accounted for 54 per cent of the OPEC official flows in 1975 and for 75 per cent in 1980. As a percentage of GNP, these countries’ official flows averaged about 10 per cent for the 1974–80 period. For the oil exporting developing countries as a group, the official flows averaged nearly 3 per cent during this period. About two thirds of the flows to other developing countries are in the form of bilateral grants and concessional loans (Table 31); the remainder is channeled through multilateral institutions. The main recipients of this aid have been African and Middle Eastern countries, which together received about two thirds of the total.147

Table 31.

Main Components of OPEC Aid, 1974–80

(In per cent)

article image
Sources: Organization for Economic Cooperation and Development, Development Assistance Committee, Development Co-operation, annual reviews (Paris).

Altogether, the oil exporting developing countries’ foreign aid record has been laudable, in itself and in comparison to other aid donors. According to a recent World Bank report, “relative to their incomes, OPEC members were six times more generous in their aid efforts than the industrial countries.”148 According to UNCTAD, OPEC’s aid performance as a group during 1978–81 surpassed that of Development Assistant Committee members by a ratio of 10 to 1.


The decisions of the oil exporting developing countries regarding oil production, pricing, imports, lending, borrowing, and foreign investment have a crucial bearing on the magnitude and pattern of global imbalances and their adjustment. Up to now, oil importing countries—both developing and developed—have been able to manage the transition from cheap oil to more expensive alternatives at some costs. Economic growth in the industrial countries has slowed considerably, and external balances have shown moderate deficits. Non-oil developing countries have maintained higher growth rates than the major oil importing countries, but their external accounts have shown persistent and large deficits, and the prospects are for continued gaps throughout the 1980s.

For a variety of reasons, the outlook for dealing with payments imbalances in the 1980s is rather uncertain. For many of the poorer developing countries, balance of payments deficits cannot be sustained for long. For others, the limits on access to commercial capital are being rapidly approached. And the middle-income developing countries, who have served as an engine for recycling the oil exporting developing countries’ surplus through the international capital market, find that not only are borrowing conditions markedly stiffer149 but that debt servicing is considerably more burdensome, if not intolerable.

While the private capital market is expected to play a continuing major role in the international adjustment process, international financial institutions and national governments will also have to share in coping with external deficits. International agencies can assume a more active part in bridging the gap between surplus and deficit countries. Governments of the oil exporting developing countries, in addition to pursuing a predictable oil pricing and production policy, could substantially ease the global recycling task by maintaining a high and steady growth rate, importing more from the other developing countries, increasing their direct foreign investments, and expanding bilateral aid and multilateral assistance to the non-oil developing countries.

In sum, the solution to the world payments imbalances is neither one dimensional nor a quick fix. It takes many forms, and it takes time. Above all, it takes close cooperation among the concerned parties.


See R.S. Associates, Inc., “International Economic Letter” (Washington), March 17, 1981.


Fund staff projections of a $1 billion surplus for 1982 have been revised downward by other analysts. The OPEC Secretariat puts the 1982 current account balance at a deficit of $9.5 billion.


The discrepancy between the total (OPEC plus industrial countries) surplus and non-oil developing country deficits reflects errors, omissions, and balances of these groups with other (mainly centrally directed, nonmarket) economies.


During 1960–73, OPEC oil supplied 40 per cent of the increase in total world primary energy and 63 per cent of the increase in global oil use. After 1973, the growth in OPEC’s share of energy supplies stopped altogether.


The adjustment, however, did not occur easily. The average price of crude had to rise from $1.80 a barrel to $36 for medium-term elasticities of supply and demand to bring about significant structural changes. And it took eight years for OPEC’s share in total world oil production to decline from 53.5 per cent in 1973 to 43.6 per cent in 1980 (and 35.6 per cent in 1982).


Hollis B. Chenery, “Restructuring the World Economy: Round II,” Foreign Affairs, Vol. 59 (Summer 1981), pp. 1102–20.


The precise magnitude of OPEC investments by various categories and by individual countries has not been published and has been the subject of much debate and doubt in the press, and investigations by the U.S. Congress.


See Jahangir Amuzegar, “Petrodollars Again,” Washington Quarterly, Vol. 4 (Winter 1981), pp. 130–48. See also Chenery (cited in footnote 104).


See Chapter VI, below.


While the term “recycling” has come into use only recently, the concept to which it refers is the old problem of a current account deficit that is considered to be of longer-than-normal duration. Early postwar Europe’s deficits vis-a-vis the United States, the 1950–70 deficits of developing countries vis-à-vis OECD countries, and the recent deficits of the rest of the world vis-à-vis OPEC countries are three such examples. See J. Nicholas Robinson, “The Role of Oil Funds Recycling in International Payments and Adjustment Problems,” OPEC Review, Vol. 4 (Summer 1980), pp. 98–109.


Estimates are based on the assumption of constant real oil prices, moderate rates of economic growth in the industrial countries, declining worldwide inflation, and no further decline in OPEC’s share of world crude output.


Some analysts now talk seriously about the possibility of a zero or even a negative OPEC external balance for the rest of the 1980s.


Forecasts of oil prices and supply have been systematically wrong in recent years. Some analysts now talk about a price range of $15–150 a barrel of oil within the next five years, with equal possibilities of the actual price being anywhere in that range!


International reserves increased at an average annual rate of 15.3 per cent between 1969 and 1978, of which up to 82 per cent can be attributed to a rise in official holdings of U.S. dollars. It is argued that the United States has been able to finance its oil imports in the same way as it has paid for domestic oil. See Bruce R. Scott, “OPEC, the American Scapegoat,” Harvard Business Review, Vol. 59 (January-February 1981), pp. 6–30. Needless to say, the argument has consistently been refuted by the United States on many grounds.


For a discussion of relationships among these variables, see Paul Hallwood and Stuart W. Sinclair, Oil, Debt, and Development: OPEC in the Third World (London and Boston, 1981).


Explanations offered by oil country officials for the concentration of the OPEC surplus in industrial countries is that the non-oil developing countries suffer from money inadequacies, including monetary restrictions and recurrent changes in investment laws and regulations.


Non-oil developing countries’ additional reserves of some $39 billion between 1974 and 1978 almost matched their foreign grant inflow of $38 billion.


See Organization for Economic Cooperation and Development, Development Assistance Committee, Development Co-operation, 1982 Review (Paris, 1982), and International Bank for Reconstruction and Development, World Development Report, 1982 (Washington, 1982).


See Rinaldo Ossola, “The Vulnerability of the International Financial System: International Lending and Liquidity Risk,” Banca Nazionale del Lavoro, Quarterly Review, Vol. 33 (September 1980), pp. 291–305; see also Tim Anderson, “The Year of the Rescheduling,” Euromoney (London), August 1982.


To the extent that debt repayments represent short-term maturities and a high underlying role of worldwide inflation, the cause for concern may be overstated. Two thirds of the debt and three fourths of the debt service are also accounted for by 20 countries that may be in a better position to handle their debts.


See “A Nightmare of Debt: A Survey,” The Economist (London), March 20–26, 1982.


The United Nations Conference on Trade and Development’s figure for the same period is only $362.5 billion.


Of the surplus countries, only Kuwait and the United Arab Emirates have a publicly announced policy of building up foreign assets as a source of future national income.


See “Kuwait’s $70 billion Finance Minister,” Wall Street Journal, November 25, 1981, p. 31. The United Nations Conference on Trade and Development, Trade and Development Report, 1982 (New York, 1982), states that “the United States’ freeze on Iranian assets appears to have had some impact on the deployment of OPEC investments” between U.S. and non-U.S. banks during 1980 (UNCTAD/TDR/2, Vol. II, July 28, 1982, p. 194).


The self-imposed limits for some large surplus countries include the purchase of no more than 5 per cent of the voting stock of any foreign company and staying away from certain sensitive industries.


The conceptual and statistical definitions of foreign direct investment are a matter of debate. In principle, the difference between direct and portfolio investment hinges on the issue of management and control. For operational purposes, therefore, any holding of a certain percentage of the ordinary shares or voting stock of a host country’s enterprise (signifying a measure of management and control) may be regarded as direct investment. In the past, it was thought to be 25 per cent, but recently a 10 per cent or more holding is regarded as direct investment.


For the source of some figures and arguments in this section, see “Arab Banking,” Euromoney (London), April 1980.


Affecting the flow of risk capital also are certain attractions, as well as some barriers, that are largely beyond the control of home and host countries.


For details, see National Legislation and Regulations Relating to Trans-National Corporations. It is scheduled to be published by the United Nations.


This risk is now fairly negligible, since the statutes of most industrial and developing countries provide for fair compensation.


Political risks exist in debt capital as well. But they are believed to have a much more constraining influence on equity investments because the investments are normally for longer terms and are more conspicuously vulnerable.


Khodadad Farmanfarmaian, and others, “How Can the World Afford OPEC Oil?” Foreign Affairs, Vol. 53 (January 1975), pp. 201–22.


For a critical account of private bank lending to developing countries, see Anthony Sampson, The Money Lenders (London, 1981).


See Rahman Sobhan, “Institutional Mechanisms for Channeling OPEC Surplus within the Third World,” Third World Quarterly, Vol. 2 (October 1980), pp. 721–45.


See Reza Fallah and Fereidun Fesharaki, “A New Proposal for Indexation of Oil Prices,” Middle East Economic Survey, Vol. 20 (June 27, 1977), pp. 13–15.


See Walter J. Levy, “Recycling Surplus Petrodollars via Internationally Issued Indexed Energy Bonds,” Middle East Economic Survey, Supplement, Vol. 23 (April 7, 1980), pp. 1–7.


See David Kleinman, “Oil Money and the Third World,” The Banker, Vol. 124 (September 1974), pp. 1061–64.


See Morgan Guarantee Trust Company, “World Financial Markets,” (April 1981), pp. 6–10.


For details, see International Monetary Fund, Annual Report of the Executive Board for the Financial Year Ended April 30, 1980 (Washington, 1980), p. 72, and IMF Survey, Vol. 9, February 4, 1980 and March 3, 1980, pp. 33 and 65.


See The Financial Issues of the New International Economic Order, ed. by Jorge A. Lozaya and A.K. Bhattacharya (London, 1979). See also Richard C. Williams, and others, International Capital Markets: Development and Prospects, 1982, International Monetary Fund, Occasional Paper No. 14 (Washington, July 1982).


For a critical view of the role of international organizations, see M.M. Sakbani, “A Critique of the Prevailing Monetary System: Principal Themes of a Reformed System” Third World Quarterly, Vol. 3 (July 1981), pp. 460–72.


The typical current account deficit of industrial and non-oil developing countries rose from about 3 per cent of GDP in the early 1970s to over 7 per cent in 1980–81. See Address by J. de Larosiere, Managing Director of the International Monetary Fund, before a symposium of the European Management Forum, February 3, 1981, Davos, Switzerland; reproduced in International Monetary Fund, IMF Survey, Vol. 10, February 9, 1981, p. 34.


A recent indication of this was the ability of the Fund to borrow directly from the Saudi Arabian Monetary Authority (SAMA) in April 1981. According to the agreement reached with SAMA, the Fund can borrow SDR 4 billion in the first year and a further SDR 4 billion in the second year. See International Monetary Fund, Executive Board Decision No. 6843-(81-75), May 6, 1981, Selected Decisions of the International Monetary Fund and Selected Documents, Ninth Issue (Washington, June 15, 1981), and IMF Survey, Vol. 10, April 6, 1981, p. 97.


This proposal has so far resulted in turning the former OPEC Special Fund from merely an “account” to a legal entity renamed OPEC Fund for International Development. Cf. “South-South Cooperation: The Financial Potential,” South, No. 15 (January 1982), pp. 95-96.


For more detailed discussions of these proposals, see Hazem El-Beblawi, Oil Surplus Funds: The Impact of the Mode of Placement, OPEC Fund for International Development (Vienna, 1981); and Ibrahim F. I. Shihata, The Other Face of OPEC: Financial Assistance to the Third World (London and New York, 1982).


See, for example, The Case for Multilateral Insurance of Private Investment in Developing Countries, R.S. Associates (Washington, 1982).


See, for example, H. W. Arndt, and others, The World Economic Crisis: A Commonwealth Perspective, Report by a group of experts, Commonwealth Secretariat (London, 1980).


See J.T. Cummings, and others, “An Economic Analysis of OPEC Aid,” OPEC Bulletin, Supplement, Vol. 9 (September 25, 1978). For possible repercussions of OPEC aid and of recent shortfalls in OPEC oil revenues, see New York Times, April 4, 1982, p. E3; and Alan Stoga and Philip Bennett, “How Fast Is OPEC’s Surplus Disappearing?” The Banker, Vol. 131 (September 1981), pp. 115-21. See also Ibrahim F.I. Shihata and Robert Mabro, The OPEC Aid Record, OPEC Special Fund (Vienna, 1979); Ibrahim F.I. Shihata, OPEC as a Donor Group, OPEC Fund for International Development (Vienna, 1980); and Mehdi M. Ali, Financing the Energy Requirements of Developing Countries, OPEC Fund for International Development (Vienna, 1981).


For details of individual OPEC member contributions, terms, and other characteristics of OPEC official development assistance, as well as a comparison with other donors, see Organization for Economic Cooperation and Development, Development Assistance Committee, Development Co-operation, 1982 Review (Paris, 1982).


International Bank for Reconstruction and Development, World Development Report, 1982 (Washington, 1982), p. 14.


For a recent account of the situation, see Group of Thirty, The Outlook for International Bank Lending: A Survey of Opinion Among Leading International Bankers (New York, 1981), and How Bankers See the World Financial Market: A Survey (New York, 1982).

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