This Selected Issues paper and Statistical Appendix analyzes economic developments in Botswana during the 1990s. The paper analyzes the growth process during 1982/83–1996/97 by assessing the contribution of capital, labor, and technological progress, both at the macroeconomic and sectoral levels. The paper examines the diversification initiatives undertaken by Botswana and the extent to which diversification and employment creation have been achieved. It provides the background to the unemployment problem, and summarizes Botswana’s policy initiatives to diversify and create sustainable employment.

Abstract

This Selected Issues paper and Statistical Appendix analyzes economic developments in Botswana during the 1990s. The paper analyzes the growth process during 1982/83–1996/97 by assessing the contribution of capital, labor, and technological progress, both at the macroeconomic and sectoral levels. The paper examines the diversification initiatives undertaken by Botswana and the extent to which diversification and employment creation have been achieved. It provides the background to the unemployment problem, and summarizes Botswana’s policy initiatives to diversify and create sustainable employment.

III. Diversification and Employment Growth39

A. Introduction

66. Botswana has experienced strong economic growth during the last two decades, but its economic base has remained narrow. The mineral sector has been the mainstay of the economy, generating more than one-third of GDP and 70 percent of export earnings, In contrast, the share of the agricultural sector in GDP declined steadily, falling from 11 percent during 1979/80-1983/84, to about 3 percent in 1997/98 (Table III.1). The manufacturing sector, however, maintained its share in GDP relatively constant at 5 percent by growing at a rapid pace during the 1980s and the second half of the 1990s, reflecting, inter alia, strong investment growth. Despite strong growth, Botswana has experienced persistent and rising unemployment, owing not only to the weaknesses in the agricultural sector but also to the lack of adequate employment creation in the nonagricultural sectors. Consequently, the government has promoted diversification of the economic structure in order to reduce dependence on the diamond sector and create employment opportunities for a rapidly growing labor force. This has been a particular challenge in view of the decline in agricultural employment.

Table III.1.

Botswana: Sectoral Real GDP, 1979/80-1997/98 1/

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Source: Central Statistics Office.

National accounts year beginning July 1.

67. This paper examines the diversification initiatives undertaken by Botswana and the extent to which diversification and employment creation have been achieved. The paper is structured as follows. Section B provides the background to the unemployment problem, Section C summarizes Botswana’s policy initiatives to diversify and create sustainable employment, and Section D analyzes the extent to which diversification and employment creation objectives have been achieved, as well as the limitations to diversification. Section E provides some concluding remarks.

B. Trends in Employment and Unemployment

68. Notwithstanding the high growth rates during the past two decades, employment growth has been insufficient to absorb the rapidly growing labor force, and unemployment has remained high. While the trends in unemployment have been mixed over the past two decades,40 the most recent estimate for 1995/96 shows the national unemployment rate rising to 22 percent41 The persistent high unemployment remains a major cause of the high

69. Table III.2 shows changes in the labor force participation rate over the period 1981-95. After increasing robustly from 1981 to 1984, it fell precipitously between 1984 and 1991. This sharp decline was partly explained by the rapid expansion in the rates of school enrollment during the period. For example, between 1985 and 1991 school enrollment rose from 17 percent to 22 percent of the population. The decline in the participation rate from its peak (63 percent in 1984) was also partly explained by the increase in the proportion of discouraged workers, which usually moves in line with rising levels of unemployment

Table III.2.

Botswana: Labor Force and Labor Force Participation Rate, 1981-95

(In thousands, unless otherwise indicated)

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Source: Central Statistics Office.

70. There has been an upward trend in the unemployment rate over the past two decades, as it rose from 10 percent in 1981 to over 21 percent in 1995. A notable exception was the period between 1984 and 1991, when the rate fell temporarily (Figure III). This pattern was consistent with overall economic developments. The drought and sluggish growth in the first half of the 1980s were followed by an economic boom in the late 1980s, which led to a sharp increase in employment between 1984 and 1991. This boom was followed by a slowing of growth and stagnating employment growth in subsequent years.

Figure III.
Figure III.

Botswana: Diversification and Employment Growth, 1979/80-1997/98 1/

Citation: IMF Staff Country Reports 1999, 132; 10.5089/9781451806342.002.A003

Sources: Botswana authorities; and Fund staff estimates.1/ National accounts year beginning April 1.

71. The key constraint to employment creation in Botswana has been structural, as the sectors where the economy has a natural advantage in production, such as diamond mining, are not labor intensive. Moreover, in contrast with many other sub-Saharan African countries, arable agriculture, where labor-intensive techniques may still be an efficient method of production, shows little potential for further development in Botswana.

72. In 1964, the composition of the workforce was largely agricultural, with almost 91 percent employed in subsistence agriculture. In contrast, less than 4 percent of the total workforce was employed in industry, and 5½ percent in the services sector.42 In 1971, agriculture continued to dominate, with over 86 percent of those employed engaged in agriculture. However, by 1981, employment opportunities had decreased by almost 40 percent; meanwhile, employment in both the industrial and services sectors of the economy had almost tripled since 1971, effectively offsetting the job losses in agriculture. In 1991, the transformation of the workforce was continuing: employment opportunities in agriculture had decreased by another 37 percent during the decade, while those in industry and services had increased by 207 percent and 93 percent, respectively. With the rapid decline of agricultural activity continuing in the 1990s, the 1995/96 Labor Force Survey estimated that only 14 percent of the active labor force was employed in traditional agriculture.

73. The low participation rates in agricultural activities have put additional pressure on other sectors, especially the formal sector, to be the source of job creation. About 45 percent of the active labor force is currently employed in the formal sector. As employment in the formal agricultural sector was declining and the mining sector’s contribution to employment generation was limited, the public sector was the largest contributor to employment growth over the past decade, growing by 6 percent annually during 1987-97 (Table III.3). Public sector employment growth was mainly driven by the significant expansion of the education system.43

Table III.3.

Botswana: Formal Sector Employment, 1990-98,1/

(In thousands)

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Source: Botswana authorities.

Data for March.

C. Policies to Diversify and Create Employment

74. Several policy initiatives have been undertaken to diversify the economy and create sustainable employment. The policies can be categorized as follows: first, are the regulatory instruments governing the establishment of enterprises; second, are the direct incentives provided by government to promote employment.

75. The Industrial Development Act of 1968 has been the main instrument of regulating and promoting industrial development in Botswana. One of the objectives of the IDP was initially to promote import substituting industries. With the exception of the traditional exports in the mining sector, the export drive did not take off until the late 1980s.44 However, due to the continued increase in unemployment that prevailed in the early 1980s, the IDP was revised in 1984 to promote the creation of productive employment for citizens, training of new workers for jobs with higher productivity, and dispersion of industrial activities to rural areas. The IDP was further revised in 1997 to provide an enabling environment for highly productive and efficient export industries. As the IDP was not particularly tailored for Small, Medium and Micro Enterprises (SMME), a policy framework for the development of SMMEs was approved by Parliament in 1998. The framework sets out the guiding principles and objectives of developing SMMEs which include: creating an environment within which SMMEs will grow; encouraging competitive and sustainable SMMEs; promoting the development of vertical integration and horizontal linkages between SMMEs and primary industries in agriculture, mining and tourism; fostering citizen entrepreneurship; creating sustainable employment opportunities; and, discouraging dependence of SMMEs on government.

76. In addition to creating a conducive environment for diversification, government has also created several incentive schemes to promote sustainable employment opportunities in the nonmining sector. The Financial Assistance Policy (FAP) is currently the main government initiative to stimulate productive employment and diversify the economy. This policy was introduced in 1982, and substantially revised in 1995.45 In a recent evaluation of FAP, the government concluded that the program had succeeded in creating jobs for the unskilled in a cost effective manner. However, the report also identified several weaknesses including: low survival rate of small scale enterprises; the negative effects of the program on labor productivity; and, early closure of firms when the grant expires. Apart from FAP, other incentives which have been used to promote employment and diversification are: Local Preference Scheme, the Selebi-Phikwe Regional Development Program, and the Arable Lands Development Program (Box III.1). In addition to the above incentives, government has also introduced the vocational training program to address the high unemployment rate among school leavers. This program is mainly intended to reduce the mismatch between the type of skills acquired in school and those required by the changing economy.

D. Measures and Limitations of Diversification

77. The twin objectives of Botswana’s diversification policy have been to reduce the dependence on the mining sector and to create employment in the nonmining sector.

Sectoral diversification

78. The degree of diversification can be considered a function of the distribution of individual sectoral shares. When using measures of concentration to describe the degree of diversification, it is assumed that a lower level of concentration would lead to increased stability or growth. Popular measures of concentration include the Ogive index and the entropy index. The Ogive index measures deviations from an equal distribution of sectoral (export) shares among sectors and is given as follows:

Diversification and Employment Incentives

1. Financial Assistance Policy: This scheme provides prospective employers with grants based on the size and location of new investment, the number of unskilled workers employed, and the cost of training programs. These grants are limited to a period of five years. The financial assistance is provided to entrepreneurs in manufacturing, small-scale mining, mineral processing, agriculture (other than beef production), and tourism. The incentives for small-scale businesses (currently defined as those with investment in fixed assets of P 75,000 or less) are confined to citizen-owned firms. Incentives for medium- and large-scale businesses are available to all eligible firms, irrespective of citizenship.

2. Local Preference Scheme (LPS): The LPS was introduced in 1976 and modified in 1986. Its main objective was to direct a substantial share of purchases by the central and local governments and parastatals to local manufacturers. The scheme was aimed at increasing production in Botswana and encouraging the use of local raw materials and labor in manufacturing. Local firms that qualified for the LPS were given special preference over foreign firms, when tendering for government contracts. In 1997, the LPS was replaced by a new Local Procurement Program, whose main purpose was to channel a proportion of orders for central government supplies to locally based small, medium, and micro enterprises.

3. Selebi-Phikwe Regional Development Program (SPRDP): This program was established in 1988 and its main objective was to promote diversification by encouraging investment in nonmining economic activities in the Selebi-Phikwe area, which was totally dependent on copper-nickel mining. This scheme involved a reduction of the corporate tax rate to 15 percent for 20 years. The evaluation of the SPRDP in 1992 found that the location of the area remained a strong disincentive for potential investors, although the program had attracted some export-oriented foreign investors. Subsequently, the SPRDP was integrated into the Trade and Investment Promotion Agency after the corporate tax was reduced to 15 percent for all manufacturers regardless of location.

4. Arable Lands Development Program (ALDP): In order to improve the productive capacity of farmers, the government introduced the ALDP in 1982. The program was designed to assist farmers with on-farm investment packages. In addition, the government aimed at maintaining a high and sustainable level of cattle production through improved livestock management and husbandry techniques, land conservation, and a more efficient land tenure system.

Ogive=Σn=1N(XnI/N)2I/N,(1)

where N is the total number of sectors (or export commodities) being considered, I/N is assumed to be the “ideal” share of earnings for each commodity, and Xn is the actual share of each commodity in total exports. Perfect diversification is defined as an equal distribution of sectoral shares (Xn equals I/N for each commodity), and in this case the Ogive index would be equal to zero. A more unequal distribution of export shares results in a higher Ogive measure.46 An alternative measure for diversity is the entropy index, which can be expressed as

Entropy=Σn=1NXnInXn,(2)

where Xn is the sectoral (export) share of total output (exports). If the economic activities are concentrated in a single sector (commodity), then Xn=1, and hence the value of the entropy index equals zero. If there is equal distribution among the N sectors, then the entropy index achieves a maximum value, In (N), which indicates perfect diversity.

79. When these two indices are applied on the sectoral shares of GDP in Botswana, little progress has been made in diversifying Botswana’s economic base. The concentration of activity in the mining sector and overreliance on diamond exports continues to be high. Figure III shows diversification trends in Botswana during the period 1979/80-1997/98. Both indices show that Botswana’s economy was most diversified during 1979/1980-1983/84, a period when mining contributed 30 percent of the GDP. The Ogive index for this period was 0.71, while the entropy index was 2.02 (Table III.4).47 However, during the period 1984/85-1988/89, when the share of mining was on average 45 percent of GDP, the two indices worsened. The Ogive index increased by 20 percent, while the entropy index declined by 2.5 percent. Since 1995/1996, the two indices have shown a greater diversification of the economic base, mainly reflecting the expansion of the manufacturing sector.

Table III.4.

Botswana: Aggregate Sectoral Diversification Indices, 1979/80-1997/98

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Source: Fund staff estimates.

Employment creation

80. The 1995 Labor Force Survey shows a continued decline in employment opportunities in traditional agriculture to less than 15 percent of the total labor force. As previously discussed, the weaknesses of the agricultural sector, mainly due to poor climatic conditions and limited arable land, have contributed significantly to unemployment and poverty. In addition, government schemes to improve productivity in the agricultural sector have also been largely unsuccessful.48 Given the difficulties of the relative decline in the agricultural sector, diversification initiatives have been mainly tailored to increasing employment in nonagricultural sectors, especially manufacturing and services. Initiatives in these areas—nonmining and non-agriculture—have been partially achieved, as portrayed in the formal sector employment data.

81. Between 1983 and 1992, annual aggregate employment growth in the formal sector was 8½ percent (Table III.5). However, employment growth during the period 1993-97 stagnated, largely reflecting the contraction in the construction and agricultural sectors. Development of the manufacturing sector has been the most promising route for economic diversification and job creation, and it has been favored with concessionary tax rates, as well as a variety of incentives under the Financial Assistance Policy (FAP). As a result, this sector has demonstrated fairly high employment growth rates since 1980, particularly during the period 1983-87, when employment grew by more than 15 percent on average.

Table III.5.

Botswana: Formal Sector Employment, 1983-97 1/

(Average annual percentage change)

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Sources: Central Statistics Office; and Fund staff estimates.

Data for March.

82. While employment has increased, labor productivity in the manufacturing sector has been on a declining trend since the early 1980s, except for a temporary increase in the mid-1990s (Table III.6). One possible cause of this long-term decline has been the gradual change in the composition of output in this sector toward more labor-intensive products and techniques. Other sectors that are targeted by the FAP, such as trade, hotels and restaurants and finance, have witnessed declines in labor productivity as well.

Table III.6.

Botswana: Labor Productivity, 1982/83-1997/98 1/

(Average annual percentage change)

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Sources: Central Statistics Office; and Fund staff estimates.

National accounts year beginning July 1.

Limitations of diversification

83. Botswana’s potential for diversification is limited by its natural resource base, geographical location, shortage of skilled labor, and the small size of its domestic market. Botswana’s climate is mostly arid or semiarid, with mean annual rainfall ranging from over 650 millimeters in the northeast to less than 250 millimeters in the extreme southwest. The incidence of rain is highly variable both in time and space, and drought is a recurring hazard. With less than five percent of the land arable and a large variation of the incidence of rain and recurring droughts, diversification and employment creation in the agricultural sector has remained limited. In addition, livestock production is constrained by a growing shortage of grazing land and by periodic droughts. In recent years, Botswana has not been able to fulfill its quota to the EU market as a consequence of droughts and the need to rebuild the herds afterward.49 Beef exports are also vulnerable to outbreaks of disease, including foot-and-mouth disease (now largely prevented by the use of quarantine fences) and cattle lung disease, which led to a marked drop in beef exports in 1996.

84. Another limitation to the diversification of the economic base is the shortage of skilled labor. Since the 1970s, high priority has been given to spending on education; as a result, the proportion of skilled labor increased from 16 percent of the labor force in 1975 to 40 percent in 1995 (Table III.7). While the unskilled labor force increased at a rate of 1 percent per year between 1975 and 1995, skilled labor increased at an 8 percent rate during the same period. Despite extensive spending on education, there is still high unemployment among school leavers and low levels of self-employment, which suggests a mismatch between the type of skills acquired in school and those required by the rapidly expanding economy.

Table III.7.

Botswana: Skilled and Unskilled Labor Force, 1975-95

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Source: Central Statistics Office.

85. The Africa Competitiveness Report 199850 ranks Botswana third in competitiveness of the 23 African countries used in the survey. While Botswana scored highly in several factors that are important for competitiveness, the report also identified some weaknesses, including (i) the lack of investment protection for foreign investors; (ii) the high costs of utilities, especially electricity; and (Hi) the limited supply of educated workers. Another key factor for maintaining competitiveness is realigning wages and productivity. The highly productive mining industry supports the relatively high—by developing country standards—wage levels in the mining and the public sectors. When extended to manufacturing and services sectors, these wage levels are above what the productivity of these sectors can support. Those high wages also make it more difficult to develop labor-intensive manufacturing, as the existing policies aim to do.

86. The small size of the domestic market is also a factor limiting diversification. Botswana’s population is estimated at 1.5 million, of which about 75 percent still live outside formally established urban areas. The limited rural income base and dispersed population both constrain the expansion of the domestic market. In addition, being a land-locked country has also partially slowed the development of industry because the cost of accessing distant markets is high. The lack of direct access to sea ports results in high transportation costs and a dependency on transit routes through South Africa. Road and rail transportation is costly, making some domestic products more expensive than imported products from South Africa, where local manufacturers source most of their raw materials and equipment. Finally, the high cost of utilities renders some of Botswana’s products expensive in the domestic, regional, and international markets. This high cost is partly explained by the small, widely dispersed population.

E. Conclusion

87. The primary objective of economic diversification in Botswana has been to create productive and sustainable employment opportunities in the nonmining sectors. A number of policy initiatives have been undertaken to attain this objective. The overall effectiveness of these initiatives can be analyzed on two fronts. At a sectoral level, the concentration of activity in the mining sector and the overreliance on diamond exports continue to be high. However, the objective of creating employment opportunities in the nonmining sectors has been partially achieved in the manufacturing sector. However, labor productivity in the manufacturing sector has been generally on a decline, owing to the intensive use of labor. The analysis also finds that the public sector has continued to be the largest contributor to employment growth, which may not be sustainable over the longer term.

88. A significant part of the employment creation and diversification problems are structural, as they reflect the weaknesses in the agricultural sector, the shortage of skilled labor, the mismatch of skills between the labor force leaving the agricultural sector for other sectors, the high wage levels compared with other countries in the region (with the exception of South Africa), the small size of the domestic market, the shortage of serviced industrial land, and the high cost of utilities. However, continued emphasis on the diversification of production and employment—as well as more effective efforts to limit the decline in employment opportunities in the agricultural sector—will be necessary to alleviate the persistently high unemployment rate.

Annex Botswana: Summary of the Tax System, December 1998

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Sources: Tax, and Customs and Excise Departments.

STATISTICAL APPENDIX

Table 1.

Botswana: GDP by Type of Expenditure at Current Prices, 1993/94-1998/99 1/

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Sources: Central Statistics Office; and Fund staff estimates.

National accounts year beginning July 1.

GDP minus consumption.

Table 2.

Botswana: GDP by Type of Expenditure at Constant 1985/86 Prices, 1993/94-1998/99 1/

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Sources: Central Statistics Office; and Fund staff estimates.

National accounts year beginning in July.

Table 3.

Botswana: GDP by Type of Economic Activity at Current Prices, 1993/94-1998/99 1/

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Sources: Central Statistics Office; and Fund staff estimates.

National accounts year beginning July 1.

Table 4.

Botswana: GDP by Type of Economic Activity at Constant 1985/86 Prices, 1993/94-1998/99 1/

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Sources: Central Statistics Office; and Fund staff estimates.

National accounts year beginning July 1.

Table 5.

Botswana: Beef Sales, 1993/94-1997/98 1/

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Source: Botswana Meat Commission.

Year beginning October 1.

Table 6.

Botswana: Mineral Production and Value, 1993-98

(In units indicated)

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Source: Central Statistics Office.

Estimated value of production.

Table 7.

Botswana: Agricultural Producer Prices, 1993/94-1998/99 1/

(In pula per ton)

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Source: Botswana Agricultural Marketing Board.

Crop year beginning in April 1.

Table 8.

Botswana: Formal Sector Employment, 1993-98 1/

(In thousands)

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Sources: Central Statistics Office.

Data for March.

Table 9.

Botswana: Statutory Minimum Wage Rates, 1993-98 1/

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Source: Central Statistics Office.
Table 10.

Botswana: Average Cash Earnings by Sector, 1993-98 1/

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Source: Central Statistics Office.

Data are for March.

Table 11.

Botswana: Consumer Price Index of Tradables and Nontradables, 1993:Q1-1999:Q2

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Sources: Central Statistics Office; and Fund staff estimates.

Ratio of price index of tradables to price index of nontradables.

Table 12.

Botswana: Cost of Living Indices by Commodity, January 1996-June 1999

(Twelve-month percentage change)

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Source: Central Statistics Office.
Table 13.

Botswana: Cost of Living Indices for Tradable and Nontradable Goods, January 1996-June 1999

(Twelve-month percentage change)

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Source: Central Statistics Office.