The Dutch disease in Angola and how it influences GDP

Until the 1980s it was believed that the abundance of natural resources makes enable for developing countries to overcome successfully the transitional period and achieve the industrial "take-off" in the same way with Australia and the USA. Nowadays, many economists have the opposite point of view and think about Dutch disease named “Groningen effect”.

Dutch disease represents the negative effect of influence a strengthening real exchange rate of national currency on economic development because of the boom in a separate sector of the economy. Theoretically, the reason for the boom is not significant, but in practice, the effect is usually connected with a natural resource discovery.

The inflow of oil revenues has a negative effect on the industry. Foreign currency earnings from the export of oil leads to a strengthening of the national currency. As a result, other export production becomes uncompetitive and effect a massive outflow of labor and capital resources in the extractive sector is observed. The country becomes dependent on imports and agriculture and traditional industries are destroyed.

A classic example of the country suffered from Dutch Disease is Angola, a country in Southern Africa. The oil boom has led to a tendency for real exchangerate appreciation that has contributed to reducing the competitiveness of the nonresource and tradable sectors, predominantly agriculture and manufacturing. Undoubtedly, it also has been massively enhanced by 35 years of civil war in which production has been handicapped by displacement, destruction of infrastructure, instability, banditry, and landmines. To this challenging and complex business environment, should be added Angola’s legacy of centuries of bureaucratic colonization and central planning.

Moreover, Angola has negative effect from Dutch disease in social sector. From Michael Ross`s point of view (University of California at Los Angeles) oil countries fare worse on child mortality and nutrition, have lower literacy and school-enrolment rates and do relatively worse on measures like the UN's “Human Development Index”. To my mind, it`s can be connected with the following fact: unlike agriculture, the oil sector of Angola employs few unskilled people. The inherent volatility of commodity prices hurts the poor the most, as they are least able to hedge their risks. And because the resource is concentrated, the resulting wealth passes through only a few hands—and so is more susceptible to misdirection.

In order to estimate how big Dutch Disease symptoms are, the economic model describing GDP effected export of oil, M2, exchange relation, inflow of foreign direct investments, inflation was analyzed. There are two endogenous variables, such as GDP and export of oil (EXPOIL), and four exogenous – M2, exchange relation (EX), inflow of foreign direct investments (INV), inflation (INFL). In the result, the following model was made:

GDP = C(1) + C(2)*EXPOIL + C(3)*M2 + C(4)*EX

EXPOIL = C(5) + C(6)*GDP + C(7)*INV + C(8)*INFL

After calculations, using the econometrics program Eviews, the following results were obtained:

Equation: GDP = C(1) + C(2)*EXPOIL + C(3)*M2 + C(4)*EX

Instruments: EX INV INFL C

Observations: 21

Equation: EXPOIL = 0(5) + C(6)*GDP + C(7)*INV + C(8)*INFL

Instruments: EX INV INFL 0

Observations: 21

In accordance with the results, we can conclude that 97% of total GDP is explained by the fluctuations of exogenous variables (M2, exchange relation, inflow of foreign direct investments, inflation). Such a high coefficient of determination ( R -squared =0,97 and R -squared =0,95) tells us about adequate econometric model. It indicates a significant degree of dependence of the resulting values from the factors. The model can be interpreted in the following way: a change in the export of oil rate by 1% will result to the change in the value of GDP (0.33 USD Billion).

After made analysis, the further strengthening of the role of Angola oil market can be expected. One of the factors is that oil is the main USA interests in Africa. Within five years, the USA plan is to increase the continent's share in the total volume of oil imports to 25% compared with 15% at the moment.

Nevertheless, as oil revenues shrink, Angola has made steps in recent years to change its economic future. Due to received investment from the United Kingdom, Brazil and the United States, and Angolan President Jose Eduardo dos Santos has pushed business reforms and economic diversification to wean the petro state off crude dependency.

Despite government efforts to increase economic diversification through an increased focus on the mining, agricultural, and construction sectors, Angola’s economy is still heavily dependent on oil exports for foreign currency earnings. The oil sector contributes significantly to GDP and takes a great part in the government revenue. In the result, the following conclusion can be made: obtained econometric model describes economic situation in Angola and can be useful for analyses how export of oil, M2, exchange relation, inflow of foreign direct investments, inflation contribute to Angola`s GDP and cause Dutch disease.