It has often been observed that resource-abundant economies tend to grow less rapidly than resource-scarce economies—a phenomenon referred to as the “resource curse.” But Botswana appears to be an exception. Although it is one of the most resource-rich countries in the world, it has achieved remarkable economic success. A new IMF Working Paper casts light on the relationship between growth and natural resources in Botswana and suggests that governance may play a catalytic role in transforming resource abundance into economic development. The study finds that good regulation and powerful anticorruption policies are particularly important for resource-abundant developing countries.
For the past 30 years, Botswana has experienced extraordinary growth—about 9 percent a year on average since the mid-1970s (see chart)—raising its per capita GDP, currently estimated at over $5,000 a year (in current prices), from the low-income-country to the upper-middle-income-country level. This strong economic growth has largely been attributable to an abundance of diamonds, of which Botswana is the world’s largest producer, with about $3 billion in exports every year. The mining sector (copper, nickel, and coal, as well as diamonds) accounts for about 40 percent of Botswana’s total growth. Mineral wealth has also enabled Botswana to register current account surpluses averaging 5 percent of GDP over the past three decades and accumulate over $6 billion of foreign reserves.
The role of governance
But mineral wealth alone does not account for Botswana’s economic growth. Botswana has also been praised for its sound institutions and good governance, which are rooted in the strong political leadership that has prevailed since it achieved independence in 1966. According to the Governanc Research Indicator Country Snapshot (GRICS) indices developed by the World Bank, Botswana ranks well above the aver age of middle-income countries in all aspects of governance and compares favorably even with some high-income countries in several aspects (see table).
Botswana’s fiscal management, in particular, has been disciplined and transparent. With an implicit rule that all mineral revenue is used to finance “investment expenditure,” the government has, except in several recent years, run surpluses for almost two decades. Investment expenditure is defined as development expenditure and recurrent spending on education and health care; other recurrent spending is funded from nonmineral revenues.
Bucking the curse
Botswana’s resource wealth has allowed it to grow at a healthy rate and achieve upper-middle-income status.
Citation: 35, 15; 10.5089/9781451968507.023.A012
Data: Botswana authorities and World Bank, World Development Indicators, 2006.
The resource-growth link
Why is the link between resources and growth not automatic? Despite expectations that resource-rich countries can promote growth by using the large revenues they derive from their resources to invest more in economic infrastructure and human capital, economic growth in these countries has often stagnated. Various reasons have been put forward.
From a political economy perspective, natural resource wealth can sow the seeds of discord and conflict among domestic stakeholders, such as politicians, developers, local tribes, and citizens. If monitoring systems and fairness based on the rule of law are not in place, stakeholders may be motivated to seek unfair resource rents—those that exceed economically reasonable profits—quickly depleting natural resources. Sometimes, tribal conflict or an international civil lawsuit results. Resource rents may also bring about corruption, eroding economic efficiency, and undermine sound fiscal management, reducing the pressure on governments to collect taxes and enforce accountability and weakening fiscal discipline.
From an economic point of view, Dutch disease is another possible reason that resource wealth doesn’t automatically promote growth. In resource-exporting countries, sectors other than natural resources (typically manufacturing) are likely to suffer from the real appreciation of the national currency, because resource earnings are absorbed, in part, by the domestic nontradables sector, raising the country’s income level. Some have attributed Africa’s slow growth in recent decades, in part, to the Dutch disease syndrome. The lack of positive spillover effects associated with natural resource extraction, which is generally capital-intensive and location-specific, may also limit vigorous development in the agglomeration of nonmineral industries.
On all measures of governance, Botswana compares favorably with averages for middle-income developing countries and is not far below those for high-income (developed) countries.
|Voice and accountability||0.75||0.42||0.38||0.57||0.82|
|Quality of regulation||0.72||0.38||0.34||0.51||0.85|
|Rule of law||0.67||0.33||0.29||0.47||0.84|
|Control of corruption||0.62||0.29||0.25||0.39||0.76|
Resource abundance should be advantageous to any economy whose government has a sound long-term plan for extracting natural resources and an effective mechanism for investing revenues in the social and economic infrastructure needed for sustained growth and economic diversification. However, if governance is poor, resource earnings are liable to be unevenly distributed and unfairly dissipated, and the country may be doomed to economic stagnation.
Explaining the relationship
Is good governance essential for resource richness to lead to growth, as it has done in Botswana? To explore this relationship, the Working Paper uses a growth regression approach that takes into account all relevant macroeconomic conditions: natural resource richness measured by per capita natural resource exports (such as oil, metals, and precious stones, but not agricultural products), governance, average tax rate, trade openness, and population growth. The study analyzes 89 countries—60 developing countries and 29 high-income countries—between 1998 and 2002.
To measure governance, the study uses the GRICS indices. By introducing an interactive coefficient between resource abundance and each of these six governance indices into the estimation equation, it examines which dimension of governance is most crucial to helping ensure that resource endowment contributes to producing economic prosperity.
The study finds that natural resources tend to affect economic growth negatively. However, the interactive effects of resource abundance and governance are systematically positive for growth, meaning that if a country has good governance, resource wealth is conducive to economic development. Thus, resource abundance itself does not prevent faster growth, as implied by the resource curse hypothesis. Rather, with proper government management, resource richness can generate growth.
The right policies
For any country to manage its natural resources beneficially, good governance is important in four dimensions: voice and accountability, government effectiveness, the quality of regulation, and anticorruption policies. The study’s regression results indicate that for developing countries, the last two are particularly important.
The policy implications are straightforward. First, voice and accountability refer to civil liberties and political rights and represent the ability of a democratically accountable government to discipline those with the authority to extract resources. Without monitoring by citizens and a process for selecting and replacing those in power, resource rents will tend to be dissipated unfairly. Second, government effectiveness, as measured by the quality of public services and the competence of civil servants, also needs to be high. If the government cannot produce and implement adequate resource and revenue management policies, resource wealth will be overexploited.
Third, because natural resource development necessarily involves a long-term relationship with private parties, market-unfriendly policies like price controls, excessive regulatory burdens, and arbitrary political interventions in mining transactions, are undesirable. Finally, anticorruption policies are essential to ensure that resource benefits are distributed fairly and transparently. To prevent corruption, the budgetary and procurement process needs to be transparent; an independent anticorruption authority may have to be established to ensure that this is the case.
Other factors still matter
A remaining question is whether good governance is sufficient for resource-rich countries to avoid the resource curse. Good governance alone may not prevent Dutch disease, especially given that resource-dependent counties—including Botswana—are often not economically diversified. Despite its income prosperity, Botswana is lagging behind in terms of employment and social development. It is clear that, in addition to good governance, other supporting policies, including structural reforms, are necessary to ensure that natural resource benefits are effectively channeled into sustainable growth and social development.
IMF African Department
This article is based on IMF Working Paper No. 06/138, “Did Botswana Escape from the Resource Curse?” Copies are available for $15.00 each from IMF Publication Services. See page 240 for ordering information. The full text is also available on the IMF’s website (www.imf.org).