Oil Price and Economic Growth in Small Pacific Island Countries
T. K. Jayaraman, Evan Lau
DOI: 10.4236/me.2011.22020   PDF    HTML     6,778 Downloads   12,084 Views   Citations


Among the 14 Pacific Island countries (PICs), only Papua New Guinea has fossil fuel resources. None of the remaining 13 PICs has any energy sources. Consequently, all the 13 PICs are totally dependent on oil imports for their economic activities. Recent surges and volatility in oil prices have had serious economic re-percussions on economic growth. Since PICs have limited foreign exchange earning capacities, as they have very narrow range of exports and are highly dependent on foreign aid, high oil prices in recent months have seriously tested their economic resilience. This paper applies the recently developed panel analysis procedures to five major PICs, namely Fiji, Samoa, Solomon islands, Tonga and Vanuatu with a view to assess the impact of oil price on economic growth. The findings are that oil price, economic growth and international reserve are cointegrated. The study findings are that although in the long run there is no long run causality relationship between these variables, in the short run the causality linkage runs from oil prices and interna-tional reserve to economic growth. The paper concludes with a brief discussion on policy options.

Share and Cite:

Jayaraman, T. and Lau, E. (2011) Oil Price and Economic Growth in Small Pacific Island Countries. Modern Economy, 2, 153-162. doi: 10.4236/me.2011.22020.

Conflicts of Interest

The authors declare no conflicts of interest.


[1] Australian Agency for International Development, “Pacific Economic Survey 08, Connecting the Region,” Commonwealth of Australia, Canberra, 2008.
[2] United Nations Economic and Social Commission for Asia and Pacific (UNESCAP), “Economic and Social Survey 2008,” UN ESCAP, Bangkok, 2008.
[3] Asian Development Bank (ADB), “Asian Development Outlook 2008,” Manila, 2008.
[4] Asian Development Bank (ADB), “The Challenge of Higher Oil Prices,” In: Asian Development Bank, Eds., Asian Development Outlook 2005 Update, ADB, Manila, 2005, pp. 65-86.
[5] A. Prasad, P. K. Narayan and J. Narayan, “Exploring the Oil Price and Real GDP Nexus for a Small Island Economy, the Fiji Islands,” Energy Policy, Vol. 35, No. 12, December 2007, pp. 6506-6513. doi:10.1016/j.enpol.2007.07.032
[6] World Bank, “World Development Indicators 2007, CD ROM,” The World Bank, Washington D.C., 2007.
[7] Asian Development Bank (ADB), “Key Indicators of Developing Asian and Pacific Countries,” Manila, 2007.
[8] T. Levantis, “Oil Price Vulnerability in the Pacific,” Pacific Economic Bulletin, Vol. 23, No. 2, 2008, pp. 214-225.
[9] J. Morris, “Small Island States bulk Fuel Procurement of Petroleum Products: Feasibility Study,” Pacific Islands Forum Secretariat, Suva, 2006.
[10] A. Sanghi and A. Bartmanovich, “Harnessing Competitive Forces to Reduce Fuelcosts in Small Island Economies,” Pacific Economic Bulletin, Vol. 22, 2007, pp. 175-179
[11] K. A. Mork, “Oil Shocks and the Macroeconomy When Prices Go Up and Down: An Extension of Hamilton’s Results,” Journal of Political Economy, Vol. 97, No. 3, 1989, pp. 740-744. doi:10.1086/261625
[12] K. Lee, S. Ni and R. A. Ratti, “Oil Shocks and the Macroeconomy: The Role of Price Variability,” Energy Journal, Vol. 16, No. 4, 1995, pp. 39-56. doi:10.5547/ISSN0195-6574-EJ-Vol16-No4-2
[13] J. Hamilton, “Oil and the Macroeconomy since the World War II,” Journal of Political Economy, Vol. 91, No. 2, 1983, pp. 228-248. doi:10.1086/261140
[14] J. Hamilton, “This Is What Happened to the Oil Price— Macroeconomy Relationship,” Journal of Monetary Economics, Vol. 38, No. 2, 1996, pp. 215-220. doi:10.1016/S0304-3932(96)01282-2
[15] J. Hamilton, “What Is an Oil Shock?” Journal of Econometrics, Vol. 113, No. 2, April 2003, pp. 363-398. doi:10.1016/S0304-4076(02)00207-5
[16] R. H. Rasche and J. Tatom, “Energy Price Shocks, Aggregate Supply and Monetary Policy: The Theory and the International Evidence,” Carnegie Rochester Conference Series on Public Policy, New York, 1981, pp. 9-93.
[17] M. R. Darby, “The Price of Oil and World Inflation and Recession,” American Economic Review, Vol. 72, No. 4, 1982, pp. 738-751.
[18] J. Burbidge, A. Harrison, “Testing for the Effects of Oil Price Rises Using Vector autoregressions,” International Economics Review, Vol. 25, No. 2, 1984, pp. 459-484. doi:10.2307/2526209
[19] M. Gisser and T. H. Goodwin, “Crude Oil and the Macroeconomy: Tests of Some Popular Notions,” Journal of Money, Credit and Banking, Vol. 18, No. 1, 1986, pp. 95-103. doi:10.2307/1992323
[20] R. Jiménez-Rodriguez and M. Sánchez, “Oil Price Shock and Real GDP Growth: Empirical Evidence for Some OECD Countries,” Applied Economics, Vol. 37, No. 2, 2005, pp. 201-228. doi:10.1080/0003684042000281561
[21] S. Kim and T. D. Willett, “Is the Negative Correlation between Inflation and Economic Growth? An Analysis of the Effect of the Oil Supply Shocks,” Applied Economics Letters, Vol. 7, No. 3, 2000, pp. 141-147. doi:10.1080/135048500351681
[22] Y. U. Glasure and A.-R. Lee, “The Impact of Oil Prices on Income and Energy,” International Advances in Economic Research, Vol. 8, No. 2, 2002, pp. 148-154. doi:10.1007/BF02295345
[23] IMF, “The Impact of High Oil Prices on the Global Economy,” Research Department, IMF, Washington DC., 2000.
[24] G. S. Maddala and S. W. Wu, “A Comparative Study of Unit Root Tests with Panel Data and a New Simple Test,” Oxford Bulletin of Economics and Statistics, Vol. 61, Special issue, 1999, pp. 631-652. doi:10.1111/1468-0084.61.s1.13
[25] K. Hadri, “Testing for Stationarity in Heterogeneous Panel Data,” Econometrics Journal, Vol. 3, No. 2, 2000, pp. 148-161. doi:10.1111/1368-423X.00043
[26] A. Levin, C.-F. Lin and C.-S. J. Chu, “Unit Root Tests in Panel Data: Asymptotic and Finite Sample Properties,” Journal of Econometrics, Vol. 108, No. 1, 2002, pp. 1-24. doi:10.1016/S0304-4076(01)00098-7
[27] K. S. Im, M. H. Pesaran and Y. Shin, “Testing for Unit Roots in Heterogeneous Panels,” Journal of Econometrics Vol. 115, No. 1, 2003, pp. 53-74. doi:10.1016/S0304-4076(03)00092-7
[28] P. Pedroni, “Critical Values for Cointegration Tests in Heterogeneous Panels with Multiple Regressors,” Oxford Bulletin of Economics and Statistics. Vol. 61, Special Issue, 1999, pp. 653-670. doi:10.1111/1468-0084.61.s1.14
[29] P. Pedroni, “Purchasing Power Parity Tests in Cointegrated Panels,” The Review of Economics and Statistics, Vol. 83, No. 4, 2001, pp. 727-731. doi:10.1162/003465301753237803
[30] P. Pedroni, “Panel Cointegration: Asymptotic and Finite Sample Properties of Pooled Time Series Tests with an Application to the PPP Hypothesis,” Econometric Theory, Vol. 20, No. 3, 2004, pp. 597-625. doi:10.1017/S0266466604203073
[31] C. Kao, “Spurious Regression and Residual-Based Tests for Cointegration in Panel Data,” Journal of Econometrics, Vol. 90, No. 1, 1999, pp. 1-44. doi:10.1016/S0304-4076(98)00023-2
[32] P. Pedroni, “Fully Modified OLS for Heterogeneous Cointegrated Panels,” Advances in Econometrics, Vol. 15, 2000, pp. 93-130. doi:10.1016/S0731-9053(00)15004-2
[33] D. Holtz-Eakin, W. Newey and H. S. Rosen,“Estimating Vector Autoregressions with Panel Data,” Econometrica, Vol. 56, No. 6, 1988, pp. 1371-1395. doi:10.2307/1913103
[34] D. Holtz-Eakin, W. Newey and H. S. Rosen, “The Revenues-expenditure Nexus: Evidence from Local Government Data,” International Economic Review, Vol. 30, No. 2, 1989, pp. 415-429. doi:10.2307/2526655

Copyright © 2024 by authors and Scientific Research Publishing Inc.

Creative Commons License

This work and the related PDF file are licensed under a Creative Commons Attribution 4.0 International License.