The decline in oil prices: An opportunity

A decade of elevated oil prices brought prosperity to many developing countries.

Oil prices have fallen to about US$60 per barrel, the lowest they have been since mid-2009.

Oil prices have fallen to about US$60 per barrel, the lowest they have been since mid-2009.

Incomes rose, poverty shrank, macroeconomic buffers were rebuilt. The fiscal space for investing more in education and infrastructure increased, resulting in better sharing of prosperity. At the same time, higher commodity prices and surging global demand resulted in much more concentrated exports in all developing oil-rich countries.

“Diversifying exports” became a priority for policy makers and development economists around the world. Historical experience and evidence to the contrary from successful resource-rich countries notwithstanding, many widely believe that a more diversified export structure should be an important national goal and may well be a synonym for development, a goal that government can target and achieve. And a more diversified export structure typically meant a smaller share of commodity exports in total shipments abroad or a reduced concentration – as measured by the Herfindahl-Hirschmann Index – of exports.

Fast forward to December 2014. Oil prices have fallen to about US$60 per barrel, the lowest they have been since mid-2009. The collapse in oil prices is hurting hydrocarbon producers – fiscal and external balances, output growth, currencies, and confidence have all suffered. While oil and natural gas do not generate many direct jobs in hydrocarbon-rich countries, spending oil-related revenues does.

The decline in oil – and other commodity – prices is also lowering the standards used to measure diversification. A hypothetical average oil price of $60 per barrel compared with the likely average of about $100 per barrel in 2014, reduces the share of hydrocarbons in Nigeria’s exports by three percentage points and in Russia by almost 13 percentage points (Russia’s exports are almost five times as large as Nigeria’s and the share of hydrocarbons is much lower). On the same metrics that some economists used to worry about the concentration of exports during the last decade, exports now look much more diversified.

While governments of oil-exporting countries were worried about concentration before, they are unlikely to be satisfied with less concentration now. One reason is that governments are increasingly realising that achieving durable and inclusive growth requires diversification of the components of national wealth – achieving a more balanced structure of natural wealth, built capital, and institutions – than worrying about the concentration of exports.

As argued in our recent book, Diversified Development (Indermit Gill, Donato De Rosa and myself), what distinguishes successful from less successful resource-rich countries are the institutions to manage volatility, ensure high-quality education, and provide a competitive regime that creates a level playing field for enterprises. Success comes from a balanced portfolio of assets, not a balanced structure of exports. It is never too late to start strengthening economic institutions – and lower oil prices provide an opportune moment to embark on a path to diversified development.

Ivailo Izvorski is a lead economist in the East Asia and Pacific region for the World Bank, working on regional economic and financial issues. This article was first published on the World Bank’s blog network.