The Current Account of Oil-Exporting Countries

• Author: Irineu E. de Carvalho Filho
• Position: References
• Pages: 1-6

The intertemporal approach for the current account views the current account balance as the outcome of forward-looking dynamic saving and investment decisions. In its simplest form, it applies the logic of Milton Friedman's permanent income hypothesis (PIH) to countries. The basic intuition of the PIH model is that households attempt to smooth fluctuations in their consumption by saving more during good times, thereby accumulating assets that might sustain consumption levels in the event of a negative shock, such as an unemployment spell. Translating it to the analysis of countries, windfalls in export revenues due to transitory terms of trade shocks ought to be saved and put aside in a rainy day fund, and that is how countries seem to behave (Kent and Cashin, 2003).

Oil-exporting countries, however, present a special case. Not only do most movements in oil prices seem to be transitory (see Barnett and Vivanco, 2003), but because oil reserves are finite and exhaustible, the whole stream of oil revenue from beginning of exploration through depletion can be seen as transitory from a longer-term perspective. To the extent that current generations value the welfare of their children, some of the oil wealth will be saved and shared with future generations and this will be reflected in the behavior of the current account. The desire to spread the oil wealth across generations is often called the intergenerational equity motive.

There is a plethora of IMF research applying this intuition for specific oil-exporting countries, both for the determination of the current account and the fiscal balance. Typically in this literature, the authors derive an "optimal" path for the current account or fiscal balance that is consistent with a specific distribution rule (e.g., oil wealth should be consumed in equal amounts every year from today to eternity). Unfortunately, economic theory does not have much to say about how oil wealth should be distributed across generations. This choice in theory rests on a moral question, but ultimately depends on the aggregation of the preferences of policymakers and consumers. That is not a trivial issue because the optimal current account and fiscal balance paths predicted by the intergenerational equity motive are highly sensitive to the choice of oil wealth distribution rule. For instance, in a country with a growing population, the size of savings required to sustain constant aggregate consumption out of oil wealth indefinitely is substantially smaller than if the goal were to sustain constant per capita consumption out of wealth.

This point has also been observed in a number of recent studies...