Background of the study

Undoubtedly the curse of natural resources represents one of the most puzzling
debate in economics. In fact, prior to the last four-decades, the majority of
neoliberal economists advocated a positive relationship between economic growth
and natural resource abundance (Rostow, 1961 and Balassa, 1980). Consistent
with the belief that the endowment of natural resources by a country is beneficial
to its industrial development through fomenting investment as well as creating
domestic demand. Another classical approach, however, which began with
Prebisch (1950) and Singer (1950), claims for an adverse relationship between
natural resource abundance and economic growth (Bruno and Sachs, 1982; Corden
and Neary, 1982; Sachs and Warner, 1995). This belief has led to the so-called
“resource curse” theory which outlines the poor performance of markets and
institutions due to the methodical propensity of natural resources’ dependence to
slow down development and economic growth (Auty, 1994).

Furthermore, this theory was expanded by Corden and Neary (1982) and Bruno
and Sachs (1982) with the advent of the “Dutch disease” phenomenon which had
attracted the attention of the most literature owing to the episode faced by
Netherlands in 1970s when they discovered and began to extract natural gas. The
key argument of Corden and Neary (1982) was that the exploitation of natural
resources attracts more labour force in the extractive sector than in other sectors
such as, manufacturing and agriculture, due to its higher returns to the supply of
labour which, in turn, leads to labour’ shortage as well as higher input costs in
manufacture and agriculture sector. Consequently, the increase of the revenue
from the extractive sector will lead the government to increase its expenditure on
non-traded goods and services, such as construction and therefore rising the prices
of these goods and leading to an appreciation on the real exchange rate. Thus,
“Dutch disease” effect occurs when the extractive sector “crowds out” other
sectors’ promotion of growth (Wijnbergen, 1984; Krugman, 1987; Sachs and
Warner, 1999).

In this regard, the issue of economic diversification has been a longstanding

challenge for many countries across the globe, especially, for developing countries
endowed with natural resource abundance (James, 2015). Angolan economy is one
of the highest export concentrated economies in Africa as the oil exportation
represents more than 95% of its total exportations and oil revenues epitomises
more than 80% of its total revenues (IFM, 2015). In fact, over the last decade the
economic growth of the country has rapidly increased owing to almost solely the
oil sector as the economy is presently the third largest in Sub-Saharan Africa.
However, the current oil price downturn has severely affected the Angola’s
economic growth (IFM, 2015). Therefore, economic diversification and
consequently a rise of the non-oil sector constitute, indeed, a major necessity for
the country in order to prevent it from adverse oil price shocks in the global
market. Henceforth, a study conducted in this area of research is believed to be
relevant as it helps governments with empirical evidence that could mitigate high
dependence of natural resources exportations and therefore reducing their
exposure to external shocks.

1.1. Research question

Given the fact that dependence on oil by Angola could have an adverse impact on
the economic growth, this study is set to answer the following research question:

To what extent the non-oil revenues of Angola affect its economic growth?

1.2. Research aim and objectives

The principal purpose of this study is to explore the extent to which Angola’s non-
oil revenues affect its economic growth. Nevertheless, the following specifics
objectives were also formulated in order to accomplish the fundamental one:

 To critically examine the relationship between oil revenues sector and non-
oil revenues sector.
 To critically review Angola’s diversification policy with a view to drawing
conclusion on its effectiveness.

1
 1.3. Scope and limitations

The study analyses the role and significance of non-oil revenues in Angola over the
last fifteen years, from 2000 to 2014. Besides, the possible influences of Angola’s
oil dependence on non-oil revenues as well as the relationship between revenues
from the oil sector and revenues from the non-oil sector will also be analysed.
However, every research has its own limitation as it is beyond the researcher’s
control. Therefore, this research has the following limitations:

 Due to the high level of corruption observed in the country (Transparency

International, 2016) the data set may be counterfactual.
 Indeed, there exists other variables that might affect non-oil revenues
which this study does not take into consideration such as, human capital,
institutional quality and transparency.

However, in order to minimize the impact of the above limitations, the study
considers with caution different sources of data. Moreover, control variables
suggested by the literature are also used so that it can be avoided misspecification
error in the model.

1.4. Motivation and originality of contribution

Over the last decades the process of economic diversification has fascinated
several academics and developed many institutions. Despite the fact that more
recent studies advocate innovative methods of industrialisation based upon a
different mosaic of development (Murshed and Serino, 2011; Massol and Banal-
Estañ ol, 2012), the classical argument of diversification has not changed within
which this process should be attained with new industries out of the commodity
exports which, in turn, ultimate to the benefit of economic growth. Hence,
diversification prevents the economy from external shocks as well as the non-
resource sector from being affected by the Dutch disease and one of the best
examples of resource-rich countries are Brazil, Chile, Mexico, Malaysia and Sweden

2
which were capable of diversifying their economies, while having favourable
economic growth.

Consequently, a large part of the literature has paid attention on the relationship
between countries’ natural resource abundance and economic growth, however,
there is a scant attention on the impact of these resources’ revenues on revenues
from the non-resource sector apart from the study conducted by Bornhorst et al.
(2009). Thus, this research has two major contributions to the body of knowledge:
First, it evaluates the real impact of non-oil revenues on economic growth of
Angola, in which, as far as the researcher is concerned this represents the first
attempt. Second, it critically examines the relationship between oil and non-oil
revenues of Angola’s economy.

The immense significance of this particular study has engrossed the researcher’s
enthusiasm as it bridges the gap existent in the literature principally regarding the
impact of Angola’s non-oil sector on its economic growth. The research will be
relevant to readers across the world, in general, and to Angolans and Africans, in
particular. It will also establish a new ingredient toward economic diversification
outlook. Therefore, the structure of this study is as follows: Section 2 provides an
overview of the relevant literature as well as the theoretical framework. Section 3
deals with the methodological approach and data sample, whereas section 4
highlights the data analysis and findings. Lastly, section 5 provides the discussion
of the findings and draws conclusion and recommendations of the study.

2. Literature Review
2.1. Introduction

Natural resources abundance is very often regarded as a production function of

capital of a country which can be transformed into different forms of outputs.
Though, this viewpoint is confronted by the belief of natural resources abundance
being a ‘curse’ rather than a ‘blessing’. As such, this section aims to highlight all
relevant studies reported in the literature as well as the theoretical framework.

2.2. A Review of relevant studies

3
Studies initiated in the 1950s such as, Innis (1954), Baldwin (1956) and later
Hirschman (1977) suggest an export theory based upon natural resources. For
instance, Innis (1954) by showing evidence from Canada, claims that many
countries by exporting primary resources had grown and industrialised their
economies. Consistently, Davis (1995) found a positive relationship between
commodity exports and economic development by using a stock of a mineral
export in total of commodities exports. Likewise, Ledermann and Maloney (2003)
by using the same methodology as Davis, however, with total labour force as an
additional variable they also found a progressive growth effect. Furthermore, other
studies have also inclined their findings in this line of belief (Alexeev and Corand,
2009; van der Ploeg and Poelhekke, 2010; Cavalcanti et al., 2011).

Nonetheless, a study conducted by Gelb (1988) with selected countries shows that
even though the price of oil rose over the 1970s, the economic growth of those oil-
exporting countries decreased. Hence, Geld concluded that the economic
circumstances of those countries would have been better, if the price of oil had not
risen. Sachs and Warner (1997) show that exports from the manufacturing sector
in countries with poor natural resources is higher than in countries with natural
resources abundance. These findings are also consistent with Corden and Neary
(1982). In addition, several researchers have found that the negative relationship
between natural resources abundance and economic growth is partly owed to lack
of institutional quality (Mehlum et al.: 2006; Sala-i-Martin and Subramanian: 2003;
Stevens and Dietsche: 2008). In the same vein, Davis and Tilton (2005); Vinod and
Kaushik (2007) advocate that the lack of governments’ transparency toward
revenues from the natural resources sector is a major cause of poor economic
growth.

Interestingly, a source of development and wealth should be resources, and the

revenues from these resources should be a relevant foundation for a development
process and an essential impulse for economic growth (Collier: 2007).

2.3. Theoretical framework

2.3.1. Resource curse theory

4
The fundamental theory which outlines the negative relationship between natural
resources abundance and economic growth is known as ‘Resource curse’ theory.
As mentioned earlier, this theory was first embodied in the economics literature by
Prebisch (1950) and Singer (1950) when they started noticing a negative
correlation between these two variables and encouraging countries to diversify
their economies away from the natural resource sector. Though, this theoretical
assumption entirely contradicts the classical Anglo-Saxon assumption advocated
by Adam Smith and David Ricardo which primes for specialisation in the product
in which the country has comparative advantage in relation to their trader
partners. Smith (1776) and Ricardo (1817) believed that international trade based
on the country’ most abundant product was a central pillar for them to increase
their economic growth.

Indeed, the most prominent explanation for the ‘Resource Curse’ theory is the
phenomenon called ‘Dutch disease’. As explained earlier, the ‘curse’ in the case of
this phenomenon is the barrier created by the appreciation on the real exchange
rate to stimulate economic diversification as it increases the reliance on the
natural resource exportation. Hence, these two major issues will dominate large
part of this research.

2.4. Summary

This chapter outlines important literature regarding natural resources abundance

and economic diversification. Two views of the impact of natural resources
abundance on economic growth were discussed. Some part of the literature claim
for a positive relationship, whereas other argue for a negative relationship. From
this latter argument emerged the ‘Resource Curse’ theory which is mostly
explained by the ‘Dutch disease’ phenomenon. Therefore, the next chapter aims to
discuss the research methodology and design.

3. Research methodology and design

3.1. Introduction

After having identified the research problem and objectives early in this study, the
research paradigm and the empirical methodology will be discussed in order to

5
find answer for the research question. Moreover, hypotheses and variables of the
study will also be identified.

3.2. Research Paradigm

The present study adopts a positivism philosophical approach due to the nature of
its research problem and objectives as they consist of empirical observation and
deductive logic. Besides, a positivist epistemology is also considered as the
researcher seeks to fill the gap currently existent in the evaluation of impact of the
non-oil revenue on Angola’s economic growth.

3.3. Sources of data collection

This research is conducted by using secondary data between the period of 2000
and 2014. In order to enhance the validity and reliability, all the data concerning
oil and non-oil revenues will be collected from the central bank of Angola, World
Bank and International Monetary Fund. These sources of data have been used
previously and are considered to be credible (Bornhorst et al., 2009; Murshed and
Serino, 2011).

3.4. Empirical methodology

In order to assess the impact of non-oil revenue on economic growth and to

analyse the relationship between oil and non-oil revenue, this study uses two
models. In similar thought to Ude and Agodi (2014) and James (2015), model 1 is
presented as follows:

Gi = β0 + β1Xi + controls + εi
Where, Gi represents the average annual growth rate of real GDP as measure of

economic growth performance, Xi represents non-oil revenue, followed by series of

controls variables, and εi is the error term. β0 is the intercept and β1 is the
coefficient on non-oil revenue. Based on empirical findings in the literature such
as, Ude and Agodi (2014) and Olurankinse and Bayo (2012) it has been chosen oil
revenue and exchange rate as controls variables. The significant impact of the main
natural resource’ revenue on the economic growth of the country which suffers
from ‘resource curse’ is a purpose to use oil revenue as a control variable (Ude and
Agodi, 2014). Furthermore, exchange rate is identified by the majority of

6
economists as having direct impact on economic growth, especially when the
exchange rate is overvalued as a result of poor management of exchange rate
(Krugman, 1987; Sachs and Warner, 1999). Thus, the following hypotheses have
been proposed by the literature and empirical studies.

H0: Non-oil revenues have a negative impact on the annual growth rate of real GDP

H1: Non-oil revenues have a positive impact on the annual growth rate of real GDP

Consistent with Bornhorst et al. (2009), model 2 is presented as follows:

N
R R
=β 0+ β 1 +controls+ε i
Y Y
N
R R
Where, denotes non-oil revenue as a percentage of the GDP, denotes oil
Y Y

revenue as a percentage of the GDP followed by series of controls variables and εi

is the error term. β0 is the intercept and β1 is the coefficient on oil revenue as a
percentage of the GDP. Based upon empirical findings in the literature such as,
Bornhorst et al. (2009) and (Goode 1984), the control variables are income,
measured as the log of the GDP per capita, and openness to international trade,
measured as the addition of non-oil import and export in relation to GDP. The use
of income as a control variable has arisen from its expected positive impact on the
revenue GDP-ratio as it represents a proxy for the development of the economy as
a whole (Goode 1984). Moreover, higher rates of economic growth and
productivity are very often associated to greater openness to international trade
(Ricardo, 1817; Frankel, 1999). Hence, the hypotheses are defined as follow:

H0: Oil revenues have a negative correlation with non-oil revenues

H1: Oil revenues have a positive correlation with non-oil revenues

In fact, the model 1 aims to accomplish the fundamental objective of the study,
while model 2 seeks to achieve the second objective.

3.5. Summary

7
This chapter discusses the research methodology and design. A positivism
philosophical approach as well as a positivist epistemology approach will be
adopted as the data will be collected from the central bank of Angola, World Bank
and International Monetary Fund. In the empirical methodology section the
hypotheses were defined as two models were considered. In an effort to enhance
the validity of this study, further diagnostic tests will be carried out to ensure the
data is appropriately explained by the model. The next section will provide a brief
discussion regarding expected results.

4. Expected results

Based upon previous findings in the literature such as, Ude and Agodi (2014), the
researcher expects to find a significant positive relationship between non-oil
revenues and economic growth of Angola. However, in line with Bornhorst et al.
(2009) it is expected to find a significant negative relationship between oil and
non-oil revenues. This is because of the ‘Dutch disease’ phenomenon experienced
by the country.

5. Conclusion

This paper attempts to carry out an empirical investigation of the impact of non-oil
revenue on economic growth of Angola. The background of the study, the research
question as well as the objectives were presented. In order to fully answer the
research question and achieve the research objectives, secondary data will be used
based upon a wide range of the underlying literature as well as empirical studies.
Therefore, in line with previous findings the researcher foresees a significant
positive relationship between non-oil revenue and economic growth of Angola.

8
References:

Alexeev, M. and Conrad, R. (2009) ‘The elusive curse of oil’. The Review of
Economics and Statistics 91 (3), 586–598

Auty, R.M. (1994) ‘Industrial policy reform in six newly industrializing countries:
the resource curse thesis’. World Development. 22 (1), 1165–1171

Balassa, B. (1980) The Process of Industrial Development and Alternative

Development Strategies. Princeton University, Princeton, NJ

Baldwin, R.E. (1956) ‘Patterns of development in newly settled regions’.

Manchester School of Social and Economic Studies, 24, 161-179

Bornhorst, F., Gupta, S. and Thornton, J. (2009) ‘Natural resource endowments and
the domestic revenue effort’. European Journal of Political Economy 25(4),
439-446

Bruno, M. and Sachs, J. (1982) ‘Energy and resource allocation: a dynamic model of
the ‘Dutch Disease’. Review of Economic Studies XLIX, 845–859

Cavalcanti, T.V., Mohaddes, K. and Raissi, M. (2011) ’Growth, development, and

natural resources: new evidence using a heterogeneous panel analysis’. The
Quarterly Review of Economics and Finance 51, 305–318

Collier, P. (2006) ‘Is Aid Oil? An Analysis of Whether Africa Can Absorb More Aid’.
World Development 34 (9): 1482–97

Corden, W.M. and Neary, J.P. (1982) ‘Booming sector and de-industrialisation in a
small open economy’. The Economic Journal 92 (368), 825–848

Davis, G. A. (1995) ‘Learning to love the Dutch disease: evidence from the mineral
economies’. World Development 23 (10), 1765-1779

Davis, G.A. and Tilton, E.J. (2005) ‘The resource curse. Natural Resources Forum 29,
233–242

E.V., T. (2016) Transparency International - Country Profiles [online] available

from <https://www.transparency.org/country/#idx99> [24 March 2016]

9
Frankel, J. (1999) ‘Does trade cause growth?’ American Economic Review 89, 379–
399

Gelb, A.H. (1988) Oil Windfalls: Blessing or Curse? Oxford University Press, Oxford

Goode, R. (1984) Government Finance in developing countries. Washington:

Brookings Institution

Hirshman, A. O. (1977) A generalized linkage approach to development with special

reference to staples. University of Chicago Press. Chicago

Innis, H. A. (1954) The Cod Fisheries: The History of an International Economy. New
Haven: Yale University Press. Toronto

IMF, (2015) Angola Selected Issues [online] available from

<https://www.imf.org/external/pubs/ft/scr/2015/cr15302.pdf> [7 April
2016]

James, A. (2015) ‘The resource curse: A statistical mirage?’ Journal of Development

Economics, 114, 55-63

Krugman, P. (1987) ‘The narrowing moving band, the Dutch disease, and
competitive consequences of Mrs. Thatcher: notes on trade in the presence
of dynamic scale economies. Journal of Development Economics 27, 41–55

Ledermann, D. and Maloney, W.H. (2003) ‘Trade structure and growth’ World Bank
Policy Research Working Paper No. 3025

Massol, O. and Banal-Estañ ol, A. (2012) ‘Export diversification and resourced-

based industrialization: the case of natural gas’. In: Les cahiers del’économie n◦85.
IFP School, Rueil-Malmaison

Mehlum, H., Moene, K. and Torvik, R. (2006) Institutions and the resource curse.
Economic Journal 116, 1–20

Murshed, S.M. and Serino, L.A. (2011) ‘The pattern of specialization and economic
growth: the resource curse hypothesis revisited’. Structural Change and
Economic Dynamics 22, 151–161

Olurankinse, F. and Bayo, F. (2012) "Analysis of the Impact of Non- Oil Sector on
Economic Growth". Canadian Social Science 8 (4), 244-248
10
Prebisch, R. (1950) The Economic Development of Latin America and its Principal
Problems. United Nations, New York

Rostow, W. (1961) The Stages of Economic Growth: A Non-Communist Manifesto.

Cambridge University Press, Cambridge

Ricardo, D. (1817) On the Principles of Political Economy and Taxation. Variorum

edition in P. Sraffa, ed., Works & Correspondence of David Ricardo, Vol. I.
Cambridge: Cambridge University Press, 1951

Sachs, J.D. and Warner, A.M. (1995) ‘Natural resource abundance and economic
growth’. National Bureau of Economic Research, Working Paper No 5398
revised 1997, 1999

Sala-I-Martin, X. and Subramanian, A. (2003) ‘Addressing the natural resource

curse: an illustration from Nigeria’. IMF Working Paper, vol. 139.
International Monetary Fund

Sachs, J.D. and Warner, A.M. (1999) ‘The big push, natural resource booms and
growth’. Journal of development economics 59, 43–76

Singer, H., (1950) ‘The distribution of gains between borrowing and investing
nations’. American Economic Review 40, 473–485

Smith, A. (1776) An Inquiry into the Nature and Causes of Wealth Of Nations. New
York: Random House, 1937

Stevens, P. and Dietsche, E. (2008) ‘Resource curse: an analysis of causes,

experiences and possible ways forward’. Energy Policy 36, 56–65

Ude, D.K. and Agodi, J.E. (2014) ‘Investigation of the Impact of Non-Oil Revenue on
Economic Growth in Nigeria’. International Journal of Science and Research,
3(11), 2571-2577

Van der Ploeg, F. and Poelhekke, S. (2009) ‘The volatility curse and financial
development: revisiting the paradox of plenty’. In: OxCarre Research Paper
24. Department of Economics. University of Oxford

Vinod, H.D. and Kaushik, S.K. (2007) ‘Human capital and economic growth:
evidence from developing countries’. American Economist 51(1), 29–39

11
Wijnbergen, V. S. (1984) ‘The “Dutch Disease”: a disease after all?’ Economic
Journal 94 (373), 41–55

12