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Bangladesh Development Studies, Vol. 9, No. 2 (Summer 1981), pp. 1-20 Published by: Bangladesh Institute of Development Studies Stable URL: http://www.jstor.org/stable/40794314 . Accessed: 27/02/2012 00:05
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of SomeMacroeconomic Implications for Oil Prices Bangladesh Higher
by Rizwanul Islam*
The paper analyses the impact of the steep rise in oil prices that has taken place since 1973 on the terms of trade, balance of trade and the capacity to pay for imports out of export receipts of Bangladesh. It shows that the countrywould have faced a deteriorating terms of trade even in the absence of such a rise in oil prices« but this phenomenon has made things much worse for her. Not only her terms of trade deteriorated setback and the reduced severely/ her major exports suffered a capacity to pay for imports led to a shrinking of the volume of crucial imports. The additional cost of imports due to higher oil prices was also quite substantial in relation to the country's GDP, its growth and exports. Thus the rise in oil prices seems to have made substantial contributionsto the country's impoverishment during the seventies.
I. INTRODUCTION of Thereis no domestic supplyof oil in Bangladeshand no reserves all the oil comsuoil have yet been foundin the country.Obviously, from abroad. Hence any change med in Bangladesh must be imported on in the international oil market is bound to have a directeffect the economyof Bangladesh.It may, therefore, be usefulto analyse the of theunprecedented risein oil forthe economyof Bangladesh implications halfof 1973. It can be easilysurmised that tookplacesincethelatter prices that the most immediate impact of this price hike must have been on and termsof trade of the country.Apartfrom the balance of payments the various sectors of the economy thesemacroeconomic implications, musthave been affectedin varyingdegreesdepending on the extent and on oil. The present paper, however, natureof theirdependence concentrateson the macroeconomic implicationsonly. Beforetaking up these issues in sectionIII, weprovidea background to theproblerü in section II. some concluding The finalsectionpresents observations.
♦ The author is an Associate Professor in the Department of Economics, University of Dhaka. He is currently associated with ARTEP, 'ILO, Bangkok.
0 7.jute or traditional non-commercial to sticks. cannot be called non-commercial in a strict sepse. and hence. and rice straw) and dried cow-dung.1It may be interesting TABLE SUPPLY OF ENERGY I BY SOURCES.0 1 Some of these do have a market in Bangladesh. leaves Other wastes Sub-total Grand Total Source: .0 265.7) (6.1 Commercial Coal Oil Gas (2.0 36. naturalgas and hydro-electric power. rice hull. oil. g.0 18. The main sourcesof fuel are crop residues(e.1 Sources 50.9) (4.0) (13.6) (18.0 11. THE BACKGROUND The EnergyScene in Bangladesh used in Bangladesh can be broadlycateThe main sourcesof energy and 'non-commercial'.0 18.4) 100.0 48.7 65.6) (2.0 7. 1973/74 (Percentage of Total) IN BANGLADESH Sources Amount Supplied (in 1012 BTU) Sources 5. (18.3) (24.2 The BangladeshDevelopment Studies H..6) (6.8) (75.6) Electricity Sub-total Non-commercial Cow-dung Jute sticks Rice straw Rice hulls Bagasse Firewood Twigs. .1) (4.8) (6.0 12.1) (2.0 200.3 36.5) (13.1 16. The first includes gorisedas 'commercial' category coal.
Table I gives a detailed breakdown of the various sources of energy supply in Bangladesh. and construction Manufacturing Transport Household and other sectors Total Source. j Oil Used (in 10n BTU) 1. However.these industries iron and steel.The largest user of oil is the domestic sector accountingfor more than 30 per centof the total oil consumption. paper and paper products. and jute textiles togetherconsume more than 50 per cent of the oil consumed by the entire industrial sector. contributing more than 55 per cent of the total supply.75) (28. In 1973/74.56) (22.58) (45.00 ¡ I (Percentage of Total) (3.Islam : Implications of HigherOil Pricesfor Bangladesh 3 note that a large part of all energy consumed in Bangladesh is still derived primarilyfrom these traditional or non-commercialsources. of the pattern of oil use in Bangladesh reveals interestAn examination ing features. Sectors and fisheries forestry Agriculture. oil is the most importantsource. for example.24 36. oil accounts for less than one-thirdof the total consumption fact is sector. TABLE II USE OF OIL IN BANGLADESH BY SECTORS. .2 The Rise in Oil Prices rise in oil prices started in mid-October 1973. . 1973/74 c . The unprecedented when nine out of the ten Arab petroleumexporting countries agreed to 2Data presented in this and the earlier paragraph are taken from .11) 100.35 10. It is clear from Table I that only 14 per cent of the total recorded energy consumptionin Bangladeshis derived fromoil.00 However. Another interesting of commercial energy by the industrial that oil consumptionin this sector is dominated by a few largeuserslike .in respect of commercial energy only.followed by the transportsector (see Table II). Next in importance comes the industrial sector. commercial fuel sources accounted for less than of thetotal energy one-fourth supply.28 8 13 16.
50 per barrel in September 1974 and reached $ 10. The immediate impact of these actions in Bangladesh. rose to $ 8. 1974/75.87 by March 1975. They also established and market prices under which the former would exceed the latter by 40 per cent. the import price of crude petroleum which was $ 2.34 per barrel in January 1973. Trade data indicatethat the prices of petroleum and petroleum an unprecedented increase products(POL products)in Bangladesh registered between the later half of 1973 and the firsthalf of 1975. TABLE III MOVEMENT OF IMPORT PRICES OF CRUDE PETROLEUM AND PETROLEUM PRODUCTS IN BANGLADESH 1969/70* to 1978/79* Year 1969/70 1972/73 1973/74 1974/75 1975/76 1976/77 1977/78 1978/79 Note: j Price of Crude Petroleum (dollars per ton) 18 22 60 121 89 103 108 124 j j Price of Petroleum Products (dollars per ton) 25 50 86 124 126 121 127 157 * Years referto fiscal years (July-June). the pricesof othercommodities whichare linked up with thoseof POL products also went up. as in other oil-importing countries. . Table IV shows the changes in the prices of some importantimported commodities. the Gulf members of the Organization of Petroleum ExportingCountries (OPEC) decided to raise the Gulf posted a link between posted prices prices by 70 per cent. was an upward movementin the price of crude oil. For example. 3Data taken from . at the same time. 1975/76 and . It should also be mentionedthat the result of the increase in crude oil prices at source was not confinedto an increase in the import price of oil and oil products.3 Table III shows the movementof import prices of crude petroleum and petroleum products over the period 1969/70 to 1978/79.4 The Bangladesh Studies Development restricttheir exports in total and to prohibit altogether exports to certain countries . Source: .
THE MACROECONOMIC IMPLICATIONS The immediate impact of the rise in the prices of oil and related commodities has been on the external position of the country. p. for example. In order to give an indication of the order of magnitude of such impacts. After a temporary lull of 1976/77. the increase in oil prices can lead to a worseningof theterms of trade of an oil-importing country such as Bangladesh. Source : [ 6. oil seeds. This may .prices started rising again in 1978. balance of trade and the capacity to import. Implicationsof HigherOil Pricesfor Bangladesh 5 We see from Table IV that after 1972/73. And this price increase had ceeded or reached close to the 1975/76 importantimplications for the country's terms of trade. Between 1972/73 and 1975/76.Islam. the import prices of commodities other than petroleum and petroleum products also registered substantial increases. fertilizers and cement either exlevel. 25 ]. and the 1978/79 prices of importantimport items like wheat. We shall now turn to an analysis of these impacts. prices and cement of importantimport items like rice. III. cotton yarn. First. edible oil. more than doubled or trebled. it may be convenient to distinguishtwo separate though related consequences brought about by these price increases. fertilizers TABLE IV PRICE INDICES OF SOME IMPORTED COMMODITIES 1973/74 to 1978/79 (1972/73 = 100) 1973/74 | 1974/75 | 136 258 Rice 171 160 Wheat 158 135 Edible oil 292 216 Oil seeds 273 550 Crude petroleum 172 248 Petroleumproducts 196 196 Raw cotton 260 200 Cotton yarn 271 142 Fertilizer 215 370 Cement | Note: Items IN BANGLADESH 1975/76 1976/77 | J 261 194 154 125 110 140 191 177 405 468 252 242 145 206 325 230 244 133 225 235 1977/78 j 1978/79** 148 101 141 215 491 254 176 173 171 240 179 132 161 211 564 314 181 162 208 295 The figuresare the indices of unit prices.
6 The Bangladesh Studies Development happen due to a rise in the import price index which in turn has been caused by the increased cost of petroleum imports as well as that of other imports. Thus theimmediate impact of higher oil prices must have been on the terms of trade of thecountry. This reduction had an adverse impact on her foreign exchange earnings. Impact of Higher Oil Prices on Terms of Trade The above discussion indicatedthat higher oil prices must have affected the import price indices of Bangladesh. But there is no evidence to show that a sufficient inflow of capital has actually taken place. 4This adverse effect could. But the direct impact of the higher oil price in raising import costs represents only part of the consequences. For this purpose. We shall examine the nature and magnitude of these effectsby analysing the movementof terms of trade. The external financingproblemhas resulted mainly from the need to increase the flow of receipts of foreign exchange in order to meet higher total import bills. Necessary data were obtained from the Planning Commission and the BangladeshBureau of Statistics.theexportprices of Bangladeshhave also gone up to some extent. and thus on her capacity to import and to support domestic investment. And it is possible thatin the wake of worldwide inflationthat followed the rise in oil prices.4'5 Secondly. The methodology used is described in the appendix. . Some illustrations of such secondary repercussions can be found in . 5The secondary repercussions of this reduction in exports must have been on domestic production and hence on employment. be compensated by an additional inflow of capital. A lower volume of economic activity in the developed countries had led to a reduction in the volume of exports from Bangladesh. the rise in oil prices has aggravated an already acute balance of paymentsof the country. of course. It is. The earlier year has been selected as the base year. we have selectedthe period 1972/73 to 1978/79. because the prices of oil and oil products started rising only towards the end of 1973. therefore necessaryto analyse the nature and magnitude of the balance of payments problem in maintaining the and examine whether there has been any difficulty flow of imports needed to maintain the production level of sectorswhich depend primarilyon imported inputs.
They are distinguishedfrom each otheras follows: (i) the firstset includes petroleum products at currentprices: (ii) the second set includes POL products but assumes that the prices in all subsequent years were the same as that in 1972/73 . however. the real effect of increased oil prices on the terms of trade of Bangladesh could be shown more clearly. for example. Such a of and oil products excluding theimports oil comparison. Accordingly. But it is clear from Table V that increases in the price of POL products have further aggravated the situation. three sets of commodityterms of trade have been calculated. and (iii) the third set excludes POL products altothree These sets are presentedin Table V. that the true impact is between two sets of terms greaterthan that indicated by the difference of trade presentedin Table V. we have tried to 6One might point out that the terms of trade improved after 1975/76 despite the fact that oil prices continued to increase. gether. The comparison between these three sets indicates the impactof rising oil prices on the terms of trade of the country.one by including and the otherby culating two sets of importprice indices . It is probable. In order to determinethe extentto which the country has been made poorer by the increased cost of petroleum imports.6 Moreover. indicates that even with constant prices of POL products. It may also be noted. that the import price index went up again in 1978/79 when the oil prices registered a big increase over the previous year and the prices of most of the other imports followed suit (see Tables IV and V). This clearly is due to the declining trend in the prices of many of the imports which started in 1975/76 and became more prominent in the two subsequent years. it is possible to isolate the impact of higher oil prices by cal. however. A comparison between sets 1 and 2. One way of allowing these products a place in the import price index and yet isolating the impact of their increased prices could be to calculate an import price index assuming that their prices in all years were the same as that of the base year. however. . the country would have faced a substantial decline in her terms of trade.and comparingthem. because the outright exclusion of oil and oil products would preventthem from playing any role in the import price index although they have an important weight in the import bill. it must also be mentionedthat in this analysis we have not been able to isolate the terms of trade effectof other price increases caused by the rise in oil prices.Islam: Implications of HigherOil Pricesfor Bangladesh 7 Now. would not reveal the true picture. If this latter impact could be isolated. The trend might as well have been set by the temporary fall in oil prices during the same year.
Government .8 TABLE TheBangladesh Studies Development V TERMS OF TRADE FOR BANGLADESH (1972/73-100) v Year ExportPrice Index ImportPrice Index Terms Commodity of Trade Set 1 1973/74 1974/75 1975/76 1976/77 1977/78 1978/79 Sat 2 1973/74 1974/75 1975/76 1976/77 1977/78 1978/79 Set 3 1973/74 1974/75 1975/76 1976/77 1977/78 1978/79 105 127 178 213 221 274 164 226 332 304 269 327 64 56 54 70 82 84 105 127 178 213 221 274 157 206 300 266 229 279 67 62 59 80 96 98 105 127 178 213 221 274 160 213 313 277 238 291 66 60 57 77 93 94 Source : Calculated fromdata provided by (i) Foreign Trade Wing. Bangladesh Bureau of Statistics . (ii) World Bank Resident Mission in Bangladesh of Bangladesh. and (iii) Planning Commission.
Additionalcost of oil imports due to price increase 39.716 122.237. See [6.421 190.000 6.836.3 143.9 135.(2) -134. but there is no doubt that the post-1973 global inflation was caused to a large extent by oil price increases.135 77. GDP at marketprices 6. It is of course true that not all this additional cost can be ascribed to higher oil prices. (1) + (2) as % of (4) 3.763 380. this additional cost was more than 2 per cent of the national income.1 27. Additionalearningsfromexports*due to price increases 14.53 9. And hence.Islam : Implications of HigherOil Pricesfor Bangladesh 9 quantifysome of the macroeconomic implications. Actual exports 371. the implicationsare seen to be even more serious.481 3.207 3. 1973/74 TO 1976/77 (value in thousand US dollars) Items 1973/74 over 1972/73 1974/75 over 1972/73 1975/76 over 1972/73 1976/77 over 1972/73 1.661 427.551 -113. (1) as % of (8) 10. First we have calculated the additional cost of petroleum imports (forthe years after 1972/73) which has been solely due to increased prices. the additionalcost of petroleumimports as a percentage of national income increased further.880 2. row 6 of Table VI (which TABLE VI SOME MACROECONOMIC IMPLICATIONS OF HIGHER OIL PRICES FOR BANGLADESH. Additionalcost of otherimports* due to price increases 108. If we add the additional cost of other imports due to price rise. per capita income in 1973/74 and 1974/75 were Taka 650 and 645 respectively.03 2.7 32. nationalincome per capita also declined compared to that of 1973/74.700.719 104.12 13. .469 382.6 10.6 73. Table VI summarizes the results. (1) + (2) as % of (8) 59.6 29.242 -473.000 5.(1) .45 8. During the next two years.807 411. 7lt mightalso be interestingto notethat during 1974/75. This additional cost can be expressed as a percentageof national income. (1) as % of (4) 0. In 1974/75.64 2.875 3. In constant prices of 1972/73.217 8.6 Note : * The appendix contains a list of the importsand exports included here.036.7 Thus we see that the increased cost of petroleum imports has morethan eaten up the increase in national income during that year. Source : Calculated fromdata providedby sources mentionedunder Table V.73 3.12 7.069 181.347 160.29 6.675 412. 187J.143 4.200 9.904 121. for example.179 -355. (3) . It may be mentioned here that the rate of increase of national income during this year was only 2 per cent. p.
). however.the next two years were somewhat better with the exports of raw jute and tea rising. . Row 9 of Table VI reveals that the additional cost of petroleumimports due to the price rise alone in 1974/75 was about 32 per cent of total exports that year. the volumeof raw jute exportscould never reach the levels of 1972/73 and 1973/74. After the trough of 1974/75. But the net result was considerable deficits as indicated in row 7 of Table VI.R. In fact. 78 per cent of the total value of her exports went to countries in North America. Europe (including East Europe and U. The only major exceptions were hides and skins which had already reached a low in 1973/74. The exports of jute and hides and skins fluctuatedeven after 1974/75. But the volume of both the exports declined again in 1977/78. it is well-knownthat the recession in developed countries in thevolumeof exports followingthe rise in oil prices led to a reduction from many LDCs. Moreover.8 That Bangladesh is no exception to this can be seen from Table VII where we show the movementof the volume of exports of the major commodities since 1972/73. This indicates that only if Bangladesh had increased exports by this amount she could have maintained her capacity to pay for other imports out of export receipts. In 1976/77 for example. and the resulting gain must have offsetthe loss to some extent. but this did not happen. And here it may be pertinent to ask : What proportion of Bangladesh's exports goes to the DCs ? An examination of the destination of Bangladesh's export reveals that a major portion of it goes to the DCs.10 The BangladeshDevelopment Studies expresses the additional cost of all imports taken togetheras percentage of national income) can be taken as a rough measure of the extent to which the countryhas been made poorer by higher oil prices. 8lt may be pointed out that this is only true so far as the LDCs exports to OCs are concerned. It is true.S.S. (Data from). It is seen thatexports of almost every commoditywent down in 1974/75.that the prices of exports from Bangladesh have also registeredsome increase during this period. withthe manufacturing levels of the latter in 1977/78 and 1978/79 being lower than that of 1974/75. Australia and New Zealand. Impacts on the Capacity to Importand the External Balance How the country's capacity to pay for imports from exports alone was affectedby the rise in oil prices can be seen from a comparison of the value of exports and the additional cost of oil imports.
58.807 n.245 48. 1976/77 and [3:4]. we have calculated three sets of income terms of trade between these three sets is the same as in (see Table IX).a. which depends on foreignaid and loans. The income terms not.be confused with total import capacity.998 11 306 522 55. . It should be mentionedherethatthe declinein the trade deficitafter 1914/15 (as Table VIII shows) is more apparent than real. But we have just seen that after 1973/74 exports from Bangladesh came under pressure from an inward shift in the foreign offer curve. 9 361 457 54. The Taka value of the deficitin fact shows a continuous upward trend with the exception of 1976/77. denotes not available. n. especially of oil and oil products.500 75. In order to examine the extent to which the country's capacity to import has been affectedby the rise in prices.300 Fish cwt. The consequences of such a shift can be analysed by using the income terms of trade which measures a country'simport capacity in terms of exports of trade as a measureof import capacity should alone. A comparison between the commodity the commodityand income terms of trade reveals that the deterioration in the latter has been much more severe upto 1976/77. '000' tons' 433 Tea '000' lbs.452 69. 10 461 307 Kaw jute '000' tons 464 Jute 379 438 maiHjfg. 136. and has been caused by the devalution of 197S. The difference of of terms case trade (Table V).a.a. etc.Islam : Implications of HigherOil Prices for Bangladesh 11 The result has been a reduction in her capacity to pay for imports and a deterioration in her external balance situation (see Table VIII).836 n.461 13 454 392 64. This indicates . TABLE VII EXPORTS FROM BANGLADESH. 1972/73 to 1978/71 Commodities Unit 1972/73 1973/74 1974/75 1975/76 ¡1976/77 1977/78 1978/79 407 439 51. however. net factor earnings.800 44.214 Hides 7 11 and skms '000' tons 11 Note : Burees: n.971 64. It must be noted here that the commodityterms of trade used in our earlier analysis does not allow for shifts in the foreign offercurve.a.
12 The Bangladesh DevelopmentStudies Table VIII BALANCE OF TRADE OF BANGLADESH. 14. The conclusion is inescapable.472.50 After 1975/76: $1 =« Tk. and intermediate goods. 15. .250 631. that the decline in the volume of exports has severelyaffectedBangladesh's capacity of pay for the greatly increased import bill (which was again caused largely by higher oil prices and related price increases). It is clear from this table that had the prices of POL products remained constant.Tk.624 963. Table X presents importantconsumer as had the com9After 1976/77 the income terms of trade startedimproving in the former being more marked.875 554. the decline in income terms of trade would have been less sharps.50 [2.00 Up to 1974/75: 1975/76: $1 .322 Note : Officialexchange rates used for the conversionof value figuresare : $1 .we have calculated the indexof the volumeof imports for some these indices. 311]. 1972/73 to 1978/79 Year 1972/73 1973/74 1974/75 1975/76 1976/77 1977/78 1978/79 (value in thousand US dollars) Surplus/Deficit + 55.9 If we could show how far the shift of the demand curve in the export market was due to rising oil prices. can have serious implications for the flow of imports of such into the country.451 -712. This in turn. we could demonstrate their impact on the country'scapacity to import more fully. But moditytermsof trade-the improvement would have been more pronouncedin the absence Table IX shows that the recovery of thesteep riseinthe oil prices.129 -780. A comparison between sets 1 and 2 in Table IX shows the impact of higher oil prices. In order to examine the nature and magnitude imports.Tk. p. Source: that the decline in export volumes coupled with an already deteriorating commodityterms of trade severelyimpaired the country's capacityto pay for imports.however.103 . 8.
TABLE IX INCOME TERMS OF TRADE OF BANGLADESH (1 972/73« 100) Year 1973/74 1974/75 1975/76 1976/77 1977/78 1978/79 Source: Our calculations. In the aggregate a change in the total volume of imports can be detected by comparing the total import value index with the importprice index: if the volume of imports remains constant as import prices .Islam : Implications of Higher Oil Prices for Bangladesh 13 Data presentedhere indicate thatin almostall cases except POL products. TABLE X INDEX OF THE VOLUME OF IMPORTS INTO BANGLADESH (1972/73 = 100) Commodities Foodgrains Rice Wheat Crude petroleum Petroleumproducts Raw cotton Cotton yarn Fertilizer Cement Source: 1973/74 | 1974/75 | 1975/76 | 1976/77 | 1977/78 | 1978/79 57 23 63 47 562 44 173 61 36 87 67 90 112 345 63 18 96 103 51 102 43 115 311 57 8 149 69 28 51 25 141 219 63 45 19 66 58 77 55 158 248 48 90 174 123 42 15 46 142 293 66 50 265 139 | Set 1 60 46 58 68 89 95 | Set 2 63 51 64 78 105 111 | Set 3 62 49 49 75 101 107 Calculated from[11.although in varying degrees the flow of imports was adverselyaffected in variousyears. p. .87]. The case of capital goods could not be examined because of the lack of data on the quantity of such goods imported.
while there was no increase in the imports of cotton yarn to offsetthis decline. imports cannot be ascribed to reduced import requirements. In some cases increased to replace ) domestic production ( e. It is possible to argue that increased domestic production may have of the country and that the above-discussed reduced import requirements fall in import volume may simply reflectsuch reduced requirement. Generally speaking. for example.. . We may. in the movementof the two indices in Table XI. Table XI shows that the index of import values was much lower than the import price index throughoutthe periodunder conclude that the volume of imports investigation." TABLE XI INDEX OF IMPORT VALUE AND IMPORT PRICE (1972/73=100) v Tear 1973/74 1974/75 1975/76 1976/77 1977/78 1978/79 I I Index of the Value of I Total Imports ( 127 193 174 119 185 220 ImportPrice Index 164 226 332 304 269 327 Source : Index of import value has been calculated fromdata provided bythe World Bank. If the former index changes less than the latter. declined after 1972/73. Imports of raw cotton. declined substantiallyafter 1972/73. there was a sharp fall in the imports of yarn as well after 1973/74. Report mentionedat the bottom of Table X. this was due to the country's shrinkingcapacity to pay. 10This conclusion is subject to the qualification that the weights used in and thismighthave caused some difference the two indices are somewhat different. foodgrainsand fertilizers the in die total volume of imports but reduction to some extent.14 The Bangladesh Development Studies increase. therefore. Importprice indexIs taken fromTabJe V. But the decline in the volume of imports occurred even in the areas where the countrydepends entirelyon imports. In fact. a decline in the volume of imports is indicated. the two indices will change in the same proportion. g.
etc. the manufacturingindustries of Bangladesh suffered acute shortage of raw materials. The results presented in the paper indicatethatthe termsof tradeeven in the absense of would have faced a deteriorating country such a rise in oil prices. In fact. be dismissed as a second-orderproblem for Bangladesh.11Consequently.fertilizers.) were much machinery. and since Bangladeshdoes not have any domestic supply of oil the only way to do it would be to "See . more important thantherisein thepriceof oil. therefore. . The additional cost of imports due to higher oil prices was also quite substantial in relation to the country's GDP. but this phenomenon has made things much worse for her. SUMMARY AND CONCLUSIONS In this paper we tried to examine the impact of the steep rise in oil prices that has taken place since 1973 on the terms of trade.of course. How can the adverse consequences of the increase in oil pricesbe minimized? One way would be to reduce imports. But we have arguedthatthe 1973 global inflationwas caused toa large extent by the increasein postthe price of oil. her a setback and the reduced capacity to pay for major exports suffered imports led to a shrinkingof the volume of crucial imports. balance of trade and the capacity to pay for imports out of export receipts of Bangladesh. One may. Thus the rise in oil prices seemsto have made substantial contributionsto the country's impoverishment during the seventies. 12See . Thus althoughthe rise in the price of oil was not the only shock inflictedon the economy of Bangladesh the 'total' effect of this shockwas quite farreaching and severe.arguethat for Bangladesh increases in the prices of other commodities(like foodgrains.12 IV. We have also attemptedto see the additional costs the country had to incur because of higher oil prices in relation to her gross domestic products and exports. This should not. and exports. its growth.the rates of operationof industriesdeclined considerably. Not only her terms of trade deteriorated severely. there is evidence that after from an 1972/73.Islam : Implications of Higher Oil Prices for Bangladesh 15 goods ( including raw maImports of capital goods and intermediate terials) were cut most drastically.
The major users of oil in Bangladesh are the household.14 In the manufacturing should be made into the present pattern of using oil and the possibilities of substitution. Clearly. . a lot more need to be known before one can make useful policy recommendations. (Various years). Statistical Yearbook.MonthlyStatistical Bulletin of Bangladesh. EconomicReview.13 In the transportsector. StatisticalPocketbook of Bangladesh. 14One way. issues). . for the latter can have many more profitable uses and the economics of oil-gas substitution should be carefully worked out for the household sector. an analysis of the impact of the phenoof the using sectorscould be quite interesting. Foreign Trade Wing. the role of pricing and other policies in achieving substitutionand economy in the use of oil should be explored. 4.attempts sector also careful investigation in the use of oil. Even in case no conscious adjustmentwas made. 3. 1979. Bangladesh Bureau of Statistics. for example. menon on the cost structure of The economics using alternativesin various sectors need to be carefully worked out.Advance Release. Finally. Governmentof Bangladesh. 1980. and more economical alternativesin these uses need to be found. Bangladesh Bureau of Statistics. These can be subject mattersfor future research in the area.16 The Bangladesh Studies Development reduce the consumptionof oil. 1978/79. Fuel for cooking and lighting are the importantuses of oil in the household sector. the transport and the manufacturingsectors. Planning Commission. and the necessaryeconomy in oil consumptionhas to be achieved mainlyin these sectors. 6. . Economic Survey. simultaneously with the should be made to achieve economy search for alternativefuel. REFERENCES 1. of doing the latter would be to develop and encourage the use of mass transport rather than private transport. 13Here one should avoid the danger of naively suggesting a substitution of oil by natural gas which is available domestically. (Various 5. March 1978. 2. Ministry of Finance.It might be useful to examine how the different sectors using oil adjusted to the changed circumstances.
Bangladesh Energy Study (main report). Nove (eds. Some Economic Implications of Higher Oil Prices: The Case of Bangladesh. 1979. . Rizwanul. No. Islam. APDAC.).in The Bangladesh Development Studies. Public Enterprise Policy in the Asian and Pacific Region. Kualalampur. 1976. 1979. 198& Economic Position and ShorMerm Outlook* World Bank. in P. 8.ILO. 1. Geneva. Montreal Engineering and others. K. "Reasons for Idle Capital : The Case of Bangladesh Manufacturing". Voi Vi. Current . . Basu and A. WEP ResearchWorking Paper. 11. 10. "Public Enterprise Policy in Bangladesh".Islam : Implicationsof HigherOil Prices for Bangladesh 17 7. 9.
(ii) wheat commodities the following . imported has been covered The period which in the present is from1972/73 study in the The was most to 1978/79. So. seriousproblem difficulties posed by . We calculatedthe unit value of exportsby using this data.Appendix DATA AND METHODOLOGY FOR CALCULATING TERMS OF TRADE Sourcesof Data and Commodity Coverage It should be noted at the outsetthatwe have used unit value indices and imports. we had to look for alternative of Bangladesh of the Government for importdata. PlanningCommission and the World Bank Resident Mission in Dhaka were able to provide data for the major import items. and (v) tea. The above constitute are : (i) rawjute . These together . importprice index is based on exports major : (i) rice.The ForeignTrade Wingof theBureau this is especially of Bangladesh whichis in charge of of Statistics of the Government data in this area faced many problems in doing so afterthe compiling sources of the country. (iii)^edible oils .We did our own us with necessary items. coverageof all imports and exports on the basis of Standard Trade on the basis of the Classification. (vii) fertilizers . (vi) cottonyarn . provide Unfortunately. . (iv) leather . (iii) hides and skins accountfor nearly95 per cent of the total exportsof Bangladesh.Thisis of coursea common as price indicesforboth exports involved of because obvious the in obtaining practice difficulty pricefigures for individual items. of the importprice indiceson the basis of these calculations Relevantdata on exportswere available in thevariousissuesof Advance Release suppliedby the ForeignTrade Wing of the Bureau of Statistics. and obtainingdetailed and reliable trade statisticsfor this period true of imports. (v) raw cotton . (ii) jutemanuincludedin the exportpriceindex items factures . a complete noneofthe sourcesmentioned above. . Liberation Hence. petroleum products. (viii) cement and The items mentioned crude . we had to do our calculations The of and items imports. (iv) oil seeds. petroleum (x) (ix) over 60 percent of the total imports of Bangladesh.
Moreover. the two indices should be Unless there are significant fairly close to one another. Laspeyre's. structuralchanges. That is why. Paasche's or Fisher's Ideal index). the Paasche index uses currentyear quantities as weights. and P = import price index. or export of the i-thcommodity where V* is thevalue of import is .ioo Pxo **xo where p111 and pX for the i-th commodityare calculated as and q. The choice between the firsttwo would of course depend on the type of question we are asking. how do we calculate Px and Pm ? problem arises from the various ways of calculating these indices (for example. would obviously mean an adverse movementin the The first A decline in T country's terms of trade. we calculated both the commodityterms of trade and the income terms of trade. Now the question is. The relevant index for imports and exports are : respectively p m _ Pml qmo 100 n n *mo Mmo px=ïîLJï«_.Islam : Implications of Higher Oil Prices for Bangladesh 19 Methodology In this study. we have used the Laspeyre's price index. While the Laspeyre index is a base year weightedindex. The formula for the commodity termsof trade ( Tn ) is given by rm where Px _ export price index. And it is difficult to establish the superiorityof either of the first two indices over the other. for the present study it seemed more appropriate to investigatehow the prices of a given bundle of goods moved compared to the base year.
100 pm x y is the index of the volume of exports.O . From the formula of income terms of trade. The resulting thus clearly becomesa measureof import capacity. It shows the purchasing power of exports. The income of trade can take place quite independently terms of trade may decline despite a rise in the commodity terms of trade if the fall in export volume more than offsetsthe rise in the prices of exports relative to imports. Here the index of the index value of exports is deflated by the importprice index.20 The Bangladesh Studies Development the volume of export or import of the i-th commodity. it can be seen that movementsof the commodityterms of trade and income terms of each other. .. The income terms of trade ( T ) has been calculated as : T where Q = .
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