Angola s Homegrown Answers to the Resource Curse

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Angola s Homegrown Answers to the Resource Curse Nicholas Shaxson* Many outside experts have long regarded Angola as suffering from a classic case of the resource curse, the thesis that countries dependent
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Angola s Homegrown Answers to the Resource Curse Nicholas Shaxson* Many outside experts have long regarded Angola as suffering from a classic case of the resource curse, the thesis that countries dependent on natural resources like oil are cursed by their patrimony they are held to grow more slowly, to be more authoritarian, more conflict-prone, more corrupt, and more volatile, in economic and political terms, than their peers. Angolans themselves tend to resist this view,and indeed recent history lends their claims credibility, at least on the surface: this oil-rich, former Portuguese colony has enjoyed Africa s fastest GDP growth rates over the last three years, according to traditional measures of GDP. In the present chapter, we shall examine the evidence for and against the applicability of the resource curse thesis to Angola, and conclude that the resource curse is very real in Angola s case. This examination will entail a broad exploration of Angola s economic and political history, with a focus on oil, and a discussion of Angola s diverse economic partnerships, notably with China. In the course of our presentation, we shall also * Nicholas Shaxson is an Associate Fellow with the Africa programme at Chatham House. He has been active as a journalist, researcher, and consultant, who has lived in and written about the economics and politics of oil producing countries in West Africa since 1993. 52 Governance of Oil in Africa: Unfinished Business have cause to challenge some of the prevailing opinions about Angola in the media, and provide pointers for the future. Background For the last three years Angola has easily been Africa s fastest-growing economy, averaging just under 20% GDP growth from 2005 to 2007 (OECD 2008). Years, and even decades, of severe macroeconomic instability and hyperinflation have given way to a period of sustained improvement in state revenues and finances, sharply lower inflation, and far better economic stability in purely macroeconomic terms. Angola s economic growth is heavily dependent on its fastgrowing oil industry, which is, at the time of this writing, producing just under 2 million barrels per day (bpd), with an annual export value that will probably reach almost $70 billion in Angola is also developing its capacity to export liquefied natural gas (LNG),having started construction of a project in May 2008 that will begin supplying the US market by around 2012; and it is boosting its refining capacity,with plans for one, and possibly two, new refineries with a capacity of 150, ,000 bpd each, complementing the old Luanda refinery,which currently processes about 35,000 bpd. Angola also exports diamonds: data are opaque and scarce, but official exports set the value at approximately $1 billion per year. Though this makes Angola one of the world s major producers of diamonds, it is still tiny when compared to oil. Angola is recovering from a long and bitter civil war, which erupted upon gaining independence from Portugal in 1975 (after a violent anti-colonial struggle) and continued punctuated by two periods of temporary peace in and until the Angolan army tracked down and killed Jonas Savimbi, leader of the rebel party União Nacional para a Independência Total de Angola (UNITA) in The war with UNITA is definitively over, and there is no chance that it will re-ignite. (The sudden departure of President dos Santos, however, would create new potential for instability, though there is no clear sign that this is likely any time soon.) The end of the war, which has ushered in a period of political Angola s Homegrown Answers to the Resource Curse 53 stability and economic reconstruction, has been a major factor contributing to recent economic growth, setting the stage for major investments, mostly but not exclusively in the oil and diamond sectors. Political power is highly centralized and almost uncontested in Angola. President José Eduardo dos Santos sits atop an extensive and sophisticated patronage network, through which power is exercised by playing off different constituencies against one another. None is especially powerful in political terms. The key constituencies are: the ruling party Movimento Popular para a Libertação de Angola (MPLA), whose members significantly overlap with all the other constituencies; the public sector ministries, notably the ministries of the economy,finance, and planning; the state oil company Sonangol and, to a lesser extent, the state diamond company Endiama; the armed forces, the intelligence services, and the office of the presidency. The only sources of significant opposition (or alternative viewpoint) to President dos Santos are the former rebel movement UNITA, which received a pitiful 10% of votes in legislative elections in September 2008; the Partido de Renovação Social (PRS), which produced a healthy result in its traditional northeastern, diamond-rich strongholds; and the Catholic Church, which is independentminded but rarely raises its voice in overt opposition to the MPLA. These alternative poles,however,have only very limited influence on national politics and economic management. Angola s international profile and image has also been evolving rapidly in the early years of the 21st century. From the late 1990s, aseries of campaigns by Western transparency activists successfully painted the oil-rich African country as a poster child for international corruption, pointing to the extreme wealth of an oil-rich elite amid a sea of poverty, a terrible civil war, and economic mismanagement. After the war ended in 2004, these perceptions began slowly to shift, and Angola is now increasingly being viewed through a somewhat different lens. While the corruption story remains alive, with the new Angolagate corruption trials in Paris from October 2008 as the latest installment, an alternative narrative is emerging alongside it: one that casts Angola as a land of 54 Governance of Oil in Africa: Unfinished Business opportunity for risk-taking foreign investors. Inflation is falling, and public financial management was, at least until the emergence of the new economic crisis, becoming more stable and less opaque, albeit from an exceedingly low base. Angola s government is pursuing a homegrown approach to economic management. According to popular Western perceptions, Angola has been let off the hook on corruption and IMF-styled reform by China, which has extended large loans, partly in the hope of securing upstream oil licenses. Yet these perceptions are largely misplaced: Chinese lending, at several billion dollars spread out over several years, is currently flowing at a rate of about $1 billion per year, dwarfing Angola s budget. In reality, what Angola has been doing is to look at the advice offered by IMF, Brazilian, Portuguese,Chinese,and other consultants,the UNDP,and many other outsiders, and then select the advice (and technical support) that it likes,while rejecting the rest. What has insulated it from outside pressure is not Chinese lending but its oil. It is also hardly surprising that Angola takes a hard-line approach to outside advice and pressure. First, while outsiders with some justification point to Angola s scandalous corruption, Angolans correctly point out in return that their country has been the victim of scandalous interference from outsiders over the past decades, most notably some Western governments military and other support for UNITA during the war, especially in the two decades after independence. Second, much of the advice from the IMF and others that has been implemented has (rightly) been seen as producing disastrous outcomes in Angola. Western theoretical models for approaching the resource curse are regarded as simply inapplicable in Angola from a political and even an economic point of view. An example of such advice comes from the World Bank s (2006) major document on Angola, its Country Economic Memorandum from October The very first recommendation in the report reads: Angola needs to complete the transition to a market economy. While this might seem like a good idea in theory, it completely ignores the political and economic realities of an oil-rich, developing African country. Such a transition is simply not likely to happen as long as the Angola s Homegrown Answers to the Resource Curse 55 oil lasts. As will be discussed below, Angola, almost inevitably due to its mineral resources, will take a highly statist, planned approach to economic management. Some of the most obvious manifestations of economic reform amid fast-growing sophistication of economic management and spectacular headline GDP growth (that is, growth measured in gross macroeconomic terms, potentially masking very different realities for different sections of the population) have occurred since the end of the war in 2002, one might be tempted to conclude that it was ultimately the end of the war that spurred the changes. This conclusion would be incorrect, however. The end of the war, and rising oil prices, certainly helped to push change forward, but the real sea change for reform in terms of political will, following the tumultuous economic changes at the beginning of the 1990s, happened around This became evident to the author through a series of interviews in Luanda with senior Finance Ministry, Central Bank, and other officials in 2005 and The most important reasons for the new reform impetus seem to be the disastrous economic turbulence of the mid-1990s, and especially hyperinflation, which peaked in peacetime in Inflation started to fall really only in 1997, and has maintained a generally downward trend ever since. The other major bifurcation in economic policy at around the same time was the near-abolition in 1998 of the wide divergence between official and black market exchange rates which had been hitherto exploited by well-connected elites to obtain what was, in essence, free money from the state through legal means. It was hyperinflation and economic instability, in the context of an imminent return to war, that finally convinced President dos Santos to surrender a large measure of political power to the technocrats at the Ministry of Finance: that appears to have been the point at which the current phase of economic reforms properly began. True to his instincts, Dos Santos allowed the changes to be introduced 1. Vines, Shaxson, and Rimli A Drivers of Change Angola follow-up was conducted by Nicholas Shaxson, João Neves, and Fernando Pacheco in 2007, but has not yet been published. The reports were commissioned by the UK s Department for International Development (DfID). 56 Governance of Oil in Africa: Unfinished Business Table 1. Angola: Basic Data, 2006 (unless otherwise indicated) Population (millions) 16.4 GNI per capita, Atlas method, current US$ 1,980 GDP (current US$ billion) 45.2 GDP growth (annual, % 2007) 19.7 Annual inflation (%) 12.0 External debt ($ billion) 9.5 International Reserves (end-2006, $billion) 8.6 Oil production ( 000 bpd) 1.43 Price of Angola s oil ($/b) 61.4 Current-account balance (including transfers, as % of GDP) Oil production (million barrels per day,2007) 1.7 Diamond production ($ million) 1,200 Social indicators Under-5 mortality rate per 1,000 live births 260 Life expectancy at birth (2005) 41 Adult literacy report (%, ) 67 Health expenditure (public + private, % of GDP, 2003) 2.8 Composition of GDP (2006) Agriculture, etc. 7.8 Extractive industries 59.4 Industry 4.9 Electric energy 0.1 Construction 4.4 Services 23.3 Sources: World Bank Angola at a Glance 2007, IMF (various, 2007), OECD African Economic Outlook 2008, UNDP Human Development Report statistics 2007, OGE (Orçamento Geral do Estado) only gradually, for fear of a repetition of the appalling economic outcomes stemming from rapid economic policy change after the abandonment of official Marxism-Leninism at the start of the 1990s. Angola s state budget has grown very fast in recent years: the 2009 budget puts revenues and expenditures at 3.2 trillion Kwanzas, or about US$43 billion at current exchange rates. To put this in perspective,this figure based on an oil price of just $55 per barrel, significantly exceeds all OECD countries annual overseas development assistance to all of Africa (OECD 2007). Yet despite all this money,and the economic growth, many of Angola s social and human indicators remain among the world s worst. For example, according to current official data, over 260 of every 1,000 Angolan children born alive die before their fifth birthday the world s second worst infant mortality rate. Angola s Homegrown Answers to the Resource Curse 57 Angola s great wealth and rapid growth, combined with extremely poor social outcomes and widespread international findings that the country is poorly governed and highly corrupt, suggest that Angola may well be suffering from a bad case of the resource curse. Many Angolans strongly reject this notion, however. Angolan state media, and many of Angola s leaders, strongly promote the view that the oil wealth is almost unequivocally a blessing. It is the history of war that is at the root of Angola s problems, it is argued; the oil wealth will enable Angola to overcome its problems in time. Many ordinary Angolans, when asked, believe their oil is good for their country. Who is right? The Resource Curse The resource curse involves several symptoms and causes, and has led to certain policy prescriptions. According to the resource curse literature, alarge endowment of resource wealth relative to the size of the economy tends to, or can, lead to: long-term economic growth greater economic (and political) volatility more corruption more authoritarianism greater violence The notion of a resource curse is widely, though not universally, accepted: some mineral-rich countries (such as Norway or Botswana) seem to have avoided its worst effects; others dispute some of the evidence (the economist Jeffrey Sachs [2007], for example, now argues that the problem is not that resource-rich countries perform worse, but simply that they do not live up to their potential). Three main generic explanations are typically given for the resource curse. The first is the Dutch disease. When oil money floods into a country,local price levels rise (economists talk about appreciation of the real exchange rate: either the nominal exchange rate appreciates, or inflation rises, or both). 58 Governance of Oil in Africa: Unfinished Business The end result is that costs rise in sectors that produce goods that can be traded (manufacturing,in wealthier countries; agriculture, in poorer nations) such that those sectors cannot compete with imports; these sectors then tend to wither away as imported goods replace their output, leaving the economy even more dependent on the mineral sector. The second explanation focuses on volatility. Commodity prices fluctuate wildly over time. For example,by July 2007 oil prices had risen more than fifteen-fold since 1999, from under $10 per barrel to $147 per barrel, and by the end of October 2008 it had fallen to $60 per barrel. This plays havoc with national accounting no country can absorb such volatile revenues, let alone a conflict-ridden African nation. This economic volatility,in a country so utterly dependent on one commodity,develops into political volatility. The third element is the most complex: the effect on political conditions. This has several parts, and analysts are divided as to which is the most important. One is the principal-agent problem. As the financier George Soros (2007: xii) put it: the rulers are not the principals. They are the agents of the people. The rulers get their rewards from the [oil] companies,not from the people whose interests they are supposed to safeguard. The key here is taxation. Students of European and American history are well aware of the role that taxation plays in building strong, accountable states, epitomized in the cry of early American settlers: no taxation without representation. In resource-rich states like Angola, rulers tax oil companies, not citizens, with the result that they are less dependent on, and accountable to, their people. A related political concept is one developed by scholars of Middle Eastern politics: that of the rentier state a state based on economic rents, or unearned income. It is also discussed in the context of patronage politics : the downward allocation of resources, permissions, or positions by rulers to underlings in exchange for political support. This phenomenon is not restricted to mineral-rich or African states. Many other countries are also rentier or quasi-rentier states: the most common source of alternative non-resource rents are strategic rents, that is, rents obtainable from outside, such as foreign aid. Angola s Homegrown Answers to the Resource Curse 59 Generally, these rents do not entirely cause the problems: to a large degree, they exacerbate existing latent tensions and schisms and malign political tendencies. There are five leading Western policy prescriptions currently recommended for tackling the resource curse. They are: first, set up oil funds (such as Norway s) to keep money outside of a producer economy and to smooth volatility; second, boost transparency; third, diversify the economy away from the natural resource. A fourth approach (related to the third) was pioneered by China in Africa but not yet widely recognized in Western policy circles as a mechanism for mitigating the resource curse; it is to use a form of barter: foreign companies build infrastructure in exchange for oil cargoes or oil concessions. (Whether this self-interested approach is effective or not is another matter.) A fifth,more radical proposal distribute oil revenues directly to a nation s citizens so far has made less headway in international policy debates. Angola s Oil Industry Angola s entire post-independence history has been shaped by oil. It was first exploited and produced (onshore) in the 1950s. By 1973, two years before independence, production had reached 173,000 bpd, and oil was already the country s largest export sector, despite a robust colonial agricultural and manufacturing sector. Oil production rose slowly but steadily after that,despite the fact that the country slipped into civil war soon after independence. Over time, Angola s production profile shifted steadily away from the more vulnerable onshore sites to offshore sites, where the geological potential has been shown to be greater. Oil s growth was not reversed by the fact that the Portuguese colonial administration was replaced by an official Marxist-Leninist government. While the newly independent nation nationalized most things in the economy after the Portuguese left, oil was treated as a special case, and the national oil company Sonangol was allowed to carve out a special role for itself, isolated and protected from predatory political interests and from the Marxist-Leninist system. 60 Governance of Oil in Africa: Unfinished Business Production grew slowly through the 1980s and 1990s, dominated by the giant Cabinda Gulf (Chevron) Block Zero shallow water license off the northern enclave of Cabinda, which for many years accounted for more than half of Angola s oil output. By 1994, the end of a two-year period of war, production had risen to half a million bpd all from relatively shallow-water licenses near the mouth of the Congo River, either immediately north of it (Cabinda Gulf s Block 0 ), or immediately south of it (Blocks 2 and 3, off the northern town of Soyo). In the mid-1990s, something else happened. World oil technology had been advancing apace, and now a range of new offshore territory in deep water, mostly in depths of over 1,000 meters,was now coming within range. The world s major oil companies began to sign new deep water licenses: Block 17 (Elf, now Total, signed January 1993); Block 15 (ExxonMobil, August 1994); Block 14 (operated by Chevr
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