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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 1974 1980 1971 1981 World Price of Crude Oil since 1861 1998 120.00 100.00 $/barrel 80.00 60.00 40.00 20.00 Source: BP Statistical Review of World Energy $ 2004 Median Mean Median = $18.18 Mean = $24.28 2006 2001 1996 1991 1986 1976 1966 1961 1956 1951 1946 1941 1936 1931 1926 1921 1916 1911 1906 1901 1896 1891 1886 1881 1876 1871 1866 1861 0.00 Figure 1: Oil Production in Angola, 2000-2020 3,000 2,500 2,000 1,500 1,000 500 Current production 2020 2019 2018 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 Pending production Figure 2: Oil Revenues under Different Price Scenarios ( 45000 40000 35000 High price 30000 US$ million 2001 2000 - 25000 Base price 20000 15000 Low price 10000 5000 0 1990 1995 2000 2005 2010 2015 2020 2025 2030 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 Oil revenues/Total revenues (%) Figure 5: Oil Dependency for Selected Countries 90 Nigeria 80 Angola 70 Trinidad and Tobago 60 Gabon 50 Algeria Venezuela Mexico 40 Norway 30 Cameroon 20 10 0 0 20 40 60 80 Oil exports/Total exports(% ) Norway Brunei Darussalam Qatar United Arab Emirates Bahrain Kuwait Mexico Trinidad and Tobago Libyan Arab Jamahiriya Malaysia Russian Federation Oman Saudi Arabia Venezuela Ukraine Kazakhstan Human Development Index - HDI 0.963 0.866 0.849 0.849 0.846 0.844 0.814 0.801 0.799 0.796 0.795 0.781 0.772 0.772 0.766 0.761 Turkmenistan Iran, Islam. Rep. Azerbaijan Algeria Indonesia Egypt Equatorial Guinea Gabon Sudan Cameroon Nigeria Angola Congo, Democ. Rep. Chad Sub-Saharan Africa Human Development Index - HDI 0.738 0.736 0.729 0.722 0.697 0.659 0.655 0.635 0.512 0.497 0.453 0.445 0.385 0.341 0.515 Low Social Indicators 100 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 Increases in prices of non-tradables Appreciation of the RER Resource Movement Effect Erosion of diversity and balance in the economy – concentration on oil sector 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