The Effect of Oil Price Increase on Economic Growth and Income Convergence (Case Study: Evidence from GCC and Iran)

Abstract

Considering the fact that the main income source of the oil producing countries such as members of Gulf Cooperation Council (GCC) and Iran is earned by exporting oil, it is expected that an increase in oil price creates economic convergence. Nevertheless, by considering the low level of intra-regional trade and dissimilarity of their trade cycles, many experts point out the lack of economic convergences in these countries. Hence, the hypothesis considered in this research is that an increase in oil price would not have convergence in per capita income and will not lead to a steady state path. In order to test this hypothesis, we applied Solow-Swan model by using panel data method. The results showed that absolute and conditional convergences have been rejected although the effect of oil price increase on the economic growth is confirmed during the investigated period (1998-2008).<br /> <strong>JEL Classification: </strong>F43, O47.