Angola: The Tale of an African Oil Economy

Flavio G. I. Inocencio

Angola is the 3rd (third) largest economy in Sub-Saharan Africa.It is a country endowed with significant oil reserves (being the 2nd largest oil producer in the world) and as such, it is member of OPEC.Angola is also a significant exporter of oil to the West and the largest exporter of oil to China after Saudi Arabia.

The country suffered from a long civil war spurred by the Cold war from its independence in 1975 until 2002. During that period, the ruling Party (MPLA) aided by the Soviet Union adopted a communist regime and a planned economy. The advent of the Peace and the market reforms of the early 1990s did not fully liberalise the economy. The prolongation of the war associated with the lax policies of its Central Bank (to finance Government deficits by printing money) created hyperinflation in the country, an experience remembered by every Angolan.

However, since the end of war in 2002 and fuelled by its oil wealth, Angola enjoyed some of the highest growth rates in the World. Nonetheless, these growth rates were elusive as they were based solely on the oil revenues and did not alter significantly the human development level of its citizens as The Economist stated: “Oil provides few jobs for locals and Angola is horribly unequal. The quality of life of people in rural areas and slums, such as Luanda’s Chicala, has barely improved since 2002. Most Angolans lack running water or electricity.”

This meant that the fluctuations of oil prices have a significant impact on its economy. That was the case after the 2008 economic crisis and it is the case with the current economic crisis in 2015.

For some economists, Angola suffers from the “Dutch disease,” which is the economic effect of having an increase of imports because of the appreciation of its national currency which is sustained by an influx of Dollars which derive from the oil revenues and thus create disincentives for investment in other sectors. Many are unaware that Luanda, the capital city is the most expensive city in the world for expatriates. The price of food is extremely high, because it’s cheaper to import. That is why many call this economic effect a “resource curse.”

One of the main problems in the resource rich countries is the misallocation of resources in the economy. Angola is a good example.  The end of the civil war created huge opportunities for reconstruction of the country; particularly with the resources available, considering that the revenues of oil provide the country with about Forty (40) Billion US Dollars per year.

The Government has pursued a Keynesian approach by assuming that spending alone would necessarily increase the total wealth of the country and increasing the standards of living without reforming profoundly the institutions and bureaucracy inherited from its Communist past. What followed was a crisis in the economy, particularly in the construction sector that was heavily dependent on Government contracts and subsidies when oil prices suddenly dropped in 2009 as a result of the financial crisis. The same events will happen in 2015.

Furthermore, it is important to point out that the recent plunge in oil prices was caused by the strategy of increasing market share of the Gulf Arab Countries led by Saudi Arabia.

Unfortunately oil revenues are not being used to spur diversification of the economy, but are used instead as “rents” by politically powerful groups, particularly in the property market by expanding artificially the construction sector through government spending, creating unproductive investments or “mal-investments.”

Furthermore, those investments created huge asset bubbles in the property market, making the cost of housing prohibitively high for most households and businesses. Other distortions were created with the entrenchment of monopolies attributed to certain interest groups, thus damaging competition, particularly for consumers, who now have to pay higher prices for goods and services.

The revenues from oil created an economy dependent on consumption in its entirety and that meant that the incentives to diversify the economy for entrepreneurs and businesses do not exist, considering the problems of market access to international investors and national entrepreneurs. This model will soon run out, particularly with the inflationary pressure from the devaluation of the national currency (the Kwanza) because of the reduction of the Foreign Exchange Reserves, which mostly are denominated in US Dollars.

The requirement to sustain the unsustainable consumption based on crude oil prompted the Angolan Central National Bank (BNA) to embark on the sale of US Dollars through auctions in order to sustain the national currency, the Kwanza through the “Hard Kwanza policy.” However, the demand for the national currency (the Kwanza) is not higher because of the extreme fragility of the Angolan economy and its dependence on imports caused by the Dutch Disease.

The problem of Angola is that its foreign exchange earnings (Dollars) are not being allocated to the most productive uses in the Economy.  For those reasons, Angola offers a cautionary tale, of how powerful interest groups can capture government policy to promote their own interests at expense of everybody else and that sometimes Government policy does the wrong things instead of promoting entrepreneurship and removal of barriers for businesses in general.

The diversification of the economy will occur when those barriers are removed and when economic agents are protected by a stable legal regime that guarantees the protection of property rights, in order to avoid what Bastiat calls “legal plunder.”

Hence, the protection of property rights should be seen as a foundation for development and in a country such as Angola with a deficient court system and Government policies that encourage misallocation of resources, it is difficult to have a solid framework for economic growth without a proper functioning legal framework. As Hayek argues: “An effective competitive system needs an intelligently designed and continuously adjusted legal framework as much as any other.

What Angola needs is a proper legal framework with a capable judiciary, a proper monetary policy and an effective liberalisation of its economy and the elimination of monopolies and privileges to politically connected groups and individuals. The focus should be the creation of a skilled labour force in order to free the entrepreneurial forces of its population, as the Economist wrote about Angola:

Yet Angola remains a difficult place for investors and entrepreneurs. In the World Bank’s latest “ease of doing business” survey, the country ranks 179th out of 189. Enforcing a contract through Angola’s inefficient and sometimes corrupt courts can take years. Getting a visa is a hassle. A dire shortage of electricity means local firms struggle to compete with imported goods.

In Angola, the ghosts of its communist past still remain, and a culture of entitlement looms large. Angola has now a “degenerated capitalism” based on special privileges and a welfare State based on relations of patronage.²⁰

For all of those reasons, when formulating its economic policies, the Government should consider their impact not just to one group but to the society as a whole and not just in the short term but also in the long term. Henry Hazlit made it clear: “the art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.