CHAPTER V THE CONCEPT OF ECONOMIC …shodhganga.inflibnet.ac.in/bitstream/10603/34468/12/12...of...

CHAPTER V

THE CONCEPT OF ECONOMIC DUALISM AND ITS APPLICATION TO SOME OF OPEC MEMBER COUNTRIES

The process of economic evolution is characterized by changes in the

conditions of production, consumption, investment and other related macroeconomic

magnitudes. Distinction is made between 'economic growth' and 'economic

development' on the basis whether the changes in the aggregate variables are

significant or not. On the same basis, distinction is also made between the! more

developed countries (MDCs) and the less developed countries (LDCs). However,

the process of transformation from latter to the former has often been marked by the

coexistence of certain economic segments and institutions which are widely different

from each other.1 The simultaneous existence of such segments and institutions

is known by the name of economic 'dualism'. The purpose of this chapter is to take

a closer view of this concept and institutions in a historical perspective; to discuss

how they have been incorporated in the important models of development and

growth; and finally to examine the relevance of these concepts and institutions in the

development process of the OPEC member countries.

5.1 The Concept of Economic Dualism

The concept of dualism has had varying connotations depending on where,

how and when it was applied or discussed. According to Myint, dualism is defined

as "as the continuing coexistence of a 'modern' sector and a 'traditional' sector within

the domestic economic framework of an underdeveloped country.2 Generally

1. For an evolutionary approach to development perspectives, see, Ashok S. Guha, An Evolutionary View of Economic Growth, (Oxford : Clarendon Press, 1981).

2. H.Myint, Economic Theory and The underdeveloped Countries, (New York: Oxford University Press, 1971) pp.315-347.

126

speaking, the modern and traditional sectors are recognized by the existence of a

commercialized industrial sector along with a subsistence agricultural sector. As

pointed out by Lewis, they could be distinguished also by the properties of capitalist

and non-capitalist sectors respectively. At the same time, the two sectors may be

identified on the basis of their organizational setting such as urban versus rural. Sen.

( 1968) has discussed the possibility of technological dualism which are defined on the

basis of differing capital-labour ratio. 3 In a country like India, economic dualism can

he viewed both as a cause and as an effect of the slow growth of per capita income.4

As an effect, it may be present in the form of islands of wealth existing side hy side

with poverty, urban versus rural, landlords versus landless, large-scale versus

small-scale, etc. These diversities of economic characteristics are caused by other set

of economic dualistic factors, what may be termed as financial dualism, the

technological dualism, the socio-cultural dualism, the ecological dualism and so on.

At times, dualism has also been identified by the perpetuation of the existence of a

'leading' sector along with other 'lagging' sectors as may be the case with most of the

oil producing and exporting countries.

In the literature on development economics, the phenomenon of dualism has

been, in general, made out to exist only in the state of underdevelopment. The

transformation of the Japanese economy in a relatively short span of time presents

a glaring example of how economic dualism can be useful for the purpose of

development and growth. Myint ( 1985) is very right in stating while dualism is

pre-eminently a phenomenon of underdeveloped economies, its remnants may survive

3. Amartya Kumar Sen, Choice of Techniques. An Aspect of The Theory of Planned Economic Development, Third Edition, Indian Branch, Oxford University Press, 1972.

4. Malcolm S. Adiseshiah, "Reduce inequalities for harmony", in YOJANA, vol.31. Nos. 1 & 2, 26th of January 1987, p.18.

127

even in the most advanced industrial economies.5

The existence of dual sectors in a developing country implies that the rujce

mechanism which works as a guide for the efficient allocation of resources, is

effective only in a part of the economy. The sector which is not touched by latest

technological developments, is characterized by imperfect markets and remains

largely non-monetized.

5.2 Modelling the Concept of Economic Dualism

The historical development of MDCs has been explained in terms of various

models of growth and development, e.g.,Rostow's theory of "Stages-of-growth".

Unfortunately, this came under criticism because it was not readily applicable to the

experience of the LDCs. As a result, alternative explanations have been given in

terms of some other transitional stages in the process of the development of these

countries.

Theory of dualistic development is one such explanation Dualism is defined

as a transitional state in the process of the development which is characterized by the

coexistence of two sectors which are quite different from each other in terms of their

economic characteristics. In this context, Lewis (1954) was perhaps the first to point

out the dual nature of a developing country in terms of the simultaneous existence

of modern commercialized industrial sector along with a traditional subsistence

agricultural sector.6

5. H. Myint, "Organizational Dualism and Economic Development", in Asian Development Review, vol. 3, No. I, 1985, pp. 24-42.

6. W.Arthur Lewis, "Economic Development with Unlimited Supplies of Labour, "in The Manchester School of Economic and Social studies, vol. 22, May 1954, pp. 139-191.

128

Lewis explains the process of development in a dual economy as composed

of "a capitalist" sector and a "non capitalist" sector. The capitalist sector, according

to him is that part of the economy which uses reproducible capital, make payments

to the capitalist for the use of capital and employs labour for the purpose of profit

maximization. In other words, the capitalist production need not be restricted to

industry or manufacturing. It may also be applicable to plantations, mining and

petroleum. Similarly, the capitalist sector may be either private or public. On the

other hand, the non-capitalist sector which does not use reproducible capital and

does not employ wage labour for profit, is the traditional sector. It is endogenous

and has self-employment. The marginal productivities of labour in the capitalist and

non capitalist sectors are widely different. A fundamental property of the Lewis'

model is the existence of a unique relationship between the dual sectors of the

economy. When the capital sector expands, it draws labour from the non capitalist

sector which is assumed to have "unlimited" supply of labour.

The mechanics of Lewis model can be explained by Fig. 5.1 where OA

represents subsistence earnings in the traditional sector, OW the real wage rate in

the capitalistic sector, and WS the perfectly elastic supply of labour. Given a fixed

amount of capital at the outset, the demand for labour is initially represented by the

marginal productivity schedule of labour, N1D1• If we assume profit maximization,

capital will then be applied up to the point where the current wage equals the

marginal productivity of labour. If OW is the current wage, the amount of labour

employed in the capitalistic sector is OL; beyond L, workers earn whatever they can

in the subsistence sector. The total product N1PLO in the capitalist sector will then

be divided between wages in the amount OWPL and the capitalists' surplus or profits

in the amount WPN1•

1-u ::::::> 0 0 a: Cl

..J <( z (5 a: <( ~ 0 z <(

IJJ

~ ~

129

LEWIS MODEL OF DUALISTIC DEVELOPMENT

N1

. w s

02 03 A

Ot

0~----------------------------------------------------------L

QUANTITY OF LABOUR

SOURCE: Gerald M. Meier, Leading Issues in Economic Developaent., Fourth Edition (Oxford University Press, 1984) p.163.

Fig. 5.1

130

Lewis emphasizes7 that the key to the process is the use of the above

mentioned capitalist surplus. The driving force in the system is generated by the

reinvestment of thi's surplus in creating new capital. As the capitalist sector expands,

labour withdraws from the subsistence sector and gets absorbed into wage

employment. This surplus then becomes even larger, there is still more reinvestment

of profits, and the process continues progressively absorbing surplus labour from the

subsistence sector. This process results into an outward shift of the demand for

labour, from N,D, to N2D 2, N3D 3, ••• and so on.

It is clear from above that the growth in capitalist profits is crucial in this

process and the share of profits in the national income is of strategic importance.

As the capitalist sector expands, and the wage-price ratio remains constant, the share

of profits in national income increases. And since the major source of savings is

profits, savings and capital formation also increase as a proportion of the national

income.

Boeke (1953)8 represents another classical model of dualism about the

existence of the phenomenon in the Eastern Societies. Based on the precapitalistic

state of development of Indonesian economy, Boeke pointed out absence of

unlimited wants and the complete lack of profit-seeking tendency as the main

characteristic of the "Eastern" economy. Both of these properties result into a

backward sloping supply curve of effort and risk taking. According to him the

western economic theory was totally inapplicable to underdeveloped areas even if it

7. Gerald M. Meier, Leading Issues in Economic Development, Fourth Edition (Oxford University Press, 1984) pp 163-1M.

8. J.H. Boeke, Economics and Economic Policy of Dual Societies. As Exemplified by Indonesia, Haarlem:Tjecnk Willink and Zoon, 1953, Chs. 1, 3 and 9, pp.3-9, 21-35 and 100-112.

131

was in terms of a separate imported dual sector of an economy. He said "we cannot

reverse the process of social disintegration in dual societies because it is not possible

to transform the operating forces into the opposite of what they are".9 In other

words he suggested that a uniform economic policy may not be possible for a country

having economic dualism.

Higgins (1955-56)10 reacted to the above thesis very strongly. He maintained

that Boeke's ideas had very little to suggest by way of a positive economic policy for

the development of underdeveloped countries. He refuted Boeke's emphasis on

limited wants or backward sloping supply curves of effort and risk taking. He

pointed out that the consumption pattern of people in Indonesia, Brunei, and

Sumatra for endogenous and imported goods were indicative of "unlimited needs'.

However, to turn these wants into a wellspring of economic growth, the people must

be their own willingness to work, save, and take risk. According to him, this is a task

which may be difficult but not impossible.

Ultimately, Higgins presented an alternative explanation of Eastern dualism

in terms of a set of economic and social factors in which he emphasized the role of

size of family and rapid growth of population. He also suggested that development

of such areas required large amounts of capital investments, especially in the

underdeveloped sector. This investment must be made in a sizable amount and not

through marginal increments. From here it can be concluded that for countries with

limited scope of capital accumulation, external assistance may be required badly,

whereas for a group of countries like OPEC member countries a joint or collective

effort may solve their problem.

9. J.H. Boeke, Q1l. £it.., p.289.

10. Benjamin Higgins, 'The Dualistic Theory of underdeveloped Areas", in Economic Development and Cultural Change, vol.4, 1955-56, pp.99-115.

132

Later the classical model of "dualistic economy" has been modified to

incorporate the relative role played by the dual economic sectors under different

situations. Among the prominent contributions to the chain of these modifications

are Rollins (1956), Hirschman (1958), Ranis- Fei (1961 and 1975) Jorgenson (1961

and 1967), Kelly, Williamson and Cheetham (1972), etc.u

The main objective of these studies by various economists is to explore the

interaction between the two economic sectors. In the particular context when one

of the sectors involved is that of an extractive industry like petroleum, it is important

to take notice of the study done by Rollins (1956)'2, in which he investigated the

effects of the high growth capital-intensive and foreign trade oriented oil industry

on other parts of the economy. He has classified these effects into two categories :

direct influences and fiscal influences. Rollins concluded that the development of

mineral resources in dualistic economies was not likely to lead to general economic

growth. His contention was that foreign investments in the developing country were

generally small in relation to the value of output, the prospects of an accrual of

domestic capital in the private sector were rather slight, and the proportion of labour

force employed was insignificant because such investments tended to be highly

capital-intensive. Rollins was critical about the fiscal influences also and said that

the magnitude of direct payments to the host governments may not be very large.

Moreover, he argued that the presence of a foreign mineral scheme could well

prejudice the possibility of the native government's utilizing funds made available to

it by other sources. Regarding the response of the private sector or the stimulus

II. Gerald M.Meier, ill!. cit., p.162.

12. Charles E. Rollins, "Mineral Development and Economic Growth", in Social Research, Autumn 1956, pp.253-RO.

133

provided by government policies, Rollins observed that private investors were likely

to respond only if the government was capable of directing private expenditures into

the desired channels. But such a direction, in general, was contrary to the financial

interest of the raw-material producers - at least in the short-run. What Rollins

concluded was that foreign investments in oil industries were not likely to lead to

general ecc>nomic growth because they did not become integrated into the economy

of the source country to the extent required.

In a study of Iranian economy, Amuzegar- Fekrat (1971)13 have pointed out

that Rollins conclusions could be invalid in those cases where the domestic political

leadership was very strong and the response of private sector to the state leadership

was tremendous. Under these circumstances the system was expected to produce the

backward and forward linkages as discussed by Hirschman (1958) and others.

Although it is difficult to have a development strategy which could be valid under all

kinds of situations but whenever the development strategy includes an exhaustible

resource (such as oil), we might do well by aiming at increasing the degree of

integration between the foreign-financed export-oriented sector and the rest of the

economy. It implies that the development efforts of the government could be geared

at increasing the backward and forward linkages by focusing on those investments

that would contribute toward raising the relevant demand and supply elasticities.

Under these conditions, the foreign-financed export-oriented sector can be expected

to contribute to general economic growth via direct influences. A well-designed

public expenditure scheme under this strategy can, in turn, enhance the effectiveness

of its indirect forces.

13. Jahangir Amuzegar and M.Aii Fckrat, Iran Economic Development Under Dualistic Conditions,(USA: The University of Chicago Press, 1971), p.9.

D4

Under such circumstances, economists have preferred and advocated what is

known as the "hi~ push" approach. The main objective of this approach is to enforce

a deliberate and conscious effort for Fostering high rates of growth in certain sectors

of the economy. llowever, this strategy of development requires a comprehensive

and consistent planning of production, consumption, investment and other macro

economic activities. This has been already pointed out in the last chapter on

input-output analysis. Hirschman (1958)14 has provided an elaborate description

of the possibility of coexistence of two sectors which are quite different from each

other. The dualistic character of developing countries has been explained by him

with the classical example of the coexistence of "airplane" and "mule"- both fulfilling

their essential economic functions. According to him, "enclaves" created by dualistic

development arc characterized not only by two different levels of wages but also by

the different levels of capitalization, monetization, urbanization, techniques of

production, styles of living etc.

Ranis- Fei (1961)15 have described the conditions of dualistic development

for an economy which is Labour surplus but poor in underground resources so that

a vast majority of population is engaged in agriculture. Their model of the economy

is characterized by widespread disguised unemployment and high rates of

population growth. Their model draws heavily upon the Lewis model and focuses

on the development process between the position of "take-off' and the stage of

"self-sustaining growth". Later (1975), they presented a modified version of their

14. Albert 0. Hirschman, The Strategy of Economic Development, (New Haven Connecticut: Yale University Press Inc., 1958), pp. 125-129.

15. Gustav Ranis and John C.H. Fei,"A Theory of Economic Development", m American Economic Review, Vol.51, No.4, September, 1%1, pp.553-565.

135

model which was applicable for an open dualistic labour surplus economy.16 This

analysis was based on the post war experience of Taiwan and Korea which shared a

relatively strong agricultural infrastructure and exhibited the properties of being

labour surplus and open dualistic. The main purpose of their study was to

demonstrate that the post war experience of Taiwan and Korea through the decades

of 1950s and 1960s was very successful in solving their immediate problem of rising

unemployment. This was achieved by the process of a slow but continuous change

from the a system of production and exports which was traditional and land based

to a system which was nontraditional and labour based. The transition so obtained

has been explained in terms of two sub-phases - an import substitution sub-phase

followed by an export substitution sub-phase. Whereas the import substitution

sub-phase was characterized by the setting up of a variety of import substitution

industries, the export substitution sub-phase implied that the traditional exports (e.g.

rice, sugar etc.) were replaced by the non-traditional labour-intensive manufacture

exports. It may be noted that since the work of Fei - Ranis these economies have

moved further on the path of export substitution and have switched on to the

specialization of more sophisticated manufacture items. The studies of Ranis - Fei

are, therefore, very helpful in understanding the role of the dominant sector in the

development of a dualistic economy.

Around the same time, Jorgenson (1961) discussed how a dual economy would

develop under the assumption of agricultural surplus. According to him , the course

of development would change if there was a change in other parameters of the

system such as the net rate of reproduction defined as the difference between birth

16. John C.H. Fci and Gustav Ranis, "A Model of Growth and Employment in The Open Dualistic Economy", in Journal of Development Studies, vol.ll, No.2, January, 1975, pp.32-63.

136

and death rates prevailing at that time. This model was applicable to a country with

a fast growing population. An increase in the net rate of reproduction results in the

agricultural labour force growing at a rate which is more rapid than the rate of

growth of population. As a result the economy declines to what is known as

Leibenstein's "low-level equilibrium tnip". Accordingly, the development process of

a dual economy is characterized by a balance between capital accumulation and the

growth of population each adjusting to the other. On the contrary the growth

process of an already developed economy is characterized by a balance between

savings and investment and the growth of population is treated as a constant

parameter.

The Jorgenson model of a dual economy divides the economic system into two

sectors. 17 The advanced or modern sector is represented by the manufacturing

sector whereas the backward or the traditional sector is denoted by agriculture.

Special feature of this model is the asymmetry in the production functions of these

two sectors. The output of agricultural sector is a function of land and labour only

and there is no capital accumulation. On the other hand, the output in the

manufacturing sector is a function of capital and labour alone and no land is

required. Secondly, agricultural activity is characterized by diminishing returns to

scale and the production in the manufacturing sector changes in accordance with

constant returns to scale. Another feature of this model is that the production

functions for agriculture and industry can shift over time due to the technological

developments in these two respective sectors.

17. Dale W. Jorgenson, "The Development of A Dual Economy", in The Economic Journal, vol."ll, March, 1961, pp. 311-312.

137

As a later stage, Jorgenson (1967) 18 focused on the issue of structural change

in a dualistic economy by way of contemplating a relationship between the degree

of industrialization and the level of economic development. The former can be

measured by the share of Industrial activity in the macro variable such as GOP,

employment, saving and investment, while the latter is denoted by an increase in the

real GOP per capita. Researchers by now had established a positive empirical

association between them. The association between the degree of industrialization

and the level of economic development can be established theoretically also under

the set of assumptions both classical as well as neo-classical. Under these alternative

sets of assumptions, Jorgenson ·examined how the policies of change in the structure

of output, employment, rate of investments, factor intensity and factor substitution

could he important strategies for the industrialization of the developing countries

especially those exhibiting the properties of economic dualism.

Jorgenson, therefore, concluded that the industrial sector can play an

important role in the development of a dual economy with or without disguised

unemployment. This feature of his model is relevant to all LOCs including the oil

exporting countries. The end result of the process of the development is that the

industrial output and industrial labour force ultimately become dominant. This is

facilitated by a shift in the consumer demand from a~ricultural to industrial products

and the rising proportion of investment demand in total output. However, it is of

utmost importance that the supply conditions for the agricultural sector must not be

neglected. In other words, the industrial development of a dualistic economy may

not be economically viable unless technological progress in agriculture is sufficiently

18. Dale W. Jorgenson, "Surplus Agricultural Labour and The Development of A Dual Economy", in Oxford Economic Papers, Vol.t9, No.3, November, 1%7, pp. 338-362.

138

rapid to outstrip the growth of population and the force of diminishing returns.

From an analytical point of view, the process of structural change and

economic transformation of a dualistic system can he treated by various techniques.

The classical and neo-classical explanations of growth and development are based on

partial equilibrium analysis. It is a useful technique to understand the role of various

factors taking each of them separately and individually, hut it cannot spell out the

interaction between factor and product markets. The interdependence of factors and

outputs is better described by a general equilibrium system. By this method we are

able to take stock of the factor and product markets together and know about the

steady growth path followed by the economy. While Walras and Von-Neumann are

the main contributors of general equilibrium theory, partial equilibrium framework

is associated with the names of Chenery, Clark and Kuznets. Following the

assumptions and the framework of general equilibrium model, Leontief provided the

input-output technique. The static and dynamic versions of this model help us in

examining sectoral changes in the economy based on the assumption of proportional

growth in the factor and commodity markets. Kelly, Williamson and Cheetham

(1972) 19, presented a growth model which is capable of generating non proportional

changes in the factors and outputs of different sectors. Based on the formulations

of Jorgenson and Fei-Ranis, the model given by Kelly et.al is made more general by

the incorporation of technological dualism in agricultural progress, dualism in rural

and urban household demand for goods and services, and dualism in the household

choices for family size. By extending it to more general characteristics of an

underdeveloped economy "with special reference to Philippine and other South East

19. Allen C. Kelley, Jeffrey G. Williamson and Russell J. Cheetham, Dualistic Economic Development. Theory and History, (Chicago: The University of Chicago Press,1972), ch.2, pp. 22-57.

139

Asian countries", their model is capable of presenting more realistic analysis of a

dualistic economy.

The Japanese experience of development and growth is an excellent case

study. It has often been selected as a proto-type of the labour surplus country

·following a successful path of development. Ohkawa • Rosovsky (1960)20 have

provided a thorough analysis of the sectoral development of Japanese economy

where they assess the role of agriculture in modern economic development of this

economy. During the period of long sustained growth since Meiji restoration, there

have been various changes in the development process of Japan which provide a

good example of how a country's development can be assisted by agriculture, foreign

sector and power of the state. According to Ohkawa ·- Rosovsky, World War I

marked a distinct structural change in this economy which was especially pronounced

in the relationship between agriculture and industry. Analyzing the role of agriculture

during the period from 1878 to 1917, they estimated the advancement in output and

productivity. It was found that the expansion rate of food crops was high enough to

outstrip the growth rate of population. It averaged about 2.3 per cent per annum in

this period. The land productivity in the same period increased by 80 per cent. The

labour productivity (output-labour ratio) was reported to have increased at annual

rate of 2.6 per cent. The implications of these changes in output and productivity

become clear when understood in conjunction with other endogenous macro variables

of Japanese economy. Thus, the expansion of agricultural output was almost large

enough to supply much needed food for the rapidly growing urban population and

also to meet the increased food demand a rising from a rise in real per capita

20. Kazushi Ohkawa and Henry Rosovsky, "The Role of Agriculture in Modem Japanese Economic Development", in Economic Dcvclo[!mcnt and Cultural Chanie, Vol.9, No.2, October, 19(..0, pp.43-67.

140

income.21 In this way, the forces of demand and supply for food were almost in

equilibrium during the initial phase of her industrialization. In other words,

agriculture in Japan developed in balance with the industrial sector thus revealing

a pattern of harmonious dualistic development. Such a contribution in the

industrialization and urbanization was necessary to contain the inflationary pressures

stemming from possible shortage of food as experienced by many developing

economies of present times.

Besides its domestic function, agriculture also played a big role in the

expansion of its external sector. Silk-cocoons and tea-leaves were the primary

agricultural goods used in the manufacturing and export of raw silk and tea. In this

way agriculture played the role of foreign exchange earner which was very important

for the early economic development of Japan.

5.3 Application of Economic Dualism in Some of OPEC Member Countries

Almost all the theories and explanations of economic dualism discussed in the

last section point out to the existence of a leading sector which in the course of

development makes a positive impact on the remaining sectors of the economy. In

other words, the dominant sector introduces a kind of dynamism and puts the

econoll]y on the path of sustained growth.

The study of economic development broadly defined as a process whereby per

21. During the period 1878-1917 population increased at a rate between 0.8 and 1.3 per cent per year. The income elasticity for demand of food items was estimated to be between 0.6 and 0.7. Since per capita real income increased at about an annual rate of 2 per cent, these data taken together indicate that the demand for food increased roughly at the rate of 2 per cent. per annum.

Sec, Kazushi Ohkawa and Henry Rosovsky, Q1h cit., p.46.

141

capita mcome increases over a period of time, is the study of the complex

relationships of interdependent variables among various economic sectors. During

the period encompassing last two centuries, the process of economic development

in the OPEC member countries has generally been led by the so-called growth

centers or leading sectors. The growth center in some cases has been no more than

a single industry. A leading sector is one that experiences a high growth rate in

relation to the rest of the economy and consequently, induces favourable response

from the other sectors. The inducement is provided by the supply of low cost

products for the consumer, or by stimulating output in other industries, or by creating

external economics that can be captured and integrated into other sectors of the

economy.

In the case of OPEC member countries, the leading sector is obviously the oil

sector which includes the allied activities also.' As mentioned earlier this sector has

been operated by multinational oil companies. The presence of multinational oil

companies in operation of the oil sector introduces complications in the evaluations

of overall costs and benefits. We shall not go into the details of issues such as

foreign dominance and dependence arising from the foreign investments in this

sector. Instead, we confine to an examination of the backward and forward linkages

of this sector in dualistic settings of economies of the OPEC member countries:·

In this section, therefore, we study the actual position of sectoral distribution

*

**

The influence of the oil industry in these countries is so pervasive that it tends to embrace all their sectors. Thus, while the mining and quarrying activities belong to the primary sector, its refining is characteristic of manufacturing. At the same time, the distribution and marketing of oil and allied product are to be classified in the service sector.

Here Oil sector and oil industry have been used as synonyms. They both mean mining and quarrying of crude oil and natural gas. The process of oil refining is included in the manufacturing sector.

142

regarding important macroeconomic variables in relation to a sample of selected

OPEC member countries namely, Gabon, Iraq, Libya, United Arab Emirates

and Venezuela: The study of the relationship of their agriculture sector with other

sectors (specially the manufacturing sector) of the economies can throw light on the

situations of economic dualism in these countries. Before that, however, we give a

brief description of the major economic sectors of these countries (see Appendix

4.14).

5.3.1 Impact of Oil Sector on the Economies of OPEC Member Countries

The experience of the OPEC member countries shows that as long as the oil

sector remained under foreign control, its impact on the rest of the economy was

minimal. The overall contribution of oil sector was more or less in line with the

observations made by Rollins for Bolivia and those of Amuzegar- Fekrat for Iran.22

These studies showed that the royalties paid by the multinational oil companies

formed but a small portion of the total developmental expenditure. In other words,

the major part of the government budgetary finances came from sources other than

oil e.g. taxes, customs, and road levies. Similarly, the direct impact of the oil sector

in terms of the backward and forward linkages have been minimal also. The flow

of resources from the domestic economy into oil industry was totally insignificant.

No strategic industries, other than oil, developed in spite of the availability of raw

materials,- cheap labour, and other relatively favourable circumstances. It implies

that the effect of backward linkages was absent. As far as the forward linkage are

concerned, the impact was again feeble and insignificant. The multinational oil

•

22.

The selection of these countries in the sample is largely due to the slightly better availability of data on their macro variables e.g., GOP, capital formation and employment of labour.

Sec, Rollins (1956) and Amuzegar-Fekrat (1971), Q1!:. cit., pp. 253-80 and p.9 respectively.

143

companies had no interest in establishing the by product and ancillary industries

linked to oil production and refining. Since they kept their foreign exchange

earnings, reserves, and deposits in the foreign banks, the developmental impact on

banking and other financial institutions was insignificant, and therefore, there was no

inducement for the development of tertiary sector. In fact, except that some oil was

used for domestic consumption, the overall forward linkage effect was very little.

Consequently, most of the economies of OPEC member countries continued to

remain glaring examples of dualistic economic structure because of the prolonged

existence of their respective traditional sector along with the foreign dominated and

highly capital-intensive oil sector.

However, the above mentioned economic scenario of the OPEC member

countries was valid only up to early 1970s when the nationalization of the oil industry

was completed in almost all the countries. As a result of nationalization, the leading

sector came under the direct control of the sovereign governments and was made to

play a positive role in the process of development. There have been significant

structural changes in all those OPEC member countries which are characteristic of

forward looking and upward rising economies. As shown in the subsequent analysis,

the share of the traditional sector which played an important role of sustaining the

development process, has been declining in terms of its share in GDP, capital

formation and employment. At the same time the share of the oil industry,

particularly its manufacturing activities, has been continuously increasing except

where the continuous increase has been suddenly interrupted by various unexpected

events. The relative share of the leading sector vis-a-vis the traditional sector in the

important macroeconomic aggregates reflects the changing structure of the OPEC

member countries. This claim can be easily substantiated by analyzing the sectoral

144

5.3.1.1 Sectoral Analysis of GDP

As already pointed out in the preceding discussion, the economy of the OPEC

member countries is, of late, dominated by economic activities related to the oil

sector. It is, therefore, no surprise that this sector is the largest single contributor to

the gross domestic product. In general, the relative importance of the oil sector in

the OPEC member countries has increased after 1973 when the prices of oil

increased four times and again in 1979 when the prices were doubled. For the

purpose of analyzing the importance of oil sector in the OPEC member countries,

we take a sample of five countries (Gabon, Iraq, Libya, United Arab Emirates and

Venezuela) and divide their GOP into four major sectors namely, agriculture, mining

and quarrying, manufacturing and other sectors. The analysis is focused on the

period of 1970s and 1980s except where the data for these years were not available.

The analysis of sectoral share in terms of constant prices (1980' = 100) for Gabon,

Iraq, Libya, United Arab Emirates and Venezuela is given in Table 5.1.

From the point of view of agricultural share the countries of the sample can

be divided into two groups : (i) countries like Gabon, Iraq and Venezuela where

• Except Venezuela in which case the base is the 1968 prices .

145

agriculture sector has a visible share in the GOP around 5-10 per cent, (ii) countries

like Libya and United Arab Emirates where the share of agriculture has been rather

small (around I to 2 per cent). From the Table 5.1, it is clear that the share of

agriculture sector during the decade of 1970s declin~d in all countries of the first

group. The decline was prominent in Gabon and Iraq which are known to have a

self-sufficient agricultural base. There was a noticeable decline in the case of Libya

also. The general decJine in the share of agriculture in Gabon, Iraq and Libya shows

that during 1970s the rate of growth of agricultural output in these countries was

lower than that of aggregate output. The case of the United Arab Emirates is a

typical one because this island country increased its expenditures on agricultural

activities in an effort to change their deserts into arable land.

Surprisingly, share analysis of the agriculture sector in most of these countries

has shown the opposite trend during the decade of l9H0s. It can be easily explained

in terms of the price crash of oil arising from the world wide recession in

international economy during this period. By the turn of 1980s, as one would expect,

the share of agriculture sector again showed a declining trend in the OPEC member

countries as a ·result of recovery in the international oil market.2.'

23. World Bank, World Development Report, Oxford University Press, 1990.

146

Table 5.1

Distribution of Gross Domestic Product in Some of OPEC Member Countries

among Four Major Economic Sectors (Percentage)

Economic Sectors Years Gross

Agriculture Mining & Manufacturing Other Domestic Quarrying Sectors Product

Gabon

1972 12.424 32.436 7.985 47.155 100.000

1973 11.646 30.875 6.625 50.854 100.000

1974 9.131 47.913 4.123 38.833 100.000

1975 8.817 40.473 4.973 45.737 100.000

1976 5.133 31.632 4.855 58.380 100.000

1977 5.705 35.185 6.623 52.487 100.000

1978 6.695 38.254 7.339 47.712 100.000

1979 5.461 41.934 6.634 45.971 100.000

Iraq

1970 16.000 31.000 9.001 43.999 100.000

1971 15.000 36.000 8.001 40.000 100.000

1972 18.000 29.000 10.000 43.000 100.000

1973 13.000 36.000 10.000 41.000 100.000

1974 8.000 60.000 6.000 26.000 100.000

1975 8.000 51.000 7.000 34.000 100.000

1976 9.000 61.000 8.000 22.000 100.000

1977 8.000 52.000 8.000 32.000 100.000

Contd ...

147

Table 5.1 Contd ...



1978 8.000 52.000 7.000 33.000 100.000

1979 5.000 59.000 6.000 30.000 100.000

1980 5.000 62.000 4.000 29.000 100.000

1981 9.000 30.000 7.000 54.000 100.000

1982 10.000 25.000 7.000 58.000 100.000

1983 11.000 24.000 8.000 57.000 100.000

1984 13.000 26.000 8.000 53.000 100.000

1985 16.000 26.000 10.000 48.000 100.000

Libya

1975 2.022 74.016 1.121 22.841 100.000

1976 1.883 78.537 1.225 18.335 100.000

1977 1.445 76.693 1.553 20.309 100.000

1978 1.530 72.208 1.762 24.500 100.000

1979 1.500 71.870 1.570 25.060 100.000

1980 1.731 62.599 1.817 33.853 100.000

1981 2.433 49.327 2.498 45.742 100.000

1982 2.425 51.287 2.677 43.611 100.000

1983 2.851 49.576 3.190 44.383 100.000

1984 2.886 45.282 3.630 48.202 100.000

1985 2.772 47.408 4.238 45.582 100.000

Contd ...

148

Table 5.1 Contd ...



United Arab Emirates

1975 0.696 68.155 0.895 30.254 100.000

1976 0.791 65.302 1.158 32.749 100.000

1977 0.790 58.793 2.699 37.718 100.000

1978 0.933 54.371 3.269 41.427 100.000

1979 0.842 60.687 2.926 35.545 100.000

1980 0.753 64.431 3.816 31.000 100.000

1981 0.903 57.992 6.874 34.231 100.000

1982 1.041 51.611 8.950 38.398 100.000

1983 1.256 45.979 9.262 43.503 100.000

1984 1.363 46.094 9.403 43.140 100.000

1985 1.522 45.504 9.422 43.552 100.000

1986 2.052 32.521 9.492 55.935 100.000

1987 1.996 36.835 9.312 51.857 100.000

1988 2.093 33.626 9.501 54.780 100.000

Venezuela

1970 6.999 19.315 16.321 57.365 100.000

1971 6.847 17.757 16.297 59.099 100.000

1972 6.575 15.760 16.577 61.088 100.000

Contd ...

Table 5.1 Contd ...

Years Agriculture

1973 6.514

1974 6.517

1975 6.576

1976 5.827

1977 5.888

1978 5.951

1979 6.043

1980 6.282

1981 6.183

1982 6.360

1983 6.767

1984 6.913

1985 7.394

1986 7.493

1987 7.571

Economic Sectors

Mining & Quarrying

15.756

13.426

10.236

9.044

8.127

7.861

8.432

8.045

7.865

7.013

6.960

7.191

6.716

6.767

6.723

Manufacturing

16.748

16.759

16.508

17.005

16.490

16.863

17.337

18.008

17.615

18.206

18.960

20.096

20.817

20.848

20.749

Other Sectors

60.982

63.298

66.680

68.124

69.495

69.325

68.188

67.665

68.337

68.421

67.313

65.800

65.073

64.892

64.957

149

Gross Domestic Product

100.000

100.000

100.000

100.000

100.000

100.000

100.000

100.000

100.000

100.000

100.000

100.000

100.000

100.000

100.000

150

The sectoral analysis given in the Table 5.1 clearly shows that mining and

quarrying of crude oil and natural gas has been the dominant and the leading sector

in all the OPEC member countries. The share of this sector in the early 1970s varied

from around 19 per cent in Venezuela to 78 per cent in Libya. However, the

situation changed during the 1980s when the manufacturing activity overtook the

mining and quarrying sector. In general, decline in the share of the mining and

quarrying sector during 1980s can also be explained by collapse in the prices of crude

oil.

As regards the manufacturing activity (by which we mean oil refining and

natural gas processing, petrochemical industries, fertilizer and other allied

industries.), the share of this sector in the GDP of the sample countries has

continuously increased throughout the decades of 1970s and 1980s except country like

Iraq and Gabon where late nationalization of oil industry caused the share of mining

and quarrying sector to be more than the manufacturing and allied industries. The

ever- increasing share of manufacturing sector speaks of the direct and indirect

effects of the oil industry in the development proeess of the OPEC member

countries produced by the backward and forward linkages as made out earlier in the

last chapter. As clear from the table, the share of manufacturing sector increased

in all these countries except Gabon where it has remained constant at a round 7 per

cent. In some countries like Libya and United Arab Emirates the share of this sector

in the early 1970s was as small as 1 per cent, whereas in Iraq and Venezuela it was

about 10 and 20 per cent respectively.

The figures for the share of "other sectors" indicate that it invariably formed

about half of the GDP for all the countries throughout the period of our analysis.

It is not surprising because there are a large number of economic activities included

151

in this sector. Usually, known by the name of tertiary sector, it includes electricity,

gas and water; construction; wholesale and retail trade, restaurants and h<?tels;

transport, storage and communication; financing, insurance, real estate and business

services; and community, social and personal services. More important is the

observation about the ever increasing tendency in the share of this sector. Like

manufacturing, the increase in the share of "other sectors" is indicative of a positive

feature in the economic devet'opment of the OPEC member countries. The

observation of a general increase in the share of manufacturing and "other sectors"

implies that they both grew at a rate which was higher than the growth rate of

aggregate output. Needless to mention that the expansion in the shares of

manufacturing and the "other sectors' is matched by an equivalent decrease in the

shares of agricultural and the mining sectors. This trade-off in the shares of the

traditional and the non-traditional sectors provides us an idea about the continuous

change in the dualistic conditions prevailing in the OPEC member countries.

5.3.1.2 Sectoral Analysis of Capital Formation and Employment

The extent of dualism in the economies of the OPEC member countries and

the repercussions arising therefrom can also be seen by examining the sectoral shares

in the gross fixed capital formation and the total employment of labour. The

analysis for capital formation at constant 1980' prices is given in Table 5.2 whereas

for employment.. it is presented in Table 5.3. Such an analysis is helpful for the

purpose of accounting for changes in the stocks of productive resources (Labour and

Capital) employed in each of the major economic sectors considered above.

*

**

Again, the base for Venezuela is 1968 prices.

Our definitions of capital formation and employment conform to those given in U.N. National Account Statistics and ILO Statistics

152

The availability of data on employment is scanty for the countries in the

sample except for Venezuela where distribution of employment shows a shift away

from agriculture and an increase towards mining and manufacturing. More or less

same picture is available from whatever meager data are available on other

countries. This is in conformity and supplements the sectoral analysis of GDP

carried out in the last section. In other words, the oil sector encompassing mining

and manufacturing activities has been playing the leading and dominant role not only

in terms of sectoral distribution of output, but also in terms of the distribution of

employment in the OPEC member countries.

The implication and interpretation of the distribution of gross fixed capital

formation into major economic sectors, depends to great extent on the meaning of

capital formation itself. However, the sectoral shares of capital formation extracted

from United Nations, National Accounts Statistics indicate that the OPEC member

countries have had different experience regarding the share of the agriculture

vis-a-vis those of mining and manufacturing. Nevertheless, there has been a general

and common tendency of increasing amount of capital formation going into "other

sectors". This may be dNe to the reason that after the strike of general affluence

as a result of hike in the price of oil, most of the OPEC member countries have

concentrated on the development of infrastructural facilities in their respective

economies. The enhancement in the infrastructural facilities such as transportation,

communication, banking, insurance etc., result in an immediate improvement in the

overall efficiency of production.

153

Table 5.2

Distribution of Gross Fixed Capital Formation in Some of OPEC Member Countries

among Four Major Economic Sectors (percentage)


Agriculture Mining & Manufacturing Other Fixed Quarrying Sectors Capital

Fonnation

Gabon

1972 3.000 25.000 3.000 69.000 100.000

1973 3.000 25.000 3.000 69.000 100.000

1974 3.000 25.000 3.000 69.000 100.000

1975 1.000 15.000 6.000 78.000 100.000

1976 1.000 8.000 6.000 85.000 100.000

1977 2.000 9.000 4.000 85.000 100.000

1978 2.000 10.000 8.000 80.000 100.000

1979 2.000 10.000 8.000 80.000 100.000

Iraq

1970 11.993 3.992 23.000 61.015 100.000

1971 15.006 5.007 22.003 57.984 100.000

1972 13.996 5.995 23.000 57.009 100.000

1973 12.002 11.003 23.996 52.999 100.000

1974 7.998 13.001 20.002 58.999 100.000

1975 7.001 8.000 23.000 61.999 100.000

1976 10.001 12.001 18.999 58.999 100.000

Contd ...

154

Table 5.2 Contd ...



Formation

1977 11.999 12.999 20.002 55.000 100.000

1978 10.999 10.001 16.000 63.000 100.000

1979 12.000 9.000 19.001 59.999 100.000

1980 12.999 6.001 12.999 68.001 100.000

1981 11.000 3.999 13.001 72.000 100.000

1982 11.000 4.001 13.001 71.997 100.000

1983 11.000 4.002 12.001 72.997 100.000

1984 12.999 4.000 6.999 76.002 100.000

1985 13.998 10.003 7.002 . 68.997 100.000

1986 13.874 7.194 6.997 71.935 100.000

Libya

1975 13.284 4.037 12.254 70.425 100.000

1976 13.170 3.247 14.740 68.843 100.000

1977 14.691 5.148 12.632 67.529 100.000

1978 13.419 9.627 11.054 65.900 100.000

1979 12.046 7.085 14.855 66.014 100.000

1980 13.503 6.202 17.446 62.849 100.000

1981 13.219 5.574 14.836 66.371 100.000

1982 10.267 6.567 13.425 69.741 100.000

Contd ...

155

Table 5.2 Contd ...


Agriculture Mining & Manufacturing Other Fixed Qu.arrying Sectors Capital

Formation

1983 11.011 7.699 17.456 63.834 100.000

1984 12.114 8.867 16.658 62.361 100.000

1985 10.794 11.569 16.459 61.178 100.000


1975 1.522 15.728 20.887 61.863 100.000

1976 1.299 11.089 13.061 74.551 100.000

1977 0.947 11.523 14.706 72.824 100.000

1978 1.196 13.028 23.084 62.692 100.000

1979 0.971 14.592 38.260 46.177 100.000

1980 1.857 18.116 33.106 46.921 100.000

1981 1.078 22.702 38.681 37.539 100.000

1982 1.518 12.119 40.398 45.965 100.000

1983 1.356 24.388 24.102 50.154 100.000

1984 1.349 28.161 23.933 46.557 100.000

1985 1.036 28.441 23.303 46.950 100.000

1986 0.848 27.483 20.481 51.188 100.000

1987 0.995 33.327 13.642 53.036 100.000

1988 0.626 33.008 14.923 51.443 100.000

Contd ...

156

Table 5.2 Contd ...



Formation

Venezuela

1970 6.649 12.805 13.764 66.782 100.000

1971 7.380 9,951 17.364 65.305 100.000

1972 5.205 6.961 18.977 68.857 100.000

1973 4.454 6.758 15.788 73.000 100.000 ..

1974 5.177 9.465 13.720 71.638 100.000

1975 6.086 4.237 13.244 76.433 100.000

1976 3.372 3.084 16.530 77.014 100.000

1977 3.329 3.960 9.904 82.807 100.000

1978 2.726 5.704 7.829 83.741 100.000

1979 2.842 9.450 4.802 82.906 100.000

1980 3.261 14.213 6.644 75.882 100.000

1981 3.798 17.679 4.073 74.450 100.000

1982 3.036 22.297 3.764 70.903 100.000

1983 2.242 21.757 1.591 74.410 100.000

1984 3.619 19.328 1.839 75.214 100.000

1985 5.838 17.471 3.254 73.437 100.000

157

Table 5.3

Distribution of Employment in Some of OPEC Member Countries among Four

Major Economic Sectors (percentage)

Economic Sectors Years Total

Agricultur~ Mining & Manufacturing Other Employ-Quarrying Sectors ment

Gabon

1970 18.254 8.413 14.762 58.571 100.000

1971 17.231 9.385 14.154 59.230 100.000

1972 18.248 10.219 13.285 58.248 100.000

1973 N.A. N.A. N.A. N.A. N.A.

1974 N.A. N.A. N.A. N.A. N.A.

1975 14.064 6.272 10.512 69.170 100.000

1976 13.266 6.129 12.102 68.503 100.000

1977 13.564 4.834 12.338 69.264 100.000

Iraq

1970 55.280 0.638 5.984 38.098 100.000

1971 55.338 0.637 6.171 37.854 100.000

1972 55.526 0.654 6.164 37.656 100.000

1973 55.767 0.670 6.154 37.409 100.000

Libya

1970 27.664 2.869 4.815 64.652 100.000

1971 27.669 3.094 4.662 64.575 100.000

. 1972 26.168 2.951 4.693 66.188 100.000

Contd ...

158

Table 5.3 Contd ...

Economic Sectors Years Total

Agriculture Mining & Manufacturing Other Employ-Quarrying Sectors ment

1973 24.066 2.843 4.813 68.278 100.000

1974 21.640 2.685 4.825 70.850 100.000

1975 19.658 2.599 4.859 72.884 100.000

1976 19.271 2.525 5.104 73.100 100.000

1977 18.941 2.510 5.451 73.098 100 .. 000

1978 19.128 2.639 6.130 72.103 100.000


1975 8.010 1.456 5.964 84.570 100.000

1980 5.786 1.146 7.246 85.822 100.000

1985 6.167 1.518 8.153 84.162 100.000

Venezuela

1975 19.934 1.339 15.366 63.361 100.000

1976 18.805 1.178 15.867 64.150 100.000

1977 17.556 1.409 16.242 64.793 100.000

1978 16.023 1.219 16.970 65.788 100.000

1979 15.405 1.357 16.378 66.860 100.000

.1980 15.015 1.480 15.893 67.612 100.000

1981 14.570 1.393 15.989 68.148 100.000

1982 14.460 1.518 15.690 68.332 100.000

Contd ...

Table 5.3 Contd ...

Years Agriculture

1983 14.H31

1984 16.077

1985 16.1H1

1986 15.506

1987 14.297

1988 13.709

1989 13.281

Economic Sectors

Mining & Quarrying

1.493

1.448

1.349

1.141

1.010

1.062

1.038

Manufacturing

14.78H

14.762

15.479

16.274

17.176

17.113

17.199

N.A. stands for data not available.

Other Sectors

68.888

67.713

66.991

67.079

67.517

68.116

68.482

159

Total Employment

100.000

100.000

100.000

100.000

100.000

100.000

100.000

The sectoral analysis of GOP, capital formation and employment given in

Tables 5.1, 5.2, and 5.3, reveal the shifts in the shares of agriculture, mining and

quarrying, manufacturing and services sector The shares of agriculture and mining

and quarrying in the total output as well as total employment declined all along in

the period of our study in the all the OPEC member countries. During the same

period the distribution of capital formation presented a slightly different picture.

The share of mining and quarrying to gross capital formation increased for the

whole sample, while the share of agriculture, manufacturing and services sector

registered a decline in relation with the mining and quarrying. The observation

regarding a decline in employment figures in the mining and quarrying sector may

be viewed in a critical manner. But this may not be surprising in light of the highly

160

capital intensive nature of the oil industry not only in the OPEC member countries

but any where in the world. It may be also noted that due to high intensity of capital

and the requirement of high skills of labour, wages in the oil industry tend to become

very high and thus the existence of dual techniques of production results in skewed

distribution of income.

In order to have a complete picture of the nature and extent of economic

dualism in the OPEC member countries, it is also necessary to take into account the

changes in factor productivities and factor intensities. The measurement of intensity

and productivity of labour and capital is not a simple task. The complication in their

measurement arises because an increase in the output may be attributed either to

arise in the efficiency or to arise in the intensity of the factor under consideration.

5.3.1.3 Sectoral Analysis of Factor Productivity and Factor Intensity

The question of the technique of production employed in the various sectors

is not easy to be analyzed. Even then, some features of the dualistic economies can

be understood with the help of ratios V /K, V /Land K/L where K,L and V represent

capital, labour and output respectively. In this section, we examine the pattern or

the movement of capital and labour productivities (more precisely the ratios defined

as output per unit of capital and per unit of labour respectively). Figures of these

ratios for the sample countries for the decades of 1970s and 1980s are given in

Tables 5.4 and 5.5 respectively. As expected, the output per unit of labour in

agriculture sector has been on the decline. Same is true for the output per unit of

capital in agriculture sector. This is quite an expected result. Since the total

amount of land in agriculture sector is fixed, the increase in other factors of

production soon results in the diminishing returns. As there is little possibility of the

161

Table 5.4

Product Per Worker in Some of OPEC Member Countries in

Four Major Economic Sectors

Economic Sectors Years Economy

Agriculture Mining & Manufacturing Other Wide Quarrying Sectors

Gabon

1972 3948.424 18408.157 3485.890 4694.890 5799.417 (0.681) (3.174) (0.601) (0.810)

1973 N.A. N.A. N.A. N.A. N.A.

1974 N.A. N.A. N.A. N.A. N.A.

1975 5159.509 53040.211 3888.538 5435.115 8219.653 (0.628) (6.453) (0.473) (0.661)

1976 3861.532 51507.215 4003.372 8505.076 9979.751 (0.387) (5.161) (0.401) (0.852)

1977 3340.207 57806.418 4263.409 6018.208 7941.927 (0.421) (7.279) (0.537) (0.758)

Iraq

1970 0.675 113.263 3.507 2.693 2.332 (0.289) (48.569) (1.504) (1.155)

1971 0.655 140.418 3.131 2.552 2.415 (0.271) (58.144) (1.296) (1.057)

1972 0.730 99.914 3.654 2.572 2.253 (0.324) (44.347) (1.622) (1.142)

1973 0.605 139.389 4.214 2.842 2.593 (0.233) (53.756) (1.625) (1.096)

Contd ...

162

Table 5.4 Contd ...



Libya

1975 1.086 300.818 2.438 3.311 10.564 (0.103) (28.476) (0.231) (0.313)

1976 1.170 372.395 2.874 3.006 11.972 (0.098) (31.105) (0.240) (0.251)

1977 0.952 381.484 3.556 3.469 12.484 (0.076) (30.558) (0.285) (0.278)

1978 1.014 346.721 3.641 4.305 12.669 (0.080) (27.368) (0.287) (0.340)


1975 15.887 8556.190 27.442 65.404 182.826 (0.087) (46.800) (0.150) (0.358)

1980 26.422 11414.032 106.913 73.332 203.018 (0.130) (56.222) (0.527) (0.361)

1985 39.921 4851.702 186.990 83.731 161.807 (0.247) (29.985) (1.156) (0.517)

Venezuela

1975 6.064 140.567 19.749 19.345 18.382 (0.330) (7.647) (1.074) (1.052)

1976 5.863 145.277 20.278 20.092 18.921 (0.310) (7.678) (1.072) (1.062)

1977 6.480 111.443 19.615 20.722 19.320 (0.335) (5.768) (1.015) (1.073)

1978 7.101 123.311 18.999 20.148 19.120 (0.371) (6.449) (0.994) (1.054)

Contd ...

163

Table 5.4 Contd ...



1979 7.394 117.121 19.951 19.223 UU\48 (0.392) ( 6.214) ( 1.059) (1.020)

1980 7.476 . 97.104 20.247 17.884 17.g7o (0.418) (5.434) ( 1.330) ( 1.001)

1981 6.750 96.778 17.524 15.950 15.906 (0.424) ((1.084) ( 1.102) ( 1.003)

1982 6.853 71.987 18.079 15.601 15.581 (0.440) (4.620) ( 1.160) ( 1.00 I)

1983 6.681 68.287 18.774 14.308 14.643 (0.456) (4.663) ( 1.282) (0.977)

1984 6.192 71.501 19.603 13.993 14.400 (0.430) ( 4.965) ( 1.361) (0.971)

1985 6.426 70.000 18.912 13.660 14.063 (0.457) ( 4.978) (1.345) (0.971)

1986 6.870 84.286 18.213 13.753 14.216 (0.483) (5.929) ( 1.281) (0.967)

1987 7.350 92.424 16.769 13.355 13.881 (0.530) (6.658) ( 1.208) (0.962)

Notes: Figures in parentheses indicate to the sectoral ratios. N.A. stands for data not available.

164

Table 5.5

Product Per Gross Fixed Capital Formation in Some of OPEC Member Countries

in Four Major Economic Sectors



Gabon

1972 11.090 3.475 7.128 1.830 2.678 (4.141) (1.298) (2.662) (0.683)

1973 15.673 4.986 8.916 2.976 4.037 (3.882) (1.235) (2.209) (0.737)

1974 7.286 4.588 3.290 1.347 2.394 (3.043) (1.916) ( 1.374) (0.563)

1975 17.637 5.398 1.658 1.173 2.000 (8.819) (2.699) (0.829) (0.587)

1976 9.233 7.112 1.455 1.235 1.799 (5.132) (3.953) (0.809) (0.686)

1977 6.232 8.542 3.618 1.349 2.185 (2.852) (3.909) (1.656) (0.617)

1978 8.558 9.780 2.345 1.525 2.557 (3.347) (3.825) (0.917) (0.596)

1979 9.322 14.316 2.831 1.962 3.414 (2.731) (4.193) (0.829) (0.575)

Iraq

1970 13.026 75.824 3.821 7.041 9.764 (1.334) (7.766) (0.391) (0.721)

1971 9.887 73.088 3.597 6.823 9.891 ( 1.000) (7.389) (0.364) (0.690)

1972 8.361 31.448 2.827 4.904 6.501 (1.286) (4.837) (0.435) (0.754)

Contd ...

Table 5.5 Contd ...

Years Agriculture

1973 6.6X5 (l.OX3)

1974 3.XX1 ( 1.000)

1975 4.013 (1.143)

1976 3.304 (0.900)

1977 2.442 (0.667)

1978 2.993 (0.727)

1979 1.389 (0.417)

1980 1.754 (0.385)

1981 2.996 (0.818)

1982 4.056 (0.909)

1983 4.191 (1.000)

1984 5.117 (1.000)

1985 7.278 (1.143)

Economic Sectors

Mining & Quarrying

Manufacturing

20.193 2.572 (3.272) (0.417)

17.907 1.164 (4.615) (0.300)

22.389 1.069 (6.375) (0.304)

18.661 1.546 (5.083) (0.421)

14.654 1.465 (4.001) (0.400)

21.399 1.801 (5.200) (0.438)

21.849 1.052 (6.555) (0.316)

47.103 1.403 (10.332) (0.308)

27.473 1.971 (7.502) (0.538)

27.882 2.403 (6.249) (0.539)

25.138 2.794 (5.998) (0.667)

33.262 5.848 (6.500) (1.143)

16.552 9.093 (2.599) ( 1.428)

Other Sectors

4.775 (0.774)

1.710 (0.441)

1.926 (0.548)

1.369 (0.373)

2.131 (0.582)

2.156 (0.524)

1.667 (0.500)

1.944 (0.426)

2.747 (0.750)

3.595 (0.806)

3.273 (0.781)

3.568 (0.697)

4.430 (0.696)

165

Economy Wide

6.172

3.880

3.512

3.671

3.663

4.115

3.333

4.559

3.662

4.462

4.191

5.117

6.368

Cont1L.

166

Table 5.5 Contd ...



Libya

1975 0.705 84.982 0.424 1.503 4.635 (0.152) (18.335) (0.091) (0.324)

1976 0.746 126.178 0.434 1.391 5.216 (0.143) (24.191) (0.083) (0.267)

1977 0.531 80.489 0.664 1.625 5.403 (0.098) (14.897) (0.123) (0.301)

1978 0.591 38.863 0.826 1.926 5.181 (0.114) (7.501) (0.159) (0.372)

1979 0.628 51.121 0.533 1.913 5.040 (0.125) (10.143) (0.106) (0.380)

1980 0.548 43.127 0.445 2.302 4.273 (0.128) (10.093) (0.104) (0.539)

1981 0.576 27.715 0.527 2.158 3.132 (0.184) (8.849) (0.168) (0.689)

1982 0.915 30.261 0.773 2.423 3.875 (0.236) (7.809) (0.199) (0.625)

1983 1.113 27.692 0.786 2.990 4.300 (0.259) (6.440) (0.183) (0.695)

1984 1.074 23.027 0.983 3.485 4.509 (0.238) (5.107) (0.218) (0.773)

1985 1.581 25.232 1.585 4.588 6.158 (0.257) (4.097) (0.257) (0.745)


1975 1.504 14.255 0.141 1.609 3.289 (0.457) (4.334) (0.043) (0.489)

Contd ...

167

Table 5.5 Contd ...



1976 1.928 18.640 0.280 1.390 3.165 (0.609) (5.889) (0.088) (0.439)

1977 2.279 13.937 0.501 1.415 2.732 (0.834) (5.101) (0.183) (0.518)

1978 1.764 9.432 0.320 1.494 2.260 (0.781) ( 4.173) (0.142) (0.661)

1979 2.432 11.652 0.214 2.157 2.802 (0.868) ( 4.158) (0.076) (0.770)

1980 1.477 12.954 0.420 2.406 3.642 (0.406) (3.557) (0.115) (0.661)

1981 3.259 9.930 0.691 3.546 3.888 (0.838) (2.555) (0.178) (0.912)

1982 2.439 15.141 0.788 2.970 3.555 (0.686) ( 4.259) (0.222) (0.835)

1983 3.035 6.181 1.260 2.844 3.279 (0.926) ( 1.885) (0.384) (0.867)

1984 3.490 5.650 1.356 3.198 3.452 (1.011) ( 1.637) (0.393) (0.926)

1985 4.651 6.385 1.614 3.702 3.991 ( 1.165) (1.600) (0.404) (0.928)

1986 8.404 4.110 1.610 3.795 3.473 (2.420) ( 1.183) (0.464) (1.093)

1987 8.747 4.965 2.974 4.260 4.357 (2.008) (1.140) (0.683) (0.978)

1988 14.213 4.331 2.707 4.528 4.252 (3.343) (1.019) (0.637) (1.065)

Contd ...

168

Table 5.5 Contd ...



Venezuela

1970 4.868 6.976 5.848 3.972 4.625 (1.053) ( 1.508) (1.186) (0.859)

1971 3.960 7.617 4.007 3.863 4.269 (0.928) (1.784) (0.939) (0.905)

1972 4.820 8.640 3.333 3.385 3.816 (1.263) (2.264) (0.873) (0.887)

1973 5.422 8.642 3.932 3.096 3.707 ( 1.463) (2.331) (1.061) (0.835)

1974 5.074 5.718 4.924 3.562 4.031 ( 1.259) (1.419) (1.222) (0.884)

1975 3.677 8.222 4.242 2.969 3.403 ( 1.081) (2.416) ( 1.24 7) (0.872)

1976 4.979 8.449 2.964 2.549 2.881 (1.728) (2.933) ( 1.029) (0.885)

1977 4.217 4.893 3.970 2.001 2.384 (1.769) (2.052) (1.665) (0.839)

1978 5.112 3.228 5.045 1.939 2.342 (2.183) ( 1.378) (2.154) (0.828)

1979 6.312 2.649 10.717 2.441 2.968 (2.127) (0.893) (3.611) (0.822)

1980 6.554 1.926 9.223 3.035 3.403 (1.926) (0.566) (2.710) (0.892)

1981 5.362 1.465 14.248 3.024 3.294 (1.628) (0.445) ( 4.325) (0.918)

1982 7.218 1.084 16.662 3.324 3.445 (2.095) (0.315) ( 4.837) (0.965)

Contd ...

169

Table 5.5 Contd ...

Economic Sectors Years Economy·


1983 13.323 1.412 52.610 3.993 4.414 (3.018) (0.320) (11.919) (0.905)

1984 10.253 1.997 58.630 4.695 5.367 (1.910) (0.372) (10.924) (0.875)

1985 6.420 1.948 32.425 4.492 5.069 (1.267) (0.384) (6.397) (0.886)

Note : Figures in parentheses indicate to the sectoral ratios.

scale economies to be obtained, the average productivity of labour and capital falls

as is clear from the results given in the table above. On the other hand, the

application of increasing amount of labour and capital in the mining, manufacturing

and the service sector leads to availability of the internal and external economies.

The net result is increase in the average factor productivities in these sectors. It can

be observed from the above tables that the mining and quarrying sector has shown

the highest output per unit of labour in all the countries. Similarly, agriculture sector

represents the lowest improvement in the output per unit of labour. Similarly,

highest and the lowest growth in terms of output per unit of capital are also shown

by mining and quarrying and agriculture sectors respectively.

The pattern of changes in output per unit of labour and output per unit of

capital as seen above should not be equated with changes in productivity per se. In

general, when more than one factor is involved in a given production function, the

productivity (averaged and marginal), of any one factor can be measured only by

hol.ding the other factors constant. In reality, however, what we observed is most

170

likely the change in total output caused by proportionate changes in all the input

factors. As long as production function is linearly homogenous (such as the

Cobb-Douglas function), the average total productivity caused by all the factors and

the marginal productivity caused by any single factor will be the same.

In order that our findings of output per unit of labour and output per unit of

capital are applicable to overall productivity, it is necessary that factor proportions

(the K/L ratio) remains relatively constant over the period of analysis. This leads

us to another analytical problem about the measurement of factor intensity. The

intensity of labour, for example, can be measured in terms of per unit of time, per

unit of output or per unit of capital. The last of these definitions is the one which

is commonly used in empirical research. Also, in the publications of economic

development, labour intensity (L/K or L/V ratio) is often deduced indirectly from

the degree of capital intensity (K/L or K/V ratio). This indirect approach to the

measurement of factor intensity implies that production functions are of such type

that an increase in K/L and K/V ratios satisfactorily reflects a decline in L/K and

L/V ratios.2A

The state of technology employed in the major economic sectors and the

quality of dynamism infused by the leading sector into the rest of the economy can

be examined with the help of the factor intensities. The data base for the

capital-labour ratio for the period of our study (1970-90) was scarcely available for

all the countries of the sample except Venezuela. However, the figures of K/L ratio

given in Table 5.6 strongly suggested the existence of dualism first between

24. For a detailed discussion on the concept and measurement of intensity of labour and capital see, A.S. Bhalla, Technology and Employment in Industry. A case study approach, Third Edition, copyright ILO, 1985, p. 17.

171

Table 5.6

Gross Fixed Capital Formation Per Worker in Some of OPEC Member Countries

in Four Major Economic Sectors



Gabon

1972 356.024 5297.957 489.044 2565.328 2165.590 (0.164) (2.446) (0.226) (1.185)

1973 N.A. N.A. N.A. N.A. N.A.

1974 N.A. N.A. N.A. . N.A. N.A .

1975 292.535 9826.648 2345.185 4633.457 4108.904 (0.071) (2.392) (0.571) (1.128)

1976 418.234 7242.354 2750.699 6884.541 5548.350 (0.075) ( 1.305) (0.496) ( 1.241)

1977 535.952 6767.373 1178.462 4460.665 3634.869 (0.147) ( 1.862) (0.324) (1.227)

Iraq

1970 0.052 1.494 0.918 0.383 0.239 (0.218) (6.251) (3.841) (1.603)

1971 0.066 1.921 0.871 0.374 0.244 (0.270) (7.873) (3.570) (1.533)

1972 0.087 3.177 1.293 0.525 0.346 (0.251) (9.182) (3.737) (1.517)

1973 0.090 6.903 1.638 0.595 0.420 (0.214) (16.436) (3.900) (1.417)

Contd ...

172

Table 5.6 Contd ...



Libya

1975 1.540 3.540 5.748 2.202 2.279 (0.676) ( 1.553) (2.522) (0.966)

1976 1.569 2.951 6.628 2.162 2.295 (0.684) (1.286) (2.888) (0.942)

1977 1.792 4.740 5.355 2.135 2.311 (0.775) (2.051) (2.317) (0.924)

1978 1.715 8.922 4.409 2.235 2.445 (0.701) (3.649) (1.803) (0.914)


1975 10.563 600.238 194.651 40.656 55.579 (0.190) (10.800) (3.502) (0.731)

1980 17.891 881.129 254.668 30.474 55.739 (0.321) (15.808) ( 4.569) (0.547)

1985 8.584 759.830 115.885 22.618 40.545 (0.212) (18.740) (2.858) (0.558)

Venezuela

1975 1.649 17.097 4.656 6.516 5.402 (0.305) (3.165) (0.862) (1.206)

1976 1.178 17.194 6.842 7.884 6.567 (0.179) (2.618) (1.042) ( 1.201)

1977 1.536 22.776 4.941 10.356 8.103 (0.190) (2.811) (0.610) (1.278)

1978 1.389 38.201 3.766 10.391 8.164 (0.170) (4.679) (0.461) (1.273)

Contd ...

173

Table 5.6 Contd ...



1979 1.171 44.221 1.862 7.874 6.350 (0.184) (6.964) (0.293) (1.240)

1980 1.141 50.406 2.195 5.893 5.251 (0.217) (9.599) (0.418) (1.122)

1981 1.259 66.043 1.230 5.275 4.829 (0.261) (13.676) (0.255) (1.092)

1982 0.950 66.433 1.085 4.693 4.522 (0.210) (14.691) (0.240) (1.038)

1983 0.501 38.355 0.357 3.583 3.317 (0.151) (11.563) (0.108) (1.080)

1984 0.604 35.806 0.334 2.980 2.683 (0.225) (13.346) (0.124) (1.111)

1985 1.001 35.927 0.583 3.041 2.774 (0.361) (12.951) (0.210) (1.096)

Notes: Figures in parentheses indicate to the sectoral ratios. N.A. stands for data not available.

agriculture and mining and quarrying and secondly between agriculture and

manufacturing. Strikingly, the capital-labour ratio in the mining and quarrying sector

was dis-proportionately high compared to the manufacturing and tertiary sector in

the all countries of the sample. This gives an indication of the OPEC member

countries priorities in the continuous upgradation of the process of extracting oil and

gas e.g., beginning with exploration, drilling, exploitation, production, oil refining and

gas processing, in addition to transport and ending with the marketing of oil and gas

174

and their products. Except in Gabon, the capital intensity of the manufacturing sector

was found to be much higher when compared with the economy wide aggregate of

the K/L ratio. Putting together the observations given above it can be concluded

that the economies of the OPEC member countries continue to exhibit a strong

tendency of dualism between agriculture sector and the oil industry. The "other

sectors" segments of these economies showed a level of K/L ratio not much deviating

from the aggregate level. The interrelationship of the four major economic sectors

and their repercussion for the economic development of OPEC member countries

have already been dealt with elsewhere.

In this chapter, we have examined the concept of economic dualism both in

historical context and in relation to the experience of the OPEC member countries.

In the light of development experience of present MDCs, dualism often implies the

coexistence of the modern and traditional sector in which the latter plays significant

role by generating surpluses necessary for the process of economic development.

Incorporated in the writings of Lewis, Fei-Ranis, Jorgenson, etc., the development

activity in this approach is endogenous. On the other hand, models of unbalanced

growth, such as those advocated by Hirschman are based on the principle of

simultaneous existence of the modern and traditional sectors, but in this case the

former is responsible for deriving the economy towards the stage of sustained growth.

This approach of economic dualism can be called as exogenous. In both the cases the

modern and the traditional sectors embody dual characteristics in terms of their roles

towards GOP, capital formation, employment, factor productivity and factor intensity.

Keeping this framework in mind, we have analyzed the state of economic dualism in

the OPEC member countries. Due to paucity of data, we have confined our

observation to the period of 1970-90. Our analysis shows that the member countries

175

of OPEC experienced varying and mixed response to economic development in terms

of the endogenous and exogenous approaches of dualism mentioned above. A few

countries such as Gabon, Iraq and Venezuela which had a rich heritage of agriculture

can be put in the endogenous category of dualism. Besides, all the OPEC member

countries had a large oil sector which was invariably foreign dominated and

capital-intensive. Hence, the oil sector has been working as a leading sector

providing growth stimuli to rest of the economy. It is no wonder, therefore, that the

sh:tre of oil sector in GOP and employment has been rising continuously as already

demonstrated by our analysis. The process of transformation of the OPEC member

countries is also evidenced by the changing patterns of productivity and intensity of

labour and capital respectively. Analysis of economic dualism shows that the

traditional and the modern sectors though interdependent, are far from being

integrated into their respective economies.

In the end, we should caution that oil being a primary commodity is subject

to the uncertainties of market. This has been amply clear by the adverse effects

experienced by the OPEC member countries caused by the worldwide recession of

early 1980s. In such situations the role of national governments becomes very

important. Special efforts have to be made not only to protect these economies from

the . vagaries (including the external influence on domestic output, employment,

investment etc.) but also to ensure that the benefits of oil sector are completely

funneled into the domestic economy.

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