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ECONOMICS AND MANAGEMENT IN DEVELOPING COUNTRIES Professor Pushan Dutt Case Study: Botswana – The Gem of Africa By Aditya Gupta Rajiv Mehta Ananth Ram 26 April 2005 INSEAD Singapore Period 4 INSEAD Singapore Economics and Management in Developing Countries Period 4 26 April 2005 Botswana – The Gem of Africa Introduction Botswana has had the highest rate of per-capita growth of any country in the world in the last 35 years. This occurred despite adverse initial conditions, including minimal investment during the colonial period and high inequality. Botswana achieved this rapid development by following orthodox economic policies. How Botswana sustained these policies is a puzzle because typically in Africa, “good economics” has proved not to be politically feasible. Good policies were chosen in Botswana because institutions of private property were in place. This is because of the following factors 1. Botswana possessed inclusive pre-colonial institutions, constraining political elites. The British did not destroy these institutions. 2. Maintaining and strengthening institutions of private property were in the economic interests of the elite. 3. Botswana is very rich in diamonds, which created enough rents that no group wanted to challenge the status quo. The situation was reinforced by a number wise post-independence leaders. The Gem of Africa Botswana was one of the poorest countries when she attained her political independence in 1966 with a per capita income of about US$80. By the beginning of the 1980s, diamonds had overtaken beef as the country's leading foreign exchange earner and in 1982 diamond exports accounted for 40% of total exports and rose rapidly thereafter to reach approximately 80% of total Aditya Gupta - Rajiv Mehta - Ananth Ram 2 INSEAD Singapore Economics and Management in Developing Countries Period 4 26 April 2005 foreign exchange earnings by 1989. In 1974, about 40% of Botswana’s exports were to South Africa, the remaining percentage went to Europe, the USA and other parts of the world. Diamonds continued to dominate the exports trade even in the 1990s. However, following the establishment of several assembly plants in the country, exports of vehicles surpassed copper/nickel and beef in 1994 to become the second largest export commodity after diamonds. During 1999, exports rose sharply by 40.7% as a result of a rise in sales of diamonds, copper/nickel, and hides and skins. The performance of the economy has enabled the Government to increase resources for its development budget. During 1999/2000, the total development budget was P3.450 billion. The bulk of the budget went to Social Services which include Education, Health, Food and Social Welfare Programmes and Housing. The second largest share went to Infrastructure. This is aimed at achieving the objective of improving the national road network and access to schools and health facilities so as to improve the standard of living in Botswana. Botswana continues to enjoy the highest Sovereign credit rating in Africa with the third year in the A grade as determined by the credit rating agencies. The Gross Domestic Product 2003/4 was P39.9 billion representing a growth rate of 5.7%. The growth rate for the next 2 years is projected to be between 4 and 5%i. (1 USD = 4.55 Pula) Aditya Gupta - Rajiv Mehta - Ananth Ram 3 INSEAD Singapore Economics and Management in Developing Countries Period 4 26 April 2005 History After 1836, Batswana realized that due to the ambitious expansions of the Boers, they were slaves on their own land working for the Boers. The Boers constantly raided the people of Botswana who came to hate and fear them. They sought help from the British considering them to be the lesser of the two evils. However the British were not interested in increasing their commitment in the region. In 1885, they defined the present day Botswana borders. Due to the plea made by the Batswana chiefs to the crown, the region was kept under the British territory instead of being handed over to Rhodesii. The British continued to administer the Protectorate for the next 70 years - years of slow progress against the background of security and peace. Sir Charles Rey was among several notable administrators of this period. He increased the power of the administration and appointed an economic consultant, who proposed various surveys which were aimed at improving the cattle Aditya Gupta - Rajiv Mehta - Ananth Ram 4 INSEAD Singapore Economics and Management in Developing Countries Period 4 26 April 2005 ranching industry and moving the Capital to within the Protectorate’s borders. In eight years, he doubled the school attendance, the expenditure and improved all around infrastructure. By 1955, British policy had begun to alter course considerably. Plans were made for independence for the protectorate, and legislation was passed to effect this. The protectorate was granted internal self government in 1965 and the republic of Botswana became completely independent on 30 September 1966, under the new president, Sir Seretse Khama. Policies and Institutions Institutions are the endogenous creation of individuals. Here we analyze three key factors: 1. Economic Interests: Whether a good institutional setup will lead to outcomes that are in interests of the politically powerful. 2. Political Losers: Whether institutional development will destabilize the system, making it less likely that elites will remain in power after reforms. 3. Constraints: When institutions limit the powers of rulers and the range of distortionary policies that they can pursue, good policies are more likely to arise. The first point to note is that in the aftermath of independence, property rights were in the interests of Botswana's political elites. After independence, cattle owners were the most important economic interest group, and they were politically influential. The close connection between the cattle owners and the Botswana Democratic Party (the current ruling party) has played a key role in Botswana’s development. At independence the only real prospect for a sector of the economy to develop was ranching and this was done successfully. The political elites were therefore enriched by the developmental policies that were adopted from 1966. They benefited from membership of the Custom Union with South Africa, and from the heavy investment in infrastructure throughout the country. By the mid 1970’s the income from diamonds swamped the income from ranching. Aditya Gupta - Rajiv Mehta - Ananth Ram 5 INSEAD Singapore Economics and Management in Developing Countries Period 4 26 April 2005 It was important that political elites did not oppose or feel threatened by the process of growth. They did not fear becoming political losers. The political security of the elites was to some degree an outcome of the relatively developed institutions that Botswana inherited from its pre- colonial period, which ensured some degree of political stability. It was also an outcome of Seretse Khama’s legitimacy as a leader, and his relations with the tribal chiefs and cattle owners. In this context, the limited impact of colonial rule in Botswana, as compared to the experiences of many other nations in Africa, South America or the Caribbean, may have been quite important. Political elites faced effective constraints. The constraints placed by these institutions explain why the cattle owners did not use their political power in order to expropriate the revenue from diamonds starting in the 1970’s. There was no political instability in Botswana, and Sertese Khama could build a relatively effective bureaucracy without the majority of economic groups fearing future expropriation. Contrary to many other countries in Africa, colonial rule did not strengthen Botswana’s chiefs and did not destroy institutions, nor did it introduce indirect rule with substantial power delegated to the political elites representing the British Empire. Botswana got off onto the right track at independence and by the time the diamonds came on stream, the country had already started to build a relatively democratic polity and efficient institutions. The surge of wealth likely reinforced this. Because of the breadth of the ruling party, diamond rents were widely distributed and the extent of this wealth increased the opportunity cost of undermining the good institutional path--- no group wanted to fight to expand its rents at the expense of "rocking the boat". Botswana was able to adopt good policies and institutions because they were in the interests of the political elites, which included the cattle owners and powerful tribal actors. Moreover, it is clear that political elites have studiously avoided exacerbating any underlying ethnic tensions in Botswana. Key decisions made by Batswana leaders, particularly Seretse Khama appear to have been crucial. Seretse Khama’s handling of the independence negotiations and Aditya Gupta - Rajiv Mehta - Ananth Ram 6 INSEAD Singapore Economics and Management in Developing Countries Period 4 26 April 2005 constitutional convention, minerals policy, and generally political issues ensured that political stakes remained low, contributing to political stability and an environment with secure property rights. Had he not reduced the political powers of tribal chiefs shortly after independence, tribal cleavages may have been more important?iii Aditya Gupta - Rajiv Mehta - Ananth Ram 7 INSEAD Singapore Economics and Management in Developing Countries Period 4 26 April 2005 Mauritian Miracle – a comparison with Botswana Along with Botswana, Mauritius is one of the few countries in the Sub-Saharan African (SSA) region that has had long and sustained levels of growth. This has ensured high levels of income and standard of living. Mauritius was a typical African economy; monocrop; prone to terms- of-trade shocks; growing rapidly in population; and susceptible to ethnic tensions. Yet, Mauritius has defied all predictions to grow rapidly. Below we have presented a short study of Mauritian economic miracle, highlighting the key differences between Botswana and Mauritius. Quick facts about Mauritius: 2003 Population, total (millions) 1.20 Population growth (annual %) 1.10 GNI (current US$) (billions) 5.20 GDP (current US$) (billions) 5.20 GDP per capita (constant 1995 US$) 4,633.70 Life expectancy at birth, total (years) 72.50 Mortality rate, infant (per 1,000 live births) 17.00 Surface area (sq km) (thousands) 2.00 Source: World Development Indicators History Mauritius, an increasingly popular tourist spot, was uninhabited when the Dutch took possession in 1598. It was home to the flightless bird, the dodo, which was hunted into extinction. The island was abandoned by the Dutch in 1710, taken over by the French in 1715 and seized by the British in 1810. It gained independence in 1968 as a constitutional monarchy, with executive power nominally vested in the British monarch. It became a republic in 1992. The population consisted of a Hindu majority and the minority consisted of Franco-Mauritian, indigenous Creole and the Muslims. The political system was initially fragmented along ethnic lines, but a unique political Aditya Gupta - Rajiv Mehta - Ananth Ram 8 INSEAD Singapore Economics and Management in Developing Countries Period 4 26 April 2005 compromise aimed at protecting minority rights was achieved. The political system since then has remained surprisingly stable, with only four prime ministers having held power since 1968: Sir Seewoosagur Ramgoolam (1968-82); Sir Anerood Juganauth (1982-95; and 2000-03); Mr. Navin Ramgoolam (1995-2000); and Mr. Paul Berenger (2003 – present). Unlike Botswana, Mauritius has had to face ethnic diversity which could have complicated the political stability. Geography Although Mauritius is not landlocked, it does have a fully tropical climate and in terms of remoteness from the world markets, Mauritius fares the worst, being about 25% farther away from the world’s economic centre of gravity than the average African country and 30% farther than the average developing country. Apart from this, Mauritius was also a highly commodity dependent country. This meant that it was potentially at risk from rent seeking and corruption to which commodity dependence gives rise. But Mauritius was less susceptible to commodity dependence since sugar (Mauritius’s main export) was less variable, in terms-of-trade demand, than other commodities. However, Mauritian sugar production has been subject to series of cyclone and drought related shocks. Thus, unlike Botswana, Mauritius has been dependent on sugar which can be grown anywhere in the world. Botswana had captive power over the supply of diamonds. Policies and Institutions To counter the ill-effects of the geography and history, Mauritius succeeded in developing its economy through a mix of good policies and institutions. Mauritian trade policy was heterodox, involving segmentation with imports being “closed” and exports relatively open. This was done my high tariffs on imports and through the creation of export processing zones (EPZs like in the case of South Korea and Japan). The EPZs had duty–free access to all imported inputs; had access to Aditya Gupta - Rajiv Mehta - Ananth Ram 9 INSEAD Singapore Economics and Management in Developing Countries Period 4 26 April 2005 variety of tax incentives; and the labour market for the export sector was effectively segmented from the rest of economy. In the EPZ, minimum wages for women were set at lower levels which created disproportionate amounts of female participation which had favourable social consequences. The wages at the EPZ saw a significant premium over the rest of the economy. “The creation of the EPZ generated new opportunities of trade and of employment (for women), without taking protection away from the import-substituting groups and from privileged male workers. The segmentation of labour markets was particularly crucial, as it prevented the expansion of the EPZ from driving up wages in the rest of the economy, and thereby disadvantaging import-substituting industries.”iv EPZ wages compared to other wages Role of Preferential Access – Perhaps greater than the incentives provided by the government, Mauritius also benefited to a guaranteed export quotas to the EU in sugar, textile and clothing sectors. Rents to Mauritius from this preferential access in sugar and clothing together amounted to about 7% of the GDP in the 1980s and to about 4.5% of GDP in the 1990s. This preferential access was probably the single biggest difference between Botswana and Mauritius. The terms-of-trade Aditya Gupta - Rajiv Mehta - Ananth Ram 10 INSEAD Singapore Economics and Management in Developing Countries Period 4 26 April 2005 fluctuations were minimized by this access to the European access. At the same time in case of Botswana, the price of diamonds was maintained by the DeBeers led cartel. Role of institutions – While other African economies to have tried to replicate the EPZ model, very few have succeeded because of a lack of proper institutions. Mauritius ranks well above the average African country on all indices of institutional quality, political as well as economic. Mauritius and other countries with respect to indices of institutions Mauritius was plagued by ethnic tensions right from the time it gained independence. The minority populations (French, Muslims, Creoles – comprising 44% of the population) decided to stay as a British colony due to fears that the Hindu majority would usurp all the power and economic control. To assuage these fears the ruling government had to quickly come up with laws and functioning courts that would guarantee the property rights and maintained good law and order. This also had the effect that the ruling political factions were separated from the economic factions. Also, like in case of Botswana, the civil servants in Mauritius were very well paid. Some of the benefits of good institutions like courts and political process are: a culture of transparency and participatory politics; a well paid civil service which led to lower levels of corruption and Aditya Gupta - Rajiv Mehta - Ananth Ram 11 INSEAD Singapore Economics and Management in Developing Countries Period 4 26 April 2005 inefficiency. One direct result of good institutions has been that Mauritius has nurtured and developed the sugar sector rather than tax it, while the rest of Africa (unlike Botswana, where the diamond industry is run more along private lines) has killed its cash cow. Future challenges for Mauritius The three pillars of Mauritius economy have been: Sugar, Textiles and Tourism. Although the economy has sustained high annual growth for the last two decades, the loss of preferential access to US and European markets by 2007 (due to the WTO) would have negative consequences for two of the three pillars supporting the country's economy: sugar and textiles. The impending loss of free market access has resulted in a rationalization process in the export- processing zone (EPZ), with tens of thousands of jobs lost in 2003/04, while the forthcoming loss of the EPZ's trade advantage was causing many investors to relocate to other countries. Tourism, the third pillar of the economy, has shown little growth and recent tourist arrival figures point to overall stagnation. This is unlike the case of Botswana, where they face more challenges like HIV/AIDS etc. (more below). Aditya Gupta - Rajiv Mehta - Ananth Ram 12 INSEAD Singapore Economics and Management in Developing Countries Period 4 26 April 2005 Botswana - Challenges and Visions for the Future We have now discussed some of the core reasons behind Botswana’s success since independence. We have also used a comparison with another Africa success story, Mauritius, to better understand what Botswana has done with its policies and institutions to bring about economic growth. However, economic growth needs to be sustained over long periods for a nation to truly reap its benefits. To achieve the Millennium Development Goals set out by the United Nations, the Botswana economy will need to grow at 7% per annum for the next ten years. Botswana’s own Vision 2016 manifesto sets the target growth rate at a higher 8%.v To achieve these levels of growth, Botswana will have to overcome several daunting challenges that it faces. Challenges HIV/AIDS The HIV/AIDS prevalence rate in Botswana among those older than 18 months is 17.3%. The age group 30-34 years has the highest prevalence rate at 40.7%.vi With one of the highest prevalence rates in the world, AIDS threatens to reverse all the growth achieved by Botswana until date. This epidemic has dropped life expectancy in Botswana. According to the UNDP Human Development Report, Botswana’s life expectancy in 2002 was only 41.2.vii Productivity has also seen a dramatic decline. Most people suffering from AIDS are able to remain in the workforce due to government sponsored anti-retroviral treatment, but their output is poor. Furthermore, the large number of funerals has resulted in increased employee absenteeism as funerals are large and expensive family events. The cost of funerals has also resulted in people taking out loans from their companies and loan sharks that they cannot afford thus placing themselves in a debt trap. Despite this debt trap, consumerism has seen a rapid rise as well, in part due to the rapid economic growth Aditya Gupta - Rajiv Mehta - Ananth Ram 13 INSEAD Singapore Economics and Management in Developing Countries Period 4 26 April 2005 but also because of the reduced life expectancy and thus lower propensity to save. Another concern is the rapid increase in the number of orphans as a result of this epidemic – the number of orphans in the government’s orphan care program alone increased from 21109 in 1999 to 47725 in 2004.viii With the public more and more in debt and government expenses growing rapidly due to the free provision of ARV treatment and the AIDS orphan care program, HIV/AIDS threatens to roll back the growth experienced by Botswana since independence. The government has been tackling the HIV/AIDS problem through widespread free and anonymous testing. Affected individuals are provided with free ARV treatment. To tackle rising hospital costs, the government has encouraged home-based care for critically ill patients. Condoms are distributed freely at all public locations to encourage safer sex. The government also spends extensively on education programs to bring about the fundamental behavioural change necessarily to stop the spread of the disease. Regional Stability Botswana also faces challenges due to the political instability of the region and the continent in general. The recent collapse of Zimbabwe in the wake of rapid and violent land reform in 2000 virtually sounded a death knell to tourism in Botswana which has now partially recovered due to Botswana’s appeal as a terrorism free travel destination.ix Western tourists fearing racial backlash in Botswana similar to Zimbabwe stayed away from Botswana’s unique tourist offerings. Furthermore, Investors became concerned about Botswana’s capacity to avoid a similar collapse. Zimbabwe had been heralded as the bread basket of Southern Africa and Robert Mugabe seen as a forward thinking African leader. Thus if Mugabe could destroy Zimbabwe in such a short period of time, it became likely that Botswana itself may be at risk sometime in the future. Another concerning factor is the growth in crime in Botswana’s major towns and cities. The rapid increase in crime in post-apartheid South Africa and the influx of illegal immigrants from Aditya Gupta - Rajiv Mehta - Ananth Ram 14 INSEAD Singapore Economics and Management in Developing Countries Period 4 26 April 2005 Zimbabwe into Botswana has fuelled a spate of armed robberies and associated crimes – events largely foreign to Botswana until recent times. Dependence on diamonds Botswana is the world’s largest exporter of gemstone diamondsx and mineral revenues (consisting primarily of diamond revenue) constitute 45% of all government revenues.xi Such dependence on a single non-essential mineral is a matter of concern for Botswana since the nations economic wellbeing is closely linked to the value of gemstone diamonds and thus the success of De Beers in marketing and selling those diamonds. In 1964, when Zambia gained its independence, it was one of the richest countries in sub-Saharan Africa with 66% of its export income coming from copper. 1975 saw a rapid decline of copper prices that pulled down the Zambian economy. Botswana faces the same risk with diamond prices. Botswana Export Development and Investment Authority (BEDIA) along with the Botswana International Financial Services Centre (IFSC) lead the effort to diversify Botswana’s economy. Touting political and economic stability, high credit rating, low tax regime and other investor friendly policies, BEDIA encourages foreign direct investment:xii IFSC works to encourage the growth of a financial services sector in Botswana. Unemployment and poverty The 2001 estimate of unemployment in Botswana by the CIA World Factbook was 40%. xiii In 2002/2003, 30% of the population lived below the poverty line.xiv Though these figures are much better than when Botswana gained independence, they are far from those of developed countries – there are still huge differences between the have and the have-nots. Aditya Gupta - Rajiv Mehta - Ananth Ram 15 INSEAD Singapore Economics and Management in Developing Countries Period 4 26 April 2005 Visions for the future Vision 2016 Vision 2016xv forms the core of all decisions taken by the government. It lays out five fundamental principles underlying the vision: Democracy, Development, Self-Reliance, Unity, and Botho (good manners and respect for one another). The vision states that Botswana will achieve a few clear goals by the year 2016: “Botswana will be a prosperous, productive and innovative nation.” The country looks for sustainable development through hard-work, economic diversification, environmental preservation and universal employment. “Botswana will be a compassionate and caring nation.” A reversal of the AIDS epidemic, equitable income distribution, poverty eradication and universal access to health and sanitation services form the core of this goal. “Botswana will be a safe and secure nation.” This includes law enforcement, road safety and national security. “Botswana will be an open, democratic and accountable nation.” “Botswana will be a moral and tolerant nation.” The nation wishes to encourage tolerance of different cultures, religions and disabilities. “Botswana will be a united and proud nation, sharing common ideals, goals and symbols.” Family values and pride in tradition and history are core to this point. Aditya Gupta - Rajiv Mehta - Ananth Ram 16 INSEAD Singapore Economics and Management in Developing Countries Period 4 26 April 2005 Conclusion Africa is a continent full of potential but riddled with troubles. She is diverse with beautiful beaches, deadly deserts, raging rivers, pristine lakes, thick rain forests, arid savannah teeming with wildlife, snow capped mountains and mist filled rift valleys. The continent is blessed with immense natural resources such as oil, gold, diamonds, uranium, platinum and a wide range of agricultural products. And yet, Africa suffers – carved out by Europe in the colonial era, its people forced into slavery, and eventually left to its own now divided elements in the late 1900s. Tribes and interest group battled against each other for supremacy over resources and political power. Millions died and continue to die in famines and war. Yet, nestled with Africa is a silent success story – Botswana – the Gem of Africa. If the lessons learned from Botswana are implemented around the continent, Africa could well wake up and take its rightful place in the world. Institutions have been the central secret of Botswana’s success. Landlocked she had little access to the outside world, and yet her inclusive and democratic institutions allowed her to reap the benefits of her critical natural resource – diamonds. Other examples exist such as Mauritius. This tiny island far off the coast of Africa has also shown how institutions can make a huge difference. Botswana faces challenges for the future, but as long as she keeps faith in independent institutions, one hopes that her Vision 2016 – of being prosperous and productive – will be only 11 years away from attainment. i http://www.gov.bw/economy/index.html ii http://www.gov.bw/gem/history_of_botswana.html iii Acemoglu, Johnson and Robinson. An African Success Story: Botswana. July 11, 2001 iv Rodrik 1999a v Gaolathe, Baledzi (Minister of Finance and Development Planning). Republic of Botswana: Budget Speech 2005. Delivered to National Assembly on 7 February 2005. vi Central Statistics Office, Botswana. Press Release: Release of the results of “The households income and expenditure survey (HIES)”, “Literacy survey” and “Botswana AIDS impact survey II (BAIS II)” 16 December 2004 vii Human Development Report 2004: http://hdr.undp.org/statistics/data/ viii Republic of Botswana: Budget Speech 2005. Aditya Gupta - Rajiv Mehta - Ananth Ram 17 INSEAD Singapore Economics and Management in Developing Countries Period 4 26 April 2005 ix BBC News: http://news.bbc.co.uk/2/hi/uk_news/magazine/4464293.stm x Government of Botswana Website: http://www.gov.bw/home.html xi Republic of Botswana: Budget Speech 2005. xii http://www.bedia.co.bw/ xiii CIA – World Factbook 2002: http://www.faqs.org/docs/factbook/fields/2129.html xiv Republic of Botswana: Budget Speech 2005. xv Botswana Government Website: http://www.gov.bw/gem/vision_2016.html Aditya Gupta - Rajiv Mehta - Ananth Ram 18
" Botswana - Congoleum Corporatio"