The impact of oil-export dependency on a developing country: The case of Algeria

Abstract

What is the effect of reliance on oil exports on development in Third World countries? A large oil export sector is often considered to be a potential spur to diversification and full modernization, especially when a central government controls and plans the use of oil revenues with such goals in mind. We evaluate this proposition by developing a 12-equation Keynesian econometric model of the Algerian economy. The model's equations, estimated using ordinary least squares, are robust with strong R-squares, significant t-tests for the independent variables, and reasonable Durbin-Watson statistics. Historical simulations track the true variables rather closely. Our RMSEs (percentage) are in general better than those in most studies of less-developed countries, ranging from 7 to 21%. Our results indicate that there has been a growing dependency of most major economic sectors on oil revenues, both before and after nationalization. Improvements in oil exports will, ceteris paribus, lead to elastic increases in luxury imports and domestic consumption, and inelastic increases in domestic investment. Thus, the goals of diversification, modernization and industrialization will not be met under the current set of policies in Algeria.