18 - Petrodollars and the Different Growth Performance of Industrial and Middle-Income Countries in the 1970s

Abstract

This chapter discusses petrodollars and the different growth performance of industrial and middle-income countries (MICs) in the 1970s. It presents a standard two-period model of tradable goods production, with raw materials. The two-period model leaves open the question of oil depletion or what happens to oil that is left over at the end of the second period, which is valueless. The model does not enable the proper emphasis on the role of internal demand-management policies of different countries in the determination of world equilibrium. Another set of issues raised by the world equilibrium analysis is the interplay of OPEC oil pricing, industrial country responses, and interest rate effects. There is also the interesting strategic question of how OPEC's pricing behavior is affected by the experience of the resulting change in real interest rates, an externality that in turn affects the rate of return on its own assets. There is a similar externality problem for the industrial countries whose contractionary policies have indirectly enabled the MICs to expand at the industrialized countries' expense.