Botswana: Beyond the Sparkle
Botswana: Beyond the Sparkle
The diamond decade draws to a close
Botswana's success story owes much to an extraordinary stroke of geological fortune. The discovery of diamonds shortly after independence, followed by the opening of the Orapa mine in 1972 and Jwaneng—the world's richest diamond mine—in 1982, transformed the country's prospects. Unlike most commodity producers, Botswana avoided the boom-bust cycles that typically plague resource-dependent economies, thanks to the peculiar structure of the diamond industry.
Until recently, De Beers controlled over 90% of the world's diamond supply, maintaining tight vertical integration from mine to retail counter. This market power allowed the company to sustain rising prices by carefully managing output. For Botswana, the arrangement meant stable revenues and protection from the volatile terms of trade that often stifle growth elsewhere.
Botswana's position was uniquely advantageous. Its diamond mines, the largest and most profitable on Earth, gave the government unusual negotiating leverage. It secured over 80% of revenues from domestic operations—a rare feat in the extractive industries. In 2013, Botswana used this clout to persuade De Beers to relocate its Global Sightholder Sales department from London to Gaborone, a remarkable reversal of the usual flow of business operations from developing countries to Western capitals.
The development of a cutting and polishing industry in Gaborone has helped Botswana capture more value from its resources. Yet these achievements cannot disguise an uncomfortable truth: the diamond bonanza is fading. Production peaked at over 34m carats in 2007 and has since plateaued at around 22m-23m carats.
Bashi Gaetsaloe, managing director of the Botswana Development Corporation, puts it plainly: "The belief was that diamonds really were forever. But we are definitely getting close to the point where we simply cannot continue to be complacent. The issue of diversification is critical." Further exploitation of Botswana's largest mines will require substantial new investment, reducing both profits and fiscal revenues. While production may continue until 2050, the basic fact remains: diamonds are finite and declining.
The diamond sector's impact on the economy is almost purely fiscal. It creates little employment and has few linkages to the wider economy—a pattern with serious implications for inclusive growth. This places an extraordinary obligation on the government as custodian of Botswana's diamond wealth.
Preparing for a more challenging future
As the local saying goes, "diamonds are not forever"—a maxim well understood in Botswana. The need for economic diversification has been central to development discourse since production began. While the resource may not be fully depleted for another generation, output is well past its peak. Preparing for a post-diamond world lies at the heart of Botswana's development challenge.
Over the past half-century, Botswana has been among the world's fastest-growing economies, rising from desperate poverty to upper-middle-income status. Most citizens have been lifted out of poverty. Yet many remain poor, inequality is among the world's highest, and human development outcomes fall short of what they should be.
The country remains almost entirely reliant on diamonds and the public sector, leaving it exposed to short-term shocks and vulnerable to medium-term structural changes. As diamond revenues decline, fiscal and external vulnerabilities will increase. The foundations of Botswana's development success are being inexorably eroded.
Economic diversification will require broad-based job creation, enhanced productivity, and a fundamental shift in the growth model—from one almost totally reliant on extractive enterprises and the public sector to one based on a diversified, competitive, export-oriented private sector, underpinned by skilled, dynamic, and entrepreneurial enterprises.
Dr Racious Moatshe, chief executive of Business Botswana, explains: "We have been working hard on updating the Private Sector Development Programme. This is meant to address key areas of our private sector development strategy and aims to stimulate and sustain growth through diversification while building the capacities of institutions and human resources that will support the private sector."
The legacy of investment
Botswana's historic growth model channelled diamond revenues into infrastructure, health, and education. At independence, the country had just six kilometres of paved roads, three secondary schools, and few health facilities; only 1.5% of the population had completed primary education. Today there are 7,000km of paved roads, over 300 secondary schools, and 95% of the population lives within eight kilometres of a health facility. Primary education is free, with enrolment reaching 90%.
The model served Botswana well, delivering sustained growth of 5-6% over many decades. But it has been poor at generating jobs and has contributed to high inequality, creating heavy dependence on the state as both the main investor and employer.
Over the past decade, Botswana has achieved substantial diversification, with the services sector and household consumption becoming the largest contributors to GDP. Yet the sustainability of this shift is questionable. Maintaining consumption growth will be difficult amid weak job creation, slow wage growth, and rising household debt. Growth through public investment will be constrained by fiscal tightening, low productivity, and poor returns. Failure to diversify exports will heighten external trade imbalances, restraining growth or even triggering contraction.
A new direction
What Botswana needs is a more aggressive, outward-oriented private sector, principally in employment-intensive services such as nature-based tourism and high-value business services, where it can capitalise on regional or international comparative advantages. With such a small domestic economy, successful development of this nascent private sector will depend crucially on export markets. This will require improving the integration of Botswana's firms into regional value chains through an overhaul of trade policy and the removal of barriers to regional trade and investment.
Delivering a new growth model will require the private sector to take the lead in investing and developing competitive, outward-oriented firms. While entrepreneurs are emerging, Botswana's private sector remains shallow. Encouraging investment in export-oriented activities will require reform of the existing inward-looking environment, which currently favours domestic non-tradables and government contracts. It will also require addressing the high costs of operating in Botswana.
Improving productivity through investment in workforce development and human capital—particularly skills training—is essential. The adoption of technology will be critical in developing more competitive firms, as will improved connectivity through better trade facilitation, value chain integration, air-transport links, and ICT infrastructure. Industrial policy should be refocused on sectors where Botswana's comparative disadvantages are less binding, including modern commercial services and tourism. Trade, competition, and immigration policies must be reconfigured to support an export-oriented private sector.
Signs of progress
Progress has been made. The non-mining sector's contribution to value added has grown from two-thirds to three-quarters over the past decade. Botswana has several strong assets on which to draw. Besides diamonds, it is a significant producer of copper and nickel, long the second-largest export. Recent finds of natural gas, uranium, and iron ore could contribute substantial export earnings. The biggest opportunity may lie in coal: Botswana is estimated to have over 200bn tonnes of reserves (around two-thirds of Africa's total), though extraction 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 anchor a highly successful nature-based tourism industry. The country is ranked among the top in Africa for good governance, creating an effective environment for business growth and foreign direct investment.
"Our tourism sector has a lot of potential, but we need to do more to market ourselves," says Dr Moatshe. "This marketing needs to be targeted towards foreign investors who will put money into the country to help us grow and develop."
The challenge ahead
It is important to recognise that economic diversification will be far from easy. Botswana is a small, landlocked country with a highly dispersed population and an economy that remains in relative infancy. While prudent management of diamond resources has opened huge opportunities, which Botswana has exploited well, these historical and structural challenges may paradoxically restrict its potential today.
Botswana's small and dispersed population raises specific barriers to achieving agglomeration and scale, and increases service delivery costs. Highly specialised skills will remain in short supply, with entrepreneurialism still nascent. In this context, Botswana cannot do everything itself. Instead, it must focus on where it has comparative advantages and can exploit niche opportunities. It must be open to both the region and the world, strategically positioned to exploit resources beyond its borders.
There is no doubt that Botswana has diversified in recent years. On the most basic measure—share of economic output—minerals' contribution has declined from a high of 60% of value added in the early 1980s to below 16% now. Similarly, the contribution of minerals to fiscal revenues has declined from around 60% to around 30% 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 8% contraction in GDP, forcing the government to take on substantial debt.
The rise of services
What is replacing diamonds in Botswana's growth model? Services and consumption. Since 2003, services have played a more significant role, accelerating through the crisis, with mining's contribution to GDP falling from one-third to one-quarter. This was not due to declining diamond output. Two-thirds of the growth in services' contribution to GDP was explained by real growth in the sector; just one-third by declining minerals output. In the post-crisis era, growth has been strong across the services sector, particularly in retail and vehicle trade.
Where will future growth come from?
Sectoral diversification has been at the top of the national agenda for over 30 years, with a long list of government programmes and more recent "hubs" and special economic zones, along with multiple agencies established to promote diversification and private-sector development.
The most recent policy initiative—the Economic Diversification Drive—aims to develop a diversified private sector through a two-stage process: first, local preferences in government procurement; second, facilitating competitiveness for local firms in regional and global export markets. Despite these concerted efforts, however, progress towards establishing a competitive non-resource sector has been slow.
Many aspects of Botswana's economy suggest symptoms of "Dutch disease" may be 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-tradables and government contracts.
Botswana's manufacturing sector remains small, fluctuating between 5% and 6% of GDP over the past two decades—low by the standards of other middle-income countries—and accounting for around 11% of all formal jobs. Performance has been mixed. Labour-intensive sub-sectors like apparel have shrunk dramatically, and there is ongoing debate about Botswana's ability to compete in labour-intensive manufacturing. Despite its status as one of Africa's richest countries, Botswana is not a high-wage economy. Minimum wages in manufacturing are just one-sixth the level in neighbouring South Africa and on a par with Lesotho and Eswatini.
Why, then, is Botswana not attracting labour-intensive production from South Africa? Productivity is part of the story, as are issues of scale economies and location. In the absence of an existing manufacturing sector, Botswana relies on importing virtually all inputs, 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 establishment of the "diamond hub", the opportunity to develop large-scale manufacturing—whether 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, expanding 14% in nominal terms between 2010 and 2015, according to Statistics Botswana. Growth has been strong across all segments, with the most rapid growth coming from locally traded activities like retail and household enterprises. Despite the disappointing performance of the International Financial Services Centre, modern service sectors like finance, communications, and business services remain important and continue to grow moderately well.
Investments in projects like the Innovation Hub show a continued emphasis on developing Botswana as a "knowledge" or "headquarters" economy, leveraging the strength of its macro environment, good infrastructure, and educated population—with the caveat that constraints in both education levels and infrastructure represent important barriers to growth.
Tourism, built around the country's natural beauty, remains Botswana's most important services export and a critical sector for employment and poverty reduction. The latest tourism accounts show the sector accounts for up to 6.5% of GDP and employs some 45,000 people. It is also an important source of foreign direct investment, though 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. But this positioning, combined with Botswana's fragile ecosystems, restricts expansion. The need for diversification outside the UNESCO-listed Okavango Delta and Chobe areas is well understood.
Expanding trade and deepening regional integration
In sum, Botswana must strive to become a country of exporters if it is to achieve diversification and private-sector-led 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. While much recent emphasis in industrial policy and private-sector support has focused inwards—for example, developing local supply opportunities for government procurement—there is a clear need for greater emphasis on integrating with global markets. This made Botswana's traditional export sectors such as diamonds, beef, and tourism successful, and it is the only starting point for future growth.
While Botswana's traditional exports are associated with global markets, for the vast majority of firms and sectors, 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—its favourable labour environment, including both competitive wages and harmonious labour relations, and Botswana's advantages of stability and security, the country should be a relatively attractive location for regional trade and investment. In the context of the development of the Southern African Customs Union's regional industrial policy built around regional value chains, Botswana could be well positioned to participate in agribusiness, light manufacturing, and services.
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