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Angola’s Political and Economic Development

Author: Stephanie Hanson
July 21, 2008

Introduction

In April 2008, Angola quietly surpassed Nigeria to become Africa's top oil producer. The country's gross domestic product is projected to grow nearly 16 percent this year, placing Angola among the fastest growing economies in the world. Business is booming in Luanda, the capital, where Bentleys and luxury SUVs speed down the streets and a hotel room—if you can find one—will run three hundred dollars a night. Yet most Angolans live in poverty, and development indicators for the country have improved little since the end of its decades-long civil war in 2002, raising questions about how well the oil-rich country will translate its windfall into sustainable long-term economic growth. The Angolan government has made efforts to strengthen political institutions and to develop an economic diversification strategy, but experts say it is hobbled by an entrenched patronage system, a dearth of skilled workers, and the distortionary effects of an economy dominated by oil.

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The Ramifications of War

Angola achieved independence from Portugal in 1975, after which the competition between different movements that were vying to lead the country descended into civil war. The Popular Movement for the Liberation of Angola (MPLA), a Marxist-oriented group that included urban intellectuals, nominally led the country. It was opposed by two factions—the National Liberation Front of Angola (FNLA), and the National Union for the Total Independence of Angola (UNITA). The MPLA bolstered its rule with oil revenues, Soviet military equipment, and Cuban troops. UNITA and the FNLA were fueled by black market diamond revenues, South African military advisors, Chinese weaponry, and covert military and financial assistance from the CIA. War between the two sides shook the country for twenty-seven years, during which an estimated 1.5 million people died, over 4 million were internally displaced, and another five hundred thousand fled the country.

Angola's civil war destroyed the roads, railways, and bridges built during Portuguese rule, decimated agricultural infrastructure, and left much of the population with no memory of what life was like in peacetime. Today, Angola lacks a pool of skilled labor (nearly half the population is under fifteen years old); a functioning health-care system (its infant mortality rate is among the highest in the world); and enough schools for its children (45 percent of school-age children are not reached by the education system). It ranks 162 of 177 countries on the UN's Human Development Index.

Political Patronage and Corruption

The Angolan government faces a paradox: It is an incredibly rich country, but also a very poor one. Like most African countries, it faces some of the steepest development challenges in the world. Unlike its neighbors, however, it does not depend on foreign aid or the largesse of international financial institutions such as the World Bank and the International Monetary Fund (IMF). As a result, Angola is not obliged to follow the reforms and policy recommendations of such groups. Critics say this imperviousness to pressure has fostered an opaque financial system rife with corruption, and has also weakened democratic institutions. According to a report issued by the British investigative group Global Witness in 2004, nearly $1.7 billion disappeared from the government's budget between 1997 and 2001. While Angola's finances were certainly opaque during this time period, some Africa experts note the Global Witness report is controversial and the Angolan government did make efforts following its publication to account for the lost funds.

Power in Angola is concentrated around the president, José Eduardo dos Santos, who has held office since 1979. Experts say Dos Santos heads a patronage system that operates outside normal state channels. As a result, ad hoc commissions or other bodies that combine members of different government ministries tend to undermine the efficacy of formal institutions. The president also frequently removes people from their posts and assigns them elsewhere, a process much like "musical chairs," says a January 2008 report funded by Britain's Department for International Development (DFID).  In Angola: Anatomy of an Oil State, author Tony Hodges notes that Angola had an unusually high number of planning and finance ministers from 1990 to 2002, with power continually rotating between the two ministries. Though Angola nominally has a multiparty political system, it has not held multiparty elections since 1992, and the main opposition party (and former independence movement), UNITA, is considered weak. According to a June 2007 survey published by the independent Semanário Angolense newspaper in Luanda, only 16.8 percent of respondents planned to vote for an opposition party.

Since the end of the civil war in 2002, the government has made some efforts to promote transparency. In conjunction with the World Bank, it established a program to monitor the majority of government expenditures as they occur. The ministry of finance is publishing information on its website about budgets, oil revenue, and Chinese financing with "an unprecendented level of detail," according to a May 2008 report from the Economist Intelligence Unit. A 2006 World Bank report (PDF) outlines some of these changes in detail. Yet these efforts have attracted little notice outside Angola; many donors and policymakers continue to perceive the country as a "sea of chaotic corruption," suggests the DFID report. Some experts say the Angolan government hasn't helped to dispel this impression. As a 2007 report on Angola from CFR's Center for Preventive Action notes: "The Angolan government's response to allegations of corruption—a combination of candor, denials, and evasion—is not always helpful and increases the skepticism with which many view Angola's current efforts."

The Angolan government has balked at implementing measures that would erode the president's grip on power. According to the IMF report, measures to promote transparency have not extended to the country's state-run oil company, Sonangol. The country continues to rank near the bottom of Transparency International's Corruption Perceptions Index, scarcely higher now than it was in 2002 (its most recent ranking is 147 of 179 countries). Lazar Antonic, Angola country director for the International Republican Institute, says "opposition parties and viewpoints do not have the same access to media as the ruling party does." In July 2008, the government closed Radio Despertar, which Antonic says was one of the few Angolan media outlets giving airtime to opposition political views. Angola comes in at 42 of 48 countries on the Ibrahim Index of African Governance, with notably low marks on metrics of human rights, democratic participation, and rule of law. Nigeria, a country that has long been dependent on oil revenues in much the same way that Angola is now, ranks 37, just five spots higher.

Angola's Oil Company

Perhaps the most significant barrier to more robust and transparent Angolan political institutions is Sonangol, the state-run oil company. Created in 1976, it has a 51 percent interest in all production from the oil-rich province of Cabinda, as well as all offshore concessions. It also oversees licensing for exploration and production. As part of this "concessionaire" role, Sonangol determines the oil profit due to the government, as well as its payment to the finance ministry. But economists say Sonangol also performs functions that should be under the aegis of the finance ministry or the central bank.  As the 2006 World Bank report notes: "It is a taxpayer, it carries out quasi-fiscal activities, it invests public funds, and, as concessionaire, it is a sector regulator. This multifarious work program creates conflicts of interest and characterizes a complex relationship between Sonangol and the government that weakens the formal budgetary process and creates uncertainty as regards the actual fiscal stance of the state." Despite the fact that so many state fiscal functions are carried out by Sonangol, the transparency measures that the finance ministry has adopted do not extend to the oil company.

Even so, Sonangol is regarded by its international oil industry peers as an extremely well-run operation. Even during Angola's civil war, the company repaid its oil-backed loans and stuck to its contracts. It has also negotiated some of the most favorable terms of any African country for its contracts with foreign oil companies, according to the DFID report. Some experts say Sonangol's employees are the most talented professionals in the country. Sonangol is "extremely professional and knowledgeable at all levels," says Filippo Nardin, president of the Angola Educational Assistance Fund. "It is a de facto arm of the government but it also competes with the government" for skilled personnel.

Western economists recommend that Sonangol shift away from its quasi-fiscal role and focus on its core competencies. The World Bank says the company could contribute to Angola's economic development by training Angolans to work for foreign oil companies, increasing fuel storage capacity, investing in social projects, and improving fuel distribution to interior regions.

Economic Development

Angola's oil resources have provided a steady influx of funds into government coffers, but they also create significant challenges for macroeconomic stabilization and economic diversification. The booming oil industry creates wealth in related sectors—finance, hospitality, and other  industries that service oil companies—but it also makes it more costly for everyone to do business. Aftereffects of the civil war have exacerbated these asymmetries. Economists say the Angolan government has done an admirable job at stabilizing the economy—reducing inflation (which was in the triple digits during the war) and paying back creditors. An August 2007 IMF report praised the government's macroeconomic policies. But Africa analysts express mixed opinions on the government's efforts to promote economic diversification and implement a pragmatic development strategy. Some say it has made significant progress since the end of the war, while others say it has not directed enough energy and attention to helping the poor. There is consensus, however, that given the tremendous number of challenges waiting to be addressed, the government's task is a daunting one.

Rather than targeting poverty reduction explicitly, the Angolan government has focused on large infrastructure and public works projects. These projects are administered through the Gabinete de Reconstrução Nacional (GRN), which was created in 2004 by the president and is led by Helder Vieira Días “Kopelipa,” a close presidential adviser. This focus on the "hardware" of development contrasts with the "software" approach taken by many international nongovernmental groups, which stress the development of strong civil society groups and judicial systems, says the DFID-funded paper. "Angola is in the rehabilitation phase; this is before the development phase," one official told the paper's authors.

Technical capacity has limited the government's ability to enact these large projects. "Government ministries were returning up to 40 percent of their budgets to the Treasury during the last fiscal year because projects couldn’t be implemented," says Paul Hare, executive director of the U.S.-Angola Chamber of Commerce. Experts say ministers and deputy ministers are competent, but the low and middle rungs of the civil service are problematic. Only 16 percent of government employees have completed high school. The lack of capacity to support the work of the minister and his deputies is often "mindboggling," says Nardin. "Although the government is making efforts to train people, it would be unrealistic to think that they train people as quickly as they build infrastructure," write Indira Campos and Alex Vines of London's Chatham House in a March 2008 paper.

No one doubts that Angola needs to repair its infrastructure and upgrade its communications and other vital systems. The problem, experts say, is that it also needs to provide concrete improvements to the lives of poor Angolans. In a 2006 opinion poll administered by the International Republic Institute, 75 percent of respondents said unemployment was the most important issue facing the country. Some analysts say agriculture is a sector that could create a significant number of jobs. According to the World Bank, roughly two-thirds of the population earns its living from small-scale agriculture, but the government allocates less than 1 percent of its budget to the sector. But Nardin is skeptical about how large the agriculture sector could grow, pointing out that Angolan agriculture might not be particularly competitive internationally, given that "their economy is made so expensive because of the oil sector."

The economy's dependence on oil revenues also makes economic diversification difficult. Private investors look more favorably upon Mozambique, the continent's other former Portuguese colony, primarily because the cost of doing business is far lower. In Angola, investments flows go to oil or oil-related sectors. Angola has created a national agency for private investment, but the country still ranks near the bottom of the World Bank's Doing Business Index.

Business is Booming—with China

Angola's most successful business relationship is also a diplomatic one: China. As President Dos Santos said when the Chinese prime minister visited Angola in 2006, "China needs natural resources, and Angola wants development." Angola is China's largest trading partner in Africa, and it is also China's single largest source of oil. Oil exports to China have increased sevenfold since 2002 (twice the growth rate of Angolan oil exports to the United States over the same period). China has extended three multibillion dollar lines of credit to the Angolan government; two loans of $2 billion from China Exim Bank, one in 2004, the second in 2007, as well as one loan in 2005 of $2.9 billion from China International Fund Ltd. The two loans from China Exim Bank will finance projects on energy, water, health, education, fisheries, and communications. The $2.9 billion credit line, which is managed by the GRN, not the ministry of finance, is allocated for railway rehabilitation, highway construction, and building a new airport. The Chatham House paper notes that "Unlike projects undertaken by the ministry of finance, it is unclear how much money is directly managed by the GRN, how funds are allocated among projects, and how much money so far has been spent."

Some analysts have expressed concern that the Angolan government has grown closer to China at the expense of its other diplomatic relationships. But Western oil companies have many projects in Angola, and Luanda has sought to expand its ties with a variety of countries—from France to India to the United States. Some of these countries have also offered credit lines to the Angolan government (albeit smaller ones). Angola likes Chinese financing because it offers better conditions than commercial loans, lower interest rates, and longer repayment time. Chinese companies pursue construction deals in Angola because there is limited competition. But there are signs of strain in the relationship; rumors of halted construction on the railway to Lobito have abounded, and negotiations with a Chinese petrochemical firm on building a refinery in the same port city collapsed in 2007.

Critics have suggested that Chinese workers are flooding Angola and taking jobs away from Angolans. But Nardin says China's reputation with the average Angolan is "fantastic. They all think things are starting to work because of the Chinese." Under the China Exim Bank credit lines, 30 percent of contracts are supposed to be Angolan, but the government is having trouble fulfilling its contractual obligations. In a 2006 article in the New York Times Magazine, James Traub recounts visiting a Chinese worksite where the project manager tells him he had to teach the Angolans how to mix concrete, even though it is the only building material used in Angola.

Experts express concern about the government's ability to maintain Chinese projects after they are completed. "The government will need to focus more attention on planning and organization to ensure the sustainability and transfer of know-how—or risk relying on the Portgueuse and others returning in the near future to rebuild what the Chinese have just completed," write Campos and Vines. But building a more educated and skilled population will take years. "The greatest deficiency in the country is institutional and human capital," says Hare. Angola's political and economic development will require "patience and forebearance—rebuilding a country after so much destruction, and creating a more equitable society in which Angola's leaders are politically accountable, will not be achieved quickly," cautions the 2007 report from CFR's Center for Preventive Action.

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