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

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 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 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 Expanded Demand: 1.Public Sector 2.Budget 3.Credit expansion Increases in prices of non-tradables Appreciation of the RER Declining competitiveness 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