Angola’s Private Sector: Rents Distribution and Oligarchy Renato Aguilar Abstract



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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 protracted 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 market-oriented economy, macroeconomic mismanagement, and mainly the mechanisms used to distribute the enormous oil rents.

Introduction


This paper aims at discussing the need and possibilities for developing a dynamic domestic 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 distributing 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 developing 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 develop 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 services 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. Several 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 programs have broken down, and economic management has been chaotic. In part this situation reflects 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 difficulties of managing the country's vast and growing oil wealth. Finally, we should add a dose of ideological conservatism and fear that reforms would bring undesired political changes.

Macroeconomic instability is also a factor that need consideration when discussing the development 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 market 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 features in Angola’s society.

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 cannot be postponed anymore. Thus, internal dissension within the MPLA2 and contradictions between the party and the government will become apparent.

Finally, we should mention Angola´s peculiar mechanisms for designing and implementing (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 towards 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 difficulties 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 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 territory. 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 population is either assimilated or excluded from de labor market. This effectively hindered the development 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 institutions.

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 withdrawing 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 after 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 themselves as much physical capital as possible. The Portuguese withdrawal from Angola, in November 1975, left a potentially rich country, with an exceedingly large endowment of natural resources. Colonial investment had mainly focused on natural resources and agriculture. Some industrial 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 country 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 developed with the Eastern Bloc countries, a reflection of the decisive role of Soviet assistance and 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 sector. 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 increasingly 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 parallel market activities from which state functionaries and other well-connected people derived considerable 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 Saneamento 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 implemented. A key example of the failure of this program was privatization that stalled, after a short wave of grabs and non-transparent allocations. Implementation was entrusted to a special secretariat, 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 uphold. 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 exchange 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. However, 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 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 (resulting 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 (under which the IMF would monitor progress on key policy changes but without committing IMF resources). 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 devalued 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 contraction in foreign exchange reserves left little scope for defending the fixed exchange rate (or facilitating 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. 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.

Source: INE and BNA.

Figure1. Inflation 1991-2002.

Angola's transition revealed a number of problems common to transitions elsewhere, including 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 mechanisms 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 resources 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 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 program 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 interest in co-operation, but policy changes frequently contradict Article IV Consultations, and relations 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 regarding 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 profile 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 interest quite higher than international rates.

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


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