|Lusophone Africa Conference: Intersections between the Social Sciences
Cornel University, May 2-3, 2003
Angola’s Private Sector: Rents Distribution and Oligarchy
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.
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.
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 formally 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 Ministry of Planning is the strongest one; a not surprising development after a central planning experience. 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 institutional capital.
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
The oil sector became the main source of foreign-exchange earnings as agriculture and industry 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 production, dominates the oil industry. SONANGOL operates by means of joint ventures and production 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 water and ultra-deep waters have further fostered foreign investments in this sector and Angola is expected to become Africa’s largest oil exporter very soon.
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
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 inflation, 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.
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
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 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).
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.
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