Economic Modelling 1995 12 (1) 3-14 An econometric model of the oil importing developing countries Michael Beenstock An econometric model is estimated for the oil importing developing countries (OIDC as defined by the IMF) for the period 1960-89. The model explains exports, imports, export prices, GDP, investment, inflation, capital flows and the exchange rate. The model is used to simulate the effects of exogenous shocks (e9 0ECD GDP and interest rates, aid and oil prices) on OIDC. The growth properties of the model are Romerian rather than Solovian. Keywords: Developing countries; Modelling; Econometrics In this paper I report a complete econometric model for the oil importing developing countries (IMF definition, OIDC) which is estimated from annual data observed over 1960-89. The model determines exports, imports, export prices, capital flows, the exchange rate, inflation, capital investment and GDP for OIDCs as a whole. The efforts reported here extend those pre- sented previously (Beenstock [1]), in that they endogenize the domestic economy of OIDC (GDP, inflation and investment) in addition to modelling the OIDC balance of payments. The specification of the balance of payments is essentially as before; when OIDC runs short of foreign exchange reserves imports are curtailed, capital flows are affected and the authorities are pressurized into devaluation. The state of the reserves acts as an important trigger for several key variables. In the present version of the model, however, there are a number of improvements and refinements. First, several years' (1984-89) new data have been added and the data have been updated in the light of the International Financial Statistics (IFS) Yearbook for 1990, published by the IMF. While this has affected some of the parameter estimates the essential structure of the model has not been changed. Second, in the The author is with the Hebrew University of Jerusalem. I am grateful to Udi Nissan for his excellent research assistance and to Patrick Minford for his support and cooperation. This is a revised version of a paper presented at the conference, Global Interdependence: Theories and Models of the Linkages between OECD and non-OECD Economies, Seoul, May 1991. Final manuscript received August 1994. new version of the model the supply and demand for OIDC exports are estimated structurally and export prices are assumed to clear the market for OIDC exports. In the previous version of the model there was a reduced form equation for exports. The treatment of the OIDC domestic economy assumes that aggregate supply depends on the capital stock and the real cost of intermediate inputs. Unfortunately, data on labour market indicators are not available; therefore there is no labour market in the model. Aggregate demand mainly reflects real balance effects inside OIDC while inflation is derived by inverting the OIDC money demand function. Investment is explained in terms of a flexible accelerator model in which the OIDC rate of interest (for which data are not available) is assumed to be influenced by the rate of interest in the industrialized countries (ICs). The evolution of the OIDC capital stock depends on the difference between gross investment and capital depreciation. The OIDC model is linked to the two other major geopolitical blocs (industrialized countries (IC) and oil exporting countries (OEC) as defined by IMF) in the following way. IC economic activity affects the demand for OIDC exports, as do IC export prices. OEC imports also affect the demand for OIDC exports. OIDC imports vary inversely with their relative price which depends on prices prevailing in the ICs. Interest rates in the ICs affect capital flows to the OIDCs as does also OIDC investment. Finally, real oil prices and non-oil commodity prices adversely affect aggregate supply in OIDC. They also affect the distribution of output between traded and non-traded goods. 0264-9993/95/010003-12 © 1995 Butterworth-Heinemann Ltd 3