Will the Botswanan Economy Remain Miraculous?

Will the Botswanan Economy Remain Miraculous?

Of all the colonial possessions of Great Britain, the least amount of interest may have been applied to the area that would become Botswana in the southern part of Africa. When it became inevitable that British possessions would become independent after the Second World War, it would have made some sense for areas like Botswana to be merged into South Africa as a single government. This never happened because South Africa’s system of apartheid was firmly in place by the time of Botswanan independence in the 1960s, a system condemned by the British Commonwealth, causing South Africa to temporarily leave the Crown. Botswana was allowed to go its own way in 1966.

When Botswana became independent it was the third poorest country in the world. There were perhaps twenty people in the whole country that had attended college (even more telling, perhaps only one hundred in the country had graduated from the equivalent of High School in the United States). As is the case today, it was landlocked with no access to the sea. The sum of paved roads in the country amounted to 12 kilometers. The whole of the country had a population of about 600,000 and a size about equal to France, most of which was a desert. If bets were cast at the time of independence, the odds would have strongly favored Botswana being condemned to perpetual poverty.

Instead, Botswana has become one of the most extraordinary development stories in modern history. Although the country is not rich today, it is rightly considered middle income, with the typical citizen earning the equivalent of $16,000 per year – an eighteen-fold increase from the time of independence (even adjusted for inflation).

Different Economists attribute economic growth and development to different factors. Some posit that geography is the key to understanding development challenges. Countries near the equator and without access to navigable waterways are likely to be poorer and contend more viciously with illnesses like malaria. Others put more weight on how well institutions are developed within a country Рsuch as the rule of law. But, all economists are particularly intrigued when nations that are close in geography and background diverge in development because it can serve as a natural experiment.

In Botswana’s case, none of its neighbors have developed like it has. One neighbor, Zimbabwe, was as poor as Botswana at the time of independence and has never become much wealthier since then. Another, South Africa, was rich by world standards when it broke from the British, yet has seen its economy stagnate for years.

GDP per Capita (at PPP) of Botswana and its neighbors since 1961 as well as the percentage of each countries per capita GDP to the world average.

Is there a ‘secret sauce’ that Botswana has found to propel development forward?

The Pragmatic Seretse Khama

Botswana’s first leader after independence was Seretse Khama, who was educated in England. A firestorm in South Africa and Britain erupted when Khama married a white, British woman, Ruth Williams. Initially banned from entering the British colony he was born in, he finally returned in 1956 as a businessman. But, his battle with the British made him a legend in Botswana and he was elected Prime Minister in 1965. Khama’s party, the Botswana Democratic Party, has never since been out of power.

The legal infrastructure of Botswana remained British-like after independence, with a common law legal system and parliamentary restraint on the power of the Prime Minister – yet, this fact was true through much of sub-Saharan Africa, and so explains little of Botswana’s success. Instead, the secret to Botswana’s success seems to be a good and stable government – in the same way that good governance allowed a country like Singapore to rocket into affluence last century as well.

Under Khama, a series of pro-market and pro development policies were enacted. A relatively low tax rate was applied to mining companies to encourage the extraction of natural resources and personal tax rates were kept low as well. This had important consequences in Africa in particular, because it discouraged tax evasion and corruption, common in the region. Khama also explicitly created an open society. In addition to encouraging trade, Botswana opened the doors to both former Botswanan ex-pats that had left looking for work as well as a significant population from South Africa and, at that time, Rhodesia who were seeking to escape apartheid policies.

A 1967 discovery of a diamond mine in the Kalahari desert also aided in Botswana’s development. The Orapa mine continues to be the largest diamond mine in the world. Significant numbers of countries, though, that have been blessed with resources have been unable to turn that blessing into development. A partnership with De Beers ensured expertise in mining the diamonds themselves, but rather than squandering the new-found riches, Botswana made regular five-year plans of investment to invest earnings from diamond mines into a usable infrastructure – roads, water, education, and health care.

Khama also recognized the dangers of corruption and saw to it that unambiguous anti-corruption laws were passed and strictly enforced.

GDP growth by year for Botswana, Zimbabwe, and South Africa (Top) as well as rolling ten-year moving averages (Bottom).

Another significant aid to Botswana’s development was a lack of ideology from Khama. Scores of African nations were being organized at the time along ideological principles (Marxism, Apartheid, Black Power), while Khama was only interested in practical success. He had no qualms about trading with white governments or opening the doors of Botswana to the skilled and unskilled alike.

The Algebraist Carl Gustav Jacob Jacobi is purported to have said: “All I want to know is where I’m going to die so that I never go there.” This inverted line of thinking also seems to be key to Khama’s thinking on development. Not only were positive policies implemented, but just as crucially the bad ones were avoided. Corruption and conflict would have led to perpetual poverty in Botswana, and as a result, Khama tried explicitly to ensure his country was free from those corrosive problems commonly found in Africa.

“Let me Keep My Zimbabwe”

Botswana’s neighbor Zimbabwe has had a very different post-colonial experience. It’s leaders have willingly taken the country to ‘where it would die.’ War was frequent at the outset of the nation’s independence, corruption rampant, and a quasi-Marxist worldview implemented.

To be fair to the current government, the initial warfare in the country was something that would have been hard to avoid. What is Zimbabwe today was then Rhodesia, a place where white settlers struggled to hold onto power against black guerrilla groups. One of the leaders of those groups was Robert Mugabe, the President of Zimbabwe since 1987. Despite winning the conflict, Mugabe’s views appear to have evolved very little – he still clings to an anti-colonial and pro-Marxist mindset.

Why is it wrong to be anti-colonial? It is not. The responsible thinkers of the world condemn the system, but an obsession with past wrongs makes future development all but impossible. When former British Prime Minister Tony Blair was critical of government programs to redistribute white-owned farms to black Zimbabweans, Mugabe said defiantly, “So Blair, keep your England, and let me keep my Zimbabwe.”

The seizure of white-owned farms has been one contributor to Zimbabwe’s poverty. The farms seized were generally given to politically connected allies, but transferring land from owners as spoils was bound to cause a large drop in agricultural productivity, and it did.

Mugabe also has a history of over-spending the budget of the country. Earlier this century he turned to money printing in an effort to erase the debts he had built up, but this only caused massive inflation and more economic instability. Poor governance caused Mugabe his first electoral defeat in 2000, but rather than accepting the verdict of the people, he hit back with militias, state police, and legislative actions designed to entrench his political power.

The corruption that became intertwined in Zimbabwe’s government has also choked opportunities for growth and scared away foreign investment. One such example is the so-called Willowgate Scandal that involved government officials being sold cars for well below their retail value and then getting rich reselling them. The diamond trade is also a lucrative one for corrupt officials. Mugabe himself is said to have a net worth of $10 million, while his cousin may be worth as much $200 million. Whereas resource wealth funded needed services in Botswana, a few have gotten rich from it in Zimbabwe while the country continues rotting in poverty.

Stagnation in South Africa

Unlike Botswana and Zimbabwe, South Africa had more wealth to draw upon when it emerged as an independent country – it’s income levels were approximately eight times higher than the rest of the region. Once Nelson Mandela was freed from prison, the country looked set to put its ugly history of apartheid to bed as well. But, after Mandela, the country has stagnated. The long run rate of growth in South Africa has been about 3%, but in the last ten years has averaged only 1.7%. This year, economists expect growth of less than 1%.

Much of the blame should be laid at Mandela’s two successors: Thabo Mbeki, who ruled from 1999 to 2008 and Jacob Zuma, from 2009 until today.

Growth averaged 4% during Mbeki’s time as President of South Africa, but that number was significantly juiced by an enormous increase in commodity prices during that time. While serving in Mandela’s Government, Mbeki pushed through a program known as GEAR (Growth, Employment, and Redistribution) that promoted free market policies in the country. The program was relatively successful in a broad sense but failed to effectively address the state of the vast majority of the population that had been brutalized and locked out of economic participation for so many years. After becoming President, Mbeki resorted to more authoritarian measures when many in the country sought more populism. Among the most idiotic and harmful policies of Mbeki was his refusal to accept the scientific proof that HIV causes AIDS and the accompanying policy of banning retroviral drugs in government-run facilities.

Zuma’s governance has been even worse than Mbeki and responsible for resurgent corruption in South Africa. Zuma had been accused of rape and corruption even before he took over leadership of the country. Things have gotten even worse since Zuma fired his Finance Minister, a man highly respected by financial markets, and presided over atrocious fiscal policies. South Africa’s credit rating is now just one level above junk according to Moody’s and Standard and Poor’s. It has not helped matters that Nhalanhla Nene, the fired Finance Minister, in part lost his job because he criticized Zuma’s free spending from government coffers.

Botswana: The Future of a Miracle

While Botswana is no longer growing at the rate it once was, it’s economy remains sound. It should grow at 4% this year, while Zimbabwe’s economy contracts and South Africa’s grows at less than 1%. Botswana’s longer term trend growth also remains at around 4%.

If the comparison with Zimbabwe shows that Botswana had no divine right to growth, its’ comparison to South Africa should equally demonstrate that the country can stagnate without continued intelligent policy making.

Topping the list of problems in Botswana is continued inequality. Whereas about 11% of the world is living below the poverty line, somewhat arbitrarily set at incomes of $1.90 per day, the percentage in Botswana is roughly double. According to the World Bank, Botswana is the fourth most unequal country in the world.

Income GINI coefficient for ten most unequal nations and selected economies. A higher GINI coefficient implies higher inequality. Source: World Bank.

Sub-Saharan Africa is the most unequal part of the world, rivaled only by Latin America. The causes are many but include the resource-rich nature of many of the economies, which naturally concentrates wealth in a few hands and a lack of educational opportunities among the poor. Botswana has attempted to battle inequality by handing out agricultural subsidies, which have helped incomes in rural parts of the country but does nothing to help the poor parts of urban areas like Gaborone. Whereas ownership of valuable resources is shared in Botswana, the high paying jobs in the diamond mining sector can only employ so much of the population – a prime reason why inequality has remained high and Botswana has historically had a high unemployment rate while notching strong growth. A more inclusive economy would not only lift more people out of poverty but likely increase growth from its current levels. Success has been seen in diversifying the economy from natural resources, but not in reducing inequality, indicating that some greater progressivity in the tax code and policies of the government may be wise.

Botswana must also continue building upon its successes in fighting HIV. The adult prevalence rate in the country is a stunning 25%. Yet, Botswana provides retro-viral drugs to almost all who are infected. That will not only allow those infected to lead normal lives but also prevent further spreading of the virus.

The Agency Problem

Why have more countries not followed Botswana’s development lead? Business courses often talk about the “agency problem,” when the managers of a business have different incentives than the shareholders. In many other poor countries, what is good for those in power is not the same as for those they rule. A pity, because successes like Botswana provide a general outline of how to build good institutions and work towards increasing prosperity.

Many countries would benefit from studying it. Botswana would also do well to not forget its past.

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