Angola Day Oil BroadBased Growth and Equity Angola

Angola Day Oil, Broad-Based Growth, and Equity Angola Country Economic Memorandum Francisco G. Carneiro The World Bank May 9 - 2007

International Price of Oil

Figure 2: Oil Revenues under Different Price Scenarios

The Paradox of Plenty • Karl (1997) – Venezuela, Nigeria, Iran, Algeria, and Indonesia in the midst of 1970 s 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 Plenty 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 Spending Effect Expanded Demand: 1. Public Sector 2. Budget 3. Credit expansion Resource Movement Effect Erosion of diversity and balance in the economy – concentration on oil sector Increases in prices of non-tradables Appreciation of the RER Declining competitiveness of non-oil exports Exchange Rate 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