International Monetary Fund and oilier multilateral agencies have warned that raise in price of oil poses a grave threat to the world economy. This is more political and less economic statement. In fact the price rise is beneficial for the developing countries as a whole. Higher payment for oil by America to Saudi Arabia does not lead to change in world income. It only means that income in hands of oil-exporters is more and in hands of oil-importers is less.

The increase in price can appear to have a negative impact on the world economy. Decline in the income of America is reckoned to be more than gain in income of Saudi Arabia. Such accounting is unreal. It happens only due to a historical over- and undervaluation of currencies that will soon readjust to the correct values. The fault then lies with how we measure world income rather than a true decline in world income. The IMF is crying hoarse not because world economy is threatened but because the American economy is threatened. That was not the case with earlier increases in the price of oil. A similar increase in price in early eighties did not hurt the American economy because oil-exporting countries like Saudi Arabia reinvested a large part of their income in America.

Circumstances have changed today. Oil-exporters are investing less of their incomes in America and more in emerging economies of India and China. The decline in the value of dollar makes it unprofitable for the oil-exporters to invest their incomes in America and profitable for them to invest the same in India. The shift would be more drastic if the oil-exporters did not already have sizable investments in America. The price of dollar will decline rapidly if they wholly stop investing in America. That would lead to lower value of their past investments in that country. On the other hand, if they invest in America, and that country still slips, then they will be throwing good money after bad. Just as a commercial bank has to finally shut the tap of loans to a bad investment and take a hit; similarly oil-exporters will sooner or later stop investing in America and take a hit on their past investments.

The increase in price of oil impacts countries differently. It is wholly harmful for the developed countries. They have to pay more for oil and receive reducing amounts of foreign investments in return. It is wholly beneficial for the oil exporting developing countries. They get more money for their exports of oil. It is partially beneficial for emerging market economies like India. They have to pay more for oil but receive a good amount as investment of petrodollars and through contracts for supplies for development projects. It is wholly harmful for poorer oil-importing devel-oping countries. They pay more for oil and do not get a share of the petrodollars. The increase in price of oil is beneficial for all developing countries taken together while it is harmful for the developed countries.

This is not acceptable to The IMF, World Bank and other multilateral agencies. Hence they emphasize the loss to the developed- and oil-importing developing countries and present it as a loss to the world economy. We should welcome the increase in price. It will strengthen the developing countries against the developed countries.