Angola Day

Oil, Broad-Based Growth, and Equity

Angola Country Economic Memorandum

Francisco G. CarneiroThe World Bank

May 9 - 2007

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$ 2004 Median Mean

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Median = $18.18 Mean = $24.28Source: BP Statistical Review of World Energy

Figure 1: Oil Production in Angola, 2000-2020

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Figure 2: Oil Revenues under Different Price Scenarios

The Paradox of Plenty

• Karl (1997) – Venezuela, Nigeria, Iran, Algeria, and Indonesia in the midst of 1970s oil booms

• Oil-rich countries have a tendency to create centralized bureaucracies to control oil profits

• Inefficiencies, inadequate policy choices, corruption, waste, and vulnerability

• Four main contributors to Paradox of Plenty: (i) Dutch disease; (ii) oil revenue volatility; (iii) weak governance; and (iv) limited institutional capacity.

The Paradox of PlentyFigure 5: Oil Dependency for Selected Countries

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Oil exports/Total exports(%)O

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Algeria

Angola

Venezuela

Nigeria

GabonTrinidad and Tobago

Cameroon

Norway

Mexico

Human Development Index - HDI

Human Development Index - HDI

Norway  0.963  Turkmenistan  0.738 Brunei Darussalam  0.866  I ran, I slam. Rep. 0.736 Qatar  0.849  Azerbaijan  0.729

United Arab Emirates 0.849  Algeria  0.722 Bahrain  0.846  I ndonesia  0.697 Kuwait  0.844  Egypt  0.659 Mexico  0.814  Equatorial Guinea 0.655 Trinidad and Tobago 0.801  Gabon  0.635 Libyan Arab J amahiriya 0.799  Sudan  0.512 Malaysia  0.796  Cameroon  0.497 Russian Federation 0.795  Nigeria  0.453 Oman  0.781  Angola  0.445 Saudi Arabia 0.772  Congo, Democ. Rep. 0.385 Venezuela 0.772  Chad  0.341 Ukraine  0.766 Sub-Saharan Africa 0.515 Kazakhstan  0.761

Oil Dependency

Low Social Indicators

Dutch Disease• Formal treatment of Dutch disease: Corden (1984); van Wijnberger

(1984); and Nery and van Wijnberger (2000)• Discovery and initial exploitation of vast domestic reserves of

natural gas in the Netherlands• Dutch Disease: Resource Movement Effect; Spending Effect; and

Exchange Rate Effect

Expanded Demand:1. Public Sector2. Budget3. Credit expansion

Increases in prices of non-tradables

Appreciation of the RER

Decliningcompetitiveness of non-oil exports

Erosion of diversity and balance in the economy – concentration on oil sector

Spending Effect

Exchange Rate Effect

Resource Movement Effect

Evolution of Real Exchange Rates in Oil Rich Countries

Facts to Watch• Potential to become largest oil producer in Africa and world’s largest

diamond producer• Potential to assume a strategic role in Africa• Vast economic potential that remains virtually untapped

BUT

• Huge inflow of foreign exchange may complicate macroeconomic management (volatility, competitiveness)

• Daunting social challenges may create tensions that are difficult to manage

• High dependency on natural resources can be a source of constraints for diversification of the economy and can lead to conflict

• Limited institutional and technical capacity is a lingering concern

Main Messages of the Report

• First, Angola needs to conclude the transition to a market economy

• Second, continuing deficiencies in policy design and implementation need to be addressed

• Third, a clear strategy to manage the country’s growing mineral wealth must be defined

• Fourth, improvements in the business environment and the investment climate are urgently required

• Fifth, agriculture should be prioritized given its potential to generate employment and incomes

• Sixth, the quality and supply of public services to the poor must improve