Lusophone Africa Conference: Intersections between the Social Sciences

Cornel University, May 2-3, 2003

Angola’s Private Sector: Rents Distribution and Oligarchy

Renato Aguilar

Abstract

Angola is becoming Africa’s largest oil exporter and peace seems to be consolidated.

Thus, one can wonder what are the perspectives for the private sector in this country torn by a pro-

tracted war. There is already a private sector including an oligarchy of oligopolies, tightly linked to

the public service and the party, and a fringe of competitive small traders, mostly in the informal

sectors. In this paper we discuss the origin, structure, and perspectives of Angola’s private sector.

We argue that this distorted structure is the result of war, an incomplete transition towards a mar-

ket-oriented economy, macroeconomic mismanagement, and mainly the mechanisms used to dis-

tribute the enormous oil rents.

Introduction

This paper aims at discussing the need and possibilities for developing a dynamic domes-

tic private sector in Angola. That is, a private sector able to be a leading provider of employment

and a main factor for economic and social development. Let us begin with a basic question: Why

does Angola need to develop its private sector?

The answer to this complex question includes several elements. To begin with, we want to

argue that there is a need to develop a non-oil domestic economy. Otherwise, Angola will continue

in its way towards a pure rent economy, with a small minority of Angolan working in the sector

generating those rents, or in marginal sectors closely connected to them, or in the mechanisms dis-

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tributing these rents; while a large majority becomes more and more dependent on subsidies and

hand-outs from the state. Oil rents distribution is severely skewed at present and the failure of de-

veloping a dynamic domestic economy would lead to an even more polarized society.

There are an exceedingly large number of unemployed and displaced persons. The state is

unable to provide employment and minimal services to these people. The state is also unable to de-

velop productive activities within the public sector that could provide employment and contribute

to poverty reduction. On the other hand, the state is unable to provide a satisfactory level of ser-

vices and public goods. Moreover, we will argue that Angola’s public sector is basically weak and

it is unlikely that the state will significantly improve its capacity within the foreseeable future.

Discussing the private sector amounts to discussing Angola's economic development. Sev-

eral factors can be mentioned as determinant for the development of the private sector, as well as

explaining the outcome of the economic process at large. First, we must mention the colonial past

and the shock of Independence. The second factor is the protracted war that affected the country.

Warfare has been a central issue in Angola for over thirty years. The struggle for Independence,

which also included armed conflict, was followed by international intervention and recurring civil

war. At the core of the conflict and to the frustrating task of establishing peace is the contest for

Angola's natural resource wealth. The war has devastated the country, shattered communities, and

caused immense human suffering. But, in addition to the serious economic problem caused by the

conflict, Angola suffers from a flawed and incomplete economic transition. Successive reform pro-

grams have broken down, and economic management has been chaotic. In part this situation re-

flects the strength of reform's opponents, many of whom personally benefit from market controls

and perverse fiscal and monetary policies. However, it also reflects the macro-economic difficul-

ties of managing the country's vast and growing oil wealth. Finally, we should add a dose of ideo-

logical conservatism and fear that reforms would bring undesired political changes.

Macroeconomic instability is also a factor that need consideration when discussing the de-

velopment of the private sector. Hyperinflation, and frequent policy reversal, constrain and distort

investment in both the informal and formal parts of the private sector. Macroeconomic instability

arises in part out of mechanisms that subsidize powerful oligopolies, enabling them to capture a

significant share of the large rents generated by the oil sector. These subsidies, together with mar-

ket controls, enable the oligopolies to profit at the expense of small- and micro-enterprises, thereby

hindering the creation of more employment for Angola's poor. Thus, war, economic instability,

non-transparent oil rents distribution and the emergency of oligopolies, are all tightly linked fea-

tures in Angola’s society.

2

Recent events, following the death of Jonas Sabimvi, UNITA’s1 historical leader, seem to

have put an end to civil war. However, the new situation is still fragile and several warnings

should be issued. First, and in spite of the peace agreements recently signed by UNITA, there are

still plenty of weapons and fighters in the countryside. Failure or delay of the demobilization and

reinsertion processes would lead to renewed violence and insecurity. Several recent episodes seem

to confirm this hypothesis. Second, a new political situation emerged with peace. Hard decisions,

affecting the interests of the elite, cannot be further delayed on the excuse of war. Elections can-

not be postponed anymore. Thus, internal dissension within the MPLA2 and contradictions be-

tween the party and the government will become apparent.

Finally, we should mention Angola´s peculiar mechanisms for designing and implement-

ing (or rather not implementing) economic policy. This institutional element has been critical for

hindering the development of a dynamic private sector and the development of strong oligopolistic

elements in Angola’s economy.

This paper owes a lot to discussions held with colleagues at the Ministry of Planning and

the Ministry of Finance in Angola. I was also able to get good insights on the problem from my

conversations with field personnel and colleagues in Sida3, both in Luanda and Stockholm. The

paper proceeds as follows. The next section discusses the conditions created by colonialism, the

shock of Independence, and the socialist experiment for the development of private sector. Section

3 discusses the series of stabilizing policy packages attempted after 1990 when the transition to-

wards a market-oriented economy started. This section also describes the peculiar economic policy

cycle that developed thereafter. Section 4 is a discussion about the institutions and the mechanisms

fro designing and implementing economic policy. This is a central element to understand the diffi-

culties in developing a dynamic private sector. Finally, Section 5 discusses the private sector and

its perspectives. The paper ends with a section on conclusions.

2. Colonialism, Independence, and the Socialist Experiment

Portuguese presence in Angola is one of the oldest European interventions in Sub-Saharan

Africa. However, during a long period Portugal limited itself to a few trading posts at the coast and

1 UNITA, (Union for the Total Independence of Angola) is the main military and political organization that oppose the government and wage war against it during 25 years.2 MPLA, (Popular Movement for Angola’s Liberation) is Angola´s main political party. The MPLA has held power since Independence.3 Swedish International Development Agency.

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a net of traders exploring the hinterland. A consequence of the Conference of Berlin (1884-1885)

was a more extensive colonization, as Portugal needed to show effective occupation of the terri-

tory. Boer presence in the Planalto is also another incentive for a more extensive colonization.

A main economic consequence of the Portuguese colonial style is that the native popula-

tion is either assimilated or excluded from de labor market. This effectively hindered the develop-

ment of native human capital. Additionally, it is important to note that the colonial power failed in

developing modern institutions in Angola. This is clearly related to the fact that colonial Portugal

was itself a relatively poor colonial power, not the least in terms of modern and well-developed in-

stitutions.

Independence meant a large shock for Angola, both in an economic and in a social sense,

and it was mostly a consequence of the Portuguese revolution. The Portuguese decision of with-

drawing from Angola, left the country without clear power alternatives. Several independence

movements existed, most of the defined along ethnic lines. An important exception is MPLA with

a clear connection and continuity with the revolutionary forces in Portugal. Thus, immediately af-

ter Independence the country should face civil war and even foreign military intervention. Thus,

the country became a disputed tile in the Cold War. Another fact that helps to explain the almost

permanent warfare in Angola is its role in the anti-apartheid struggle in South Africa.

Immediately, after independence most Portuguese4 settlers left Angola, taking with them-

selves as much physical capital as possible. The Portuguese withdrawal from Angola, in Novem-

ber 1975, left a potentially rich country, with an exceedingly large endowment of natural re-

sources. Colonial investment had mainly focused on natural resources and agriculture. Some in-

dustrial development could also be observed during the last colonial years. Large-scale Portuguese

immigration to Angola meant that settlers held most formal-sector jobs, including some of the

most menial, effectively hindering the development of African human capital. Thus, the new coun-

try was poor in institutional structures and human capital. In general, Portugal's ex-colonies were

left with weaker institutional structures and lower stocks of human capital than many other Sub-

Saharan countries.

Eventually, the MPLA took control of Luanda, and after a while of the country, organizing

the first national government. For the MPLA, Marxism-Leninism appeared to provide the key to

rapidly overcoming underdevelopment, and the party officially adopted that ideology in 1976. The

influence of Marxism-Leninism was further strengthened by the close political relationship devel-

oped with the Eastern Bloc countries, a reflection of the decisive role of Soviet assistance and

4 This withdrawal also included a large share of educated and assimilated native Angolans.

4

Cuban forces in defending the MPLA against UNITA and South Africa (MacQueen, 1997). Thus,

the Soviet model of central planning inspired the new government to enforce wide-ranging price

controls, to fix the exchange rate, and to nationalize large and small private enterprises together

with land and the financial system (Aguilar and Zejan, 1993). Moreover, Portuguese settlers, who

abandoned their property in the mass exodus from the country, had owned most of the private sec-

tor. Therefore nationalization was practically the only means for the new government to maintain

economic activity and prevent an employment collapse. It should be noted that that the massive

Portuguese withdrawal made nationalizations relatively painless.

The attempt to create a centrally planned economy was doomed from the start by the

state's lack of institutional capacity and skills, and by the ongoing war with UNITA, which in-

creasingly disrupted the rural economy, which totally collapsed by mid-qp80s. Moreover, since

prices were frozen at mid-1970s levels, extensive rationing evolved, leading to the growth of paral-

lel market activities from which state functionaries and other well-connected people derived con-

siderable personal profit (by 1990 parallel-market prices were twenty to forty times higher than in

the formal market). As inflation accelerated, so barter became increasingly important in economic

activity. Non-oil exports collapsed as a result of the real exchange rate's appreciation. This led to a

severe balance of payments deficit, which further intensified foreign exchange rationing, and the

growth of rationing in goods markets (with associated rent-seeking activities). Although oil output

increased with foreign investment, the decline in oil prices and the contraction of agriculture meant

that by 1987, on the verge of reforms, GDP was around half its 1974 level (Aguilar and Zejan,

1993).

By the mid-1980s, the serious economic problems and the inability to design an implement

a Central Plan became apparent. Thus, an active debate started within the MPLA about the

desirability of economic reform. Aside from the economy's decline, developments in the Soviet

Union encouraged more internal debate (Webber, 1992). In addition some people, influential

within the party and the government, realized that some aspects of reform (for example

privatization) would offer further scope for personal wealth accumulation. The MPLA's second

party congress in 1987 decided to initiate economic transition towards a market-oriented economy.

The decision to reform the economy was a main feature of the second congress of the

party. As a consequence of the MPLA’s second congress a program called Programa de Sanea-

mento Económico e Financeiro5 (SEF) was launched in 1987, with major measures announced in

1989, but aside from preparations to join the IMF and the World Bank, very little was actually im-

plemented. A key example of the failure of this program was privatization that stalled, after a short

5 Program for Financial and Economic Reorganization.

5

wave of grabs and non-transparent allocations. Implementation was entrusted to a special secretar-

iat, but opposition within the party and the state bureaucracy quickly paralyzed their efforts. Major

reforms, such as devaluation, were shelved, and by the end of the 1980s the economy was still in

dire shape (Aguilar and Zejan, 1993). In particular, external debt (including that owed to the Soviet

Union) had grown enormously.

3. The Economic Policy Cycle.

In 1990, at its third party congress, the MPLA formally abandoned Marxism-Leninism. In

1991 constitutional revisions introduced a multi-party system. Political liberalization thereby set

the scene for reviving economic transition. Prompted by a deteriorating financial situation, the

government embarked on its most serious attempt to reform the economy. Under the Programa de

Acção do Governo6 (PAG) the kwanza was devalued in 1991 and price controls were partially up-

hold. This initially corrected the currency's overvaluation, but failure to reign in the fiscal deficit

and its monetization meant that hyperinflation quickly eroded much of the gain in competitiveness

resulting from the devaluation. After the 1991 Bicesse Accords (which resulted in the suspension

of hostilities until late 1992), reforms began again. Technocrats in the Ministry of Finance and the

central bank, Banco Nacional de Angola (BNA), pushed for exchange-rate reform to replace the

non-transparent administrative mechanisms for allocating foreign exchange. The first foreign ex-

change auction was held in 1993. (Aguilar and Stenman, 1993 and 1994).

Some prices were liberalized while administrative control was retained over the prices of

utilities and petrol. Small shops were quickly set up to take advantage of this liberalization. How-

ever, the supply response was weak and disappointing. The main reasons seem to be unresolved

problems in ownership rights, including land ownership, and excess of red tape acting as effective

barriers to entry. Limited privatization accompanied the partial price-liberalization; a number of

small- and medium-sized enterprises were transferred to private ownership in a non-transparent

process that largely benefited people in the party and the government.

A currency reform in which new notes were issued and bank deposits were frozen was

also undertaken. In the ensuing confusion, many people were unable to convert their old money,

and the reform effectively destroyed much of the country's financial savings. The government

made vague promises of restitution, but hyperinflation undermined the value of this promise. The

government has never clearly explained why it implemented this currency reform. One possible

6 Program for Governmental Activities.

6

explanation is that the government feared a sharp rise in inflation after the price liberalization. By

confiscating cash balances and savings, the currency reform sharply reduced aggregate demand,

thereby curbing inflation (although only temporarily, given the failure to reduce the fiscal deficit

and its monetization). The problem, and its “solution”, has been observed in other transition

economies. This currency reform was exceedingly destructive for the confidence of the public on

the financial system, a key condition for public sector development.

The resulting unrest and the resumption of war in late 1992 favored reform's opponents.

The currency was revalued, and the finance minister and central bank governor were sacked. After

a period of policy drift, and continued economic decline, technocrats temporarily gained the upper

hand with a new set of reforms, in the Programa Económico e Social para 1994 (PES 94 followed

by PES 95-96 ). The signing of the Lusaka Protocol in November 1994 and the end of the so-

called “third war” favored again reformers. The official exchange rate was devalued in stages (re-

sulting in a substantial narrowing of the gap between the official and parallel rates) and in 1995

agreement was reached with the International Monetary Fund (IMF) on a “shadow” program (un-

der which the IMF would monitor progress on key policy changes but without committing IMF re-

sources). This appeared to mark a significant policy shift (Aguilar and Stenman, 1995). But the

Achilles heel of Angolan economic management –control of the fiscal deficit– undermined reform

yet again, and the program was abandoned after just a few months. Hyperinflation reached 2,672

per cent in 1995 and 4,146 per cent in 1996 (Figure 1). This development ended in a political crisis

with the President introducing a new government. Conservative elements gained ascendancy in the

new government and the resulting Vida Nova (New Life) program of 1996 sharply reversed PES:

the exchange rate was fixed, and many administrative controls were reintroduced (Aguilar and

Stenman, 1996).

Not surprisingly, Vida Nova proved fruitless, and liberalization restarted in early 1998 (the

Programa de Estabilização e Recuperação Económica de Médio Prazo). The currency was deval-

ued in steps and negotiations with the IMF restarted. However, the collapse in the world price of

oil over 1997-98 sharply reduced public revenues (thus raising the fiscal deficit) and the contrac-

tion in foreign exchange reserves left little scope for defending the fixed exchange rate (or facili-

tating its stepped devaluation). So, in May 1999 the currency was floated again. This took place

against a background of increasing intensity in fighting, and the eventual return to all-out war.

In summary, early macro-reform was marked by incorrect policy-sequencing, devaluation

but no supporting monetary and fiscal restraint, and botched currency reform with often chaotic

policy shifts (in turn interacting with the war). The average Angolan therefore suffered the worst

of both worlds: large price shocks but no compensating improvements in growth and employment.

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The economic agents lost confidence in the currency and in the nascent financial system, including

the newly created central bank. Ten years on, confidence had yet to be restored.

-10.0

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

Source: INE and BNA.

Figure1. Inflation 1991-2002.

Angola's transition revealed a number of problems common to transitions elsewhere, in-

cluding those in Eastern Europe and the former Soviet Union, as well as Vietnam. First, there was

no clear border between the state and the party. This resulted in erratic decision-making that made

the task of implementing the plan - a very difficult task in the best of times - totally impossible.

Thus it became very difficult for technocrats to control the economy using their planning mecha-

nisms while simultaneously introducing gradual liberalization. Second, it became clear that many

institutions critical for the efficient operation of markets simply did not exist. The financial system

was unable to offer even the minimal financial services necessary to a market economy and there

were no mechanisms capable of regulating the liberalized economy in the public interest. The legal

framework was totally inadequate and contract-enforcement was weak. The country lacked the re-

sources and skills necessary to set up the necessary institutions, a problem that remains to this day.

With time a kind of schedule for economic policy has evolved. Economic-policy making

can be best described as following a cycle of activity, passivity and crisis. Every year, often in

March, the government presents a new program, often initiated after some crisis sparks criticism

by the president. Until 1993, these programs were often rich in philosophical reflection but thin on

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concrete measures or data. The technical quality of the programs improved with the PES94, a clear

result of donor capacity-building in the core ministries. However, policy recommendations are

most often vague or inconsistent. Eventually, after much delay, the program is approved. The pro-

gram is usually abandoned by the middle of the year, and policy-making becomes paralyzed. The

year ends with a deep financial crisis, and fresh criticism by the president. The cycle then restarts.

This cycle also affects relations with the International Financial Institutions. As discussed

above, the government and the IMF engage in periodic discussions, the former declaring its inter-

est in co-operation, but policy changes frequently contradict Article IV Consultations, and rela-

tions with the Fund then break down. The group at Futungo has openly opposed to an IMF deal

and to an increased activity by the World Bank. While there are certainly legitimate concerns re-

garding IMF programs - the results in Sub-Saharan African countries have sometimes been meager

- opposition also arises because some aspects of reform would reduce the income of the country's

elite.7 Thus, Angola is one of the few countries in the Third World that has never received an IMF

adjustment credit. Indeed, Angola is almost unique among transition countries (both in Africa and

elsewhere) in its limited borrowing from the Fund.

This controversial relationship with the IMF is one of the most important factors excluding

Angola from most sources of concessional credit. This has strongly contributed to a perverse pro-

file in Angola’s external debt, which is not exaggeratedly large as compared to the level of exports,

but strongly dominated by short-term liabilities. Angola’s international borrowing today consists

mostly of short-term loans in marginal markets, guaranteed by oil shipments, and at rates of inter-

est quite higher than international rates.

Clearly the protracted and almost continuous war limited private investment. But the limited credi-

bility of economic management further constrains private investment in sectors in which returns

are long-term (manufacturing and agriculture especially) and for which the costs of policy-reversal

to investors are therefore high. Thus, private investment remains distorted towards sectors in

which returns are immediate and in where political interests provide some protection, mostly retail

trade and providing a few items for the oil industry.

7 For example, many in the state elite often argue the market, if left to itself, will import too many luxury goods (such as cars) and too few basic goods (such as food). In fact under the dual exchange-rate system, most luxury cars were imported with foreign currency obtained at the official exchange rate and food was most often imported using foreign currency obtained at the (more expensive) parallel market rate.

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4. The Means and Ways of Angola's Economic Policy

In order to understand how the private sector evolved in Angola is important to understand

the workings of the general economic environment. This economic environment is a consequence

of the peculiar manners and ways of economic policy in this country. In order to understand this

environment we need to discuss how policy is designed, how the decisions are taken, and how

policies are implemented (or most often not implemented). In order to understand the mechanisms

of economic policy in Angola is necessary to understand the origin and causes of the chronic

macroeconomic disequilibria that affect Angola’s economy. We will see that these disequilibria

are inherent to the political system. Thus, in this section we discuss the structure and mechanism

of economic policy and the causes of macroeconomic disequilibria.

4.1. The Mechanisms of Economic Policy.

The Ministry of Planning, the Ministry of Finance, and the Central Bank (BNA) are for-

mally in charge of designing and implementing economic policy. The relative importance of these

institutions often changes with the vagaries of the political process. However, most often the Min-

istry of Planning is the strongest one; a not surprising development after a central planning experi-

ence. But all three are institutionally weak and, despite donor efforts in capacity building, short of

professional staff able to collect data and formulate economic policy (partly due to the collapse in

public-sector real wages). On the other hand, professional skills are not effectively used within

Angolan public service, the division of responsibilities is unclear (and shifts frequently depending

on the political situation), and co-operation within and between government agencies is poor. High

levels of uncertainty together with corruption have undermined the creation and deployment of in-

stitutional capital.

However, a council of advisors at the presidency, known informally as the Homens de Fu-

tungo ('The men at Futungo') named after Futungo das Belas, the site of the presidential palace,

takes most decisions. This group reports directly to the president, bypassing the three institutions

formally responsible for economic management, and often reversing their decisions. As a result,

ministries are very cautious in implementing policy (thereby slowing the process even further) and

the private sector has little confidence in measures that are not openly supported by the president

and his advisors. There is a general reluctance to delegate authority. However, most public ser-

vants avoid assuming responsibility for decisions. Thus, the ministers often seek the agreement of

the Council of Ministers even for trivial decisions. It has happened that a whole meeting of the

Council of Minister went to discussing an adjustment in the price of fuel during one of the worst

periods of war.

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This is especially serious for the public investment program run by the Ministry of Plan-

ning. A long list of projects is presented with little regard to their feasibility, finance or social

value. Ministries put forward projects with almost no screening by the Ministry of Planning, and

social cost-benefit analysis is not used. Political influence rather than economic rationality drives

implementation. The group at Futungo frequently imposes decisions that contradict or override the

program's orientation. Of the few projects that are eventually executed, most have very low social

returns and high-return projects –such as investment in basic social infrastructure– languish on the

shelf.

4.2. The Distribution of Oil Rents

The oil sector became the main source of foreign-exchange earnings as agriculture and indus-

try declined. Much of the oil is offshore, and has thus not been seriously affected by the war. The

state-owned company, SONANGOL, which has the sole concession for oil exploration and pro-

duction, dominates the oil industry. SONANGOL operates by means of joint ventures and produc-

tion sharing agreements with foreign partners. Transnational oil companies such as Chevron and

Elf constitute the largest private-sector operations in Angola. Newly discovered fields in deep wa-

ter and ultra-deep waters have further fostered foreign investments in this sector and Angola is ex-

pected to become Africa’s largest oil exporter very soon.

Although war played a large part in undermining the non-oil tradable sectors (agricultural out-

put was by 2000 probably less than 5 per cent of its pre-war level), the Dutch Disease effects asso-

ciated with Angola's oil boom also played their part. The overvalued currency (discussed in section

3) shifted production incentives away from the tradable sectors - agriculture in particular, and in

favor of non-tradable activities, including commerce. The oil sector took much of the economy's

scarce skilled labor. Rent-seeking, a non-tradable activity, has been further encouraged by the ex-

tensive system of price and import controls adopted after independence.

Angola’s state captures enormous rents from the oil industry. Understanding how the large oil

rents are distributed and their role in the budget is critical to understanding the macroeconomics of

Angola and, indeed, Angolan society in general. In addition to corruption and straightforward

grabbing, the rents are distributed in two main ways.

The first mechanism is the system of budget subsidies to both private and state enterprises.

These are intended to cheapen the cost to consumers of basic goods and public services (such as

utilities) but, given the unavailability of basic goods in rural areas and the very limited coverage of

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public services, the non-poor capture most of the benefits. These are general unfocused subsidies,

benefiting mostly those with higher consumption levels; that is mostly the non-poor. Moreover, se-

nior civil servants receive direct benefits including fuel and housing allowances, car-purchase sub-

sidies, and subsidized health care. Senior civil servants often travel abroad with generous per diem

allowances. Money saved from these travels can be more important that wages. These subsidies to

senior public servants are not transparent and quite discretionary. The subsidy system is a major

contributor to the large fiscal deficit, but it does very little to address Angola's deep poverty prob-

lem and it perpetuates Angola's sharp income inequality.

Second, there is a mechanism related to the strong overvaluation of the currency and the dual

exchange-rate system that existed during most of this period. Foreign exchange earnings (oil being

the largest and almost only legal source) are distributed by the state in a non-transparent manner;

recipients received the foreign exchange at the official (overvalued) rate which could then be sold

at the parallel market rate, thus profiting from the large spread between official and market rates.

During the period 1992-98, the parallel-market exchange rate was on average 2.9 times higher than

the official rate (Gelbard and Nagayasu, 1999). This explains why influential groups were able to

block unification of the exchange rate system for such a long-time. Once again, this foreign ex-

change control did nothing for the poor and added to high-income inequality. Periodically the gov-

ernment organizes large imports of consumption goods aimed at stabilizing the domestic market,

especially during the few weeks before Christmas. The method is to allocate large amounts of for-

eign exchange to a few importers, in a non-transparent and discretionary manner. These few im-

porters can then benefit from the subsidy implicit in the differential exchange rate.

4.3. The Budget Trap

Currency overvaluation creates a budget trap in Angola. About 85 percent of budget revenues

are in foreign currency reflecting the importance of state revenues from oil. However, most current

expenditures, mainly the government wage bill, are in local currency. Given the country's high in-

flation, the state's nominal expenditures need to grow at a rate sufficient to match the rising cost of

the domestic goods and services bought by the public sector. Devaluation could raise the domestic-

currency value of export earnings, and thus the kwanza value of their budgetary contribution.

Thus, by keeping the kwanza overvalued, in order to distribute oil rents to preferred groups, the

government basically undermined its own solvency. This overvaluation of the currency overvalues

public expenditures and undervalues public revenues. One result was the collapse in real public-

sector wages, and the accumulation of large arrears on salary and other payments. In the absence

of a domestic capital market, and given difficulties in accessing foreign capital markets, the fiscal

deficit must be monetized, thus contributing to high inflation.

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With an inflation rate well in excess of the world average, the degree of overvaluation in-

creases over time, thereby creating expectations of future inflation since agents assume (correctly)

that devaluation is inevitable and a large price shock will occur. A few private enterprises thrive

under hyperinflation. But generally hyperinflation is highly damaging to private investment, espe-

cially in the informal sector. In the absence of indexed financial instruments and a severely re-

pressed foreign exchange market, only a small group with privileged access to foreign exchange at

the official rate could buy adequate inflation protection.

In summary, the oil rents were distributed in a manner that perpetuated macro-economic in-

stability and contributed to income inequality. Domestic purchasing power was rapidly eroded by

high inflation, but there were powerful interests in favor of the status quo and against reform. Thus

the issue of controlling the fiscal deficit remained unresolved. Additionally, war imposed a heavy

financial burden on the state, and must be at the core of any explanation of the critical financial sit-

uation. Military expenditures are quite non-transparent in Angola and no reliable figures are avail-

able; large expenditures are made off-budget. However, secondary information suggests that the

annual direct cost of the war was at least $500 million over the last decade. Military spending has

not only kept the fiscal deficit high, but it has also limited spending on key social and economic in-

frastructure.

4.5. The Financial Sector

An important condition for private sector development is the existence of a minimally

working financial sector. After the large shock caused by the currency changeover of 1990, the

long process of reorganization of the financial system began. Today, the financial system consists

of the Banco Nacional de Angola (BNA), with central bank functions, two state-owned banks,

Banco de Poupança e Crédito (BPC) and Banco de Comércio e Industria (BCI), the state-owned

Caixa de Agricultura e Pescas (CAP) plus three Portuguese private banks, Banco de Fomento e

Exterior, Banco Totta e Açores, and Banco Português do Atlântico. The development of a private

banking sector has occurred by the establishment of Portuguese banks rather than privatization of

existing financial institutions.

Difficulties and delays in closing its commercial bank activities have hampered BNA's focus

on its new central bank functions. Moreover, BNA has little (if any) independence from the gov-

ernment. At times, BNA's governor has held the rank of minister and has thus succumbed to pres-

sure to monetize the fiscal deficit, a main source of Angola's hyperinflation. The BNA takes many

of its decisions directly from the president and his council of advisors, bypassing the Ministry of

Finance to which it is formally subordinate. The complicated and non-transparent relationship be-

13

tween BNA, the Ministry of Finance, and SONANGOL has been a permanent contentious issue in

discussions with the International Financial Institutions. The last few years have seen some im-

provement in BNA's technical capacity to focus itself on its central bank functions, but its ability

to regulate the financial sector in the public interest is still open to question.

The state-owned banks are weak with large portfolios of bad loans and their activities are sub-

ject to minimal regulation. They are slated for eventual privatization but considerable reorganiza-

tion and re-capitalization will be necessary. CAP has severe problems. It provides soft-credits to

the private sector (sometimes using donor funds) and has a very large portfolio of bad loans. CAP

was to be wound-up, but periodically the government resuscitates it with further funding. This is

another controversial issue in the government's dialogue with the International Financial Institu-

tions. CAP has often acted as a mechanism to channel public and aid funds towards a narrow

group of the private sector, closely related to the government and the party. The role of a formal

capital market has mostly be taken by a few bureau de change trading mostly on dollar bank notes.

For many Angolans, 100-dollar bank notes serve as non-interest-bearing bonds. A further shake-up

of the CAP was announced as recently as mid-1999.

The legal framework to enforce financial obligations is weak and most transactions are con-

ducted in cash (a large number of scandals, many involving the state, constrain the use of checks)

and there are periodic liquidity crises when bank notes become scarce. Limited confidence in the

financial system reveals itself in low levels of banking activity and deposit-savings (the hundred-

dollar note remains the most common instrument for savings). Banks derive most of their profits

from international trade and foreign exchange operations. The capital market is virtually non-exis-

tent. The informal sector has almost no access to formal financial instruments and the lack of for-

mal credit and savings instruments hinders informal sector investment.

5. The New Private Sector

When the reforms started in earnest, about 1990, the formal private sector was exceedingly

small, mostly reduced to a few survivors from colonial times and a few foreign entrepreneurs. But

this began to change with the start of reforms. Two factors were especially important. First, private

investment increased significantly after the Bicesse peace agreement and partial demobilization.

Former soldiers entered business using military equipment, with their demobilization benefits pro-

viding the financial capital.

14

Second, privatization laws were enacted, and small- and medium-sized enterprises (which

were reserved for domestic investors) were privatized.8 A task force, Gabinete de Redimension-

amiento Empresarial (GARE), was set up with donor support in order to prepare the privatization

of large enterprises. A list of 100 large enterprises slated for privatization or reorganization under

continuing state ownership was prepared in 1994 for implementation over 1995-96, but little has

been accomplished. The privatization process was dubious in many respects. Thus, “insiders”,

those with links to the party, the government and the army, acquired enterprises on quite favorable

terms. The process is similar to what occurred in other transition countries in that the old state elite

used privatization to acquire wealth. Privatization sometimes amounted to simple grabbing, a

process similar to the so-called “wild” or “spontaneous” privatizations also seen in transition coun-

tries elsewhere.

Despite a seriously adverse investment environment, there has been substantial foreign invest-

ment; the high profitability of these projects compensates for the extremely difficult conditions un-

der which foreign investors operate, including high communication and transport costs. Over

1990-1997 projects worth $ 800 million have been approved; more than half are small projects

with an investment level below $1 million. About 75 per cent of the investment originates in Eu-

rope, mainly Portugal. Foreign investors include West Africans (principally Nigerians) and invest-

ment from South Africa is growing fast. Many potential investors keep offices open in Luanda,

and foreign investment was expected to surge when peace was achieved. Almost without exception

these investments are directed to the services sector or activities connected to imports.

The development of Angola's private sector is constrained by a number of factors: skilled la-

bor is scarce, infrastructure and services are deficient, and formal financial services are practically

non-existent. But in addition, both production and distribution are characterized by monopoly and

oligopoly, the result of preferential business licensing, the award of large import contracts by the

state, and privileged access to foreign exchange at the official exchange rate.9 For example, in the

retail trade, one or two large firms typically dominate importation and wholesale distribution. A

fringe of smaller traders, who compete vigorously among themselves, depend on these large oli-

gopolies for their supplies. This competitive fringe is functional to the oligopolies, because the lat-

ter can often import at official exchange rates, while the marginal cost, determining the domestic

prices, are given by the competitive fringe at the parallel exchange rate.

8 This may have yielded $ 80 million for the treasury, although the process was non-transparent and a reli -able figure is not available.9 In recent years it has been possible to import using “non-budgeted resources”, a euphemism to denote foreign currency bought in the open market, the supply of which includes foreign currency that has leaked from oil-export earnings and, most probably, from UNITA's illegal diamond operations.

15

These oligopolies are known as the Empresários de Confiança (“the few trusted enterprises”).

They are dominated by a few extended families with roots in the colonial administration, the inde-

pendence struggle, and mostly in the public service during the socialist period. They have close

connections with the government and the party, and benefit from their ability to mobilize foreign

commercial and political contacts; often the extended families owning these enterprises have mem-

bers living permanently in Portugal or holding dual citizenship. This group's influence is such that

even a change of government would probably cause only a minor alteration in its composition.

They have a strong lobby, known as AIA (Angola’s Industry Association, or Associação Industrial

de Angola), which favors protectionism and is generally hostile to reform.

The oligopolies emerged partly as a result of the state's intention to hold “strategic reserves”

of basic goods so aimed at maintaining adequate supplies, especially in the provinces (an objective

that was never in fact met). Import of such goods on behalf of the Ministry of Commerce and the

local governments was handed over to the Empresarios de Confiança on the grounds that other

private-sector participants were excessively orientated to speculation. It was assumed that Empre-

sarios de Confiança would achieve an equitable distribution of the goods without “speculative”

profits. They are also prominent in trade with the oil sector, especially through SONANGOL.

The informal private sector grew rapidly in the 1990s to account for the largest share of the

workforce; the collapse of agriculture, massive internal migration, the demobilization of the army,

and post-1990 liberalization all contributed to its expansion. The informal sector is presently a sur-

vival strategy for many but it could be a major source of employment growth, including liveli-

hoods for demobilized soldiers, if peace can be secured. A frequent survival strategy for Angolan

households includes a husband in the public sector, securing a small wage but valuable contacts

that open opportunities for the informal sector activities of his wife. Thus, women heavily domi-

nate small-scale informal trade. (Aguilar, 1992). However, informal entrepreneurs are constrained

by the activities of the Empresarios de Confiança. The latter dominate the wholesale market and

can dictate prices to informal retailers, thus keeping their profits low, and limiting informal-sector

growth. Moreover, informal entrepreneurs have little or no access to financial services and they

operate in an uncertain legal environment. The government tends to see street vendors as a social

menace and they are often the target of police action. In addition, the uncertain macro-economic

environment negatively affects the informal sector. There have been events of severe repression of

foreign traders, especially Lebanese, which seem to have growth too fast threatening the position

of some of the Empresários de Confiança.

Given the weak, and in some cases non-existent capacity to enforce contracts, transaction costs are

high. In this context, the Portuguese and African tradition of the extended family is very important

16

for business success. These networks provide information flows as well as mechanisms of contract

enforcement and an internal capital market, thereby partially overcoming the weak legal, regula-

tory, and financial framework. Improving the legal framework, and fairly enforcing it, is critical to

encouraging more private sector investment. Angola could learn much from other transitions re-

garding the importance of the legal framework to success or failure. Carefully designed liberaliza-

tion measures will be necessary to encourage competition and expansion in the formal private sec-

tor. But at present the formal private sector is closely connected to the state and, consequently, it is

conservative and favors protection of its domestic market. The “few trusted enterprises” constitute

a powerful lobby opposing reform. In fact, an extensive study on domestic and international trade

and price liberalization was commissioned at the beginning of the 1990s, but its detailed recom-

mendations never were implemented (Aguilar, 1995).

6. Conclusion

Angola needs to develop a strong and dynamic private sector, both in the rural and in the ur-

ban sector. The character and dimension of the problems faced by the country requires decisive ac-

tion from the state and the International Community. However, this is not enough, and the devel-

opment of a private sector could provide a decisive contribution to the solution of these problems,

nonetheless in the field of providing employment opportunities and poverty reduction.

War has certainly damaged the development of Angola's private sector by disrupting markets,

changing the allocation of resources in arbitrary ways, and creating high levels of uncertainty.

Peace, if it can ever be secured, would provide many profitable opportunities for domestic and for-

eign investment. The oil sector, which is today only weakly linked to the rest of the economy,

could develop many more profitable backward and forward linkages thus creating the employment

growth that Angolans desperately need. Agriculture could provide for massive employment op-

portunities and contribute to the balance of payments by substituting food imports and, in the

medium and long term, with exports.

But war is not the only factor that hindered (and distorted) private-sector development.

Macro-economic instability, in particular the persistence of high inflation, has also undermined the

growth of private investment, especially in the production sectors which are most likely to gener-

ate employment growth. High inflation is in part due to the war, but it also reflects the hesitant

character of Angola's economic transition from state socialism. In particular, the design and imple-

mentation of macro-economic policy has been erratic, reflecting severe institutional weakness and

opposition by powerful vested interests. Reform's opponents have used the war as an excuse to de-

lay much-needed policy change.

17

The recent disappearance of Jonas Savimbi from Angola’s politico-military scenario, as well

as advances in demobilization, raises then an important political issue. Now, when the boogeyman

of Angola’s politics during the last 25 years disappears, the government has no excuses to further

delay reforms. However, during the last few decades several groups with vested interests were

formed, opposing reforms. In fact, the economic recovery and the pace of reforms during the few

months since the end of military operations have been disappointing.

Especially disappointing has been the recovery of agriculture, mostly due to a problem of dis-

placed person larger than forecasted. It is increasingly clear that the reconstruction of Angola’s

agriculture is essential for stabilizing the peace process, providing employment for unemployed

and displaced people, and starting a vigorous domestic economy. However, agriculture faces enor-

mous problems. Some of these problems could be addressed only recently, as personal mines and

security at the countryside, for example. Other problems have been delayed at least during a

decade, as land ownership rights, for example.

In spite of lak of agreement about its implementation, the economy will not deliver poverty-

reducing growth until economic transition and reforms is achieved. An important element of this

transition should be a state reform increasing its efficiency, restoring decision power to the key in-

stitutions in charge of economic policy, and protecting them from the presidency. Another critical

issue is to develop a transparent and working relationship among the Central Bank (BNA), the

Ministry of Finance and SONANGOL. This relationship must be carefully isolated and protected

from the presidency. Finally, Angola must solve its contentious relationship with the International

Financial Institutions. The aim with this relationship is to be able to come back to normal interna-

tional financial markets, especially concessional ones. Thus, Angola would be able to significantly

reduce the cost of the external debt, liberating much needed resources for investment.

Angola also needs to reconstruct its seriously damaged financial sector. With significant ad-

vances in the reforms outlined above and a minimally working financial sector, Angola could de-

velop a vigorous and fast expanding private sector. It is the competitive fringe of small traders who

suffer most from the weakness in the financial sector and macroeconomic instability.

There are two large untapped sources of small-scale entrepreneurship in Angola. One of them

is agriculture. War led to the almost total collapse of agriculture. Peace has left many problems

still largely unsolved. For example, land mines and security at the countryside, a large share of the

rural population displaced, unsettled problems in land ownership rights, etc. Agriculture could be-

come a major provider of employment, in the extent that these problems are addressed. The other

source of entrepreneurship is the large competitive fringe of small traders and producers in the ur-

18

ban sector. This group has shown to be capable of a strong productive response any time they had

a chance in the past. The development of this group is seriously hindered by a weak financial sys-

tem, with a practical inexistent capital market, and an excess of red tape. In fact, private sector de-

velopment is seriously hindered by an excess of regulations that act as barriers of entry and pro-

tects oligopolies based mainly in import activities.

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