"Diamonds are not forever" Economic Diversification in Botswana
Botswana’s success was
catalyzed by the revelation of the world’s richest hoard of diamonds, and
Botswana played its hand well since their discovery, but important to recognize
just how extraordinary a hand the country was dealt. Following the discovery of
diamonds just after independence, the first major mine opened at Orapa in 1972,
with Jwaneng, the world’s richest diamond mine, opening in 1982 and thanks to
the unique historical structure of the industry, diamonds have avoided the
cyclical booms and busts that characterize most natural resource
commodities.
Until recently DeBeers
controlled over 90 percent of the world’s supply of diamonds and were strongly
vertically integrated from mining through to distribution, marketing and
retailing. This extreme market power allowed DeBeers to maintain rising prices
and income by controlling output. For Botswana, this has meant a stable income
flow and the avoidance of volatile swings in its terms of trade that can
depress growth.
Botswana’s position in the
diamond sector is also unique among resource-rich countries. Her diamond mines
being by far the largest and most profitable in the world. Allowing Botswana’s
Government to negotiate from a position of power, and enabling it to secure
over 80 percent of the revenue stream flowing from domestic diamond operations,
and in 2013, Botswana even used its leverage as the world’s second-largest
producer of diamonds to convince De Beers, to transfer its Global Sightholder
Sales department, through which the majority of its diamonds are sorted and
sold, from London to Botswana, a rare example of a multinational shifting its
main operations from a western capital to the developing world.
The development of a diamonds
cutting and polishing industry in Gaborone is helping Botswana to capture added
value beyond rough diamond exports. But despite these positive developments,
Botswana is long past the heady days of the diamond bonanza. Diamond production
declined from its peak of over 34 million carats by 2007 and has plateaued at
around 22 to 23 million carats.
Bashi Gaetsaloe Managing Director
of The Botswana Development Corporation explained, “The belief was that
diamonds really were forever. The paradigm of wealth was built on the premise
that to do something different without needing to was to do the impossible. But
we are definitely getting close to the point where we simply cannot continue to
be complacent, the issue of diversification is critical and I think the people
and the government of Botswana are starting to come to that conclusion.” Further
exploitation of Botswana’s largest mines will also need substantial new
investments. Reducing both profits and fiscal take. So while reports of diamond
production extending to 2050 may well come to fruition, the basic fact that
diamonds are a finite and declining resource remains as relevant as ever.
It has also been a story of
effective governance and economic management. So while this unique and highly
advantageous situation has been a massive boon to Botswana, it raises specific
challenges. Most obviously the heavy reliance of the government on diamond
revenues, and the more far reaching fact that the impact of diamonds on the
economy is almost purely fiscal, with the sector creating little employment and
with relatively few supply and infrastructure linkages into the wider economy.
All of which has serious implications for the inclusiveness of growth and
places an extraordinary obligation and responsibility on government as the
intermediary and custodian of Botswana’s diamond wealth.
Preparing
for a more challenging future
As the local saying goes,
“diamonds are not forever” and this maxim is well accepted in Botswana,
undeniably the need to promote economic diversification for the day when the
diamond resources are exhausted has been central to the economic development
discourse since diamond production first started.
So while diamonds may not be fully
depleted for another generation, the output is well past its peak. Thus,
preparing for a post-diamonds world is at the heart of Botswana’s development
challenge.
Botswana having been one of
the world’s fastest growing economies over the past 50 years, allowing the
country to move from being among the poorest to upper middle-income status,
pulling the majority of the population out of poverty, yet many Batswana are
still poor, inequality is amongst the highest in the world and human
development outcomes remain far below what they should be.
The county remains almost
reliant on the diamond and public sector driven economic model, rendering it
exposed both to short-term economic shocks and susceptible to medium term
structural changes. Worse yet the future will become more challenging as diamond
revenues decline in the medium term. Raising both fiscal and external
vulnerabilities. Thus, the foundations upon which the development success of
Botswana was built on over the past half century are being inexorably eroded or
facing systemic risks.
Economic diversification
will then need board based job creation, enhanced productivity, and
changing the overall structure of growth. Requiring a fundamental,
structural shift in Botswana’s growth model, from one historically and almost
totally reliant upon extractive enterprises and the public sector to one based
on a diversified, competitive and export-looking private sector, underpinned by
higher skilled, dynamic and entrepreneurial enterprises.
Dr Racious Moatshe Chief
Executive of Business Botswana stressed, “We have been working hard on updating
the Private Sector Development Program (PSDP) and this is meant to address some
key areas of our private sector development strategy, and aims to stimulate and
sustain growth through diversification of the economy while building the
capacities of institutions and human resources that will support the private
sector.”
Botswana’s historic growth
model having involved channeling diamond revenues into high investment in
infrastructure, health and education, to put this into perspective at
independence Botswana had just six kilometers of roads, three secondary
schools, few health facilities; and only 1.5 percent of the population had
completed primary education. Today, there are 7,000 km of paved roads, over 300
secondary schools and 95 percent of the population lives within 8 kilometers of
a health facility; primary education is free with the enrollment rate reaching
90 percent. The model has
served Botswana well, delivering sustained, high growth of
5/6 percent range over many decades, but has
been poor at generating jobs and contributing to high inequalities,
and creating a high dependency on the state both as
the main investor and employer in the economy.
However, over the past
decade, Botswana has brought about substantial diversification with the
services sector and household consumption becoming the largest contributors to
GDP. Yet the sustainability of this diversification and of growth is of concern
for several reasons, because maintaining the pace of consumption growth will
become fraught in an environment of weak job creation, slow wage growth and
growing household debt. Second, growth through public investment will only
become constricted by the fiscal tightening, low productivity and poor returns
on public investment and, failing to diversify Botswana’s exports will heighten
the external trade imbalances, which will restrain growth and may even trigger
a GDP contraction.
What Botswana needs is the
development of a more aggressive, outward orientated private sector,
principally in employment intensive services sectors, such as nature based
tourism and high value-added business services where Botswana can capitalize on
its regional or international comparative advantages. With such a small
domestic economy, successful development of this nascent private sector will
depend crucially on export markets. Which will require improving the
integration of Botswana’s firms into regional value-chains, which will require
an overhaul of trade policy and the trade barriers for enhanced regional trade
and investment.
Delivering a new growth model
for Botswana will thus need the private sector to take the lead in investing
and developing competitive outward-orientated firms. While entrepreneurs
are emerging, the Botswana private sector remains shallow. Encouraging
entrepreneurs to invest in export-orientated activities will need reform of the
existing inward-looking investment environment raising the relative returns to
focus on domestic non-tradable and government contracts. It will also
require addressing the high costs of operating in Botswana.
Whilst improving productivity
through investment in workforce development, and human capital, particularly
skills training and work ethic. The enhanced adoption of technology will be a
critical factor in developing more competitive firms. So too will improved connectivity by
improving the trade facilitation environment, by for example promoting value
chain integration, improving air-transport links, improving the quality and
cost of ICT infrastructure, and even the re-focusing of overall industrial
policy to sectors where Botswana’s comparative disadvantages are less binding.
Including modern commercial services and tourism. Establishing the incentives
to support an export orientated private sector, including trade, competition
and immigration policies.
Progress has been made on
diversification. The non-mining sector’s contribution to value added has grown
from two-thirds to three-quarters over the past decade. As Botswana has sought
to develop a more diversified, competitive and inclusive economy and it has
several strong assets on which it can draw. Such as its minerals diversity. As
besides diamonds, Botswana is also a significant producer of copper/nickel,
which has long been the number two export. And recent finds of natural gas,
uranium, and iron ore have the potential to contribute substantial export
earnings. The biggest opportunity of all, however, may lie in coal, where
Botswana is estimated to have over 200 billion tons of coal reserves (Around
two-thirds of Africa’s total) although it has not yet proven commercially
viable.
Botswana is above all
renowned for its biodiversity resources, including the UNESCO-listed Okavango
Delta and Chobe and Kalahari, which lie at the centre of a highly successful
nature-based tourism industry. Botswana is ranked among the top countries in
Africa in ratings for good governance, which creates an effective enabling
environment for business growth and foreign direct investment. As Dr
Racious Moatshe explained, “Our tourism sector has a lot of potential, but we
need to do more to market ourselves and this marketing needs to be targeted
towards foreign investors who will put money into the country to help us grow
and develop.”
The challenge of
diversification remains
It is important however to
recognize that economic diversification in Botswana will be far from easy and
to accept the countries reality. That of a small landlocked country with a
highly dispersed population, and with an economy that remains in relative
infancy. And while the prudent management of Botswana’s diamond resources has
opened huge opportunities that Botswana has exploited well, these historical
and structural challenges may paradoxically restrict Botswana’s potential
today.
In particular, Botswana’s
small and dispersed population raises specific barriers to achieving
agglomeration and scale and increases service delivery costs. Highly
specialized and specific skills will stay in short supply with
entrepreneurialism still nascent. So in this context, Botswana cannot do
everything its self and instead must focus on where it has comparative
advantages and can exploit niche opportunities. It must be open to both the
region and the world where it is more strategically placed to exploit resources
that lie beyond its borders.
There is no doubt however
that Botswana has in the face of these challenges diversified in recent years.
On the most basic measure of diversification – share of economic output –
Botswana’s minerals contribution has declined from a high of 60 percent of
value added in the early 1980’s to below 16 percent in now. Similarly, the
contribution of minerals to fiscal revenues declined from around 60 percent to
around 30 percent today.
However, Botswana remains
almost wholly reliant on diamonds for its exports. The precariousness of this
position was laid bare during the 2008-09 global financial crisis when a major
decline in the global market for diamonds contributed to an e percent
contraction in Botswana’s GDP forcing the government to take on substantial
debt.
So what is replacing diamonds
in Botswana’s growth model? This has been services and consumption. Since 2003
services played a more significant role in the pre-crisis years, and then sped
up through the crisis, with mining’s contribution to GDP falling from one-third
to one-quarter following the crisis. This was not due to declining diamonds
output. Two-thirds of the growth in services contribution to GDP was explained
by real growth in services, while just one-third is explained by declining
minerals output. In the post-crisis era, growth has been strong in all
parts of the services sector In particular in segments such as the retail and
vehicle trade.
Where will future growth come from?
Sectorial diversification has
been at the top of the national agenda for over 30 years, with a long list of
government programs and the more recent “hubs” and “Special Economic Zones
along with multiple government agencies established to promote diversification
and the development of the domestic private sector.
The most recent policy
initiative the - The Economic Diversification Drive (EDD) aims to develop
a diversified private sector via a two-stage process involving, local
preferences in government procurement, followed by, facilitating
competitiveness for local firms to take part in regional and global export
markets. Despite these concerted efforts, however, progress towards
diversification – establishing a competitive non-resource sector has been
slow.
Whilst many aspects of
Botswana’s economy suggest symptoms of “Dutch Disease” are present and may play
a critical role in dampening the development of diversified sectors. Including
high structural unemployment, a high share of employment in the public sector,
and a domestic business community focused on local non-tradable and government
contracts.
Botswana’s manufacturing
sector meanwhile also remains small, fluctuating at between five and six
percent of GDP over the past twenty years, low in comparison with other
middle-income countries, and accounting for around 11 percent of all formal
jobs in the country, and is important for male workers in urban
areas. But
the performance of the manufacturing sector has been mixed in recent years.
With labour-intensive sub-sectors like apparel having shrunk dramatically and
there is an on-going debate in the country on Botswana’s ability to compete in
labour intensive manufacturing. As despite its status as one of the
richest countries in Africa, Botswana is not a high wage economy. With minimum
wages in manufacturing just one-sixth the level in neighbouring South Africa
and on a par with levels in Lesotho and Swaziland.
So why in this scenario is
Botswana not attracting labour-intensive production from South Africa?
Productivity is part of the story, as are issues of scale economies and
location. And in the absence of an existing manufacturing sector, Botswana also
relies on importing virtually all inputs to the manufacturing process and given
its landlocked location and high transportation costs much of its labour cost
advantage is nullified.
Thus, except for bright spots
like the diamond cutting and polishing sector following the establishment of
the “diamond hub”, the opportunity for Botswana to develop a large-scale
manufacturing sector, either in capital intensive or assembly-line activities
appears hindered by significant structural barriers.
Services, however, have been
the biggest contributor to GDP and employment growth in recent years. The sector
expanding by 14 percent in nominal terms between 200 and 20015 according to
statistics Botswana, with strong growth across all segments, with the most
rapid growth coming from local traded activities likes retail and household
enterprises. Despite the disappointing performance of the International
Financial Services Centre (IFSC)*[1] modern
service sectors like finance, communications and business services stay
important in Botswana and continue to grow moderately well.
Investments in projects like
the Innovation Hub shows a continued emphasis on developing Botswana as a
“knowledge” or “headquarters” economy, leveraging the strength of Botswana’s
macro environment, good infrastructure and its educated population, with
the caveat that constraints in both education levels and infrastructure also
represent important barriers to growth in the sector overall.
Tourism, built around the
countries natural beauty remains Botswana’s most important services export, and
a critical sector for employment and poverty reduction. The latest update from
Botswana’s tourism accounts shows the sector accounts for up to 6.5 percent of
GDP and employs some 45,000 people. The sector is also an important source of foreign
direct investment. Although citizen owned companies now account for half of
tourism establishments. Botswana’s tourism has built its success around
low-volume, high-margin, nature-based tourism in national parks and game
reserves in the North of the country. But this positioning combined with
Botswana’s fragile ecosystems restricts its expansion. With the need for diversification
outside of the UNESCO-listed Okavango Delta and Chobe areas well
understood.
Expanding trade and investment and deepening regional integration
In sum, Botswana must strive
to become a country of exporters if it is to achieve its aim of diversification
and private sector lead economic development. This has been the lesson learned
by many successful small economies like Singapore, Mauritius and Ireland. With
a small domestic market, achieving the scale needed for productivity and growth
requires selling into regional markets and internationally. So while much of
the recent emphasis in industrial policy and private support has focused
inwards, by for example developing the local supply opportunities for
government procurement, there is a clear and present need for greater emphasis
on integrating with global markets. This made Botswana’s traditional export
sectors such as diamonds, beef and tourism so successful and the only starting
point for this will be through the placing of a much heavier emphasis on
regional trade and integration.
So while Botswana’s
traditional exports are associated with global markets, for the vast majority
of firms and sectors operating there, taking advantage of export opportunities
means selling more in the region, and in particular South Africa. Given its
proximity to South Africa’s Gauteng province, the largest economic
agglomeration in Africa. It's favourable labour environment, including both
competitive wages and harmonious labour relations, and Botswana’s advantages of
stability and security should make the country a relatively attractive location
for regional trade and investment. More so in the context of the development of
the South African Customs Union (SACU) regional industrial policy built around
the development of regional value chains, Botswana could be well positioned to
take part in regional value chains in agribusiness, light manufacturing, and
services.
[1] IFSC was established in 2003 to attract
investment in offshore banking, finance, and business services, with a special
regulatory framework and tax concessions. As of 2012 IFSC had attracted less
than 50 firms. Many arguments have been put forth to explain the performance,
including the 2020 ‘sunset clause’ in tax concessions, lack of proper
legislation in areas such as investment funds, insufficient scope of double
taxation agreements, and general lack of flexibility to respond to changing
needs and circumstances in the market (Source World Bank, 2015)
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