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Recent increases in oil prices could lead to longer-term economic damage for poorest countries

Increasing oil prices will not just effect the GDP of poor countries in potentially startling degrees, but will also make life dramatically harder for the poorest households.

“[R]ecent ODI (Overseas Development Institute) research looks at the potential impacts of a one third increase in oil prices over the next two years (which they argue is a reasonable projection, given historical experience of the effects of MENA (Middle East and North Africa) region conflicts on oil prices): The study suggests that some of the poorest countries could lose up to 4% of their GDP. Those likely to lose more than 3% of GDP as a result of a one-third increase in oil prices include Ghana, Honduras, Lesotho, Swaziland, Togo, Moldova and Nicaragua. Those likely to lose more than 1% of GDP include Burkina Faso, Burundi, Ethiopia, Malawi, Mali, Mozambique, Nepal and Niger.

“At the household level a review of the evidence finds that both rich and poor households suffer as a result of oil price increases, but the poor tend to suffer more. There are direct effects, with the poor spending a large share of their small incomes on oil and oil products. In Ghana, Guatemala, India, Nepal, South Africa and Vietnam, the poorest households may spend as much as 3-4% of their income on kerosene, compared to little more than 1% of the richest households.”

Implications from SA Node:
“There are also indirect effects, with rising transport costs affecting the poor more than the rich. The evidence suggests that rising oil prices and falling GDP have a direct impact on the most vulnerable people. It is estimated that a drop of 1% in African GDP could increase the number of infant deaths by 5 000 each year, and child deaths by around 10 000. In countries that are more sensitive to falling incomes the impact could be worse.”

Implications from Institute for the Future:
Life is becoming increasingly more expensive in poor countries, and wages are not increasing on a commensurate rate. American talk of getting off our addiction of oil is a totally irrelevant option for poor import heavy countries. Countries like Kenya that import the vast majority of their goods have seen prices of food and daily needs increase to dramatic rates. Getting off oil is not much of an option for a country like Kenya, rather they need to change the structure of their economy to creation of secondary goods rather than having a very low trade balance due to only exporting primary goods. In order for this shift to happen all of Africa needs to lower their trade barriers with each other and Europe and the US need to begin lowering tariffs on manufactured goods instead of favoring primary exports from these nations.

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South Africa Node April 2011 pg. 2