Mineral-rich countries and dutch disease : understanding the macroeconomic implications of windfalls and the development prospects-the case of Equatorial Guinea

WPS4595 Policy ReseaRch WoRking PaPeR 4595 Mineral-Rich Countries and Dutch Disease: Understanding the Macroeconomic Implications of Windfalls and the Development Prospects The Case of Equatorial Guinea Achille Toto Same The World Bank Africa Region Economic Management Department April 2008  Policy ReseaRch WoRking PaPeR 4595 Abstract Referring to the original context of Dutch Disease, Dutch Disease is a natural and necessary reallocation of the term refers to the fears of de-industrialization that resources in the economy of Equatorial Guinea. gripped the Netherlands as a result of the appreciation The magnitude of negative macroeconomic of the Dutch currency that followed the discovery of consequences of the Dutch Disease depends on the natural gas deposits. Expansion of petroleum exports in country's economic structure and stage of development. the 1960s not only crowded out other exports, it actually In a country where the manufacturing sector barely reduced other exports disproportionately and fueled the exists or where the non-oil primary sector is structurally fears of dire consequences for Dutch manufacturing. deficient, as has been the case of Equatorial Guinea, In the case of Equatorial Guinea, the secondary sector there is little to fear about the disease. The oil boom represents about 2 percent of the gross domestic product, is a blessing, given that oil revenues when properly manufacturing represents less than 1 percent, and oil managed can play a special and critical role in overall represents more than 95 percent. The negative impact economic development and poverty reduction in low- of the Dutch Disease in this context would be limited income countries. To promote good governance in the given the structure of the economy and on the contrary management of the country's oil wealth, the government may even be a good thing because it fuels the structural may wish to adhere to clear standards of accountability transformational process of the economy, which is needed and transparency; especially by complying with the in Equatorial Guinea. This paper argues that the ongoing Extractive Industries Transparency Initiative (EITI++). This paper--Poverty Reduction and Economic Management Division, Africa Region, Economic Management Department--is part of a larger effort in the department to help African Countries, manage and transform their natural resource wealth into long-term economic growth that spreads the benefits more fairly among their people for an effective poverty reduction. Policy Research Working Papers are also posted on the Web at http://econ.worldbank.org. The author may be contacted at Atotosame@worldbank.org. The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent. Produced by the Research Support Team  Mineral-Rich Countries and Dutch Disease: Understanding the Macroeconomic Implications of Windfalls and the Development Prospects The Case of Equatorial Guinea Achille TOTO SAME April 2008  Table of Contents I. Introduction............................................................................................................. 3 II. Country Background until the Onset of Oil............................................................ 4 A - Country Economic and Political Development Background until 1982 ...................... 4 B - Equatorial Guinea's Economic Management until the Onset of Oil (1982 - 1995) ..... 6 III. Recent Economic Developments............................................................................ 8 IV. Understanding the Macroeconomic Implications of the Windfalls and Development Prospects..................................................................................................... 13 V. Assessment of the Oil Wealth Governance and the Country's PFM