Botswana’s diamond for development: How did Botswana avoid the resource curse problem?  
   
 

Happy Siphambe (PhD)

Visiting Professor, University of Botswana

• Outline of Botswana’s economic history
• Resource curse literature
• Botswana’s exceptionality
• Lessons for other mineral rich countries
• Current challenges

 

Introduction

• Botswana became a British Protectorate in 1885.
• During this period, the British policy for Botswana was to do as little in the way of administration and settlement as possible
• As a result the country was administered from SA
• Consequently, until independence, the country had neither a capital town nor a Resident Governor to initiate and drive the process of economic development
• In addition, the 1910 Union Treaty had provisions to incorporate the High Commission Territories, namely, Botswana, Lesotho and Swaziland, into the Union with SA
• Because of these factors, the British colonial office neglected Botswana’s economic development, thus making it one of the poorest countries in the world at the time of independence in 1966

 
 

Botswana’s economic history

• At independence the country had an estimated GDP per capita of about USD80
• It had only 40 graduates and 100 citizens with senior secondary education from a population of about half a million
• The country had only 6km of tarred road and a railway line passing through the eastern part of the country managed by SA and Rhodesia(Zimbabwe)
• There was no industrial base except a small abattoir
• Most of the country was very rural and based on subsistence agriculture- mining did no exist
• The country is landlocked and was surrounded by hostile minority regimes

 

Botswana’s economic history Cont

Botswana in the region

• Given these circumstances, people described those leaders asking for independence as either very brave or very foolish
• But Botswana was to be fortunate upon attaining independence, especially with the discovery of diamond
• The country’s growth performance saw her moving from being one of the poorest at independence to one of upper middle income status
• In the thirty years following independence, Botswana was the fastest growing economy in the world, outperforming the Southeast Asian Tiger economies (Singapore, Hong Kong South Korea and Taiwan) with an average annual growth rate of 13%

 
 
 

Changes after independence

• In the last decade real GDP growth has averaged around 5 percent over the past 6 years due to uneven growth in the diamond mining sector
• The economy of Botswana however remains heavily dependent on the mining sector despite efforts to diversify it
• For instance, during the 2005/6 fiscal year, the mining sector accounted for 38.8 percent of GDP
• Because of the dependence on diamond, which are capital intensive(employ 5% of total) and lack of economic diversification, unemployment is still high(18%) and so is poverty (30% below the PDL)

 
 

Changes after independence Cont

• Despite the constraints of poverty and unemployment diamond have transformed Botswana’s economy quite significantly
• GDP per capita is now USD3,500
• Surplus in BOP- reserves worth 12 months of imports
• Life expectancy rose from 40 years in 1966 to 65 in 1998 before falling to 52 years currently due to HIV/AIDS
• Poverty fell from 59% in 1985 to 30% currently
• Infrastructure is widely spread with roads, schools and health facilities, and clean portable water easily available to all Batswana
• Communication also widely available
• The country is ranked AA by standard and poor, is ranked very high amongst the least corrupt
• Diamonds have been used for development

 
 
 

Changes after independence Cont

• Experience of most resource rich countries especially in Africa have seen them performing very badly- led to reduction economic growth and worsening economic conditions and welfare of the citizens- resource curse
• Why?
• Enclave economies- few or no backward and forward linkages-create an island of affluence in the midst of poverty
• Dutch disease- resource movement effect and exchange rate effect
• Wage-productivity effect-makes other sectors non competitive
• Rent seeking and limited entrepreneurial development

 

Resource curse literature

• Natural resource abundance worsens corruption and civil wars and other forms of political violence
• Abundance of natural resources are associated with low levels of democracy
• Abundance of natural resource leads to rent- the existence of such rents contributes to negative development outcomes by encouraging anti-development on part of the elite, weakening state capacity to regulate and supervise the economy, empowering social elements that are opposed to growth promoting policies, or encouraging foreign intervention

 
 
 
 

Resource curse literature Cont

• But Botswana has been an exception and the question is why?
• Good governance- democracy and a culture of consultation, consensus and social harmony
• Elections every 5 years, peace and stability, freedom of expression and the media
• Creation of good institutions that  imposed an environment of government accountability to the public
• Existence of opposition party, which even though weak was allowed to exist and critique with no limits
• Weak opposition allowed for continuity-no rush to maximize quickly while still in power
• Corruption minimized because of existence of effective checks and balances

 

Why Botswana was an exception

• Prudent financial management- managed the diamond revenue as if it was temporary- planning and applying strict fiscal rules that were meant to avoid spending on projects that were not viable
• To avoid the Dutch disease Botswana chose to create a Revenue Stabilization Fund in order to sterilize the mineral rents rather than allow them to affect government spending and the exchange rate
• Botswana also learnt from countries that had not managed their resources well in the past- free lessons from Zambia, Nigeria, etc.
• The country also had good international advice and they used it as much as possible

 

Why Botswana was an exception

• Macroeconomic stability- chose policies that were private sector friendly and adopted reforms when time was ripe. Eg liberalisation of forex, incomes policy
• All macroeconomic policies very conducive for private sector investment including FDI- but FDI not coming to Botswana because of microeconomic issues. Eg high utility costs, high levels of bureaucracy, high costs of finance, low labour productivity, etc

 

Why Botswana was an exception

• Export orientation- Botswana chose at independent to remain open and pursue export led growth- motivated by small population(less than a million then)
• Exports would increase the market- economies of scale, etc.
• The country was engaged in fewer protection measures except as a member of SACU free trade area- negative side was the loss of manufacturing and therefore the high unemployment rate
• Small population and homogenous culture- most are of Tswana origin
• Minorities exist but were assimilated through language- few tribal based clashes
• There were also very many intermarriages
• Developed cohension

 

Why Botswana was an exception

• Some scholars argue that Botswana only minimised the effects and did not avoid the disease altogether- eg mild Dutch disease
• But country still enclave in nature- dominated by mining- economic diversification not progressing at fast pace
• As a result unemployment and poverty are still high- typical of MBEs

 
 

Has Botswana avoided the resource curse?

• Lessons from management or lack of it in SSA countries indicate that abundant natural resources can and should be a blessing and not a curse
• What to do?
• Treat revenue from mineral commodity as temporary
• Spend wisely and adopt clear rules of spending including creating a stabilisation fund
• Adopt prudent monetary and fiscal policies- countries should not allow inefficient investments, nor should they permit real exchange rates to appreciate
• Countries need institutions that enforce accountability and transparency- effective institutions important

 

Lessons for the Rest the LDCs

• Countries need well defined property rights
• Some factors can be replicated like prudent economic management, democracy, rule of law, low corruption etc
• But what about institutions- can they be replicated given that they have a historical origin that is unique?
• Has Botswana just been lucky because the diamond revenue has always been there?
• If true what about countries like Liberia and DRC that have abundant diamond resources similar to those of Botswana, and yet they have not been able to avoid the resource curse?

 

Lessons for the Rest of the LDCs

• HIV/AIDS
• Diversifying the economy from diamond mining- diamond mining going to be expensive as we move from current practice
• Making the opposition strong and maintaining democracy- current threats to democracy
• Creating employment and reducing poverty
• Guaranteeing minority rights without rocking the boat of cohesion

 

Challenges

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