How important were the oil hikes of the 1970's in inhibiting Third Worlddevelopment?
The 1970’s was a turbulent decade in terms of economics, seeing the “severest shock to the world economy since World War Two”1 in the form two oil price hikes, in 1973 and 1979, both caused by OPEC - How important were the oil hikes of the 1970's in inhibiting Third Worlddevelopment? introduction. Although both oil shocks had repercussions for the first and third world, the effects, both immediate and longer term, were far more serious for third world countries. In the short run it meant many of them went into deficit and had to borrow heavily, cut back on social expenditure and suffer a loss in production.
In the long term the oil crisis was the starting factor contributing to the accumulation of large debts from borrowing the “petro dollars” created by OPEC themselves. However the oil crisis was not the only factor that inhibited development but was one of many, several of which had been inhibiting development before the oil crisis even developed. The oil crises in this respect simply highlighted the plight of the third world and brought it to world attention. It contributed to the inhibition of development but was by no means the sole factor involved.
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The first oil shock, brought about by OPEC in 1973, came into effect on January 1st 1974 when the market price of crude oil was raised from $3. 60 to $11. 65 a barrel. This “inaugurated a period of great turbulence in the world economy”2 causing a world recession from 1974-75 which was reckoned to be more widespread than the depression of the 1930’s. The immediate effect was that most non-oil producing countries in the third world experienced a dramatic increase in their oil bills which in turn produced deficits in their balance of payments.
Statistics confirm how big a problem these trade deficits were, as deficits were recorded to have leapt from $9,000 million in 1973 to $36,000 million in 1975 and total foreign accumulated debts of all the third world nations came to $120,0003 million. These deficits had to be financed by borrowing or by cut backs in expenditure and even when these took place the deficit did not necessarily disappear. Another way countries combatted increases in oil bills was to use their foreign aid to pay for it. This then meant that it was used up on paying bills rather than socially helping the country develop.
Ethiopia used almost 30% of its aid for this purpose. Also almost half of all new assistance was used to make interest payments on the debts hindering progress these countries wished to make at the time. Third world trade in general was also seriously affected by the oil crisis, having been totalled at 5% of all world trade before the oil crisis but as a result of 1973 it fell to a mere 3. 5%. First world protectionism came into play a lot as stated before as many powers evoked Article 19 of GATT which allowed them, when in difficulty, to use emergency protection.
This protection often became permanent and restricted imports. As John Cole put it “the poor countries that did not posses any oil were savagely hit”. 4 As well as oil bills increasing, the world recession meant that the first world markets were reduced, forcing them to raise prices in an attempt to maintain income. The cost of imports by the Third World countries thereby went up by 40% whilst at the same time the deepening recession cut their volume of exports. World trade before 1973 was already declining and the oil hikes made this worse as countries retracted.
From 1955-1970 the third world’s loss of world trade had cost them an amount equalling 72 million additional jobs. Oil prices also “aggravated inflation”5, making currency within the nations worth less. This in turn made it harder to pay back debts and to pay for imports as well as internal expenditure. Many countries such as Sri Lanka and Brazil were at the time embarking on large scale investment projects which had to be scaled down and sometimes discontinued. However, although the oil hikes did have severe implications for most third world countries and inhibited their development, there were some exceptions.
Some were net exporters of oil during the 70’s like Indonesia and Nigeria (Cameroon and Mexico also became net exporters of oil later in the 70’s) and therefore experienced an oil boom. Some were simply self sufficient in oil like Argentina, Columbia and Mexico and so their current account was never adversely affected. Others made up for their increased oil bills through high world demand for others exports they made. This was the case for Morocco due to high demand for its phosphates and also for Chile, which didn’t experience a deterioration in trade until 1975 due to demand for its copper.
The taking of economic action was also less necessary in the cases of Cameroon, the Ivory Coast, India and Thailand. The immediate effects of the oil price shock also depended on whether the economies were in good shape pre 1973. Those that were already in a bad way had their development inhibited more severely than others. India was in particularly bad shape in 1973 having just experienced a severe drought in 1972 which meant agricultural production was reduced, causing prices to rise. Similarly Kenya was just retracting after an investment boom that had caused serious inflation.
Some countries like Brazil launched major investment programs when the first crisis hit to divert demand away from oil in the long run. This approach was rewarded when the time of the 2nd crisis came. Also individual problems in some countries brought benefits to others during the crisis. This can most obviously be seen when Brazil experienced a severe frost in July 1975. This then raised the price of coffee for two years thus improving the export earnings of other coffee producing countries namely Columbia, Cameroon, Costa Rica, the Ivory Coast and Kenya. But as stated before these countries were the exceptions.
On the whole most third world countries tried policies such as restricting imports other than oil to balance their budgets (sometimes achieved by rationing) and through borrowing, believing that OPEC, being a cartel, would not last for long and would soon crumble (according to the ideas of Milton Friedman). A more long term problem of the oil crisis was the amount of debt that accumulated because of the oil crisis. After OPEC had increased the price of oil its current account surplus increased from $64 bn in 1974 to $114 bn in 1979-806. The OPEC countries in turn put the money into western banks for stability purposes.
Upon receiving this large amount of money, named “petro dollars” the banks decided to lend it out, particularly to third world countries on the basis that as countries they couldn’t become bankrupt in the same way a firm could. They lent it out with a variable rate of interest and the third world was only too happy to borrow the money. However they often borrowed more than they could afford to pay back. The debt problem was aggravated in the 80’s when Ronald Reagan came to power in the US. He believed that his country could go into debt with large borrowing as long as they were in a position to repay it.
However in borrowing he had to make sure there was no inflation accompanying it. So this meant keeping the interest rates high. This in turn doubled the third world’s debts making them impossible sums to pay back. Therefore after this the third world often spent much of its income on interest payments to the West to the serious neglect of its own infrastructure, economy, and physical capital. Thereby development was hindered indirectly by the oil crisis. Despite the oil crisis precipitating a number of other crises, factors before the 1973 crisis can also account for why development has been inhibited for so long.
Although the story does differ from continent to continent it can be noted that countries have not developed so well if they had bad colonial experiences. This is certainly the case with Africa, and to a lesser extent, Latin America. Bad colonial experiences left the third world with suspicions about the West (and therefore a reluctance to invite investment and MNC’s) but also with problems regarding their borders. The artificial borders established before independence in turn produced tribal problems which led to several civil wars and wars between nations.
War was therefore one factor that certainly inhibited development as it damaged the countries resources, both physical and human and tarnished its image thereby discouraging foreign investment. Many nations also suffered from unfavourable natural endowments such as poor quality soil, virgin forests, lack of mineral resources and waterpower, and unfavourable climate and precipitation conditions. Many were often short of physical capital. Many third world nations also suffered from corruption within their governments which also inhibited development.
This is because any investment that did find its way into the country was often squandered by those at the top or used for the governments own purposes such as building up the military. The social infrastructure of the country therefore remained stagnant. Many countries suffered from “authoritarian political regimes”7 as well as lack of democratic institutions. Often the governments were concerned with their own agendas rather than the general welfare of their nations and in order to maintain their power there would be a lack of free elections and suppression of freedom of speech/press in order to stop any criticism of the regimes policies.
Therefore within the third world any opposition to the government’s inhibition of development, or attempts at reform were usually muted and ineffective. The majority of help came from outside but even foreign aid and investment that was put back into the system (as opposed to being pocketed at the top) was often put into unsuccessful projects like large scale dams which didn’t achieve anything for the local people. Aid that came in often had strings attached to it by the donor, who could dictate where it went and therefore limit its usefulness.
A lot of aid also produced an unhealthy dependence on it, reducing progress towards modernisation in several of the countries. Locals were put out of business as aid undercut the price of their goods and so therefore despite it having good intentions of promoting development it rather inhibited it and caused a variety of new problems. Another factor which seemed to inhibit the Third World was the structure of its economy and exports which was and still is to a certain extent mainly primary.
Most developing nations commonly had a high proportion of the population in agriculture, even as high as 70-90%. Given the subsistent nature of it there was low income per head and relatively little savings for the large masses. For many there was also a lack of employment opportunities outside of agriculture thereby limiting the countries’ progress. Although many had a comparative advantage in this area, the relative fall of prices over time and their complete dependency on agriculture caused many problems.
The rise in the power of western buyers meant that they dictated the prices and also sometimes First World protectionism tended to destroy the advantage that the Third World had, making them pay more in order to export their goods to the West. As most farmers were subsistent they didn’t want to reform towards commercial agriculture given the risks that it might not work. So this “passive attitude of the population to change”8, and lack of innovation and initiative meant the system remained backward in its technology, equipment and methods.
Farmers were also continually in debt when they tried to modernise. In addition, the industry that the countries possessed was often inefficient producing bad quality goods and was controlled by the government. Another factor besides the oil crisis that had been a problem for some time was that of demography. Many third world countries at the time were experiencing high population growth which in turn meant high dependency ratios. The large number of younger people thereby demanded a lot of money from the government simply to feed the population whilst things such as education took a back seat.
High infant mortality rates did offset this until basic medical care increased and caused population explosions in several Third World countries. But inadequate nutrition, hygiene and sanitation as well as overcrowding meant low life expectancies were common due to bad health. So many countries were inhibited because their quality of human capital was very low. Those whose health was not affected were still not given proper education and in many countries literacy rates were very low.
Even worse, many who managed to get a decent education would leave for the West and better living prospects and therefore the third world would lose its best workers. Similarly when MNC’s set up in the third world they imported their own skilled workers thereby not enabling locals to better themselves in any way. So in some places there would be underemployment where many would be educated but would be jobless and have no capital to work with. This was the case in Sri Lanka. MNC’s that came in were often criticised for their exploitation of labour, paying the locals low wages but demanding long hours in return.
The use of child labour was also a controversial issue at the time. The countries that brought in MNC’s also suffered because profits were sent back to the country of origin. So this hindered development. The underdevelopment of the third world can be put down to a “viscous circle of factors”9 many of which do not seem to have simply solutions. There have been many approaches to try to encourage third world development from a move towards free trade to structural adjustment programs pushing nations to take a more outward looking approach.
The oil crisis was the catalyst in the third world’s history that revealed the problems that had been building up pre 1973. It did cause a variety of difficulties for the third world but was by no means the single factor inhibiting development. Third world development is still hindered today and will continue to be an issue for debate as the obstacles in its way have not yet been dealt with. In hindsight therefore the oil crisis no longer seems to be such an important factor in the inhibition of Third World development.