IIJD - Botswana: The Roots of Economic Success

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The IIJD 2007 Newsletter Archive:

Botswana: The Roots of Economic Success

By Spencer Amdur

August 3, 2007

Sub-Saharan Africa has not kept pace with world economic growth over the last forty years. Between 1963 and 2003, per capita income grew 2.5 times slower in Africa than in the rest of the world [1]. But the country that grew the fastest during this period was not the United States, nor was it Germany, Japan, or China. It was improbable Botswana, landlocked and arid, situated amongst the former British colonies of southern Africa. Working against it were a lack of arable land, an initial dearth of natural resources, and a colonizer who left without developing any industry or infrastructure. So how is it that Botswana managed to achieve a spectacular 9% growth rate over these decades to arrive at a GDP per capita of $11,000 in 2006 [2, 3]?

Ultimately, what set Botswana apart was its unique growth strategy, which involved liberal economic policies occasionally checked by government intervention and substantial public spending. This strategy revolved around diamonds, which are and have always been the main event in the Batswana economy [4]. Mined by Debswana Diamond Company, a partnership between DeBeers and the government, diamonds account for 50% of government revenue, 70-80% of earnings from exports, and 40% of national product [5, 6, 7]. Their sale comprises 36% of world diamond value [8].

But these two principal motifs—diamond mining and economic liberalism—are central to the failures of many post-independence African nations. Openness to foreign trade and investment came up short in Senegal and the Ivory Coast, while diamonds have both politically and economically devastated Sierra Leone and Angola. To understand Botswana’s success, we must therefore examine the specific policies that spawned such a steady growth rate.

The full story lies somewhere between sound institutions and a clever growth strategy. The strategy consisted of three crucial steps that Seretse Khama, Botswana’s first president, took to avoid the tragedies that would accompany diamond exploitation in other parts of Africa. First, he courted foreign direct investment (FDI) with low corporate taxes and lenient regulations on foreign ownership and operations. Next, he saw to it that a healthy chunk of diamond revenue stayed in Botswana, successfully negotiating for a 50% stake in Debswana. This guaranteed a steady stream of revenue for the Batswana government, allowing for a robust fiscal policy free of inflation.

Third, as Acemoglu et al. note, diamond revenue was “invested rather than squandered” [9]. Khama used the inflow of cash to establish social welfare programs and encourage the development of industry. This meant funding free education through the university level, financing public health initiatives aimed at curbing the burgeoning AIDS rate, developing infrastructure, and subsidizing local industries other than diamonds.

Underlying this effective growth scheme were a cast of well-developed institutions, both political and economic. Three successive transitions of executive power have been peaceful and absent of fraud, characterized by high levels of participation and transparency [10]. Inclusive public debate and free criticism of government have made Botswana a safe haven for those fleeing the repressions of apartheid South Africa and Mugabe’s Zimbabwe. Equally important are the economic institutions which predated diamond discovery. Early on, Khama put control over land and natural resources in the hands of the state to avoid ownership conflicts between tribal chiefs. He instituted vital legal frameworks to protect private property rights, but maintained a corporate tax and currency controls, thus fostering FDI while asserting Botswana’s self interest. The quality of its institutions earned Botswana the 2006 distinction of least corrupt country in Africa as rated by Transparency International [11], as well as the best credit risk in Africa by Standard & Poor’s [12].

Scholarly work has tended to credit Botswana’s deliberative and inclusive political institutions for its economic success. But the efficacy of its growth strategy should not be overlooked as a source of Batswana exceptionalism. After all, China and Singapore have repressive political institutions, but still register prolific growth numbers. Botswana’s strategy has achieved a happy medium between protectionist and free-market economics in a way that other African nations have struggled to. Certainly there were important institutional underpinnings necessary to put this strategy into place, but ultimately it is the three-pronged method discussed above that deserves credit for the 9% growth rate.

No discussion of Botswana’s success is complete without an acknowledgment of its failures. Botswana is the third most unequal country in the world. Its Gini coefficient of 63 only beats out neighbors Lesotho and Namibia [13], reflected in that 30.3% of the population lives below the poverty line (2003) [14]. Exacerbating this inequality is the fact that 23.8% of the adult workforce is unemployed [15]. Even worse, it suffers the second highest AIDS rate in the world, at 38.8% as of 2002 (only Swaziland is worse) [16]. Life expectancy is a meager 51 years [17].

What these problems add up to is a clear need for redistribution. The IIJD calls on the government of Botswana to take this crucial step and continue its economic leadership in Africa. While its institutions should be praised for their transparency and accountability, they must also have an egalitarian dimension. Such an incredible AIDS burden cannot be ameliorated with so much of the country living in deep poverty. While focused public health programs are clearly necessary, greater income equality will also induce dramatic improvements in long run health outcomes.

In the past, Botswana has never been afraid to deviate from free market policy where prudent. As an organization committed to social justice, the IIJD believes that the fairness on which Botswana has insisted in the realm of international trade should be extended to domestic affairs, with policies to benefit the third of the population living in extreme poverty. Other African nations can look to Botswana’s growth strategy as an example of how to harness the benefits of the global economy. But economic success should not be devoid of social justice. With GDP per person at such a high level, Botswana can afford to reduce income disparities. Its growth model has thus far been very successful. It is now time to share that success.

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