Angola - An introductory economic review (Vol. 2 of 2)

Report No. 8906-ANG Angola An Introductory Economic Review (In Two Volumes) Volun e II: Annexes and Statistical Appendix June 29, 1990 Country Operations Division Southern Africa Department Africa Region FOR OFFICIAL USE ONLY Document Of the world Bank This document has a restricted O1istribution and may be used I~y recipients only in the performance of their official duties. Its contents may not othef.wise be disclosed without WmWi Bank authorization. \ x, - NJ  CURRENCY EQUIVALENT Since 1975 US$ 1.00 - Kz 29.92 FISCAL YEAR January 1 - December 31  FOR OMCIAL USE ONLY ANGOLA AN INTRODUCTORY ECONOMIC REVIEW TABLE OF CONTENTS Volume II - Annexes and Statistical Appendix Page No. ANNEX I ECGNOMIC DEVELOPMENT DURING THE COLONIAL PERIOD 1 A. Introduction. 1 B. A South Atlantic Link. . . . ..... . 2 C. Settlement and Contract Labor. 6 D. Soldiers and Industrialization. 13 E. Economy and Society at Independence. 21 Bibliography ......... ..... . ..... . 25 ANNEX II THE ANGOLAN ECONOMY IN CCMPARATiVE PERSPECTIVE 28 ANNEX III GOVERNMENT INSTITUTIONS. . .... 30 ANNEX IV THE SYSTE4 OF NATIONAL ACCOUNTS IN ANGOLA 32 ANNEX V THE LEGJ.' FRAMEWORK OF SEF. . 40 ANNEX VI THE TAX SYSTEM ....47 ANNEX VII AGRICULTURE.. . 51 A. Agricultural Performance, Policy and Production Response.. . ... .... . . 51 B. Major Agricultural Products . . ....... 55 C. Rural Structure ... .. . . ....... 63 D. Agricultural Support Servicesc. .. *.. 66 E. Agricultural Policy Adjustment and Reform...... 70 ANNEX VIII TRANSPORTAT AND COMMUICATION....... 73 A. Sector Overview and Organization. . 73 B. Highway System ....77 C. Rail Transport ..... . . I . .... 82 D. Air Sector e.. 86 E. Maritime and Port Sector. . 91 F. Mail and Telecommunica tions 99 G. Availability of Modal Spare Parts. 104 H. MINTEC Analysis and Planning. 106 I. Issues, Prospects and Recommendations 113 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  Page No. ANNEX IX EDUCATION,**,. .** ..... ... ... . 118 A. Structure and Organization of the Education System ................................................. 118 B. Primary Education ....... . ...... . ... . .......... . 124 C. Secondary Education ............................. 127 D. Higher Education ................... .... .... 130 S. Recommendations ................................. . 133 List of Annex Tables ................................... 136 Statistical Appendix ............................................ 136 Maps .............................................................. 214 Map I Angola 214 Map II Angolas Relief .......... .............. . 215 Map III Angolas Population Den sity ..... # ............ 216  ANNEX TABLES Page Number Annex I: ECONOMIC DEVELOPMENT DURING THE COLONIAL PERIOD 1.1 Principal Exports, 1950-73 .........................4*.... 24a 1.2 Major Imports, 1952-73 .......... .. 24b 1.3 Output of Major Agricultural Products, 1952-73 ......... 24c 1.4 Population and GDP, by Type of Activity ............. ... 24d I.5 Manufacturing Output by Major Industry Group, 1966-70 ............................... o........................ 24e 1.6 Balance of Payments, 1955-73 ........................ .... 24f 1.7 Monetary Development, 1960-73 .......................... 24g 1.8 Gross Domestic Product, 1953-73 ....................... . 24h 1.9 Selected Social Indicators ............................. 24i Annex VI: TAX SYSTEM VI.1 Petroleum Taxation, 1980- 87 ........................... 47 VI.2 Changes in Price and Output of Crude Oil. 1980-86 .. 48 VI.3 Transfers to Government by Selected Public Enter- prises, 1984-86 ................................................... 49 Annex VII: AGRICULTURE VII.1 Distribution of Cattle and Goats in Southern Angola ... 63 VI1.2 Losses of State owned Agricultural Enterprises .. . 64 Annex VIII: TRANSPORT VIII.1 Output of MINTEC Controlled Transport Services, 1985-87 ................. o..................................... 74 VIII.2 Output of Transport and Communications Sector .......... 75 VIII.3 Road Network, by Type and Length, 1986 ................. 77 VIII.4 MINTEC Bus Utilization Data, by Province, 1985......... 79 VIII.5 ETP Urban Bus Performace Indices, 1985-87 ...........#. 80 VIII.6 Rail Transport, Passengers and Cargo ...... ..... ... 83 VIII.7 Railway Locomotive and Rolling Stock Data, 1985-86 ..... 84 VIII.8 TAAG Operations, by Market, 1986 ...................... 87 VIII.9 ENAMA Airport Network, 1987................... . 89 VIII.10 Size and Output of Maritime Fleets, 1986 and 1987 ...... 92 VIII.11 ANGONAVE Cargo, by Category, 1986 ...................... 93 VIII.12 SECIL Maritima Fleet, Selected Data, 1986 .............. 94 VIII.13 Main Port Freight Throughput, 1985-1987 ................ 97 VIII.14 Cabotage Traffic, 1985................................. 98 VIII.15 Throughput of Angolan Mail Office, 1986 ................. 101 VIII.16 Inter-urban Telephone Network, 1975 and 1980 ............ 102 VIII.17 ENATEL and EPTEL, Selected Data, 1985 and 1986 ......... 103 VIII.18 MINTEC Short Term Strategy, 1987 ...................... 109 VIII.19 Projected Freight and Passenger Movements .............. 112 VIII.20 HINTEC Proposed Program, 1987.......................... 112  Page No. Annex UXt EDUCATION IX.1 Government Budget for Education, 1980-87 ............... 123 IX.2 Government Expenditure on Education, 1980-82 ........... 123 IX.3 Primary Education - Number of Teachers, Classrooms and Schools, 1981183 .............................. 125 IX.4 Primary Education Enrollment Ratios ..................... 125 TX.s Primary Education Net Enrollment Ratios for four Provinces ............ #.*... . ................. ..* ....... 126 IX.6 Primary Education - Average Promotion, Repeat and Dropout Rates, 1980-84.... ... . .. ... ....... . 127 IX.7 Enrollment in Higher Education .................... .... 131  ANNEX 2 Page 1 of 24 ECONOMIC DEVELOPMENT DURING THE COLONIAL PERIOD A. Introduction 1. Unlike the majority of former European colonies in sub-Saharan Africa, which became independent in the late 1950's and early 1960's, Angola has been an independent nation only since 1975. The length of the Portuguese colonial presence in Angola (over 500 years) and its particular characteristics left a colonial legacy which continues to constrain Angolan economic development. The unique nature of the Portuguese colonial system is that it was based on an indigenous labor system that was never free." Domestic slavery was legal until 1870 when it was replaced by a brutal system of forced labor (euphemistically called contract labor") until 1961 when it was abolished in the wake of the nationalist uprisings. Moreover, since the 1920s, Angolan development policy focused primarily on raising the number and prosperity of the white settlers and increasing the coffers in Portugal at the expense of the indigenous Angolan peoples. Angola's best agricultural lands were seized by Portuguese settlers. Angola became the dumping ground not only for hundreds of thousands of largely illiterate Portuguese but also became the repository for Portugal's key exports such as alcoholic beverages, in particular in the twentieth century. Prior to the outbreak of the armed struggle in 1961, Portuguese economic interests enjoyed a virtual monopoly over investments in the colony and, given Portugal's own economic under-development, this caused unique distortions in the Angolan economy not found in parts of Africa colonized by the British, French, or even the Belgians. Finally, the fact that over half of the 325,000 white settlers had never gone to school and the vast majority of the rest had less than four years of education, resulted in the Portuguese occupying almost every position in the modern economic sector from engineers and doctors to waiters and taxi drivers. Thus, shockingly few Angolans were trained in any skilled profession. The singularity of Portuguese overseas policy makes it particularly important to analyze the pattern of colonial development in Angola in order to understand the opportunities and constraints of the People's Republic of Angola fourteen years later. 2. Angola's colonial economy can be characterized through various stages or cycles of development. These cycles can even be named after the major export and its directions slaves to Brazil, coffee to Portugal and oil to the United States, each cycle defining a period during which the external se:tor of the economy is dominated by a particular product, by a particular market or both. The analysis of Angola's development cannot neglect the interaction between economic dependence and colonial rule. For purposes of exposition, the colonial economic history of Angola can be divided into three broad periods. The first period includes the early alliance between the Portuguese and Congolese crowns, as well as the slave trade directed mostly to Brazil, (sometimes referred to as a South Atlantic link). The second period begins with the hundred years of transition from slaves to coffee, during which territorial occupation and settlement took place, and includes the emergence of a coffee export economy based on  -2- AM=X I Page 2 of 24 quasi-forced labor. In the forties, the Angolan economy Initiated a growth process that involved considerable immigration from Portugal, in response to the coffee boon. The white settler population increased from 44,000 in 1940 to about 325,000 by 1974. Generally favorable prospects for external trade were decisive in the evolution of internal conditions, reflected by changes in industrial regulation, in agricultural incentives, In labor laws and in monetary policy. A third period begins with the Portuguese military response to the 1961 armed revolt when some of the economic constraints of colonial rule where relaxed, allowing rapid industrialization to take place alongside the coffee economy and concludes with the beginning of the 'oil boom" which immediately preceded the 1973 price increase by OPEC and the 1974 Portuguese revolution. B. A South Atlantic Link 3. It is believed that in the thirteenth century Angola was inhabited primarily by Koisan-speaking groups who wire forced to migrate by the push of Bantu-speaking peoples whose migratory patterns and developed (slash and burn) economies took them into the territory. Some were well developed kingdoms (e.g., Luanda and Kikongo) who moved southward into Angola during the thirteenth and fourteenth centuries in search of new areas to cultivate. 4. The first encounter between Europeans and Angolans occurred in 1483 during a voyage of Diego Cao on his way to find a sea route to India. The initial contacts between the Portuguese and Kikongo were quite egalitarian and included the establishment of diplomatic relations between the two Kingdoms. The Kongo royal family even urged Lisbon to send missionaries to facilitate the conversion of Kikongo to Christianity. Within a decade of the first contacts, however, Portugal focused almost all attention on the slave trade and by 1526 the situation had deteriorated to the point that the Rongo King wrote to his Portuguese counterpart that the slave traders brought "ruin to the country. Every day people are enslaved and kidnapped, even nobles, even members of the Kings' own family." 1/ 5. At the time, the Congo occupied a vast region, including the parts south of the present Congo and Zaire and north of Angola, where the capital was situated. The region was densely populated. The population lived mainly on the cultivation of a certain number of food plants such as massambala, massango and luco. 2/ On a lesser scale, banana, vegetables, sugar-cane and the palm tree were cultivated, the latter being used to make a fermented drink called malufo. This spirit constituted on of the country's principle handmade products, besides weaving and metal-working. While malufo was produced by the peasants and satisfied an Important dietary requirement, the rest of production was reserved 1/ Paiva Manso, Historia do Congo, p. 54. 21 W.G.I. Randles, L'Mcien Rovaume dut Kongo des oriaines a la fin du XIX siecle (Ed. Mouton, Paris, 1968), p. 65. This book is the major reference for this period. A text from the end of the 16th century notes the sweet potato as the basic food.  -3- Page 3 of 24 for the nobility. Metal-working (iron, copper and gold) was practised in this part of Africa from the first century B.C. 31 In the same vay as palm was used to produce malufo, the production of cereals also gave rise to a manufacturing process for obtaining flour. The first European chronicles also note the raising of beef cattle, sheep, and poultry, but animal traction and the weaving of wool vere not practised. 41 Except for the sowing of the land, agricultural work was the responsibility of the wamen. Overall, available tools were extremely modest, although despite periods of drought or plagues, produwtion was described as abundant. 6. Land belonged to the kingdom. On the death of a particular farmer, all his fixed property reverted to the King or traditional chiefs, who then decide on the future of the estate. Inheritance was therefore dependent on royal consent. The recorded testimonies agree that this policy prevented private wealth accumulation, so that the differences between rich and poor were determined for each generation by the political process. The peasants paid taxes to the village chief, who paid the provincial governor, who in turn paid the King; at each stage of the process the receiver kept for himself a certain percentage. Although some testimonies report that the process was quiet harmonious, other testimonies report that the collection of taxes almost always implied (principally in the backward regions) the resort to violence, provoking occasional revolts. 5/ 7. Long-distance trade vas controlled by the King or by the governors of the rrovinces. Salt from the coast and from mines and raffia products form inland areas were two of the main products exchanged. Some Portuguese chronicles note that the zimbo (a small shell from Luanda island) served as currency. However there is no solid evidence of the use of zimbo for the acquisition of food; it is merely conjectured that the zimbo may have served, in certain cases, for long distance trade. Moreover, the zimbo together with other products and even slaves, were used to pay taxes. 61 The King is reported to have fixed the prices of products. 71 Indeed, the 31 R.P.A., History of Angola, p. 34. 'The blacksmith enjoyed considerable economic prestige ... he was frequently soothsayer, judge and witch- doctor. The fact of possession of metal weapons made certain tribes and peoples superior in offensive power over their neighbors who had only stone weapons. This explains how the Bantu, who arrived in the territory inhabited by the Koisan, settled there.* Al Op.cit., Randles, p. 69-70. This and the following section are based on citations of H. de Bolonha. 51 Cavazzi, cited in Randles, p. 76. 6/ Felner, History of the Kingdom of the Congo, cited by Randles, Op.cit. 7/ Proyat (1776) cited by Randles, Op.cit.  -4- Page 4 of 24 analysis of documentation from the various periods suggest that such prices remained relatively stable over four centuries. 8. The first at-empt at white settlement occurred in 1575 with the arrival in Luanda of Paulo Dias de Novais who landed with the title of "donatariol of the Augolan coast, a method of colonization used in Brazil. Novais and his men were more interested in finding the fabled (but nonexistent) silver mines near Cambambe than in establishing permanent white settlements. They also brought the pursuit of slaves carried out among the Kikongo in the north to the area around Luanda inhabited by the Kimbundu. A period of wars and incursions followed, during which the rumors about the existence of silver mines in Cambambe proved to be false. 8/ This coincided with the Brazilian depression, and forced the colonial power to search for a new economic use for the former ally. For about three hundred years, this new use was going to be the slave trade, which became the basis of all colonial economic activity until the mid 19th century. Since Angolan slaves were mostly sent to Brazil, a South Atlantic link emerged between these two Portuguese colonies. Throughout, the international market conditions were highly rewarding for the slave trade. 9/ 9. The Dutch conquert of Brazil, in the middle of the seventeenth century, led Holland to seek control of the source of tLe slaves, whi-h were more numerous in Angola than anywhere along the West African coast. The Dutch made strategic alliances with key Angolan leaders, like the famous Queen Nzinga, w..o helped them drive the Portuguese from the coast in 1640. The Dutch did not accede to Queen Nzinga's admonition to eliminate all Portuguese in the area as they found the Portuguese to be useful middlemen in the slave trade. Luanda was reconquered in 1648 by a 'razilian fleet led by the Governor of Bahia. Once the area was recovered by the Portuguese, the Dutch were naturally forced to evacuate the Important slave markets of Luanda and Benguela (founded in 1617), and other lesser ports in the north. The Sa expedition was almost entirely financed by Brazilian merchants and undertaken despite the clear policy of Dom Joao IV not to offend the Dutch in the difficult times following the Portuguese restoration. The King even threatened to punish Sa, who nevertheless was the initiator of a period of 12 years during which the governors of Luanda were Brazilians. During that period, the Brazilian slave trade became so predominant that there was a local revolt against the arrival of one of the governors in 1670, when appointing a new governor from Portugal, the Crown granted a Charter to the Luanda settlers for their protection. 10. During the Brazilian consulate, the conflict against Congo and Matamba for the control of the inland trade continued. The African 8/ D. Birmingham, Trade and Conflict in Angola. 1483-1790 (Oxfords Claredon Press, 1966), p. 62. 9/ Bernard Founous Cours sur le Develorpment de l'Afrique - Amorce du Sous- DevelopDment: La Traite Negrire. QuelQues donnes chiffres (IDEP - Dakar, March, 1979)  Page 5 of 24 Kingdoms were defeated between 1665 and 1681 and both Kings accepted a truce, becoming vassals of the King of Portugal. However, the Portuguese continued not to control the slave trade, given that they had to pay a toll to the Imbangalas for the caravans coming from the Londa Empire. For that reason, it was necessary to return to the regime of exchange, with pricet dictated by the English and French competition in the north. By that time, however, the sugar boom was over and Portugal was going through a severe depression. The volume of the slave trade decreased accordingly. 11. There are no reliable records on the number of slaves exported from Angola and Congo during the period from 1500-1700. There is some agreement on the slave imports into Brazil which total 625,000. It is thought that about half came from Angola. However many slaves exported from Angola were declared, for ax purposes, as having Brazilian destination, although they wout. go to Spanish America instead. 10/ North European competition for African daves picked up after 1650, due to the sugar boom in the Caribbean, after the Dutch had been expelled from Brazil. In the 18th century, the English and French controlled over BOX of the West African slare trade. Portugal, however, handled about two-thirds of the south Atlantic trade. In the perlod 1700-1850, almost 1.8 milijon slaves were exported by Angola and Congo, whereas Brazil imported about 3.6 million. Almost all of Angola's exports went to Brazil, and taking mortality into account, the total number of slaves exported from Angola may have been as high as 2.5 million. The anticipation of the end of the slave trade led to enormous slave imports into Brazil in the late 1820's followed by a sharp drop in the early 1930s. However, the coffee related demand for labor maintained slave imports at a high level until the midd:e of the century. At the end of the period, there is little doubt that Angola and the Congo were severely depopulated as compared to the 16th century. Contrary to what seems to have occurred in West Africa, the increase in population brought by new food products like maize and manioc was not sufficient to offset the drain of the slave trade. 12. The colonial trade mechanisms lay basically in the relationship between the owerful coast merchants and the traditional chiefs inland or in the wander1.zg activities of the hawkers, the small white, mixed race and black merchants, components of an incipient creole society. It is in this creole society that attempts at economic diversification were made several years before the abolition of slavery. In fact, from 1764 to 1772 an active economic policy was pursued in Angola under the governorship of Sousa Coutinho, leading, for example, to attempts at producing iron industrially in Nova-Oeiras, near Massangano. These efforts collapsed after Coutinho's departure but when the Brazilian demand picked up again, they were replaced by attempts to expand east and south. In 1830 the first coffee plantations appear in Massangano and Ambaca and cotton is grown in Golungo. At the same time, trading settlements like the Dondo, on the 10/ Jorge Braga de Macedo, Colonial Develovment of Anaola: The Rise and Fall of a South Atlantic Link (mimeo, Yale University, March 1978). Estimates of the total number of slaves shipped from Angola during this period range from 750,000 to 1 million.  -6- AQNEX I Page 6 of 24 banks of the Cuanza, gained importance and Portuguese coming from Brazil settled in the Namibe desert where Mocam2des was founded. Most of Angolan foreign trade was with Brazil, the slaves being paid for by Brazilian cane liquor and gold. 13. Slavery was abolished in three phases, spanning over forty years. First, there was the prohibition of slave exports in 1836, followed by the abolition of slave trade under the Po.tuguese flag six years later; finally there was the abolition of slavery itself, in 1878. The prohibition was felt as a great loss and in the 1830's the idea of remaining associated to prosperous Brazil found many supporters in the local 'comprador' class. Nevertheless, the pro-Portuguese faction won and some efforts were made to develop a tropical export economy. Wax, ivory, palm oil, and peanut exports came to the fore after the slave trade subsided. In 1870, the rubber boom spread through the territory and, until 1915, this product was to be Angola's first export, with yearly averages on the order of 2,000 tons. 11I C. SETTLEMENT AND CONTRACT LABOR Territorial Occupation 14. At the Berlin Conference in 1885, the principle of effective eccupation was accepted over the Portuguese idea of priority of discovery. The partition of Africa imposed obliged Portugal to effectively occupy the territories it claimed to have discovered. This led to renewed interest in the exploration and the 'pacification' of the interior, and to a debate over the use of the colonies. The debate was dramatized by an English Ultimatum in 1890 against the Portuguese idea of linking Angola and Mozambique by land (the so-called 'pink map"). In Angola, Portugal had occupied Luanda and its immediate hinterland since 1575, and Benguela and surrounding districts since 1617. However, only in the lgth century can the Portuguese presence be considered stable in parts of the north (south of the Kingdom of Congo) or on the coast south of Benguela). In 1906, the settled are% refers mostly to t4e zone of influence of the Benguela railway, built by the English with the purpose of transporting the minerals from Katanga and the Copperbelt and owned mostly by Tanganyika Concessions. The scant penetration and its pattern demonstrated the considerable dependence of the colony on external factors. Moreover, it suggested that after all these centuries, Portugal's colonial policy had been unable to secure an administrative occupation comparable with that achieved by the other partners in the Berlin Conference. This explains the statement that the effective Portuguese presence was limited to 65 years in about 80 of Angola's territory. 12/ 11/ Joao Maria Cerqueira d'Azevedo, Subsidios para o 'studo Economico de Angola nos Ultimos Cem Anos (Luanda, 1950). 12/ Gerald J. Bender, Angola Under the Portuguese- The Myth and The Reality, (Berkeley: University of California Press, 1978), Chapters 3 and 4. A map of the settled area in 1906 is reproduced in Randles,  7- ANNEX I Page 7 of 24 15. At the end of the First World War, when various military occupa- tion campaigns were in progress in the southern, central, and northeastern parts of the country, the internat.onal price of rubber fell. This trend continued and, in the 1930's, it forced the disappearance of rubber from the list of Angolan exports. where coffee already comes first in 1926. During this period of falling export prices, and national humiliation from the British ultimatum, some measures of colonial policy became relevant, such as the customs restrictions of 1892, which attempted to transform Angola into a closed market for Portuguese wines and textiles. Angola would thus be prohibited from manufacturing spirits which had become one of the main imports. In 1906, moreover, the native poll tax was introduced to alleviate the continuing crisis of the Angolan public finances and facilitate the recruitment of forced labor. 16. Simultaneously, important railway lines began to be built, linking the coast to the interior of the country. In 1909, the Luanda-Malange Railway was inaugurated, crossing a large segment of the territory where the commercial exchanges and the plantations had acquired considerable economic importance. The construction of the Benguela Railway (C.F.B.) was initiated six years earlier, though only in the 1930's does it attain the objective of reaching the eastern frontier to serve as the outlet for mining production from the Belgian and British possessions. A third railway was to connect the port of Mocamedes to Lubango, where the Portuguese had established a colony since the end of the 19th century. International inveitment in Angola was reflected not only in its use as a corridor by the Benguela Railway, but also by investments in the mining sector, especially in the diamond area of Lunda, where an association of English, South African, Belgian and Portuguese interests gave rise to Diamang in 1921. In 1929, the production of diamonds had reached 250 thousand carats and employed over 6,000 Africans as well as 155 Europeans. First attempts to win petroleum were made in 1917. Monetary Reform 17. The negative effects of the Great Depression on the prices of raw materials, three successive locust plagues in the 1930's and budget mismanagement contributed to the colony's economic difficulties. A monetary reform designed to stabilize the Angolan currency was introduced in 1926. This was the origin of the wangolar' (which enjoyed fixed parity with the Portuguese escudo) as well as of the OJunta da Moeda de Ang3la' (Angola Monetary Authority), a Government Department controlling the matters dealing with currency circulation as well as the management of the Monetary Reserve Fund. The Authority supplied the colony with the amount of Oangolares0 to cover transfers from Portugal as well as Portuguese Escudos in Lisbon to cover transfers from Angola. The Bank of Angola began to issue angolares in 1928. 18. Despite this reform and the fact that the country's finances were kept under control until the end of the fifties, monetary difficulties op. cit.  8 AMNEX I Page 8 of 24 plagued the colonial economy since monetary creation was directly linked to falling export revenues. The transfers of the settlers to the mother country and the slump in the export business opened a trade balance deficit in 1929, leading to the promulgation of the 'Acto Colonial' in 1931, where the social, economic and financial policies of Lisbon for the colonies took constitutional form. In the face of the persisting crisis, the Portuguese government imposed credit ceilings, set up an Exchange Fund and restricted the transfer of funds, requiring the surrender of 75? of export receipts and a strict control of imports. These measures went against the objective of transforming Angola into a Portuguese settlement colony. Regarding authorization for transfer of profits, the restrictions were less severe, suggesting that the objective of attracting foreign capital was seen as instrumental in settling the territory. Government control, relaxed after the coffee boom in 1946 and again in 1963 when monetary integration of the so-called "Escudo Zonem was introduced, was to return forty years later with the restriction on payments in 1971. In the meantime, the economic stabilization and recovery of the colony was initiated with the reduction of imports, thus allowing a trade balance surplus during the Second World War. The Coffee Boom 19. During the war, Portugal increased its share of Angolan imports from 39? to 65. At the same time, the occupation of land by the settlers increased rapidly, :uostly in the north. Official statistics refer the share of the land controlled by the settlers as having increased from 12 to 4OZ in two years, probably an exaggeration. One of the means used to spread control over land was to demarcate the estates to encompass African coffee production as 'natural growth". Production in 1946 can be considered the result of land occupations at the beginning of the decade, since the coffee trees needed five years before the first harvest. In 1945, diamonds were the principal export in value terms, but in 1946 despite a 40? increase in diamond exports, coffee exports became the main export, reaching over 46,000 tons. Coffee was to dominate the list of products exported by Angola from 1946 to 1972. The rise of coffee prices in the world market after the start of the Korean war in 1950, stimulated coffee cultivation further, and turned out to be a powerful attraction for the immigration of settlers from Portugal. The white population increased from 44,000 in 1943 to 173,000 in 1960, which together with the 53,000 of mixed race represented 5? of the total population of 4.8 million. In any event, demand for skilled labor in Angola was so strong that, from the mid - fifties, it was no longer necessary to have a 'letter of appointment", generally issued by the employer in the colony and guaranteeing that the settler/immigrant could find work there. 20. Besides coffee, whose share of total exports remained between one-third and one-half during the fifties, Angolan diamond and sisal exports normally made up the other half (Table 1). Lesser export products were sugar, cotton, manioc flour, fish-meal, dried fish and corn.After 1957, iron-ore began to be exported and in 1960, it already ranked as the fifth export. The forties were a decade of accelerated growth, due to the favorable trends in raw material prices, especially coffee and cotton. The  -9- ANNEX I Page 9 of 24 subsequent stagnation starting in the mid-fifties coincides with the fall of raw material prices despite the increased quantities exported. During the same period, close to one half of imports was accounted for by wines and spirits, textiles, freight vehicles, bulk and work iron, industrial machinery and equipment, and railway material (Table 2). 21. Angola's principal customer in the fifties was the United States, with about one fourth of exports. The share of Portugal declined from about the same to less than one fifth, whereas the share of the United Kingdom and Holland rose from one quarter to one third during the same decade. Angola's main supplier was Portugal, with close to one half of the total, with the United Kingdom and Germany providing about one quarter of imports and the United States accounting for about 10X. The predominance of Portugal in Angola's imports, while exacerbated by the legislation reserving the Angolan market for certain Portuguese products, such as textiles and wines, was not as pronounced as in other European colonies, perhaps a reflection of the mother country's relative underdevelopment. 22. The rise in the value of coffee exports after 1946 helped the Angolan trade balance, which showed surpluses between 1950 and 1956, the largest one being recorded in 1953. From 1957 to 1960, the trade balance was in deficit, due to both the temporary fall in the price of some exports (coffee, sisal and raize), and a sustained growth in imports, mainly of textiles, wines and equipment. Nevertheless, the rate of growth of imports declined sharply over the period. This sharp drop in the pace of imports did not prevent a serious exchange crisis. Although some restrictions on the spending of foreign exchange earnings had been imposed already in 1955, more drastic restrictive measures were imposed by the Lisbon authorities in 1959. Residents were required to surrender to the territory's Exchange Fund approximately 9oZ of foreign exchange earnings, besides adhering to a list of priorities for imports. This situation remained in force until 1963, when a new system of payments came into force in the 'Escudo Zone'. Colonial Policy of the 'New State' 23. Integrating the colonies in a Portuguese economic union was one of the objectives of Salazar's "New State". Indeed, the Colonial Act mentioned the principle of 'natural solidarity' between the metropolis and the colonies in article 34. This natural solidarity was said to be the foundation of the various economies, and stemmed from the 'moral and political links' between the metropolis and the colonies. In the fifties, Portugal exchanged manufactures for tropicel materials with its overseas territories. However, the level of development of Portugal and its colonies, implied a pattern of trade for metropolitan Portugal which made it unlikely that the 'Escudo Zone' would be able to exercise monopoly power in international trade, in line with the objective of collective self reliance desired by Salazar. 24. The Political Constitution of the Portuguese Republic was enacted in 1933, but it was not until 1951 that the philosophy of economic integra- tion with the colonies was fully accepted. Article 34 of the Colonial Act was thus replaced by article 158 of the Constitution, and a paragraph was  - 10 - ANNEX I Page 10 of 24 added which clearly stated the objective of national integration: 'The economic reorganization of the overseas territories must integrate itself with the general economic organization of the Portuguese nation and participate through it in the world economy. To reach the aims stated in this article, the free circulation of products within the national territory should be facilitated by appropriate means, including the gradual reduction or elimination of tariff duties. The same principle will apply insofar as possible to the circulation of people and capital assets'. In the same statute, the colonies were renamed 'overseas provinces' - a traditional label which had been abandoned after the Republican revolution of 1910. 25. At the time, though, Portuguese attempts to establish an economic union with the colonies began to clash with the general European trend toward decolonization. Thus, in 1953, when countries like France and England were starting to prepare for the decolonization of their colonies, Salazar's government promulgated the Lei Organica do Ultramar (Overseas Territories Act), stating the objectives of Portuguese presence as 'exploiting the resources and the peoples' together with 'raising the living standards of the natives within the framework of social justice". 26. Steps were thus taken to facilitate trade between the various Portuguese customs territories, so as to move towards a customs union. A decree in March 1957 established free trade among the different overseas provinces as far as their domestic production was concerned. It was also decided that metropolitan imports from overseas would only pay 30 percent of the minimum tariff and some products -- such as tea, cattle, lumber, fruit and fish -- were free of duties. Moreover, imports from metropolitan Portugal were generally granted a 50 percent rate reduction in the tariff of the overseas provinces. Contract Labor and International Factor Mobility 27. It was therefore in the fifties that the authorities in Lisbon created a framework that would justify their presence in African ter- ritories, despite the shifting international values and the increasing reluctance of international agencies to condone European colonialism. The number of home-based companies that began to invest in the colony increased, and many settlers whose prosperity derived directly or indirectly from the coffee boom started a considerable number of small and medium-sized companies. In all cases the availability of local labor was the basic condition, whether by the practice of low wages or by the resort to so-called contract labor ('contratados'). 28. Manufacturing industry, very incipient and geared to the local urban population, was based on the refining of sugar, treatment of tobacco, spinning and weaving, soap-making and fish derivatives (mainly fish-meal). The cement, beer and textile industries (those carrying largest weight in the manufacturing sector), the large agricultural companies and the import-export trade were tied to Portuguese capital, apart from the monopoly of all Angolan maritime freight, which was held by Portuguese companies. Foreign capital was dominant in the Benguela Railway, in the  - 11 - ANNEX I Page 11 of 24 mining sector (mainly diamonds, copper, manganese and iron) and also in some agricultural companies such as Cotonang and SETA which had Belgian/Portuguese and American/Portuguese capital respeXtively. Industrial licensing continued to bar entry to the colonial economy for industries that might have generated competition with Portuguese exports into Angola. Hence the Angolan economy continued to be sustained by mining and agricultural activities. 29. The expansion of the plantations and the mines and the launching of work on infrastructure created a strong demand for labor, in part satisfied by the methods of recruitment already described. More specifically, recruiting officers provided forced labor in the diamond mines and plantations, while police raids provided the labor for public works, especially the opening of new roads. The vast majority of the contract labor was recruited among the farmers and herdsmen of the central provinces. Prior to the fifties, the number of forced workers is difficult to determine. Recruiters travelled all over the bush and managed to obtain the number of workers that had been promised to the companies. The methods ranged from capture for non-payment of taxes and for misdemeanors to the corruption of some tribal chiefs. An alternative form of recruitment was through the imprisonment, in the cities, of natives ('indigenas') who were not carrying a valid work permit. The use of forced labor was to eiminish towards the end of the fifties, in the face of resistance from the popula- tion and the beginning of nationalist struggle and international pressures. In 1961, labor policy would be changed with the abolition of the Native Work Code (dating from 1928) and its substitution by the Rural Work Code, which defined working conditions in farms and mines. This was the first result at the armed struggle that started in 1961. 30. In the fifties, the majority of the indigenous population was employed in agriculture, and the commercial network, which extended from the principal markets of Angola to the hinterland, was rooted in the purchase of agricultural products and the sale of imported products. The white population which lived from agriculture possessed large estates or resided in the settlements. As the name indicates, these were zones in which the settlers' families were fixed, developing the agro-livestock potential of certain areas of the territory, which had b.en selected by the central government authorities. The regime of settlements was intended not only to provide an incentive for the immigration of Portuguese farmers, but also to rationalize and improve farming production, bearing in mind the requirements of the export markets and domestic consumption (Table 3). The creation of new agricultural bodies - farm cooperatives - also began to be encouraged. Together with this associative movement, there was a growing intervention of the Provincial Agricultural Technical services, chiefly in the "campaigns for the stabilization of indigenous/itinerant agriculture, with the aim of organizing indigenous rural life, creating a class of small, settled farmers, which both facilitated technical and social assistance and protected the soil against erosion". 31. The prevailing social structure could be roughly described in terms of the following categories: (a) a dominant class whose representa- tives remained in the colony for the term of their 'service c'mmissions',  -12- - Page 12 of 24 useful even as a means of promotion in metropolitan public life (in a sense this was an 'absentee" class, because most of its members did not reside in Angola); (b) an upper middle class consisting of resident Europeans (and their descendants) who became owners of medium-sized companies or attained top positions in business or public administration, thus controlling the economic life of the colony; (c) a lower middle class with mixed racial characteristics, though whites predominated (at the end of the fifties, it included about half of the 172,000 white inhabitants, almost all the 50,000 "assimilated* blacks and nearly all of the 53,000 mixed-race people); small proprietors, salaried employees and petty officials were included in this social layer, from which the forces behind the fight for independence were to emerge; (d) an urban proletariat, divided into two types according to race: a large number of white workers having a standard of living comparable to part of the lower middle class, and employed rural workers, entirely black, and with lower wage levels than the urban proletariat; and te)in the four or five cities, and chiefly in Luanda, a kind of 'lumpen-proletariat' became noticeable and included the majority of the black population who lived in the 'mucequesa surrounding the capital, as well as white street vendors and under-unemployed workers. 32. Although official statistics on earnings by race are unavailable, it is estimated that in the mid-fifties, Europeans earned a daily wage between US$100 and US$120, Cape Verdeans between US$60 and US$80 and black urban workers between US$10 and US$20. The wage differential, reflecting the lack of skills of the Angolan black worker as well as race, was even greater with agricultural workers, for whom daily wages ranged from US$6 to US$10. These wage differentials and the poor working conditions in rural areas led to internal migrations to the cities (mainly Luanda). In the civil service, the wage categories were practically the same as in Portugal, though fringe benefits were sometimes higher. Social stratification roughly matched racial differences. Thus, as a rule, management posts (even at the middle level) were held by metropolitan Portuguese; subordinate positions were occupied by Angolan whites, those of mixed-race and unqualified metropolitan Portuguese whites, while office boys and unskilled workers were black. Even jobs of the latter kind were also, to some extent, filled by whites towards the end of the 19609. Economic Causes of Nationalist Rebellion 33. In 1960, in the north of the country, the continuing coffee boom led many settlers to apply constant pressure to enlarge their plantations, disregarding the rights of the black owners. Simultaneously, deprivation and discontent in the countryside was attributed to the high prices charged by the traders in the hinterland and the low quality of the products they sold. While the resentment towards the bush traders was cormon in the whole territory, native property rights were more respected in the rest of the country than in the coffee growing region. The occupation of land by settlers was practiced on a smaller scale in the center, and was almost non-existent in the extreme south of the country, where the herdsmen kept possession of their cattle.  - 13 - ANNEX I Page 13 of 24 34. Perhaps because of the coffee bioom, but certainly as a reaction to the drastic increase in the Portuguese population (up 570t from 1950 to 1960 is the coffee district of Uige), political/cultural movements espousing African nationalism grew during the early fifties. In 1952, 500 Angolan nationalists sent a petition to the United Nations requesting the end of Portuguese rule. In 1953 the Party for the United Fight of Angolan Africans, was founded and became the MPLA in 1956. The presidential elections of 1958 in metropolitan Portugal revealed also that a number of settlers were against Salazar, since the opposition candidate Delgado is thought to have won in Luanda. The campaign led to the arrest of 57 nationalists (the majority considered of mixed race) in December 1959. This political arrest set a course that would culminate in the beginning of an armed struggle for independence in February-March 1961, followed by a generalized insurrection in the northern countryside. 35. The lack of organization and technical means on the part of the northern rebels, their cruel treatment of the settlers and the prevailing tribalism obstructed the progress of the insurrection itself. The rebels controlled various agricultural and plantation communities in the then district of the Congo, causing damage to equipment and buildings, but leaving the coffee trees practically unscathed. The reaction to the rebels came with a vengeance: between 8,000 and 30,000 African Angolans were killed, the former being the Portuguese official figure and the latter being the one the United Nations committee accepted. According to the same source, by December 1961, another 150,000 inhabitants from the northern rural areas fled to the Republic of the Congo-Leopoldville. 36. The events of 1961 led to reformist measures, supported by a new reinforcement of the military presence in Angola. In particular, these reforms allowed the access of a greater number of Angolans to secondary education and intermediate posts in public administration as well as the changing of work relations, with the substitution of the Native Work Code by the Rural Work Code. The resorting to contract labor became more and more sporadic. This contributed towards the creation of a more modern labor market, despite the limitation derived from the racial composition of the unskilled labor force. Because a large share of immigrant labor from Portugal reached the colony with very limited skills, the increase in the labor inflow did not improve the skill mix as much as it changed the racial mix. D. Soldiers and Industrialization 37. The direct effects of the 1961 nationalist rebellions on produ- ctive capacity were rather small. Only the cultivation of cotton was seriously affected by the armed struggle, especially since its production area - the Cassange basin - was the scene of serious incidents in the aftermath of peasant protests. This led to a massive flignt of workers, who were not replaced. In the coffee area, on the contrary, thousands of new workers were hired in the central plateau and sent north. The difference was probably due to the realization that the Angolan economy depended much more on the export of coffee than on cotton. As discussed in the following section, as a result of the events of 1961, the Lisbon  - 14 - ANNM I Page 14 of 24 authorities also abolished some laws and regulations, thus increasing the number of economic activities the colony could develop; they also improved wage conditions and created rural markets", where the surpluses of the peasants could be sold in an organized fashion. These new policies. together with the rising Portuguese immigration and military contingent stationed in the territory, amounting to over 6000 people, created employment and increased overall purchasing power, laying the basis for the expansion of industrial activities as well as coffee production. 38. In the sixties, Angolan exports continued to be dominated by the coffeeldiamond tandem. Sisal remained the third most important export product until 1968, when it was replaced by iron ore. Oil already ranked fourth in 1969 and second by 1971. In 1973, oil became the lead export, followed by coffee, diamonds and iron ore. Other products carrying weight in the export trade were sisal, cotton, sugar, manioc flour, fish products, timber, palm-oil and, after 1969, bananas. Angola's main customer in 1961 was still the US, but from the following year until 1972, it was replaced by Portugal, which bought about one third of Angola's exports, both agricultural products and minerals. Portugal was not always the final destination though, since diamonds were re-exported to the United Kingdom. In 1973, the US would again top the list of countries purchasing from Angola (with 282), mostly due to oil and coffee exports. Portugal accounted for about one quarter of exports, followed by Canada, Japan, and major European countries. 39. From 1962 onward, the Angolan econow- started to recover from the 1957-60 exchange crisis as well as from the temporary fall in the prices of its exports. A comparison of international price indices for coffee and the price of Angolan coffee shows that the years 1963/64 and 1972 were the only ones in which the international price index rose more than the Angolan index. Despite fluctuations in the relative price of Angolan coffee, export earnings grew rapidly and the balance once again recorded a surplus. This was to continue until the end of the colonial period (with the exception of the years 1967 and 1968, as a result of a strong rise in imports of equipment and motor vehicles). The strength of the external balance is evident in the data presented in Tables 6 and 7 below. 40. Unlike the early coffee cycle, during which the structure of merchandise trade seemed to change more on the export than on the import side, a change was noticeable in the composition of imported goods after 1965. Growing imports of transport equipment, industrial and farming machinery and equipment, raw and worked iron indicated the effort to equip the light manufacturing and extractive industries as well as the creation of infrastructure, such as roads and other forms of communication. The rising military contingent may also have helped step up the importation of Portuguese food and drink products, as well as textiles. 41. Regarding the supplier countries, Portugal remained at the top of the list even though its share of Angola's imports gradually diminished from 442 in 1961 to 262 in 1973. In 1971, Portugal's share was still larger than the combined share of the next three suppliers, Germany, the US and the UK, with about 102 each. Despite the possible demand bias for  - 15 - AXN= I Page 1S of 24 Portuguese consumer goods, a pattern similar to the one which followed the protectionist regime of 1892 can be observed in the structure of trade during the sixties. Despite the increase in volume, Portugal's share was decreasing significantly. A New Colonial Economic Policy 42. As mentioned above, after the events of February 1961, the Lisbon authorities felt the need to reinforce the Portuguese presence in the territory. To this end, the Portuguese government adopted a series of measures which stimulated export-led economic development and industrialization in Angola. This was also the policy that the Portuguese government was pursuing for the development of the mother country, in the framework of the European Free Trade Association (EFTA), of which Portugal was a founding member since 1960. At that time, Portugal's accession to the General Agreement on Tariffs and Trade (GATT) required the creation of an additional free trade area with the overseas territories, in such a way as to avoid the application of the most favored nation clause to the trade between GATT partners and the Portuguese colonies. 43. A significant step was taken by a Decree in November 1961 which abolished all barriers to the free circulation of domestic products within the various territories of the nation. As general economic conditions warranted, capital account liberalization was also to be attained. The abolition of customs duties was to be implemented progressively, in accordance with the level of imports. Existing quantitative restrictions, or the introduction of new ones were to be justified on grounds of facilitating the adaptation of economic activities to the new conditions of competition or in situations where a particular sector was experiencing difficulties which threatened the economic situation of a region and no other measures could be taken. This Decree also took measures to promote the elimination of disparities between legal and administrative systems, which hindered inter-regional trade, as well as the improvement of transportation. Finally, the Decree contemplated the liberalization of exchange controls between territories. 44. Even from a strictly commercial viewpoint, Portuguese economic integration had much weaker effects than the integration of the metropolitan area with Europe, including both the European Free Trade Association to which Portugal belonged and the European Community, with which it signed a free trade agreement in 1972. In the fifties, the share of the overseas territories in metropolitan Portugal's imports declined while the corresponding share increased for exports. In the sixties, however, both shares declined significantly. In 1972, the share of Europe in metropolitan Portugal's trade reached 562 for imports and 62Z for exports, up from 40S in 1954, while the corresponding figures for shares of all the 'overseas provinces, were 10X (down from 17? in 1954) and 15? (down from 25Z in 1954). The introduction in 1961 of a free trade area with the overseas territories was therefore not as important economically as it was politically.  - 16 - ANNEX I Page 16 of 24 45. Accordingly, an exchange rate union was set up in 1963, which was maintained until 1971. The new system of payments, known as the Escudo Zone, started from the principle that there would be no shortage of foreign exchange in any of the component parts of the system.If this should occur, the Monetary Fund of the Escudo Zone would intervene, granting credit to the Exchange Fund of the colonial territory in deficit. For example, an Angolan importer who purchased merchandise from Portugal would have to pay his debt in 'Angolan' escudos to the Exchange Fund which was managed by the Bank of Angola, which would then automatically effect the transfer, in Portuguese escudos, to the creditor in Portugal. 46. The improvement in the foreign exchange situation thus allowed the liberalization of payments outside Angola. The system of designating priorities for transfers, in force since 1955, was abolished. The surplus in the overseas territories' external payments contributed to the overall surplus of the "Escudo Zone' in the period. Despite the emergence of a growing trade deficit after 1964, invisible receipts allowed a surplus on the current account throughout the period. Similarly, despite a deficit on capital account between 1963 and 1968, the overseas territories contributed to the accumulation of reserves at the Bank of Portugal, a situation not unlike the Franc Zone during the same period. 47. An 'Investment Code' was also enacted in April 1965 to strongly encourage the flow of foreign capital to Angola. This Code - which also coincided with a greater opening of the Portuguese economy to foreign investment from other countries in the Organization of Economic Cooperation and Development (OECD) - was seen as a signal for the start of the "race for the progress of Angola'. The Lisbon authorities wanted to be able to count on the military, political and economic support of the major OECD countries. Therefore, they could no longer keep exclusive control of such widespread natural resources; it was necessary to share them. Later in 1965 scheme of 'new industrial licensing, was revoked, cancelling the previous legislation that prohibited the setting up of new industries in the colonies, especially textiles. Coffee-Led Industrialization 48. These new policies contributed to the year 1965 being a turning point in the growth of the Angolan economy. From a level of about 17Z of gross domestic product in the early sixties, the industrial sector (including extractive and construction industries as well as manufac- turing proper) reached 38Z of GDP in 1970. Metropolitan and foreign capital were concentrated in both the more capital-intensive -xtractive industries such as diamonds, oil, iron ore, petroleum derivatives, cement and the more labor-intensive activities of the agricultural sector, such as coffee, cotton, sisal, sugar, tobacco. In addition to these activities, which in one way or another used natural resources, several manufacturing activities were created in the sixties, particularly during the second half of the decade, including chemical products, paper, glass, electric cables, paints and metal containers.  - 17 - ANNEX I Page 17 of 24 49. Industry was very dependent on Portugal from where a high percentage of raw materials and semi-finished products came. The Portuguese authorities encouraged the process by exempting those materials and products from import duties. There were also tax exemptions granted by the Overseas Minister for the new industries to be created in the colony. These exemptions and tax incentives allowed the development of some industrial zones, centered in the Luanda area and to a lesser extent in the area of Lobito and Benguela. Moreover, in 1971, pressure from local industry forced Lisbon to adopt protective customs measures against competitive imports. 50. The sectors of activity that dominated local industry were: food and beverages, textiles and tobacco, contributing (in the 1966-71 period) an average of about 542 to the global value of sector output (Table 5). The food and drink industries alone accounted for 44Z of total output. Overall manufacturing industry grew, between 1962 and 1967, at an average annual rate of 15?, and, from 1968 until independence, at a rate of 202. This growth reflects the effects of economic measures such as the Investment Code, new Rules of Industrial Licensing, dismantling of Customs tariffs, tax exemptions, and investment in transport infrastructure, adopted in the mid-sixties and incorporated in the Interim Development Plan (1965-67) and the Third Development Plan (1968-73). 51. Although Angola had one of largest industrial sectors south of the Sahara, the participation of the manufacturing sector in exports from Angola was weak. As shown in Table S, the average percentage of gross industrial production exported was about 20? during the 1966-71 period, the rest being absorbed by the domestic market. By 1973, the food and beverage industries represented about 6? of the total export value, the chemical industry about 0,42 and textiles about 6X. With respect to the textile industry, more than half of the value of these exports was accounted for by cotton wool for metropolitan Portugal, and the remainder by fabrics and other textile articles exported to Zaire and Sao Tome and Principe, according to the Bank of Angola (1973 Report). The local textile industry (which had strong competition from Macao) concentrated basically on seed-removal or ginning and pressing of cotton, spinning, weaving and finishing of cotton, the shredding of sisal and rope-making. Malange was the main center of the cotton textile industry, with the factories of Cotonang and the city's Agricultural Cooperative. 52. In addition to the increased industrial activity, large- scale agricultural and other projects were also implemented in the sixties and early seventies. The Rural Extension Missions were created in 1971, to co-ordinate projects for the development of zones with agricultural potential,in much the same way as the settlements created in the fifties. Besides the promotion of agro-livestock activity, these projects were also intended to improve the living conditions of the peasant population. In the Lunda district, the activities of Diamang became quite significant in the late sixties, when production reached 2 million carats. About 20,000 people were employed by the company, which also had a dominant role in providing the regiou with infrastructure.  - 18 - AM=E I Page 18 of 24 Colonial Finances 53. Angola had its own budget, containing all of the revenues and expenditures authorized by the Central Government. Expenditures had to be fully covered by the revenues obtained from the colony's resources. From the thirties onward, Angola's general budget always showed an overall surplus. However, after 1961, the effort required by the colonial war, which was not entirely supported by the extraordinary tax for the defense of Angola, caused the budget surplus to drop, and even required borrowing at times. The budget structure, which did not change much from 1930 through 1973, included an "ordinary budget" and an "extraordinary" budget. Ordinary expenditures included civil service and its management. Revenue sources included direct and indirect taxes, taxes on industries subject to special tax schemes as well as taxes on other activities. Until 1973, the direct taxes were the most important revenue source, but after that year the taxation of industries subject to a special scheme (e.g., oil products) took the lead because of the large increase in oil production. Taxes accounted for half of revenues and state property provided about one quarter. The extraordinary budget included development expenditures on social and economic infrastructure. Up to the end of the fifties, these expenditures were mostly borne by Angola itself in view of the large surplus available. From the sixties on, extraordinary expenditures were mostly financed by loans provided by Portugal as well as shares of Diamang profits, sales of bonds and proceeds from a tax on extraordinary rents (imposto de sobrevalorizacoes). Money and Bankina 54. The r&pid growth of the Angolan economy was facilitated by the liberalized payments system. Even though the Escudo Zone seemed beneficial to the metropolis (where most of Angolan savings were transferred through an increase of imports and over-invoicing as well as remittances from the settlers) it turned out to generate large foreign exchange payments on Angola's behalf, so that it accumulated liabilities to the Monetary Fund. Indeed, the liberalized system of payments was to be abolished again when the financial system was seriously strained by an extraordinary volume of delayed transfers. In November 1971, Lisbon once again introduced limita- tions with a view to "stopping the accumulation of the so-called 'delayed transfers' from the province to the metropolis, and trying to create the conditions required for the regularization of those 'delayed transfers' (see Table 6 on the balance of payments). 55. The general principles in the decree which re-imposed exchange restrictions were the following: a) the limitation of transfers from each of the overseas provinces abroad (including other national territories as well as foreign countries) to the extent of the cover obtained by the same province; and b) the channelling to the official market means of payment which fed the parallel foreign exchange markets, to prevent unofficial dealings in escudos or in foreign currency. Thus, the colonies were subject to prior registration of imports, exports and re-exports, as well as to Ospecial and prior' authorization of current invisible transactions, and the import and export of capital. At the time, there was concern in  - 19 - ANNEX I Page 19 of 24 Portuguese government circles about the effects of the limits imposed on imports (especially Angolan and Mozambiquan) on Portuguese exports, assuming that such limitations "of merchandise from the metropolis are reduced to the barest minimum for the realization of that objective". The list of priorities for the spending of foreign exchange favored the imnort of equipment and raw materials to the detriment of other current consUier goods. In other words, the exchange system which came into force in 1972 reinforced the Code of Investment of 1965, trying to turn it into a true instrument of development fo. Angola, based on the transformation of agricultural and mining products. 56. Accelerated growth dating from the early sixties was accompanied by a strong money supply increase (about 8431 from 1960 to 1973). During that period, the share of currency fell from 28S in 1960 to 62 in 1973. The high level of banking time deposits are shown in Table 7, as an indicator of the financial development experienced by Angola. Another indicator of financial development, the income velocity of money, doubled in the ten years from 1960 to 1969. By then, the growth of money supply at a rate higher than the GDP played a role in the appearance of a parallel exchange market where the Portuguese escudo brought 10 to 201 more than the official exchange rate. Moreover, a certain inflexibility of the system of payments between the two countries in force since 1963 raised difficulties in obtaining Portuguese escudos in time to meet the growing demand due to the acceleration of economic growth. 57. Another indication of its financial development is the consider- able banking network Angola acquired. The commercial banks (including the Bank of Angola founded in 1926) were connected to the metropolis (Banco Comercial de Angola, a branch of Banco Portuges do Atlantico; Banco de Credito Comercial e Industrial, a branch of Banco Borges & Irmao; the branch of Banco Pinto & Sotto Mayor of Lisbon) or to foreign banks (Banco Totta Standard de Angola an association of Banco Totta and Standard Bank of England; as well as Banco Inter-unido an association of Banco Espirito Santo and The First National City Bank). In addition to the commercial banks, special investment banks also operated in Angola, mostly engaged in credit operations covering real estate, industry, agriculture and cattle- breeding. These included Instituto de Credito de Angola. Banco de Pomento Nacional, and Caixa de Credito Agropecuario. The Ori2ins and Role of the Oil Enclave 58. Although oil only becomes the main export product of Angola during the last two years of the colonial period, drilling and searching had begun much earlier. In 1952, the Ministry of Overseas Colonies had been autho- rized to sign a mining concession with Companhia de Combustiveis do Lobito (Carbonang). Carbonang established the Missao de Pesquisas de Petroleo (Petrofina, which began working in a coastal region between the rivers Kwanza and Zaire. In 1955, oil was discovered in a region near Luanda called Benfica. Oil extraction began in 1958, in small quantities. Only after 1968 did oil become noticeable in the list of Angolan exports, with 0.1$ of the total value of exports. In the following years, though, oil exports increased, rapidly becoming one of the key exported products. In  - 20 - Am=A I Page 20 of 24 1973, oil overtook coffee as Angola's first export product and by 1974, oil export values were higher than the combined total of coffee, diamonds, iron, sisal, cotton, fish, fishmeal and corn. As of the end of 1973, there were four companies with a concession for search and exploration, the most important being the Cabinda Gulf Oil Company (CABGOC), a subsidiary of Gulf-Oil. A FraRile Pattern of Growth 59. Despite the limitations of the data, the output figures reported in Table 8 show a pattern of accelerated output growth in the mid to late sixties, which becomes increasingly inflationary in the last years of the colonial period. The effect of the government budget on the one hand and external constraints on the other, on this pattern of growth are illustrated in Table 8. Throughout the period, private savings exceed private investment, the difference fluctuating from 2S to 7Z. This is consistent with acceleration of growth in the mid to late sixties, when the new colonial policy began to have a positive effect on industrialization, and induced greater investment opportunities. Indeed, the decomposition of this difference between public dissaving and foreign investment confirms that growth accelerated in the late sixties, inducing an overall budget deficit of 5S of GDP in 1971, whereas in the late fifties and early sixties the deficit was less than 22. 60. To understand Angolan development in the late colonial period, it is important to examine relative price movements, as suggested by the ratio of output deflators in Portugal and the United States and in Angola, given that the nominal effective exchange rate measured with equal shares for the two countries remained fixed until 1971, and only registered a slight revaluation in 1971 and 1973. A real devaluation of about 6Z over the second half of the fifties is evident, exactly offset by a real revaluation over the second half of the sixties, and stability of the real exchange rate in between. In the early seventies, however, there was a change in the macroeconomic balance, with the savings/investment gap disappearing in 1973, and a real revaluation of 20? developing between 1971 and 1973, and of 25Z between 1973 and 1975. It is clear that the extraordinary improvement in the terms of trade may make Angola in the early seventies another example of the so-called Dutch disease, observed in many developing countries, whereby manufacturing is discouraged and loses competitiveness due to the export of mineral resoturces. 61. The real appreciation of the Angolan currency also appears to be a strong reason to doubt that the coffee-led industrialization could ever have turned colonial Angola into a newly-industrializing country, even without strong protective barriers. The income elasticity of imports was originally close to 2, but it was negative in 1972 - a consequence of the change in the payments regime - and fell below 1 in 1973. A comparison of receipts from trade taxes and imports does not suggest an increase in protection, but the elasticity remains about 1.5, suggesting that the level might be considerable in light of the free-trade objective. In any event, given the available evidence, the demise of coffee-led industrialization was due largely to oil and exchange rate appreciation rather than changes  - 21 - Page 21 of 24 in tariffs, given that the changes in paymcnts regime implied stricter exchange controls. 62. The oil boom thus obscured the fragility of the industrialization pattern brought about by the combination of primary product exports and a rising urban population, increasingly made up of soldiers, as well as a growing group of settlers and mixed groups, with no political allegiance to colonial rule. Put another way, the policies of 1965 and 1971 did not prevent a duality in Angolan economic development. The peasantry, and to a much lesser degree, the urban worker may have in fact suffered from perverse changes in the distribution of income during the process. Gross domestic product per capita in 1972 was about $200. While this places Angola among the highest levels in sub-Saharan Africa, it masks large discrepancies between the income of the white and lassimilado* population and the remaining 90S. Per capita income of the black population was less than 1OX of average white and "assimilado' incomes (though there were significant variations in the latter category). In addition to this perverse pattern of income distribution, education and health standards did not significantly differ from the ones observed in African countries with lower incomes per head. This suggests that, whatever the effect of colonial rule in bringing Angola to the middle-income level in the early seventies, it did not bring higher social welfare at the time of independence (See Table 9 for some Angolan social indicators). Moreover, even at similar income levels, there were qualitative differences between the social services available to the African population relative to the Portuguese soldiers or even the population of Portuguese descent. E. ECONOMY AND SOCIETY AT INDEPENDENCE 63. The revolution of April 1974 in Portugal led to a decisive political opening in all territories under Portuguese administration. Though at the time the war was not very intense in Angola, the Portuguese revolution did not put an immediate end to it. There were three cease-fire agreements, the last of which was signed about the middle of the year. Meanwhile, several incidents occurred in Luanda, giving rise to racial confrontations. The major economic consequences of these incidents were a strike explosion, especially a strike on the part of the stevedores and other port workers, and the total destruction of shops established in the African residential area ('muceque"). The port strike was important for two reasons. In view of the strategic importance of seaports in the Angolan economy, the interruption of port activities was reflected in almost all other economic activities. Secondly, the hardship involved in loading and unloading ships made the workers more aware of how low the pay had become, given the change in political environment. Another crucial link of the colonial economy with the rest of the world was cut when the banks also went on strike. There, the great majority of clerks was white or mixed; nevertheless, the strike found a virtually complete acceptance. 64. The destruction of the muceque shops also had a major economic and social impact. These shops were owned by Portuguese traders who controlled almost all the distribution of staples and other essential comodities. The muceque merchants were a symbol of colonial oppression, which was  - 22 - ANXEt I Page 22 of 24 reinforced every day since the shops made evident how weak the purchasing power of black families was. Customers also found falsified products, weighing and measuring frauds as well as threatening and racist behavior. Among whites, the muceque business was seen as the result either of the lack of skill or capital to set up another comnmercial activity. The muceque merchants and, to a lesser extent, the traders in the bush, were led to exploit all the opportunities for quick profit at the expense of the native population, so as to get enough capital to start a more comfortable - so called *rich'-business. The resentment against these merchants made them a logical target for anti-colonial feelings among the population. 65. The bush merchants were not only devoted to sell but also to buy products from peasants and re-sell them to wholesalers. These dealers went out of business later than the muceque dealers did, and rarely as a result of direct violence upon them. Most fled when overall village safety was at stake or the threat of agitation became intense. When these two groups of merchants vanished, a source of social tension and occasional racial conflict ended but a serious problem came to the fore: the supply and distribution channels vanished and no alternative arrangements were in place. The lack of internal trade activity, together with the existing military and political conditions created an atmospher a) If the colonial economy was first hit by the deterioration of foreign trade and commercial and financial activities, the entire colonial society quickly collapsed after civil rights were restored for the whole population. People -2sponded in a way that seemed to reflect the importance of their roots in the country: most of the adults made plans to leave while many of their grown children born in Angola, mixed as well as white, initially chose to stay. Those plans notwithstanding, a massive exodus of the Portuguese population began. 66. Beginning in the last quarter of 1974, over-invoiced goods began to be supplied against import contracts, as a way to smuggle out foreign currency, further reducing the quantity of goods imported, since prices had also increased sharply in the wake of the oil crisis. The production stoppages also explain why machinery imports fell by a much greater percentage than imports of consumer goods. A good example is the pattern of automobile imports, which were subject to quantitative restrictions. In 1974, the overall figures fell by 50? relative to 1970, and the share of commercial vehicles dropped from 38? in 1970 to 102 during the same period. Value figures reported in the 1974 Report of the Bank of Angola show a 15t increase in 1971, no change in 1972173 and a drop of 50? in 1974. For export trade, due to a terms of trade improvement of about 751 implied by the oil price rises, quantities were slightly reduced but values almost doubled. 67. In contrast to most of the colonial period, on the eve of independence, the financial situation of the country was excellent. However, the economy was quickly disintegrating, with the collapse of distribution networks and the subsequent fall in production in 1975. Against the background of declines of 30? in economic activity and even higher figures for exports, small industry geared to the domestic market was temporarily stimulated by wage increases in 1974. According to the  - 23 - AM Page 23 of 24 booklet of official statistics for 1974. food industries increased output by 25Z and textile industries increased by over 402. 68. After the mid-1974 cease-fire agreements with the Portuguese, an intense social and political upheaval, soon to have significant military consequ-!lces, was felt throughout the country, but mostly in Luanda. At year-end, the Alvor agreement, between the three parties recognized by the colonial authority, namely the Popular Movement for the Liberation of Angola (MPLA), the National Front for the Liberation of Angola (FNLA) and the National Union for the Total Independence of Angola (UNITA) established the date of independence as November 11th, 1975 and determined the conditions for the transition government. It was formed by an equal number of Ministers from each one of the three Movements as well as from the Por- tuguese Government. A triumvirate performed the functions of Prime Minister according to a monthly rotation. The Portuguese Army as well as armed people attached to the three Movements formed the Mixed Armed Force of Angola. 69. Only two months after the transition government was sworn in. though, new encounters took place between the MPLA and FULA, simultaneously with widespread armed robbery in the muceques, leading the urban population to feel more and more insecure. By the middle of 1975, when the transition government was almost paralysed, a reconciliation attempt took place in Nakuru, Kenya, resulting in a protocol signed by the three different parties. However, this protocol did not last longer than a few weeks and was followed by open war between the liberation movements, this time involving UNITA as well. In August 1975, the Angolan territory was divided into three zones, with Luanda held by the MPLA and the Portuguese Army. 70. A short while after the transition government began, the Minister of the Economy, who had been selected by the Portuguese, submitted an Economic Programu for accelerated growth based on the existing infrastruc- ture and on the production levels obtained before the Revolution. A reduction in foreign dependence and a better distribution of resources were other objectives included in the development policy recommended by the transition government. To follow this program, Angola had to keep growth rates equal to those of the past years and correct some of the previous distortions, especially in income distribution. This required respect for the Alvor Agreement, no resort to violence and the possibility of carrying out elections and forming a stable government. At the same time, it was necessary that most of the technical and professional labor force remain in Angola. As none of those conditions were met, the program did not begin to be implemented. 71. When shortly after the cease-fire of Nakuru, violence resumed, there was a sudden change in the attitude of the Portuguese. Very quickly, nearly all farms were abandoned not only by the farmers themselves but also by workers who had no pay and feared military attacks. The same applied to most of the small and middle-sized industries, while commercial activity in towns was mostly confined to drawing down inventories. With the interruption in supplies, and the massive flight of Portuguese owners and technicians, together with the paralysis of most banks, Angolan  - 24 - AMNE I Page 24 of 24 industry suffered a devastating blow from which it has not yet recovered. The same characteristics manifested themselves in construction activity, which was already in recession. The exodus of the Portuguese, both from public and private management and other technical activities, created an enormous vacuum, since an insignificant number of Angolans had the chance to get proper skills, and some of those who did also left the country. 72. As the colonial administration ceased to function without being replaced by any of the liberation movements, taxes were not collected and maintenance of infrastructure ceased. Large businesses (commercial, agricultural or mining) kept their local management but limited their activities as much as possible to a mere presence. For security reasons, even oil production was suspended for a few months. As far as transporta- tion was concerned, the Luanda airport and the seaports operated under top priority of evacuating the Portuguese people and their belongings. It is estimated that Angola lost by destruction or smuggling 752 of its stock of trucks, which was about 27,000 vehicles. Finally as a result of the country's division into three warring zones, any regular long distance communications, including postal services, were suspended. 73. 'When Luanda was taken by the MPLA, the FNLA and UNITA ministers took cover in their own zones of influence. The first foreign troops entered the country and on November 11, 1975, which had been designated as Independence Day, the colonial period ended and all the conditions for a protracted economic and social crisis were in place.  - 24a - ANNEX I Table 1.1 ANGOLA -------- PRINCIPAL EXPORTS (Z), 1950-1973 Year Coffee diamonds 0i1 Sisal Other 1950 34.0 9.0 0.0 9.0 48.0 1951 48.0 7.0 0.0 10.0 35.0 1952 41.0 11.0 0.0 10.0 38.0 1953 53.0 10.0 0.0 5.0 32.0 1954 44.0 12.0 0.0 6.0 38.0 1955 44.0 12.0 0.0 7.0 37.0 1956 47.0 10.0 0.0 6.0 37.0 1957 42.0 13.0 0.0 6.0 39.0 1958 41.0 15.0 0.0 6.0 38.0 1959 39.0 17.0 0.0 8.0 36.0 1960 35.0 14.0 0.0 11.0 40.0 1961 36.0 17.0 0.0 8.0 39.0 1962 44.0 13.0 0.0 10.0 33.0 1963 40.0 16.0 0.0 12.0 32.0 1964 49.0 13.0 0.0 8.0 30.0 1965 47.0 16.0 0.0 5.0 32.0 1966 48.0 18.0 0.0 5.0 29.0 1967 52.0 18.0 0.0 3.0 27.0 1968 45.0 17.0 1.0 3.0 34.0 1969 34.0 20.0 5.0 2.0 39.0 1970 32.0 19.0 11.0 2.0 36.0 1971 33.0 13.0 18.0 2.0 34.0 1972 28.0 11.0 25.0 2.0 34.0 1913 26.0 10.0 30.0 2.0 32.0 Sources Bank of Angola, Annual Reports  - 24b - ANNEX I Table I 2 ANCOLA MAJOR IMPORTS, 1952 - 73 ______________ _______.___ Goods 1952 1961 1968 1973 ____ b--- --- ---- ---- Fabrics 14 11 6 5 Wines and spirits 10 11 6 3 Vehicles and accessories 7 6 12 11 Iron works and bar 6 8 10 8 Railroad tracks and other materials 4 13 - - Industrial machinery and appliances 3 2 7 13 Gasoline and fuel oil 4 4 2 3 Other Imports 52 45 57 57 TOTAL 100 100 100 100 SOURCEs Estatisticas Industriais 4* Direccao dos Servicos de Estatisticas, Luanda 1974.  - 24c - AM___ I Table 1.3 ANGOLA PRODUCTION OF MAJOR AGRICULTURAL PRODUCTS (1952-1973) (thousand tons) ITEMS 1952 1961 1968 1973 Cotton seed 21 13 41 79 Coffee (Rob./Arabic&) 51 68 198 225 Manioc - - - 1100 Corn (b) 70 150 142 300 Sisal 2S 59 58 60 Sugar cane - 643 69 967 Palm-oil (a) 20 47 48 ----------------------------------------------------- (a) Estimates (b) Acquisitions by *GrImLo de MLlho do Ultramare SOURCEZ Relat6rioe Contas do Banco de Angola  - 24d - AMNE I ANGOLA Table 1.4 POPULATION AND GDP BY TYPZ OF ACTSVITY (2) POPULATION PRODUCTION (GDP) BRANC9ES 1960 1970 1966 1970 OF ---- ----- ---- --- ACTIMVTY (1) (2) (3) PRI MRY SECTOR: 83.0 76.0 32.0 32.0 23.0 (Agric., Forestry and Livestock) SECONDARY SECTOR: 14.0 11.0 38.0 14.0 21.0 (Mining. Manufacturing and Construction) TERTIARY SECTORs 3.0 13.0 30.0 54.0 56.0 (Transportation, Services and Public Administration) e--------------------------------------------------------- SOURCE: (1) Adapted from "La Guerre en Angolal, Mario de Andrade and Marc Olivier, Paris: Maspero, 1971; (2) GDP is from a sample of 80 of output reported in 'Servindo o futuro de Angola", Costa Oliveira, Luanda, 1972. (3) GDP includes non Monetary Flows (about 201) which are all ascribed to agriculture, according to estimates in IV Plano de Fomento.  - 24e - A=NNX I Sable IS ANGOLA MANUFACTURING OUTPUT BY MAJOR INDUSTRY GROUP, 1966-70 (PERCENTAGES) ITEMS 1966 1967 1968 1969 1970 __._____ ---- ---- ---- ----- ----- Food and drinks 46 46 45 42 43 Fabricslshoes 10 10 10 10 10 Chemical and oil products 19 15 15 16 14 Ron metal mineral 8 7 7 8 7 Metallurgical products 2 2 3 3 S Machinery 1 6 5 6 6 and equipment Others 14 14 15 15 15 Total 100 100 100 100 100 Rate of growth of Total - 26 22 19 17 SHARI OF ZXPORTSI 20 22 21 21 18