The Means and Ways of Angola's Economic Policy

4.1. The Mechanisms of Economic Policy.

However, a council of advisors at the presidency, known informally as the Homens de Futungo ('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 servants 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.

This is especially serious for the public investment program run by the Ministry of Planning. 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

Although war played a large part in undermining the non-oil tradable sectors (agricultural output was by 2000 probably less than 5 per cent of its pre-war level), the Dutch Disease effects associated 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 extensive 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 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, senior civil servants receive direct benefits including fuel and housing allowances, car-purchase subsidies, 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 problem 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 exchange control did nothing for the poor and added to high-income inequality. Periodically the government 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 foreign exchange to a few importers, in a non-transparent and discretionary manner. These few importers can then benefit from the subsidy implicit in the differential exchange rate.

4.3. The Budget Trap

With an inflation rate well in excess of the world average, the degree of overvaluation increases 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, especially in the informal sector. In the absence of indexed financial instruments and a severely repressed 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 instability 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 situation. Military expenditures are quite non-transparent in Angola and no reliable figures are available; 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 infrastructure.

4.5. The Financial Sector

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 government. At times, BNA's governor has held the rank of minister and has thus succumbed to pressure 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 between 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 improvement 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 subject to minimal regulation. They are slated for eventual privatization but considerable reorganization 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 Institutions. 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 conducted 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-existent. The informal sector has almost no access to formal financial instruments and the lack of formal 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 providing the financial capital.

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 Redimensionamiento 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 countries elsewhere.

Despite a seriously adverse investment environment, there has been substantial foreign investment; the high profitability of these projects compensates for the extremely difficult conditions under 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 Europe, mainly Portugal. Foreign investors include West Africans (principally Nigerians) and investment 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 labor 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 oligopolies for their supplies. This competitive fringe is functional to the oligopolies, because the latter 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.

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 independence 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 members 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 Empresarios 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 survival strategy for many but it could be a major source of employment growth, including livelihoods 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 dominate 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 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, regulatory, 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 regarding the importance of the legal framework to success or failure. Carefully designed liberalization measures will be necessary to encourage competition and expansion in the formal private sector. 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 recommendations never were implemented (Aguilar, 1995).

6. Conclusion

Angola needs to develop a strong and dynamic private sector, both in the rural and in the urban sector. The character and dimension of the problems faced by the country requires decisive action from the state and the International Community. However, this is not enough, and the development 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 foreign 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 opportunities 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 generate 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 implementation 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 delay much-needed policy change.

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 displaced 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 enormous 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 institutions 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 international 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 advances in the reforms outlined above and a minimally working financial sector, Angola could develop 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 become 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 urban 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 system, with a practical inexistent capital market, and an excess of red tape. In fact, private sector development is seriously hindered by an excess of regulations that act as barriers of entry and protects oligopolies based mainly in import activities.

References

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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.

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

5 Program for Financial and Economic Reorganization.

6 Program for Governmental Activities.

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.

8 This may have yielded $ 80 million for the treasury, although the process was non-transparent and a reliable 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.

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