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Oil In Angola Way To Development Economics Essay

Oil is a well hidden mineral that assumed a crucial importance in modern times. Industries, transportation, heating everything spin around the necessity of energy. The world needs energy and oil is still one of its main sources. Therefore, one may say that an oil-rich country would have enough to succeed and reach high levels of development. However, figures prove the opposite and show some Sub Saharan African countries with low levels of growth, or in most cases, with high levels of growth in GNP but too scarce repercussion in development indicators, despite their oil wealth. Many say there is a “curse” associated to natural resources wealth, I should say that this curse may exist but it is not independent from other factors because there are some countries where until now it has been a “blessing”.

I will then reflect upon the different aspects that contribute for the fact that some oil-rich countries are unable to perform well and to truly improve their people’s lives with the income “extracted” from oil production. I will argue that, and giving the example of Angola, the indicators still show an underdeveloped country, where life expectancy and child mortality rate for example completely contrast with the growth in GNP in last years. Among those aspects, I will stress the corruption and lack of transparency that normally characterizes these countries’ governments, as well as the dependency in oil sector and its consequences in other sectors of the economy (Dutch Disease) and the lack of investment and concern regarding education. I will restrict my analysis to these three factors despite the awareness that might be plenty of others.

In this paper, it will also be given the example of Norway as a case of success but only to grasp the main policies that contributed for this curse’s escape.

In the end of the paper, I will propose some suggestions to reverse the curse and to take good advantage of the blessing that can be to have black gold below one’s own soil. Those are not obviously miraculous solutions but only my vision of how things can be done in different ways and what different paths can be followed in order to finally get into the development track.

I would just like to clarify what is my interpretation of the word development since this will be a key concept across the essay. It is a challenge to, within a few words, describe a concept that has been deeply discussed in many years across literature. Yet, by development I mean the combined phenomena of growth (in terms of wealth creation and income) with better conditions of living (in terms of for example health, access to education and political choice). Economic growth is then a necessary but not enough condition. If all income stays concentrated in a certain social stratum and does not improve the living conditions of the population as a whole, then a rapid income growth will not be enough for development accomplishment. That accomplishment can then only be assured by a clear improvement in real life.

Angola – poverty around huge wealth

Angola is nowadays one of the most important oil producers from Sub- Saharan Africa, having produced, in 2008, around 1,9 million barrels/day (2008 data from Angola National Bank). The economy is extremely dependent on oil production and great part of the registered growth in GDP in 2007 and 2008 (24% and 15%) is explained by the oil sector’s dynamic. Although other sectors are also growing, the dependency in this black gold is an undeniable fact in Angolan’s economy, which is a reason of concern for the next years [1] . According to Angola Energy Data, considering the amount of oil reserves existent in the country and the maintenance of the actual level of production, the former will only be assured for another 13 years. [2] 

This dynamism in the oil sector has been then responsible for the growth registered in past years, benefiting, namely from the increase in oil prices and the growing oil production. However, and according to World Bank’s data [3] , despite the impressive growth of GDP in 2005, 2007 and 2008 (20,6%, 20,3% and 14,8%), Angola’s life expectancy at birth has barely changed (46, 47 and 47) and Mortality rate under the age of 5 per million births has decreased significantly from 191 to 158 between 2000 and 2005 but in 2007 the rate suffered no changes. Moreover, in 2007, 38,5% of the population was expected not to survive to age of 40, 49% is not using an improved water source and 31% of children aged under 5 are underweight for age.

Only by analysing indicators it is possible to imagine the level of poverty these people live in but this idea would even be clearer just by making a quick trip through Luanda’s streets. Angola’s capital city escaped from civil war and therefore was the destination of thousands of people, trying to find a safe place to restart their lives. Luanda which is a city able to shelter around half million people, has nowadays a population of around 3,5 million. This is a clear obstacle to the improvement in life conditions and offers a favourable ground to disease’s proliferation and to very poor and inadequate housing conditions.

Obviously, Luanda is also the city where the richest people of the country live too. The Southern part of the city (Luanda Sul), seems like a different one, where the traffic is still chaotic but where nice houses and expats resorts can be easily found.

Yet if life is difficult in Luanda (for the majority of the people living there) in the other desertified provinces, the more rural landscape does not cover the level of poverty and economic backwardness.

Angola is, for all described above, pushed to a place in Human Development Index table that clearly contrasts with the place assumed in Sub Saharan Africa as one of the most important oil producers.

Does Governance matters?

Angola became an independent country in 1975 after fourteen years of war between Portugal (its former colonizer) and their people. During these fourteen years, three liberation groups were formed: MPLA, FNLA and UNITA. With the independence, these three groups agreed to constitute a transitional government and prepare for free elections. However, a civil war soon started between MPLA and UNITA/FNLA, which had previously formed an alliance. Only in 1991, a peace agreement was signed and finally elections were held. However, since results in first round were not effective (MPLA won in parliamentary vote, being allowed to form government but in terms of president election José Eduardo dos Santos, MPLA leader, had more votes than Jonas Savimbi, UNITA leader, but not enough) a second round had to be held, yet civil war erupted again. Only in 2002, and after UNITA leader murderer, peace was back to Angola.

This war had had tragic results for the country, killing around half million people and displacing 2 to 4 million of others, destroying its infra-structures and weakening and disorganizing an entire country.

If at first this war was driven by ideologies (socialism vs capitalism with Soviet Union and Cuba supporting MPLA and US supporting UNITA) later it became a question of controlling resource’s wealth. Both sides knew that constituting government would mean having total control over all that wealth. [4] 

Still today, after the war ended, and despite the undeniable growth in political stability in this country, all this background of fight for wealth and taking the better advantage of resource wealth affects political system and the way today’s government manage oil money. This is the historical framework that wraps this African country and that should not be forgotten, when development solutions and orientations are designed.

But why is there a link between resource wealth and corruption? Literature says and the reality too that in many cases resource wealth is associated to poor institutions, lack of democratic mechanisms, low levels of freedom, one party societies and authoritarian governments. This is evident in countries for example like Nigeria, Congo and Angola in Africa but also in Brunei, Bahrain and Saudi Arabia in the Middle East. However, the link between these two phenomena implies that the country is primarily a non democratic country. That means, if the country has an authoritarian and corrupt government to start with, oil discoveries will most likely enhance and feed that regime, in spite of promoting the rise of democratic values and institutions.

As Katz, Bartsch and Malothra stated

the main challenges [of an oil dependent economy] come from the high volatility of oil prices, the enclave nature of the oil sector, the exhaustibility of oil reserves and the high concentration of revenue flows from the oil sector, which invites rent seeking behaviour and may lead to governance problems” [5] .

These governance problems and all the corruption involved are not in favour to development, mainly because the wealth created and obtained is not being transparently distributed through the population. An Angolan University Professor Justino Pinto de Andrade said: “The role of the state should be to take that wealth and apply it in ways that will benefit the people of Angola. The oil revenues go straight to the state budget, but the people see very little benefit.” [6] 

In fact, corruption and lack of transparency are two of the major problems of Angola’s economy and society. According to Nicholas Shaxson [7] , if before, and until the 90s, oil companies were the ones blamed for the incapability of transferring and distributing the wealth involved in oil production to Angolans’ real life (being blamed of cultivating western imperialism), after that time started growing the awareness that the lack of checks and balances [8] within a corrupt society where institutions do not work, not only impedes development in a sustainable basis but also feeds that same regime.

In the graph below (World Bank Data), it can be seen how indicators like Control of Corruption and Rule of Law have evolved throughout the years. It is quite visible that these figures are still in very low levels comparing to countries worldwide. [9] 

Within a society and political system like the one represented above, the resource management is clearly not the one that most favours the quality of living and development standards of the country. Like Neil Ford, in his article in African Business Magazine, asked, I may also ask “Where does all the oil money go?” This is a fair and intriguing doubt.

Since government’s accounts are not usually published, or even if they are, they barely represent the reality, it is difficult to realize the amount of money involved in oil operations. As well as government’s accounts also the content of the contracts, signed between government and oil companies, are not publicly known. These contracts establish not only the payment of royalties and other standard payments but also the payment of signature bonuses and other bonuses throughout the contract (for example when the company starts drilling, when it finds oil, when it achieves a certain level of oil production, among others) and these are the amounts which are the most difficult to find track of.

Angola’s oil earnings are controlled not by the Treasury and the central bank, as required by law, but by Sonangol [state owned oil company] and the president’s office. Much of the money is deposited in secret offshore bank accounts. Hundreds of millions of dollars were said to be held in Sonangol accounts in various countries. [10] 

In recent years there has been international pressure, namely in Oil companies, in order to make publicly known the amounts that are being paid as bonuses and that are not included in government’s fiscal accounts. According to McMillan [11] , in 2001, BP (British Petroleum) following this international concern, stated that a signature bonus of around 100 million USD had been paid to Angola. Obviously this was at the time highly advertised throughout the world press. Sonangol’s response to that was “Given the seriousness of the situation if the provision of information by your company is confirmed and we observe moral or material damage thereof, we reserve the right to take appropriate action.” [12] This response was clearly inducing the intention to terminate the contract, unless BP took measures in order to falsify its first statement. This is just an example to show how powerful a government can be, when huge amounts of money and interests are involved.

Corruption is a dangerous cycle and that since it is rooted in the society needs deep measures to be annihilated. But why does oil contributes for its incrustration? Michael Ross [13] refers three possible explanations for the thesis that oil has anti democratic effects and feeds corruption and authoritarian governments: rentier effect, repression effect and modernization effect.

The rentier effect is related to the fact that normally in resource rich countries taxes are low, which contributes to a minor accountability from the government, that means that since people are not strongly contributing for government’s safes they won’t feel legitimized to demand any particular measures or attitudes, nor will they be expecting any representation from their government (in Angola, income tax rate maximum is 15%).

The repression effect results from the possibility that governments in these countries have of using part of the wealth available in guaranteeing that no democratic aspirations succeed, spending the necessary money in internal security and prohibition of the constitution of any groups that could endanger regime’s continuity.

Finally, the modernization effect relates to the idea that an oil rich country and all the system surrounding that type of economy do not facilitate the set of social and cultural changes needed for the constitution of democracy, “including occupational specialization, urbanization, and higher levels of education that in turn are caused by economic development” [14] 

On the other hand, Benjamin Smith tested the correlation between oil wealth and regime durability. His main goal was to understand how regimes from oil wealth countries resisted even during major crisis like in the 70s and 80s. His tests’ results indicate a robust association between these two variables. However he discards the idea that this correlation is the result of repression. He stated that “the persistence of authoritarian regimes in oil-rich states long after the bust of the 1980s suggests that leaders in many of these states invested their windfall revenues in building state institutions and political organizations that could carry them through hard times.” [15] Smith’s argument is mainly that the correlation exists and that further studies should be taken in order to better understand the reasons.

Whatever are the reasons behind the correlation referred, the fact is that this atmosphere of corruption and lack of transparency not only has a direct effect on this country’s development, through namely the unequal or inexistent income distribution but also hinders foreign investment. Although there is legislation guaranteeing equal treatment to foreign investment (Angola’s Law on Private Investment), in fact there are clear obstacles in certain sectors, which having particular legislation, do not follow the general rules of freedom of investment. The government has a strict control over the significant capital that first enters the country and this control is, even if legislated, still subject to corruption, since, namely, certain facilities are given to those who cooperate within the installed system.

Oil Sector is growing and the others?

In economies like Angola where oil plays a crucial role and represents the majority percentage in GDP contribution, the other sectors tend to grow in a much slower rhythm. The economy is focused on the sector that it is in fact creating high levels of wealth and so others tend to be forgotten. Despite the non oil sectors’ growth in last few years, in terms of percentage of GDP the importance of the oil sector remains intact (56% in 2002 and 58% in 2008).

The Dutch Disease is the phenomenon that usually is referred to every time resource curse is explained. It involves, and following the main literature about this subject (Gylfason [16] and Larsen [17] ), three effects that explain the harm caused in the economy of an oil rich: factor movement effect, spillover loss effect and spending effect. I will now briefly explain these 3 factors.

The factor movement effect involves the reallocation of means and factors from non oil sectors to the new and growing oil extraction sector. This reallocation puts pressure under wages and prices in that sector which contributes for a competitiveness loss in other sectors. As a result of this reallocation, also positive externalities are lost as well as know-how, which may harm technological assets already existent and hinders its progress. This is called the spillover loss effect. Finally, the spending effect is characterized by the increase in domestic demand that occurs as a result of high amounts of oil revenues being converted into domestic currency. This pressure over demand results in an appreciation in local currency and consequent loss of export competitiveness.

Once all these occurs, the manufacturing sector becomes very fragile and reverting this situation is something difficult and costly to achieve, which will sooner or later affect the economy as a whole. So if at first the economy benefits from an extraordinary boom, later it will start declining its growth, unless measures are taken to avoid this disease.

There is an interesting study [18] that concludes that the relationship between oil wealth and growth might be positive as long as the oil sector’s growth does not exceed 18% and that above that threshold measures should be taken. The author suggests the creation of an “oil revenue fund” that should be augmented in boost periods and could later be used in periods of decline of oil prices for example or whenever the economy needed stabilization mechanisms. Although this study is mainly establishing a link between oil revenues and growth in terms of GNP and I am trying to understand the link between the former and development, I would say that this fund would be a positive measure to be taken. It would be a way of the government saving part of the oil revenues that could later be used in the development of other economic sectors and in the promotion of education of Angolans and in other measures that would promote a sustainable growth and development. This would only function if there was a strict control over the expenditure of this money and obviously it assumes that the government is acting in the interest of the nation and not in its self interest. This fund was actually created in Norway and might be one of the reasons why it has until now escaped from the curse (See Section below).

Besides this researched effects caused by a dependency in Oil sector another point is that an economy fully dependent on this sector is most of the times highly fragile and unable to improve its development standards. The volatility that characterizes oil based economy is damaging societies characterized by malfunction of institutions and misuse of oil revenues.

This volatility has been quite visible in Angola since in 2009 and still in 2008, and as a consequence of oil price reduction, the economic growth in Angola was clearly less impressive when compared to past years (GDP growth in 2005 of 20,6% compared to 14,8% in 2008). If this country remains this dependency on oil sector it will reflect every oscillation in Oil prices and will also soon reflect the production limits imposed by OPEC. Besides that, a dependency on an exhaustible natural resource offers no sustainability or guarantee to an economy that is wanted to be strong and stable.

There should then be a clear shift of investment towards other sectors that could renew the economic system and bring new dynamics. Some investments have already been made in sectors like Tourism. This can be one of the main sectors of this country, considering its incredible natural beauty and different landscapes that could fulfil different interests. Also agriculture should be enhanced, promoting modern and sophisticated techniques and exploiting the rich soil this country has. According to Steven Kyle, Angolan agriculture has proved in the past to have important comparative advantages and be able to provide “employment and income for the majority of population” [19] . Promoting agriculture would also mean the relocation of people living in Luanda to other provinces, which is a necessary condition to improve living conditions in the country’s capital, given its overpopulation. Steven Kyle suggests then a real investment from the government in this sector so that the loss of competitiveness resultant of high exchange rates can be overcome.

However, Angola’s specificities should not be forgotten. This country was, as said before, deeply damaged by several years of civil war. Basic infrastructures were destroyed at that time and still today are being recovered. Therefore, the nowadays’ focus on connections’ recovery and improvement is, undeniably, a positive measure.

Education

Within an Economy highly specialized in the Oil sector, the necessary expertise comes, usually, from outside, from the expats, working for the oil companies and that were previously trained in their home countries. Even if there is an obvious participation from local work force (in Angola’s case, international companies are obliged to have their work force composed by at least two thirds of Angolans), there is a kind of certainty that the necessary skills will be provided from the outside.

Besides the aspect referred above it should also be stressed the fact that there might be the idea that since there is enough natural wealth there is no urgent necessity in promoting education. There is a strong focus in producing oil, since it is in fact being responsible for a strong accumulation of wealth, and the human capital and its development tend to be neglected. Oil endowment and its natural easiness in promoting economic growth tends to create a sense of comfort and security that have a counterproductive effect in education investment.

According to UNESCO 2008 Report, in 2015 there will still be 3,4 Million Illiterates in Angola, 69% of which are women. Still according to this same report, in the year 2000 the primary enrolment was of 64,3% and in 2004 tertiary enrolment was of only 0,8%.

Economic growth can in fact be enhanced by education. Gylfason found a positive correlation between these two variables, using for his study 86 observations. Yet not only economic growth can be improved. Reaching better levels of education and providing it as a right to a country’s people, might be the way to establish democratic standards and good governance. Moreover, relying in well educated local population would also enhance a better performance in terms of resource management, establishing new priorities and shifting public investment into new sectors.

If oil revenue is managed well, it can educate, heal and provide jobs for the people. But oil brings risks as well as benefits. Rarely have developing countries used oil money to improve the lives of the majority of citizens or bring steady economic growth. More often, oil revenues have caused crippling economic distortions and been spent on showy projects weapons and Paris shopping trips for government oficials. [20] 

The “Blessed” case of Norway

Norway had been for long years performing well economically and in a similar rhythm compared to its neighbours (Sweden and Denmark), yet in the early 70s something changed: this country started producing oil. The start of oil production coincided with a better performance from Norway. Since Scandinavian countries have similar structures at many levels: economic, social, political, linguistically, if one of the three countries starts growing at a faster rhythm shortly after oil is discovered, there is a clear link that can be made here. Statistics show that Norway managed to maintain an impressive level of growth more than two decades after oil discovery. This counters to the curse and disease usually associated to oil riches.

Norwegian economy apparently escaped from the 3 harmful effects (factor movement effect, spending effect and spillover-loss effect, already explained in a section above) that usually injures oil based economies after a while. This escape was in part a result of this being a well structured democracy, with strong institutions and a successful economic background (as Larsen suggested) but also because policies were followed and there was a clear intention of avoiding the expected, and for many, inevitable curse.

Norway was then able, at least during the first 25 years, to avoid the disease and escape the curse and very strict measures were followed with that intention. According to Larsen [21] Norway’s main policies were fundamental for its success. According to this author, to avoid the factor movement effect, wages were imposed by the non oil sector so that they would reflect its productivity and not the boom in the oil sector, avoiding by that way unbalances that would enhance losses of productivity. An oil fund in foreign currency and abroad was created so that spending effect could be prevented. With this fund the pressure on demand and consequent appreciation in exchange rates was avoided. There was also clear preoccupation in investing in research and technological progress and also in maintaining the export structure as diverse as possible. By that way, spill over loss effect was also prevented.

Along with specific measures to avoid these three effects, Norway has never neglected investment in human capital. As an example, the enrolment in tertiary education grew from 66% in 1999 to 80% in 2006 and adult literacy rate is, today, very close to 100%.

The 2007 OECD Economic Survey of Norway, resumes Norwegian resource management model in two words: predictability and transparency.

All oil companies are responsible for the actual operation of petroleum activities on the Norwegian continental shelf, in a competitive and cooperative framework (…). But agreements and licenses are attributed in a very flexible and innovative way. (…) The most important decision criteria include understanding the geology, technical expertise, financial strength and the experience of oil company. [22] 

Despite a certain slowdown in recent years, Norway is still a case of success and it is not the only example also Botswana, Chile and Malaysia are resource rich countries that have been achieving positive economic results.

Conclusion

Since oil is present in our modern times’ life, having it in considerable quantities as a gift from Nature could be the perfect chance for African countries, namely Angola, to finally raise its Development Indicators. And I say it could because in fact that is not happening.

Along this paper I tried to go through the 3 aspects that I think are the most responsible for the curse associated to oil wealth in Angola.

Above everything I said previously, I would like to stress the type of governance that still exists in Angola and how it should be the very first priority. For everything I said before, this type of governance is stimulated rather than disencouraged within an oil based economy. It is a cycle that can only be interrupted if corruption and wrong usage of oil revenues is once and for all stopped. I do not intend to find a solution for that, that is not my paper’s intention, but at the end of this paper this is the conclusion I reach. All efforts should be in that direction so that other different measures can then be taken. Only when people can actually trust in the people representing them and when all the revenues created by oil production are effectively distributed and used with clear development purposes, can anything or any policy succeed.

Once governance issues are overcome, education should then be the main focus. It is important to have, within the country, people with the necessary skills to make the correct choices and to implement the necessary measures, following positive examples, but never forgetting this country’s features and historical background. And that people should be Angolan. Besides all help they can get from the outside, its people should be able to, with the necessary access to education, say a word regarding the future of their own country.

With democratic and strong governance and with qualified people the country will then be able to diversify its economy, shifting their focus into tourism and agriculture, for example as I mentioned above. They would still produce oil but would use its revenues with clear intentions in guaranteeing an economic balance.

The sustainability of this economy will depend of its capability of diversification and of resounding in Human Development Indicators the growth in wealth production. Oil is then promoting a kind of growth that is occulting Angola’s real problems and that will not guarantee sustainable development to this country.

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