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. Thanks to the unique historical structure of the industry, diamonds have avoided the cyclical booms and busts that characterise most natural resource commodities.
Until recently De Beers 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 De Beers to maintain rising prices and income by controlling output and reinforced Botswana’s mining industry.
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. This allowed Botswana’s Government to negotiate from a position of strength, enabling it to secure over 80 percent of the revenue stream flowing from domestic diamond operations. In 2013, Botswana 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. It is 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 aiding Botswana to capture added value beyond rough diamond exports. Despite these positive developments, however, Botswana is long past the heady days of the diamond bonanza. Diamond production has declined from its peak of over 34 million carats by 2007 and to around 22 to 23 million carats.
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 a declining resource remains as relevant as ever.
Preparing For a More Challenging Future
As the saying goes, “diamonds are not forever”, and this maxim is well accepted in Botswana. The need to promote economic diversification for the day when the diamond resources are exhausted is undeniable and has been central to the national development discourse since diamond production first started. 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.
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 with no need to was to do the impossible. But we are definitely getting close to where we cannot continue to be complacent, diversification is critical, and I think the people and the government of Botswana are coming to that conclusion.”
Botswana’s development 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 the country, it raises specific challenges. Most obviously is 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 supplies and infrastructure linkages into the wider economy. These have 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.
Botswana’s economy has been one of the fastest-growing in the world over the past 50 years, allowing the country to move from being among the poorest to upper-middle-income status. While the majority of the population has been pulled out of poverty, many Batswana are still poor, inequality is amongst the highest in the world, and human development outcomes remain far below what they should be.
Economic diversification will, therefore, need broad-based job creation, enhanced productivity, and change the overall structure of growth. It requires 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 addresses 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 historical growth model involved channelling diamond revenues into high investment in infrastructure, health and education. To put this into perspective, at independence Botswana had just six kilometres of roads, three secondary schools, a handful of health facilities, and only 1.5 percent of the population had completed primary education. Today, there is 7,000 km of paved roads, over 300 secondary schools, 95 percent of the population lives within 8 kilometres of a health facility, and primary education is free with the enrollment rate reaching 90 percent. The model has served Botswana well, delivering a sustained, high growth of 5 – 6 percent range over many decades. However, the model has been poor at generating jobs and contributing to high inequalities and has created a high dependency on the state both as the main investor and employer in the economy.
How Far Has Botswana Diversified?
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 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. Additionally, 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.
Progress has been made on diversification. The non-mining sector’s contribution to value-add 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. The country also has several strong assets on which it can draw, such as its minerals diversity. Besides diamonds, Botswana is also a significant producer of copper/nickel, which has long been the number two export. 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 to be 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 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.”
A More Aggressive, Outward Orientated Private Sector
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 capitalise 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. This 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, as well as improved connectivity. This improvement will enhance the trade facilitation environment by, for example, promoting value chain integration, improving air-transport links, the quality and cost of ICT infrastructure, and re-focus the 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-oriented private sector, including trade, competition and immigration policies.
Where Will Future Growth Come From?
It is important, however, to recognise that economic diversification in Botswana will be far from easy and to accept the country’s reality: it is a small landlocked country with a highly dispersed population and has an economy that remains in relative infancy. 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 population raises specific barriers to achieving agglomeration and scale and increases service delivery costs. Highly specialised and specific skills will stay in short supply with entrepreneurialism still nascent. Therefore, in this context, Botswana cannot do everything itself 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 diversified in recent years, in the face of these challenges. 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 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 alarming 40 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 declining minerals output explains just one-third. 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.
Sectoral 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.
Additionally, 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. This includes 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. However, the performance of the manufacturing sector has been mixed in recent years, with labour-intensive sub-sectors like apparel having shrunk dramatically. Additionally, there is an on-going debate in the country on Botswana’s ability to compete in labour-intensive manufacturing. Despite its status as one of the richest countries in Africa, Botswana is not a high wage economy. Minimum wages in the manufacturing is 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. 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 obviated.
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 has expanded by 14 percent in nominal terms between 2000 and 20015 according to statistics Botswana, with strong growth across all segments, and 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), 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 country’s 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 industry 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
The county remains almost entirely 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.
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. Its 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.