Hollis B. Chenery is Vice President, Development Policy, of the World Bank. He is the author of Redistribution with Growth and other works. He is indebted to Robert Cassen, Mahbub ul Haq, Helen Hughes, and Peter Pollak for advice in the preparation of this article. The opinions expressed are the author's own and not necessarily those of the World Bank.
Since 1973, attempts to adjust the structure of the world economy to rapidly rising costs of energy have dominated all other economic issues. Successive efforts to accomplish this objective through international agreements between oil importing and exporting countries have met with very limited success, largely because of the attempt to link them to a range of other problems. On the other hand, adjustment in the narrower sense of maintaining essential supplies of higher cost oil within the existing framework of trade and capital flows has been quite effective for many countries. The annual growth of world oil consumption has been cut from over seven percent before 1973 to less than two percent since then, thereby eliminating the excessive drain on the petroleum resources of the nations in the Organization of Petroleum Exporting Countries (OPEC).
The cost to the world economy of this improvised solution has been quite high. In the industrial countries, half of the reduction in oil demand has been achieved by slowing down growth, largely because of their inability to cope with chronic inflation in any other way. This failure has exacerbated the problems of the less developed countries, which have suffered as much from the fall in their exports to the OECD countries as from the direct impact of the rise in energy prices. There seems little chance that these conditions will improve much until the underlying disequilibrium in energy markets is closer to resolution.
The second major rise in oil prices in 1979-80, again triggered by political events in the Middle East, confronts the world with another round of the energy adjustment. Its initial impact on the international economy
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