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Analysis of Angola: Probability of Falling Victim to the Resource Curse

angola2A research paper by Thunderbird students Christian Lorentzen and Anthony Petrunin

Executive Summary: To determine whether Angola is at risk of falling victim to the resource curse we chose to implement a framework developed by Paul Stevens and Evelyn Dietsche (Stevens and Dietsche, 2008) based on their careful study of leading academic writings on causes of the resource curse. The framework employs three main factors to determine whether a country is likely to experience the resource curse:
1) Is there the existence of historic well-functioning institutions already in place?•Considering that Angola’s present leadership came to power through a civil war in which the institutions left by the Portuguese were destroyed and new centralized systems were created, there is risk that Angola’s leadership is not dependent on a system that would lead them to make decisions in the best interest of the country.
2) Is the relative value of the resource rent high or low?•Angola is dependent on high-rent oil exports. The oil royalties are high enough to satisfy the national budget without the necessity of additional revenue streams. As a result the leaders lack motivation and incentive to develop other sectors of the economy.
3) Is the natural resource harvested across large or small geographic areas?•Oil has a small geographical footprint that does not require local support systems or labor. Therefore Angola’s dependence on oil is unlikely to create cluster economies.
By analyzing these three questions in the context of modern day Angola, we came to the conclusion that Angola is at a high risk of becoming a resource cursed country.

angola2A research paper by Thunderbird students Christian Lorentzen and Anthony Petrunin

Executive Summary: To determine whether Angola is at risk of falling victim to the resource curse we chose to implement a framework developed by Paul Stevens and Evelyn Dietsche (Stevens and Dietsche, 2008) based on their careful study of leading academic writings on causes of the resource curse. The framework employs three main factors to determine whether a country is likely to experience the resource curse:
1) Is there the existence of historic well-functioning institutions already in place?•Considering that Angola’s present leadership came to power through a civil war in which the institutions left by the Portuguese were destroyed and new centralized systems were created, there is risk that Angola’s leadership is not dependent on a system that would lead them to make decisions in the best interest of the country.
2) Is the relative value of the resource rent high or low?•Angola is dependent on high-rent oil exports. The oil royalties are high enough to satisfy the national budget without the necessity of additional revenue streams. As a result the leaders lack motivation and incentive to develop other sectors of the economy.
3) Is the natural resource harvested across large or small geographic areas?•Oil has a small geographical footprint that does not require local support systems or labor. Therefore Angola’s dependence on oil is unlikely to create cluster economies.
By analyzing these three questions in the context of modern day Angola, we came to the conclusion that Angola is at a high risk of becoming a resource cursed country.

Causes of the Resource Curse: The term “resource curse” describes the political-economic phenomenon when a country whose natural resource exports are a relatively high proportion of its GDP exhibits high GDP growth and a strong financial standing, yet does not diversify its economic or social development. Exhibit 1 is a table of countries Stevens and Dietsche compiled from World Bank data where natural resource exports made up more than 30% of their GDP from 1965-1995. Such countries can be considered resource dependent and “at risk” of not developing other sectors of their economies (Stevens and Dietsche, 2008). However the table shows that many “at risk” countries have developed non-natural resource driven sectors.

Though there are no clearly defined “causes” of the resource curse, one factor has emerged that can be used as a rule of thumb to determine the chances that a natural-resource dependent country may be at risk of falling victim to the resource curse. This factor is the transparency, efficiency, and good governance of state institutions to collect, manage, and distribute the resource revenue (or “rent”) from the extraction and export (Hamilton and Ruta, 2006). These institutions should be chartered to: 1) stabilize the economy during times of down global commodity markets and 2) distribute the rent to other sectors that will lead to business and societal development.

There are three questions that can determine whether a resource-laden economy will find it in their own best interest to create and maintain effective and transparent institutions. First, “are there historic well-functioning institutions already in place?” If a leader is elected or appointed by the rules of an established system, he will be willing to allocate sources of control and power to others outside their own circle. If a leader comes to power through a civil war or military coup he will feel pressure of others wanting to oust him, so will keep power as centralized as possible. This is amplified the more the conflict upset the county’s existing institutions (Nelson, 2011). Exhibit 2 lists reasons for an uprising. The more likely a coup, the more likely a leader will want to keep power centralized.

Second, “is the relative value of the rent high or low?” When the rent from resources is low (crops and fishing) this leads states to pursue a competitive industrialism model to develop other sectors of the economy where they will have a competitive advantage in the global market. When rent is high (oil or diamonds) state coffers are satisfied by exploiting this single source of income so there will be little to no incentive to seek it elsewhere (Auty and Gelb, 2001).

Third, “must the natural resource be harvested across large geographic areas or from small areas?” When a resource is harvested across large geographic areas greater competition and job-creation tend to result. The government will grant (and protect) land rights of competing firms and the firms will require the use of laborers. The laborers will require services to support their work. These requirements results in the development of support services. This is what is known as a cluster economy (Porter, 1998). In the case of a resource that can be produced in significant quantities from a small area, for example an oil pump from an oil field, fewer competitors and laborers will be needed. Furthermore in the case of oil, the high initial capital and technological requirements necessary to drill and operate an oil well limit entry to only the major international players (Stevens and Dietsche, 2008).

Signs Angola is exhibiting:
1) Does Angola have historic institutions in place through which the leader came to power?
The current president, Jose Eduardo Dos Santos, came to power as a result of a 14 year war for independence from Portugal, then a 26 year civil war between two ideologically opposed movements – the pro-west UNITA and the Marxist MPLA. The Portuguese had claim to Angola as a colony from 1575 to 1975. Beginning in the early 20th century the Portuguese created a diversified economy with maize, coffee, sugar, cotton, mining, railroad construction and trade. Portugal also invested heavily in the country’s infrastructure. The country had a functioning political system based on its state as colony subject to the Portuguese king. However during the fighting of the 20th Century, 1/7th of the population was killed and more than 4 million were forced to flee their homes, including 300,000 Portuguese possessing the technical skills necessary to operate the plants and farms (Hansen, 2008). Peace came in 2001 and the MPLA’s Jose Eduardo Dos Santos was elected president under fierce accusations of fraud from UNITA. Dos Santos and the MPLA instituted entirely new institutions based on the highly centralized Marxist-Leninist model.

2) Does Angola rely on high-rent resources?
Angola relies heavily on oil exports to finance government spending. This dependency is clearly evident in Exhibit 3, which shows that oil alone accounts for 96% of exports. Oil is a high-rent resource because of its significant value on the world market. The high value is derived from its finite supply, increasing global demand for consumption, its role as an investment tool, geopolitics, and macroeconomic uncertainty (Crude Reality, 2011). These dynamics make oil a very attractive product for Transnational Corporations to extract, export, and sell on the world market. As a result Transnational Oil Companies are often willing to pay an access fee to the government which has rights to the oil field, pay for all capital requirements of extraction and export, and pay the government a royalty on oil produced. This allows a government to receive a great sum of money without having to spend a cent to produce it. It is commonly argued that the decoupling of tax revenue from the population leads to the resource curse as a government no longer has to support the population in order to receive income (Musacchio, 2010).

3) Are resources produced from large or small geographical footprint?
Oil is a resource that requires very little geographic footprint to produce. Because of this small area coupled with the fact that only highly trained engineers can operate the equipment and that these engineers live in self-contained compounds, very little support services are required from the local population (Meeting the Challenge, 2006). Therefore cluster economies are not likely to develop. Furthermore often times oil sites are located off-shore where there is absolutely no contact with the locals.

As shown in Exhibit 4 and 5 Angola has a cluster of oil deposits in the Northwestern region of the country and much of it is off-shore. Not coincidentally, this is also the location of the capital city, Luanda, which has the greatest population density in the country. The correlation between the Northwest’s oil production and population density ensures that very little economic prosperity is distributed throughout the country, leaving a majority of the country by the way side. This clustering of the population and economic development does not spur job competition or distribution across the country.

Analysis – Likelihood of Angola falling victim:
By applying our framework we can see that Angola has:
•No existing historic institutions. The leader came to power as a result of conflict in which he still has strong political opponents. Therefore he established a system to keep power in the hands of a trusted few, as distributing wealth would allow opponents resources to revolt.
•Oil - A resource that pays high-rent to the government. This decreases the incentive for the government to diversify the economy as they are earning significant wealth without any expenses or management. (Exhibit 6 & 7)
•Oil - A resource with a small footprint. Oil fields tend to be isolated enclaves that do not lead to the development of the surrounding population.
Because all three of the criteria were met, we believe that Angola is at high risk of falling victim to the resource curse.

References:
“Crude Reality: Why High Oil Prices are Here to Stay.” Knowledge@Wharton. March 16, 2011.

Hanson, S., 2008. “Angola’s Political and Economic Development.” Council on Foreign Relations. July 21, 2008.

Hamilton, K., Ruta, G., 2005. “From curse to blessing: Natural Resources and Institutional Quality.” Environment Matters 2006, 24-27.

“Meeting the Challenge of the Resource Curse.” Overseas Development Institute. January 2006.

Musacchio A., Werker E., Schlefer J., 2010. “Angola and the Resource Curse.” Harvard Business School Case Study. September 7, 2010.

Nelson, R., 2011. Tools for analysis. Regional Business Environment – Latin America. Lecture, May 31, 2011.

Porter, M. 1995. “Clusters and the new economics of competition.” Harvard Business Review. Nov-Dec 1998.

“Rising Angola: Oil, glorious oil.” The Economist. January 28, 2010. .
Ross, M. 1999. “The political economy of the resource curse.” World Politics 51, 297-322.

Stevens, P., Dietsche E., 2008. “Resource Curse: An analysis of causes, experiences and possible ways forward.” Energy Policy 36, 56-65.

World Bank Development Indicators 2002. World Bank. April 2002.

Exhibits:
Exhibit 1:Comparative performance of countries at risk of resource curse

angola_exhibit 1

Source: World Development Indicators 2002, World Bank

Exhibit 2: Probability of Uprising

angola_exhibit 2

Source: Dr. Roy Nelson, 2011

Exhibit 3: Angola exports 2010

angola_exhibit 3

Source: EIU

Exhibit 4: Oil Field Reserves

Angola_exhibit 4

Exhibit 5: Geographic concentration of Angola’s resources

angola_exhibit 5

Source: University of Texas

Exhibit 6: Angola government budget (% of GDP)

angola_exhibit 6


Source: African Development Bank