BOTSWANA AND THE RESOURCE CURSE: EXCEPTION OR DELAY? By Raban Chanda Department of Environmental Science University of Botswana

RESOURCE CURSE: THE CONCEPT RC: The view that natural resource wealth increases the likelihood of negative socio-economic outcomes Original notion of the RC focused on the relationship between natural resource wealth and economic growth/development

INDICATORS/EVIDENCE OF THE RC Mineral wealth’s correlation with: Civil wars Low economic diversification/growth (Graph 1) Authoritarianism/poor governance & weak institutions (Graph 2) High inequality (Graph 3) Dutch disease

GRAPHIC ILLUSTRATION OF THE CURSE 1

GRAPHIC ILLUSTRATION OF THE CURSE 2

GRAPHIC ILLUSTRATION OF THE CURSE 3

THE BOTSWANA CASE 1: EVIDENCE & EXPLANATION OF EXCEPTIONALISM Sustained economic growth since 1966 Sustained socio-economic development Mineral wealth Good macro-economic management Good governance and institutions

Evidence 1: Sustained economic growth since 1967 At independence in 1966, Botswana was rated among the poorest states in the world with a per capita GDP of only US$283. By 2007, Botswana’s GDP per capita stood at US$13,604 and had attained the status of an upper middle income country. In fact, between 1966 and 1999, Botswana had the highest rate of economic growth in the world.

Evidence 2: Sustained socio-economic development At independence only 12 km of paved roads, now a well developed road network over 6000 km of which is paved Life expectancy at birth was estimated at 50 years in 1965, rose to 68 in 1995, then dropped to 53 by 2007. HDI was estimated at 0.509 in 1975, had risen to 0.694 by 2007 Infant mortality was 108 per 1000 live births, had dropped to 58 by 1998 Adult literacy rate was 34% in 1970, had risen to 81% by 2006 Peace, stability and democracy since independence

Explanation 1: Mineral wealth Botswana livestock economy until 1967 when diamond mining commenced. Before 1967 agriculture accounted for 40% of the total GDP Contribution of mining (particularly diamond mining) to GDP rose from 1.6% in 1967 to 51% in 1989 and down to the current 35% Mining’s share of total government revenue was virtually 0 (zero) in 1967, rose to between 45 and 65% by 2005 Mining’s contribution to export earnings rose from 1% in 1967 to between 75 and 89% from 1983 to 1995

Explanation 2: Good macro-economic management Mineral wealth not a sufficient condition for economic growth, let alone economic development – a la resource curse thesis But evidence just presented suggests that Botswana has so far been successful in utilizing the financial capital from mining to drive and sustain economic growth and development. One of the most popular explanations is the country’s adoption of, and strict adherence to, sound macro-economic objectives and corresponding policies to achieve the objectives.

Explanation 2 cont’d Two objectives adopted very early: Avoidance of external debt and stabilization of government expenditure Management of the exchange rate and/in order to promote economic diversification These objectives were to be achieved using the following policies

1. Policy towards avoidance of external debt and stabilization of public expenditure Avoid excessive public expenditure during mineral export boom periods, and instead build up budget surpluses and accumulate international reserves The surpluses and reserves would be used to finance spending during periods of mineral export ‘drought’ without having to borrow or to cut public spending drastically Consequently, Botswana has been successful in avoiding “boom and bust” cycles, as can be seen from the generally mounting surpluses since the 1980s in Figure 1

Figure 1: Public revenue and expenditure, 1971-1995 (current Pula millions) Source: Based on data from Saraf & Jiwanji(2001) p.11 Figure 1 Botswana: current public revenue and expenditure, 1971-1995 (Pula millions) (Based on data from from Saraf & Jiwanji, 2001, p.11)

One of the instruments used to monitor expenditure of mineral wealth is the Budget Sustainability Ratio (BSR), also known as the Sustainable Budget Index (SBI). BSR = ratio of non-investment expenditure (minus the budget for health and education) to non-mineral revenue. If BSR >1, government is using some mineral revenues to finance consumption. Goal therefore is to keep ratio below 1 to conserve mineral revenues and engage it productively.

Prudently, because all new domestic investments: Part of the surpluses is prudently invested in national development projects Prudently, because all new domestic investments: a) have been based on expected/projected revenue flows in the medium and long-term b) have always taken into account necessary recurrent expenditure to ensure their sustainability with or without export booms c) have always been budgeted for in 6-year national development plans and approved by parliament. Only projects provided for in the plans are funded during the plan periods.

Government domestic investment is also influenced by the capacity of the economy to absorb the development expenditure. The net result of these considerations and practices, is that domestic investments have always been well below recurrent revenue Surpluses not invested in national development projects are used to build up foreign exchange reserves which in May 2008 stood at US$10 billion Indeed, earnings on foreign currency reserves has variously held 3rd position to mineral revenue in the national economy

2. Policy towards stabilizing the exchange rate in order to promote economic diversification a) Adopt/pursue an exchange rate regime consistent with macro-economic stability. At present this regime involves pegging the Pula to a basket of currencies consisting of the Rand and the Special Drawing Right (SDR) – reflecting the country’s major trading partners. b) Invest in foreign financial reserves/assets to prevent the appreciation of the local currency. A strong Pula would make locally produced (non-mineral) goods less competitive on the international market or against imported goods, thereby discouraging diversification and generating the Dutch disease – another symptom of the resource curse. Has the diversification strategy worked? Comparatively it has worked - Refer to Table 1

ECONOMIC SECTOR & PERIOD Table 1: Average annual growth rates non-mining economic sectors for Botswana, upper middle income countries and Sub-Saharan Africa ECONOMIC SECTOR & PERIOD Agriculture Industry Manufacturing Services 1970 - 1980 1980 - 1990 1990 1996 1970 - 1980 1990 - 1996 Botswana 8.3 2.2 -1.2 17.6 11.1 1.8 22.9 8.8 2.6 14.8 11 7.1 Upper middle income 3.2 2.5 1.7 6.1 0.7 2.9 6.6 1.3 3.4 6.3 2.0 3.7 Sub-Saharan Africa 2.1 3.8 1.1 0.9 4.3 0.8 4.9 Source: Adapted from Sarraf & Jiwanji (2001), p.13

Explanation 3: Good governance and institutions Botswana has had a good, earned and sustained record of good governance. Indicators of this have included: A functioning constitutional multi-party democracy since 1966. All elections held have been conflict free and declared free and fair. Low levels of corruption: consistently lowest in Africa, and amongst lowest in the world according to Transparency International. Enduring social and political stability A free, probing and vocal media All this has been facilitated by quality and respected governance and watchdog institutions

According to Transparency International, Botswana has a strong National Integrity System (NIS): The NIS = “the sum total of laws, institutions and practices in a country that maintain accountability and integrity of public, private and civil society organizations” (TI, 2005, p.3) Some scholars have traced the evolution of effective governance structures to traditional heritage and to the fact that some of them were established before mineral wealth became a factor

Traditional kgotla system – consultative assembly as well as a court through which decisions were made, justice was administered and traditional authorities were held accountable Close similarity with post-independence parliament In 1967, before mining commenced, parliament enacted the Mines and Minerals Act which vested all sub-soil resources in the state. This might have pre-empted future conflict over mineral wealth. Parliament has control over public expenditure through approval and monitoring of the implementation of 6-year development plans Overall, Botswana has effective institutions that have created the environment within which political and economic behaviour takes place and is regulated (e.g. parliament, anti-corruption commission, independent judiciary and Ombudsman)

THE BOTSWANA CASE 2: ARE THERE ANY RESOURCE CURSE SYMPTOMS? Weak diversification despite efforts (Figure 2) High unemployment (estimates range widely, 16-40%) partly because of the low job creation capacity of diamond mining and the weak development of the non-mining private sector (Figure 3)

Figure 2 Trends in economic sector shares, 1966-2005 (Based stats from Siphambe, 2007, p.3)

Figure 3: Sectoral shares of workforce, 1980-2005 (based on stats from Siphambe, 2007, p.6)

Resource curse symptoms cont’d High poverty levels in a nation with only 1.8 million people (estimates: 22% of hh and 30% individuals below PDL in 2002/03) High inequality (Gini coefficient estimated at 0.56 for the period 1980-1998) Increasing expenditure on public consumption, as indicated by the rising BSI which was projected to rise from 0.84 in 1995 to 1.08 in 2002.

COMPOUNDING FACTORS Geographic isolation – landlocked deep into the interior of Southern Africa Drought proneness, making agricultural development challenging Soil infertility for arable production Small domestic market SACU free trade area membership HIV/AIDS

CONCLUSION Botswana has so far largely succeeded in avoiding the resource curse. Thus, when the Counsellor at the Botswana Embassy in Washington DC released the following claims to potential US investors he was stating facts about Botswana:

“Factors accounting for the confidence investors should have in Botswana include: • The political stability that has reigned since Botswana became independent in 1966; • The fiscal and monetary discipline of the government; • The absence of foreign exchange controls; • The highest standards of transparency in government, the non-governmental and corporate sectors (Transparency International and the World Economic Forum have assessed and recorded this fact); • A sovereign "A" credit rating awarded by both Moody's Investor Services and • Modern and reliable telecommunications infrastructure and a wide variety of leisure facilities”. Remarks made by Mr. John Moreti at the Botswana Embassy in Washington Source: http://www.africa-ata.org/botswana__business.htm

Conclusion cont’d In my mind, credit for all these achievements goes to the selflessness and vision of the founding leaders of independent Botswana. To appreciate this observation, compare the following statements from two renowned statesmen:

“…. we intend to conserve our resources wisely and not destroy them “….we intend to conserve our resources wisely and not destroy them. Those of us who happen to live in Botswana in the 20th century are no more important than our descendants in centuries to come” – Sir Ketumile Masire, Second President of Botswana “We are in part to blame, but this is the curse of being born with a copper spoon in our mouths” – Dr. Kenneth Kaunda, First President of Zambia

Conclusion cont’d However, we have also attempted to highlight some challenges that Botswana faces. These challenges need to be vigorously tackled or mitigated in order to permanently keep the resource curse at bay THANK YOU FOR YOUR AUDIENCE