Economic And Political Interests Of Oil Exporting Economies

1799 Words Nov 18th, 2014 8 Pages
Oil-exporting economies need to save more of their resource windfall, rather than increasing investment and consumption. They should save the difference between the budgeted and the actual prices of crude oil for example. This would be a stabilization fund for strategic, economic and political interests (Kolawole, 2014). This increase in savings would lead to an increase in the demand for dollar-denominated assets, which ultimately would enable the expansion of the US current account deficit (Setser, 2007).

The real exchange rate, which is a measure of the price of foreign goods, relative to domestic goods across different countries, is a critical factor in determining the capital account, along with the interest rate. It is an indicator of the competitiveness of traded goods, and is a good measure of national income and trade behaviour. A resource windfall would increase the external purchasing power of a country 's currency instead of an increase in the government 's oil export revenue (Frankel, 2010). The real exchange rate appreciates when there is no tight monetary policy to smooth government spending and avoid high levels of consumption; and also when there is no provision for significant proportion of the resource revenue to go into savings and domestic investment.
The Dutch Disease is when there is a quantum leap in government spending, in building of infrastructure and non-traded goods & services as a result of an apparent increase in the global price…
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