Oil Revenue Shocks, Economic Growth and Petroleum Fund

Transcription

1 International Journal of Applied Economic Studies Vol. 3, Issue 1 February 015 Available online at ISSN: Oil Revenue Shocks, Economic Growth and Petroleum Fund Department of Management, Tafresh Branch, Islamic Azad University, Tafresh, Iran alirezabehroznia@gmail.com Abstract The objective of this paper is to examine the effect of oil revenue shocks on output in Iran using data from 1960 to 010. We apply the Johansen cointegration technique, to empirically examine the long-run co-movement as well as short run error correction mechanism between oil price and output and different measures of oil shocks. The findings suggest that output growth is adversely affected by the negative oil shocks, while oil booms or the positive oil shocks play a limited role in stimulating economic growth. The findings have practical policy implications for decision makers in the area of macroeconomic planning. The use of stabilization and savings funds and diversification of the real sector seems crucial to minimize the harmful effects of oil booms and busts. A natural resource fund is an institution and a mechanism that distinguishes natural resource revenue from other revenue. Also a Petroleum Fund can support fiscal discipline and shall be a tool that contributes to sound fiscal Policy. Keywords: Oil shocks, Johansen cointegration test, Economic growth, Petroleum Fund 1. Introduction Countries endowed with non-renewable natural resources (NRNR) are faced with substantial opportunities, but also great risks. Get the choice of industrial and economic policy, their sequencing, and alignment with global value chains right; support this with fiscal prudence, adequate institutional capacity and civil society participation; and NRNR revenues can be a force for sustained economic growth and social development. Get the policies, sequencing and alignment wrong; and ignore issues of absorptive capacity and good governance; and international experience tell us that a boom in NRNR revenues can become a curse, depressing economic growth, worsening poverty and increasing political instability. The higher the proportion of national income dependent upon NRNR revenues, the more important it is for governments to be able to manage the effects of a natural resource boom. Many countries are now actively preparing for increased NRNR revenues streams, recognizing that not to forward plan in this way increase the risk that revenues will be squandered, or worse, lead to economic stagnation and political instability. Historical records about oil-rich countries show that the large resources of oil and gas as a national wealth have not caused to gain better achievements than countries without plenty of the resources. Many oil-rich countries have showed very weakand unsatisfactory performance about management and optimum use of their natural resources to develop infrastructures and competitive advantages. Therefore a part of economic literature during the last three decades was devoted to explaining of reasons what known as resource curse or plenty paradox. Oil and mineral dependence produce a kind of economic growth that offers few direct benefits for the poor; moreover, oil and mineral dependence make pro-poor reforms of growth more difficult, due to the Dutch Disease. Actually, those economies that have pursued state-led industrialization as an attempt to diversify away from raw materials have actually had a slower movement into manufactures than those that pursued open trade policies. There is considerable evidence that non-renewable natural resource revenues, especially windfall revenues, can, if not properly managed, adversely affect economic growth. A wide number of explanations for these effects have been advanced, as follows: Worsened Income Inequality, Dutch Disease, Debt Obligations, Economic Policy Failure, Trade Regime Failure, Slow Skill Accumulation, Unfulfilled Public Expectations, Decline in Administrative and Fiscal Efficiency, Inter- Generational Inequality, Corruption and the Political Economy, Rent-Seeking, Localized Resource Curse, Localized Resource Curse (Civil Conflict), Economic Predation, Economic Stagnation, Failure investment in private sector, Unemployment, Democracy, Failure in Projects, Appointing lagging skill, Fluctuations in income, Reduce the incentive to collect taxes, Institutional quality, Migration and External debt. The paper is organized in four sections. Section two reviews the empirical literature and discusses the methodology and the mechanisms through which oil price or revenues influence asymmetrically economic activities in oil exporting countries, also literature of resource curse. Section three presents the econometric model, empirical results and suggestion. Finally section four concludes.. Literature Review 1

2 Oil Revenue Shocks, Economic Growth and Petroleum Fund The resource curse happens when an influx of revenue from the exploitation of natural resources deters development which leads to stagnation or a decrease in economic growth. Expenditure of natural resource wealth can have damaging effects on the foreign exchange rate, and on other sectors (namely manufacturing and agriculture). The resource curse literature shows that natural resource revenue affects institutions. For instance, countries with natural resource revenue are more likely to experience conflict, corruption and to have weak formal state institutions. On the contrary, countries that have avoided the resource curse are those whose productive institutions are strong. A country is described as having the resource curse if it uses its natural resources (e.g. Forests, minerals or petroleum) and the consequent revenue does not support economic growth. Rather the revenue is misused and a range of indicators (including economic growth) decline. A superficial review of the literature gives the impression the resource curse might be unavoidable when a natural resource boom occurs. However, wealthy, industrialized countries such as Australia, Canada and the United States have managed to avoid it, and some have argued that countries like Malaysia, Indonesia, Botswana, and Chile (Rosser 007; Vincent 1997) have also managed their natural resource wealth well. In other words, the theory of natural resource curse argues that countries that are blessed with an abundance of natural resources, often fail to develop economically. Usually, these countries have an abundance of one or two export commodities, and they are vulnerable to changes in demand or changes in prices. A dynamic economy should be diversified and not dependent on the export of a single commodity. Dependency on exports of primary commodities will hinder progression, because there is not much donation from labor during the production process. This is in contrast with manufactured exports, where labor donation is crucial during production and industries have motivations to improve and adjust to become internationally competitive. The Dutch disease is a symptom that originated from the Netherlands, when the Dutch discovered large reserves of natural gas in the 1960 s. This increased the value of the Dutch currency and caused problems for the manufacturing sector, which faced harder times to export their products. The symptom is defined by Cordon & Neary and Bruno & Sachs as a condition whereby a resource boom leads to appreciation of the real exchange rate and in turn damages manufacturing and other tradable sectors (quoted in Rosser, 006). When a country witnesses a boom in resource exports, this implies that demand for the resource has increased. This will result in an increasing demand for the national currency, followed by an appreciation of this currency. When a country s national currency appreciates, its exports become more expensive to foreign buyers. The result is a diminishing competitiveness in the international economy. The country will witness a reduction in exports and increase in imports (Sachs and Warner, 1997). Sachs and Warner (1997) add another problem following this Dutch disease, because when the export revenues increase, domestic spending will rise. This leads to increasing prices, especially of non-tradable, since these are determined domestically, in contrast to prices of tradable that are determined on the international market. Because prices and wages of tradable fall behind those of non-tradable, there will be a shift of resources from the former sector to the latter. Consequently, the allocation of capital and labor to the manufacturing sector becomes smaller. This might lead young people to forego education and to work directly in the non-tradable sector, since the price and hence market wage in that sector is above the marginal value product of labor in manufacturing. The Dutch disease happens when a rapid arrival of resource rent comes from the export of natural resources, and results in high domestic absorption and appreciation of the domestic currency, which then affects the nonmining sectors detrimentally. and influx of revenue from the exploitation of natural resources hinders development, leading to stagnation or a decline in economic growth. Expenditure of natural resource wealth can have detrimental effects on the foreign exchange rate. In response to the strengthening exchange rate, non-mining sectors (such as agriculture and manufacturing) may shrink, become less export competitive and more dependent on import protection and subsidies to maintain their importance in the economy, thereby contributing to inefficiencies. These subsidies are provided, courtesy of the natural resource revenue. When the resource rents decline, governments can find it difficult to continue to subside the non-mining industries because of the decline in tax revenue and the exchange rate appreciation (Drysdale, 007). Knowledge that government is in receipt of large flows of natural resource revenues also raises public expectations, encouraging rapid public spending and related public expenditure problems, e. g lack of due diligence and co-ordinated planning. Natural resource endowment provides more scope than resourcepaucity does for this type of cumulative policy failure. Positive oil shocks, perceived as permanent, lead to higher levels of expenditures, and vice versa. Under certain conditions, the growth rate of government expenditure is a function of the parameters characterizing the distribution of the government's future stream of oil income. Oil countries with smaller initial government size tend to experience faster growth in public spending. Upsurge in government revenues during that period were associated with higher budget deficits (Anshasy, 006). Much natural resource revenue is wasted simply because the quality of formal institutions and mechanisms to manage the revenue are weak. Spending an influx of natural resource wealth is tempting, particularly when the amount is above annual budget expenditure requirements. When there is extra liquidity, it would appear legitimate to spend the extra revenue, and there may be pressure to do so, yet rash decisions and poor expenditure may not achieve long-term goals let alone sustainable development ((Drysdale, 007). Another temptation is to increase spending on budget items in response to pressure from the public. One example is when public pressure demands extra civil service positions, perhaps as a result of high unemployment.

3 International Journal of Applied Economic Studies Vol. 3, Issue 1 February 015 If no real need exists and jobs are created this can result in an unproductive civil service. This is a politically appealing way to distribute rents (Auty 000) as is increasing transfer payments such as pensions, and unemployment payments (Anon. 1977). Much natural resource revenue is wasted simply because the quality of formal institutions and mechanisms to manage the revenue are weak. Spending an influx of natural resource wealth is tempting, especially when the amount is higher than annual budget expenditure requirements. When there is extra liquidity, it would seem legitimate to spend the extra revenue, and there might be pressure to do so, yet rash decisions and poor expenditure may not leas to long-term goals (e.g. saving for future generations when the natural resource is exhausted) let alone sustainable development. Part of the reason for poor planning is due to public pressure to spend and politicians responding to this pressure because of short political time-frames. Unfortunately, projects are often undertaken because of their immediate income-generation potential rather than any long-term benefit (Auty 000). Often the amount spent on projects is larger than the additional revenue provided by the natural resource income. Another reason indicating that natural resource revenue is wasted is that, in some cases, there is little, or no, institutional capacity or human capital to manage finance. Or, the institutions might be capable, but they may not be designed to manage the scale of wealth. A lack of human capital may also be the reason for poor expenditure decisions. With an influx in revenue there is the attraction to invest in physical capital and infrastructure, but states often over-invest to the point where projects provide little economic return. The other way in which natural resource revenue leads to waste is because there is little incentive for a country with an abundance of natural resource wealth to collect taxes. This has a two-fold impact; the Government s accountability and responsiveness to its citizens is weakened, and less revenue is generated. Generating less revenue from other industries means the Government becomes even more dependent on natural resource revenue and therefore more vulnerable to volatility in natural resource income. Stevens (005) review of how countries have avoided the resource curse suggests that planning, expenditure and human capital are central to solving this problem. Capacity or human capital (the skills and knowledge of workers which leads to productivity) is a factor that several authors (e.g. Gylfason 001; Manning 004) have emphasized as influencing economic growth. Human capital is needed to manage natural resource wealth well and Manning (004) argues that low levels of human capital can have a negative effect on the management of natural resource revenue resulting in a lower rate of (or decline in) economic growth. Many economists believe that a solution lies in establishing a separate fund outside the budget. The oil fund is established and designed to finance the government s budget and save some revenue for future generations. Such a fund will reduce the macroeconomic instability arising from the volatility of oil revenue and bring the government to save part of oil revenues for future generations. The stabilization fund are expected to institutionalize a range of mechanisms to manage oil revenue that assist decision-makers to decide how much to save, how much to spend, how to save, and when to spend. The flow of wealth from natural resources to a state is not constant; the price of the resource changes, production output varies and resources are discovered and exhausted over time. Managing natural resource wealth well takes fluctuations into account so that when there is less natural resource wealth a state can rely on its savings, built up during a boom in natural resource wealth. Although, the recent surge in oil prices has lent further importance to such oil funds, but they cannot be a unconditional solution. The oil dependent countries need to find a right balance between financing social and infrastructure development needs (by spending oil revenues), maintaining macroeconomic stability (by sterilizing oil revenues), and saving part of oil wealth for future generations (by saving oil revenues). Policymakers need to pay close attention to the effects of higher public spending on the real exchange rate and macroeconomic stability, and should make the best strategic use of windfall gains for achieving long-term development goals (Usui, 007). On the other hand, if the extra revenue from a boom is not managed well this will have a three-fold effect; no savings will accrue, whatever the additional revenue was spent on will be neglected when there is less revenue to spend and it will be difficult to adjust to the lower income stream. These effects result in more economic instability. The economic effects of poor natural resource wealth management can be further exacerbated if a state borrows (e.g. finance from international financial institutions) to fund its unsustainable consumption and generates unmanageable debt. Moreover, transparent management of oil revenues is an indispensable requirement to make sure the money is well spent (Drysdale, 007). 3. Empirical Results 3.1. Model Estimation In this section empirical model of asymmetric effects of oil price shocks on production, is specified and estimated. In production growth equation, in addition to positive and negative oil price shocks, the effect of other variables, including investment are considered. In this study, growth equation is specified as follow: 3

4 Oil Revenue Shocks, Economic Growth and Petroleum Fund log y t 0 n j 0 pos j t j 4 n j 0 neg j t j X where indicates the first difference, log is natural logarithm, Y it is gross domestic output (without oil), pos is positive oil price shock, neg is negative oil price shock, X is explanatory variables and is error term. In addition, asymmetry hypothesis implies: H0 : j j j 1,... n In growth model, various variables are used as control variables in vector X. Some of these variables are: physical investment, human capital, free trade, inflation rate, population, government expenditures, geographical variables, foreign direct investment, exchange rates premium, abundant natural resources, institutions and the quality of macroeconomic policy.in this study, due to the limited sample size, availability of data and diagnostic test, different combinations of variables, such as government expenditures growth, (Δ ln G), Liquidity growth, (Δln M), inflation rate, (Δ ln P), real money supply growth (Δ lnm/p), the percentage changes in real exchange rate, (Δ ln EX), investment to GDP ratio (inv/y) or investment growth (Δ ln inv), as control variables in vector X are used. In fact, government expenditures, money balance and inflation variables as the demand side factors and investment ratio as the supply side factor affect the production. One of the important and considerable factors in this model is estimation method of positive and negative oil price shocks. The methodology of estimation of positive and negative oil price shocks is as follows. 3.. Positive and Negative oil price Shock In empirical studies, any unanticipated change is considered as the shock. Researchers used different techniques for differentiation between positive and negative shocks. For example, Mishkin (198), Cover (199), Karras (1996) considered the residual of the money supply growth equation (M) as monetary shocks. I used the GARCH approach to decompose positive and negative shocks, but as the ARCH effects are not significant ( conditional variance is fixed. Then I used the residual of the oil revenue growth equation as oil shocks. In fact, in these studies oil growth is divided into anticipated and unanticipated ones, and the residual from the estimated equation of oil revenue growth is used as unanticipated oil shock, as follows: NEG t = 1 {abs(o rs t ) O rst } POS t = 1 {abs(o rs t ) + O rst } Where, O rst is the oil revenue shock and NEG t and POS t are the negative and positive components of the shock or, to express it differently, unexpected depreciation and appreciation of the oil revenue Data and unit root tests Time series data required to this research include non-oil GDP(Y), real oil revenue (OILREV), money supply(m), aggregate price level(p),exchange rate(ex), government expenditures(g) and fixed capital formation or investment to GDP ratio (INV/GDP). The sources for data are balance sheets of the Central Bank of Iran during the period The cointegeration analysis is subject to the integration order of time series. The integration orders of variables are examined by Augmented Dickey Fuller (ADF) and phillips-perron (PP) unit root tests. According to ADF and PP tests in Table (1), it can be seen that all variables except the investment to GDP ratio, INV/GDP, are integrated of order one so that when first differenced, all would be stationary. t Table 1: PP and ADF test statistic variables in level and 1st difference Augmented Dickey-Fuller Phillips-Perron test test Variable 1% 1% ADF test PP test Critical Critical statistic statistic Values Values Dlog y -4.11*** *** Dlog oil -5.45*** *** Dloginv -4.66*** *** Dinv/y -5.0*** *** DlogG *** DlogM -3.7*** *** DlogP DlogMP -3.48*** Dlogex -5.17*** *** Notes: *** respectively show the significance in 1% level. t

5 International Journal of Applied Economic Studies Vol. 3, Issue 1 February Cointegration test As the level variables are non-stationary, the cointegration among the levels of the variables should be tested. It is expected that the real oil revenue, investment, and GDP have an equilibrium relationship. If there is long run relationship between these variables, the residuals from the cointegrating relationship will be considered as non-oil GDP imbalance affecting GDP symmetrically or asymmetrically. Therefore, the cointegration among these variables is tested by using the Johansson methodologies. The test results are presented in Table (). As it can be seen in the table, Johansson test confirms one long run equilibrium relationship between these three variables. According to Granger representation theorem, a long run equilibrium relationship implies error correction mechanisms. The error correction mechanism ensures the long run relationship. Thus at least one variable in the relationship should react to non-oil GDP imbalances or the residuals of long run relationship, namely ECM. In the next section we examine the importance of non-oil GDP imbalances along with other variables on the production growth. Also, these imbalances may affect the production linearly (symmetric) or nonlinearly (asymmetric). Table : Maximal eigenvalue and trace test for cointegration vectors Variables in long-run relationship: ln(oil), ln(y), ln(i) A: cointegrating space Maximal eigenvalue test Null Alternative LR statistic 95% critical value Null Alternative Trace test LR statistic 95% critical value r=0 r= r= 0 r r 1 r= r 1 r r r= r r= B: cointegrating vector Loil ly li ECM -1 (8.11) (.71) Notes: Trace test and Max-eigenvalue test indicates cointegrating eqn(s) at the level and t-ratios in parentheses Estimating the short run non-oil GDP and asymmetric test In this section, the effects of positive and negative oil shocks as well as the supply and demand side factors on the production growth in Iran economy will be studied. For this purpose, we estimate various specifications according to the Table (3). The estimates in columns one to six are based on linear or symmetrical specifications. In other words, in these equations it is assumed that the effects of positive and negative oil shocks on real production are symmetric so that the relationship is linear. 5

6 Oil Revenue Shocks, Economic Growth and Petroleum Fund variable Table3: Estimation of model with different specification c D ( LY ( 1)) D (LOIL) D (LG ) D (LI) D (LEX ) D (LM) D (LP) D ( LMP) ECM ( 1) R (9.07) (.11) 0. (7.1) (6.05) (0.6) (0.5) (1.78) ** (.08) ** (7.01) (1.90) ** (3.06) (-.49) (1.9) ** 0.84 (1.87) ** - (-0.39) (.39) 0. (7.56) (1.87) ** (3.54) (3.35) (3.34) *** - (-0.71) (1.77) * (7.1) *** 0.19 (3.14) *** (4.11) *** 0.84 (1.44) (0.16) (1.73) * (.11) ** (7.01) *** (.1) ** 0.18 (.97) *** (.09) ** 0.84 AIC SIC DW AR () RESET ** 5.0** HET NORM Notes: t-ratios in parentheses and ***, **and * respectively show the significance in 1%, 5% and 10% levels. 6

7 International Journal of Applied Economic Studies Vol. 3, Issue 1 February 015 Variable c D ( LY ( 1)) POS POS( 1) NEG NEG( 1) D (LG ) D (LI) D(IY) IY IY ( 1) D (LEX ) D( LEX( 1)) D (LM) D (LP) D ( LMP) ECM( 1) ECM1( 1) ECM ( 1) Asymmetric test statistic R AIC SIC DW AR () RESET HET NORM Table3: Estimation of model with different specification (continued) 6 (0.83) (-0.7) () (0.48) (1.81) ** - (-0.65) 0. (6.81) *** 0.4 (3.14) *** (-.49) *** (.73) *** ** (0.) (1.1) - (-0.84) (0.95) (1.97) ** (6.37) 0.07 (1.91) ** 0.33 (5.53) *** (4.70) (-0.89) 0.08 (1.3) (0.59) (1.87) ** - (-1.13) 0.4 (6.86) (0.65) (0.14) (.64) (3.41) **.15*** 5.19** 9 (0.55) (-0.75) (0.83) (1.81) ** - (-0.48) 0.49 (3.99) *** (-04.07) 0. (.7) *** (0.75) 0.08 (.01) ** ** (4.65) (-0.84) (0.55) () (1.03) ** - (-0.4) 0.5 (7.05) (0.63) (7.0) ** 14.80** (0.75) (0.43) - (-0.63) (1.38) (1.80) *** 0.19 (6.1) 0.09 (.55) (3.4) (1.15) ** 6.10** (0.96) (0.3) (1.7) (1.79).5*** 0.0 (6.56) 0.07 (.4) 0.19 (3.16) (.04) * 5.77** Notes: t-ratios in parentheses and ***, **and * respectively show the significance in 1%, 5% and 10% levels. In all linear specifications, according tor, explanatory variables explain 75 to 84 percent of real non-oil GDP changes. The coefficients for the investment growth, loginv, in all the specifications are significant and of the expected sign (positive). Show that, the investment enter positive and significant in the real non-oil GDP growth equations with the size of coefficient changing between to 0.. Using the investment to GDP ratio instead of the, loginv, renders the similar results. Real oil revenue in symmetry specification increases the GDP by coefficient of to. Thus the results show the positive relation between real oil revenue and investment with GDP. The government expenditure enters positive and significant in the real non-oil GDP growth equations with the size of coefficient 0.13, the exchange rate enter positive and significant in the real 7

8 Oil Revenue Shocks, Economic Growth and Petroleum Fund non-oil GDP growth equations with the size of coefficient, the Liquidity enter positive and significant in the real non-oil GDP growth equations with the size of coefficient, the inflation enter negative and significant in the real non-oil GDP growth equations with the size of coefficient -0.15, the real money supply enter positive and significant in the real non-oil GDP growth equations with the size of coefficient changing between 0.18 to. Error correction coefficient ecm ( 1) reflects the adjustment speed of output with respect to the oil revenue disequilibrium. Considering the size of coefficient of error correction term (estimated between to ) it can be concluded that non-oil GDP responds significantly to its disequilibrium ( ecm ( 1) ). Among the linear specifications, the third one outperforms the others based on the R, Akaike (AIC) and Schwartz (SIC) information criteria. Diagnostic test results are presented at the bottom of the Table (3) for each specification. AR () stand for the Lagrange multiplier test statistic for autocorrelation in error terms ( with two lags), RESET is Ramsey s RESET test statistic for functional form misspecification based on the squares of fitted values, NORM is test statistic of normality of residuals based on the skewness and kurtosis and HET is Heteroscedasticity test statistic. As it can be seen, the obtained results are generally satisfactory. The first to fifth specifications reflect the symmetric effects of positive and negative oil shocks on production. But if oil effects are asymmetric, the results of these models may be misleading. As it was explained in previous section, to examine and test the asymmetric effects of oil shocks on real production, oil revenue changes are divided into positive and negative ones and added as two explanatory variables to the growth model using residuals technique. Specifications 6 to 1 in Table (3) are estimated decomposition of oil shocks to positive (pos) and negative (neg) ones. As it can be seen by adding positive and negative shocks to the growth equation, In all non-linear specifications, according tor, explanatory variables explain 7 to 85 percent of real non-oil GDP changes and the negative oil shocks are much more effective than the positive oil shocks contemporaneously according to the size and statistical significance. In all cases, the negative oil shocks are much more effective than the positive oil shocks contemporaneously according to the size and statistical significance. Negative oil shocks have negative and significant effect on GDP in most equations (- to -). Positive shocks in most cases are not significant or receive less importance than the negative oil shocks. The lag of positive oil shocks and negative oil shocks (based on the coefficient pos ( 1) and neg ( 1) ) are not significant. Moreover, the symmetry hypothesis implying the equal effects of positive and negative oil shocks is rejected based on Wald test. The estimation results from the above mentioned specifications indicate that long-run positive (ecm1) and negative (ecm) imbalances also have asymmetric effects on economic growth. The size of coefficient of (ecm1), ranging from to is much less than the coefficient of (ecm) which is estimated between0.08 to. In addition, coefficient of (ecm1) is not significant in some equation, while the (ecm) has important effects on (decreasing) economic growth. Among asymmetric specifications, equation 1 enjoys the best base onr, Akaike (AIC) and Schwartz (SIC) criteria. In most of the equations, the coefficients of the variables of the investment, are significant and of correct sign. The estimated growth equation 1 passes through all diagnostic tests (Heteroscedasticity, Ramsey s RESET test, autocorrelation and normality). In addition, the preferred specification is able to explain 85 percent of changes in GDP growth. Thus 15 percent of production changes are yet attributable to factors that are not included in the model. Due to severe structural changes in the sample period (especially Iran-Iraq War and Islamic Revolution) stability of structural coefficients based on the plot of cumulative sum of recursive residuals (CUSUM) and plot of cumulative sum of squares of recursive residuals (CUSUMSQ) have been used. The plot of CUSUM and CUSUMSQ statistics together with the 5% critical lines clearly indicates stability in equation and residual variance during the sample period. 8

9 International Journal of Applied Economic Studies Vol. 3, Issue 1 February CUSUM 5% Significance Figure 1: CUSUM test for parameters stability in the growth equation CUSUM of Squares 5% Significance Figure : CUSUMSQ test for parameters stability in the growth equation 3.6. Suggestion A natural resource fund is an institution and a mechanism that distinguishes natural resource revenue from other revenue. Where no Petroleum Fund exists, to determine how much revenue is received from the exploitation of petroleum resources, let alone how the revenue is spent (or misspent), particularly where institutions are weak, is more difficult. A Petroleum Fund can support fiscal discipline and shall be a tool that contributes to sound fiscal Policy. This section explores three objectives that Petroleum Fund Law aims to achieve; stabilizing the flow of petroleum revenue, financing the State budget, and saving some petroleum revenue for use in the future. A Petroleum Fund may serve to stabilize the flow of revenue by insulating the Government, and the economy, from revenue shocks that arise from the unpredictable nature of resource extraction and petroleum prices. Instead, this volatility and uncertainty is transferred to the Petroleum Fund, and the State uses a mechanism to limit expenditure. In this way a state can reduce the risk of Dutch disease or volatility in the exchange rate, because revenue is not spent as quickly (or slowly) as it comes. Such funds are often referred to as stabilization funds. Petroleum Fund Law stabilizes the flow of petroleum revenue by creating the effect of a reservoir. Whilst some funds might save only a specified portion of petroleum revenue, all of petroleum revenue is invested in the Petroleum Fund and small scale portions of revenue are withdrawn when needed. The revenue that these fields will generate will cause the Petroleum Fund to grow substantially and, like the water in the proverbial reservoir. This revenue will put pressure on the mechanisms that affect the outflow from the Petroleum Fund. Despite the Petroleum Fund s allusion of stability, stability could be eroded as the ratio of the Petroleum Fund s balance relative to its outflow grows. When the Budget is in deficit, a withdrawal from the Fund is made to finance the Budget gap. Such a mechanism assumes there is enough revenue in the Petroleum Fund to finance that gap, and relies on the good governance of other institutions to ensure the Budget is not increased because the Petroleum Fund has the revenue to finance it. If a fund s sole purpose is to finance the State budget then the only withdrawals from such a fund would be to the Budget. Such integration between Petroleum Fund and the Budget provides a robust mechanism that can facilitate monitoring of petroleum revenue and enhance transparency and accountability. Petroleum Fund can also be described as a savings fund. A savings fund is designed to assist the Government to create a store of wealth for future generations. The rationale for saving is that all non-renewable resources are finite and, based on that rationale, a state must recognize and plan for the eventual decline and exhaustion of this natural 9

10 Oil Revenue Shocks, Economic Growth and Petroleum Fund resource income (Davis et al. 003). A savings fund has the potential to meet the needs of both current and future generations. Petroleum revenue may be saved for future expenditure if, for example, the amount of the Budget was increased such that all the revenue in the Petroleum Fund was withdrawn, there would be none saved for future generations. However, Petroleum Fund Law does specify that management of the Petroleum Fund shall be in accordance with the principle of good governance for the benefit of current and future generations. A Petroleum Fund has mechanisms, the functions of which are to stabilize the flow of petroleum revenue, save revenue for future generations, and to finance its budget simultaneously. For the most part, these objectives will simultaneously be met, but there may be occasions when they conflict. Further, the mechanism which regulates expenditure is only a guide and if not used as a rule, the amount of petroleum revenue withdrawn may become erratic and differ markedly from one year to the next, thereby making it difficult for the Government to plan. 4. Conclusion This paper analyze the asymmetric effects of oil price shock on Iran economic growth as an oil exporting country for the period of using Johansen cointegration test and Error correction mechanism. The results from long run relationships estimations indicate a negative relationship between production level and oil revenue in the long run. The findings are in line with Dutch disease or resource curse in countries with high dependency to natural resources. In addition the results from the short run estimations indicate that oil shocks have a significant effect on economic growth. But the effects of negative shocks are much stronger and longer lasting than the positive shocks. In other words, the relationship between two variables is asymmetric. It means that production growth responds stronger to the negative shocks than to positive shocks. In addition, the effects of oil revenue on economic growth have opposite signs in long run and short run as being negative and positive respectively. In an oil exporting country, oil price volatility could have been led to macroeconomic instabilities. Sharp changes in oil prices can affect monetary aggregates through volatility in external inflows, as well as fiscal responses to the shocks. The monetary impact can in turn lead to price and exchange rate volatility. To reduce the macroeconomic instability arising from the volatility of oil revenues as well as inducing the governments to save part of oil revenues for future generations, oil funds have become increasingly popular in oil exporting countries. Oil funds could help mitigate the transmission of oil price shocks to harsh changes in money aggregates, prices and exchange rates. When some sterilization in response to an oil price hike is conducted through oil funds, there are a lesser demands on monetary policy. When the exchange rate is the nominal anchor and the policy burden lies with the fiscal authorities, building up or drawing down stocks of the oil fund can be particularly effective in achieving macroeconomic stability. REFERENCES Anon. (1977) 'The Dutch Disease', The Economist 65 6 November, pp: Anshasy, A. A (006), Oil prices, fiscal policy and economic growth in oil-exporting countries, PhD dissertation, The Faculty of Columbian Collage of Arts and Sciences of The George Washington University. Auty, R. M, (000). How Natural Resources Affect Economic Development. Development Policy Review 18: Cover, J. p, (199). Asymmetric Effect of Positive and Negative Money- Supply Shocks, Quarterly Journal of Economics, Nov Drysdale, Jennifer (007), Managing Petroleum Revenue in Timor-Leste: A Brief Explanation, Development Bulletin, No. 68, Canberra: Australia National University. Gylfason, T, (004). Natural Resources and Economic Growth: From Dependence to Diversification, Centre for Economic Policy Research, Discussion Paper No Karras, K, (1996). Why are the effects of money supply shock Asymmetric? Convex Aggregate supply or" Pushing on a string? Journal of Macroeconomics, Vol.18, No.4 pg Mishkin, F. S, (198). Does Anticipated Aggregate Demand Policy Matter? Further Econometric Results, American Economic Review 7, Rosser, A, (006), The Political Economy of the Resource Curse: A Literature Survey, Working Paper 68, Institute of Development Studies. Sachs, J. D., and A. Warner, (1997). Natural Resource Abundance and Economic Growth, Cambridge, MA: Center for International Development and Harvard Institute for International Development. Stevens, P. (005) 'Resource Curse and How to Avoid It', Journal of Energy and Development 31 (1) Autumn, pp: 1-0. Vincent, J. R. (1997) 'Resource Depletion and Economic Sustainability in Malaysia', Environment and Development Economics (1) February, pp: