ANGOLA

By Meran Annalingam

Overview:• Angola is the 3rd biggest economy in sub-Saharan Africa and one that is growing

quickly• Real GDP growth was around 8% for 2012 and 2013• It is Africa's 2nd biggest oil producer (after Nigeria) - high oil and gas prices have

brought about an improved terms of trade and also a large current account surplus

• Revenues from hydrocarbon export volumes and high oil prices offset the rapid growth in imports (for capital investments) and continuing large deficits on the service and income accounts due to the booming oil sector.

• Inward FDI: currently Africa’s largest recipient of FDI, Angola is China's biggest trading partner in Africa with some $24.8bn in 2010

Angola is one of the poorest countries in the world despite the fact that it is one of Africa's major oil producers because the country has been ravaged by civil war for 27

years. The civil war has resulted in poverty in Angola in a variety of ways:

• Poor infrastructure • The health and education system has toppled

leading to illness and lack of knowledge = lack of human capital

• Rural areas still rely on subsistence agriculture

Consequences of poverty

• Harrod-Domar model• 1 in 4 children is forced to work• Reduction in human capital and productivity

Kuznet hypothesis• Angola is at the take off stage and it is moving towards the latter stage of

development. The country has established a sovereign wealth fund currently worth more than $5bn - one of the key aims of the SWF is to help fund investments in non-oil sectors to broaden the industrial base of the country.

• Fast growth has allowed Angola to establish a strong fiscal position. A high budget surplus (7% of GDP in 2012, 5.3% in 2013) is due to rents from state-owned energy businesses and charges on overseas FDI.

• Public debt has fallen down to below 30% of GDP - Government spending is rising, there is a commitment to increasing government budget on social welfare, health and education.

• Much FDI is directly funding infrastructure investment with huge spending on new roads, rail and international airports. New international airport in Luanda is set to become one of the largest airports in Africa.

Causes of inequality

• Differences in education and skills • inequality in the distribution of assets +• Undeveloped financial markets• industrialisation takes hold – workers in more

productive industries (such as oil) earn more than those in less productive agriculture

Consequences of inequality:

• Kuznet model: Angola has attracted a lot of foreign direct investment and this has resulted in a few benefitting so far, but in the long term the inequality that exists can drive economic development and growth. Thus, the current inequality can be seen to be positive.

• uneducated population who have low skills, thus lowering the productive potential of the economy.

• very little income= Harrod-Domar model + worsening the balance of payment + capital flight

Angola’s dependence on oil accounts for about 46% of GDP

• Constraints on growth and development• High level of dependence on oil: Oil contributes close to 50% of GDP, while also generating around 80% of

government revenue and over 90% of export earnings. The major challenge is to achieve diversification through investments in infrastructure, agriculture and hotels/tourism

• Political risks: President Dos Santos and his ruling party MPLA hold dominant power, corruption ranking is poor.

• Economic risks persist including poor regulation and weak human capital. Angola ranked 172nd out of 183 countries for ease of doing business

• There has been a reduction in extreme poverty but a rise in income and wealth inequality - Angola’s society is one of the most unequal in the world, with a GINI coefficient of 0.586 in 2009. Economic growth is mostly concentrated in Luanda, which produces about 75% of the GDP and has a third of the population

• Despite fast growth, unemployment remains high (relatively few jobs from the booming oil industry which is capital intensive).

• Population issues: High birth rates lead to surplus labor in the agriculture sector. This results in significant urbanization, and when young people go to the cities, they have no job and are unemployed as the oil sector is the main industry and it is capital intensive, this results in low development.

Comparing to the UAE• Since its formation, the UAE has witnessed tremendous development. • The UAE’s population has transitioned from poverty to one of the highest income

levels in the world. The UAE has become a globally prominent financial and economic centre.

• Less dependence on oil: Shipments of oil account for 40 percent of total exports and for 38 percent of GDP. In order to diversify the economy and reduce the dependence on oil revenues, UAE has made huge investments in the tourism, financial and construction sectors.

• Political and Social Stability: Since its formation in 1971 the UAE has enjoyed a political stability. The distribution of huge oil revenues in the form of social and economic infrastructure, high salaries, a high standard of social services, such as health and education, has raised the standard of living for UAE citizens and considerably reduced the likelihood of internal political and social unrest.

• Migration/increase in population: The UAE population is essentially a small one. However, after the discovery of oil and its export in the last four decades, it has experienced very rapid growth. Skilled and unskilled workers have all contributed to the development of the UAE.

Aid: There are various types:

• Bi-lateral aid: Aid on a country-to-country basis e.g. from UK to Kenya or from Brazil to Tanzania

• Multi-lateral aid: Aid channeled through international bodies / aid agencies such as CARE

• Technical assistance: Funding of expertise of various types

• Humanitarian aid: Emergency disaster relief, food aid, refugee relief and disaster preparedness

What other measures can be used to promote growth and development?

AID: FOR:• Aid helps to fill the savings gap • Aid can help to provide funds for infrastructure • Aid can help improve human capitalAGAINST: Aid results in a dependency culture Aid might not benefit those for whom it is intendedinefficient allocation of resources

Focusing on the Manufacturing IndustryAdvantages of focusing on manufacturing IndustryLewis Two sector model: • Agriculture is characterised by subsistence farming and low

productivity and therefore low development• More profits from manufacturing providing more funds for

investment and continued economic growth (Harrod-Domar model).

• Disadvantages: Criticising of the Two Sector model:• The switching of workers from agriculture to industry is not

always that easy. This is due to the lack of suitable skills of the agricultural workers who are not trained to work in industry.

• Profits are not saved domestically• Insignificant impact on employment

Debt cancellation• Advantages:• Debt relief releases funds

which can be used for development

• Debt relief would help reduce the savings gap.

• Against debt cancellation:• There is a moral hazard

problem• Corruption

THANKS FOR WATCHING…ANY QUESTIONS?

For more information follow @jmz_london