Botswana: Selected Issues and Statistical Appendix

This Selected Issues paper and Statistical Appendix on Botswana underlies that diamond reserves are not adequate to generate enough permanent revenue to support the current level of expenditure. Despite strong overall growth, in Botswana, a pattern of dependence on diamond revenue and high unemployment persists. Botswana, as a typical small open economy, is closely linked to a large neighboring economy. This linkage means Botswana’s monetary and exchange policies must consider the external economic environment, particularly the pula’s exchange rate against the rand.

Abstract

This Selected Issues paper and Statistical Appendix on Botswana underlies that diamond reserves are not adequate to generate enough permanent revenue to support the current level of expenditure. Despite strong overall growth, in Botswana, a pattern of dependence on diamond revenue and high unemployment persists. Botswana, as a typical small open economy, is closely linked to a large neighboring economy. This linkage means Botswana’s monetary and exchange policies must consider the external economic environment, particularly the pula’s exchange rate against the rand.

A Narrow Economy and High Unemployment, Twin Problems for Botswana5

A. Introduction

32. Botswana, a resource-rich middle-income country, has been praised for its stable democratic government, rapid economic growth, and prudent management of its large diamond resources. However, the country is highly dependent on the diamond mining industry and a large government sector. While nondiamond exports have grown, diamonds still dominate exports at around 75 percent, most other exports are mining-related, and growth in the nonmining private sector is weak. Foreign direct investment (FDI) has been concentrated in the mining sector, which offers limited employment opportunities because it is capital-intensive.

33. Botswana’s unemployment has been high, and as a result social indicators often lag behind those of other economies in similar income levels. Unemployment has been persistently above 20 percent, and the rate is rising, particularly among the young. The government has been the largest employer, and the main export industry, the mining industry, accounts for only 3 percent of formal employment. The result of high unemployment is that about a third of the population lives below the national poverty line (roughly comparable to $2 a day), and the Gini coefficient is at almost 0.6, compared to 0.3-0.5 in most middle-income countries6. Botswana also has one of the highest HIV/AIDS infection rates in the world (about 35 percent of adult population, according to UNAIDS), which puts further pressure on social development and costs.

34. The purpose of this paper is to understand (i) why, despite global recognition of Botswana’s institutional transparency and stable economy, the economy relies so heavily on diamonds and a large government sector; and (ii) why unemployment and poverty rates are high when the economy has been growing rapidly. It argues that the large size of the government causes two problems:

  • Diamond revenues have allowed the government to become the largest employer with an average wage well above the rest of the economy. This may have tilted the workers’ preference towards limited job opportunities in the government sector than to seek employment opportunities in the private sector.

  • At the same time, the government has provided various types of social safety net programs. This, and financial support from extended families may have increased their reservation wage: potential workers are unemployed because they are unwilling to work at a market-clearing wage.

35. The result is economic waste with high unemployment and employers, including potential foreign investors, offering fewer jobs than they otherwise would. Hence, FDI continues to be limited to the capital-intensive mining sector.

B. Sources for Botswana’s Rapid Growth

36. Botswana’s per capita income rose from US$80 at the time of its independence in the mid-1960s to US$4,600 in 2005. The rapid growth has been attributed to a stable political environment, good governance, and the rich diamond resource.

37. Despite the magnitude of diamond revenues, there has been no domestic political instability or conflict over control of revenue in Botswana. First, the ethnic fighting that has wounded much of Africa has not been a problem because most of the people are ethnic Tswanas. Second, after independence, the central government established itself as the holder of mineral rights in all tribal lands, thereby establishing the authority of the state over the entire country. This has helped it to avoid regional conflict due to diamond deposit–led income differences between regions.7 Botswana has also been praised for its institutional transparency; it is ranked among the top 25 percent (the highest in Africa) in Transparency International’s Corruption Perception Index.8

38. Botswana is the largest diamond producer in the world by both carats and value. Its successful partnership with De Beers, the world’s largest diamond mining company, has also contributed to the development of the mining sector. In 2004 Botswana’s four major mines produced 31 million carats of diamonds, about 66 percent of total DeBeers Group output. The fact that Botswana’s diamond deposits are in kimberlite pipes where diamonds are concentrated in a small area makes it much easier to secure the mines from diamond smugglers. This makes possible large-scale diamond production at low cost, which in turn contributes to high government revenues through corporate taxes, royalties, and profits from Botswana’s 50 percent share in its joint venture with DeBeers (Debswana) and its 15 percent stake in DeBeers itself.

C. Slow Diversification and High Unemployment

Progress on Economic Diversification

39. Botswana’s economy is dominated by two sectors, mining and government, and economic diversification has been slow. In 2005 the mining sector constituted 35 percent and the government 16 percent of GDP, shares that have not changed significantly over the last decade. Mining grew at an average annual rate of 5.1 percent and government at 6.2 percent between 1994/95 and 2003/04. Growth in other sectors has been minimal; it in fact decelerated from an annual average of 7 percent from 1984/85 to 1993/94 to about 1 percent in the following decade. Growth was particularly weak in the agricultural sector, which fell from about 10 percent of GDP in 1981 to about 2 percent in 2004/05. The manufacturing sector also slowed markedly, from about 13 percent in the previous decade to around 3 percent over the decade to 2004/05. During these two decades, growth in the construction sector slowed from 11 to 4 percent. The trade, hotels, and restaurants sector seems relatively resilient. It registered average annual growth about 7 percent—but this is also a significant drop from over 18 percent growth in the previous decade.

40. FDI has been largely limited to the mining sector. Despite Botswana’s liberal approach to trade and finance and its ranking in the top third in global competitiveness report (ahead of China, India, and Mexico)9, net FDI has been concentrated in diamond mining.

Chart 1.
Chart 1.

Share of Real GDP by Sector

(In percent)

Citation: IMF Staff Country Reports 2007, 228; 10.5089/9781451806465.002.A002

Chart 2.
Chart 2.

Real Growth by Sector

(in Percent)

Citation: IMF Staff Country Reports 2007, 228; 10.5089/9781451806465.002.A002

D. The Size of Government

41. The government plays a large role in Botswana’s economy with government consumption accounting for roughly one quarter of GDP ever since the early 1980s. At the same time, the share of household consumption declined from about 60 percent of GDP to less than half that by 2004/05. The government sector accounted for more than half of nonmining GDP in 2003/04. In particular, government development spending has given impetus to such sectors as construction while pushing domestic demand more generally. The government has also played a significant role in the domestic financial sector with budget surpluses being a major source of savings in the economy. Moreover, several publicly owned development finance institutions were established, and the Government was also engaged in substantial lending to parastatals and local authorities from its Public Debt Service Fund (PDSF) and Revenue Stabilization Fund (RSF). From the early 1980s to the late 1990s, total lending out of these funds was higher than the combined lending of all other financial institutions in Botswana. As the largest employer in the economy, the government was responsible for about 40 percent of total formal sector employment in the decade ending in 2004/05.

Chart 3.
Chart 3.

Share of Government and Household Consumptions

(in percent of nominal GDP, 1974/75-2004/05)

Citation: IMF Staff Country Reports 2007, 228; 10.5089/9781451806465.002.A002

E. Labor Market Conditions and Rising Social Problems

42. Slow growth in the nonmining private sector has meant that growth in employment has not been sufficient to absorb the rising labor force. Based on the 2004 Botswana AIDS Impact Survey (BAIS), unemployment is estimated at about 24.6 percent, compared to an average of 12 percent among other countries in similar income level.10 While changes in methodology and coverage make intertemporal comparisons difficult, unemployment roughly doubled from the early 1980s to exceed 20 percent by the early 1990s through to the present. Unemployment is highest among unskilled youth, at 60.8 percent for 15- to 19-year-olds and 45.6 percent for those aged 20-24. Yet significant shortages persist in more skilled occupations. Unemployment is higher in urban than rural areas, and female unemployment exceeded male by about 30 percent.

43. Botswana does not seem to have the kind of labor market rigidities often observed in European countries. The main law governing relations between employers and employees is the Employment Act of 1984 as amended, which prescribes minimum standards for contracts that apply to all employment relations. Depending on the reasons, the employer can even terminate employment contracts without notice.11 An employer can also lay off employees to reduce the size of the work force. Although there are binding sector-specific minimum wages, there is no unemployment insurance and the employer is not required to make pension, health insurance, and unemployment insurance contributions on behalf of the employee. Though labor unions exist, reportedly they are not aggressive in collective actions. Employers have stated that in general they do not see labor regulation as an impediment to doing business.

F. Factors Underlying the Narrow Economic Base and High Unemployment

44. This section attempts to provide some explanations for high unemployment and slow diversification in Botswana, with special attention to public employment and productivity. The fact that the large flow of diamond revenues allows the government to be the largest and a generous employer may unintentionally lead to twin problems for the labor market and economic diversification: (i) a rise in the reservation wage of workers results in high unemployment and poor social conditions, and (ii) the higher cost of production and low productivity, low FDI inflow, and slow private sector-led growth, industrialization and diversification.

Employment and Wages in the Public Sector

45. The 42 percent of Botswana’s formal-sector workers employed by the government claimed over 50 percent of total formal sector wage earnings in 2005. Though large public sector employment has been observed in some other countries in Anglophone Africa, in Botswana it is more pronounced (see table 3).

Table 1.

Selected Social Indicators in 2002

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Sources: United Nations, Human Development Report 2004; WDI Database; and staff estimates

Based on average of HDI value of group of countries except Botswana.

Includes Lesotho, Namibia, South Africa and Swaziland.

Table 2.

World Diamond Production Estimates

(US$ billion)1/

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Source: DeBeers

Estimates of the market value of rough production.

Table 3.

Average Monthly Cash Earnings of Botswana Citizens by Sector, 1998–2004

(In Pula)

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Source: Central Statistics Office

2004 data based on sources from Ministry of Labour and Home Affairs.

46. The government wage expenditure has increased significantly over the past decade. It rose on average by 13.3 percent annually from 1995/96 to 2004/05, though average annual inflation was just 8.2 percent. As a result, in 2005 the average wage of citizens working for the government exceeded those in the private sector and parastatals by over 40 percent. The contrast is even more stark when the parastatals are eliminated. Total public wage expenditure for 2004/05 constituted almost 30 percent of public spending12 (12 percent of GDP). Botswana’s public wage–GDP per capita ratio, which indicates whether government employees are under- or overpaid in comparison to the prevailing standard of living, is also considerably higher than in other middle-income countries.13 Moreover, it appears that the wage differential between public and private sectors widens at the lower end of the wage scale, making it more desirable for less skilled workers to work for the public sector.

Industrialization in nonmining sector

47. In Botswana, unlike many newly industrialized economies, nonmining manufacturing has not been a dynamic labor absorber. Rather, its share in GDP has been declining. Some efforts have been made in the past to boost the textile industry and take advantage of access to the U.S. market under the African Growth and Opportunity Act (AGOA), but this has become difficult now due to strong competition from other developing countries. The manufacturing sector took an upturn when the Motor Company Botswana (Hyundai) opened its plant, but this was soon closed in 2002/03.

48. Botswana’s proximity to neighboring giant South Africa may also have deterred efforts to build the manufacturing sector. South Africa, with its large domestic market and abundant labor supply, has a strong competitive advantage over Botswana; it may be cheaper for Botswana to import from South Africa than to manufacture goods domestically. For example, many automobile manufacturing plants based in South Africa service the whole continent.

49. The large diamond endowment and subsequent reliance on natural resources may have diminished its need to coordinate labor supply and demand, which can slow down industrialization. Rich natural resources can lessen political incentive to pursue difficult policies to build a labor-intensive nonmining manufacturing export sector. Experiences from emerging market countries show that resource-poor countries tend to grow through internationally competitive industrialization.14 Their governments tend to abandon closed trade policies at a low per capita income and, since commodity exports are limited, labor-intensive manufactured exports expand rapidly and soon absorb excess labor. This allows the economy to diversify within the skill-intensive manufacturing sector and later to enter into competitive capital-intensive industries so that the economy becomes more resilient to external shocks. The early elimination of surplus labor and the incentives from competitive manufacturing curb unemployment and boost saving and investment. Low unemployment leads to improvement in income inequality. In Botswana, on the contrary, unemployment remains stubbornly above 20 percent, one of the highest rates among middle-income countries.

Reservation Wage

50. A large government employment share and generous government wages may have raised the reservation wage of workers. Workers may be unwilling to work unless they receive salaries well in excess of the market clearing level in the rest of the economy. This can continue for relatively long periods if dependence on extended families for financial support can allow unemployment to persist.

51. Concerns about a rising reservation wage despite high unemployment have been expressed by the authorities on several occasions. These are expressed in the Mid-Term Review of National Development Plan (NDP) 9, paragraph 86, as well as the 2006 Budget Speech by the Minister of Finance and Development Planning, paragraph 21, which states, “… Botswana workers have become selective in the jobs they are willing to accept, choosing instead to rely on relatives or social safety nets”. The authorities have indicated that young university graduates often desire only white-collar jobs, the availability of which is becoming more limited as private sector-led economic diversification is slow. Employers needing workers with less skill have had to hire noncitizens who were willing to accept the jobs and the wages citizens have refused.

52. The social programs in Botswana may also have contributed to a relatively high reservation wage (See Table 5). Social programs in Botswana target a large population. While these are mostly people too old or too young to be in the labor force, the programs—from which about a third of the population benefit—may indirectly provide incentives to dependency, as can be inferred by the rising number of welfare beneficiaries and the high unemployment despite solid economic growth. Government expenditure on social programs more than doubled from 1997/98 (P1.4 billion) to 2004/05 (P3.2 billion). This may have positive implications because more people are elevated from absolute poverty, and it also signals that when all government programs are considered, the effective poverty level may not be as severe as some international indices suggest. Until very recently, the government provided free health care and education to its entire people. However, the rising number of social program beneficiaries, the increasing share of social in total expenditure, and continuing HIV/AIDS-related expenditure are putting pressure on government finances at a time when medium-term growth and the fiscal envelope are likely to become more constrained. Appropriate responses to the situation would be to broaden labor force participation, reduce the dependency ratio, and design policies to reduce unemployment.

Table 4.

Public sector in the labor market

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Source: ILO Laborstat 2006
Table 5.

Social Welfare Schemes in Botswana

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Production Costs, Productivity, and FDI

53. Botswana has followed textbook macroeconomic advice on attracting investment inflows, which are an important source of knowledge spillover and industrialization, increases in employment, and human capital development. That may be why it is ranked highest in Africa for competitiveness and institutional transparency (Table 6).

Table 6.

Indices of International Competitiveness

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54. Nevertheless, FDI inflow into Botswana is small and mostly concentrated in the mining sector. Larger FDI flows have been going to South Africa, where the size of domestic market is large. This highlights the importance of two factors on which multinational enterprises base their FDI decisions: (i) anticipated profit, which incorporates production cost, and (ii) market access. Since its utility and transportation costs are high because geographical location, other costs of production must be sufficiently low if Botswana is to attract foreign investors. However, as the authorities have noted in the Mid-Term Review of NDP 9, reducing production costs is difficult because Botswana lacks a local entrepreneurial culture and productivity generally is low. The Minister of Finance’s 2005/06 budget speech also cites concerns about worker productivity and work ethics to enhance its competitiveness.

55. Low productivity in the nonmining sector may be both the cause and the effect of slow economic diversification. Productivity indicators illustrate that productivity improvement in most sectors other than mining has been modest at best. In particular, as indicated in the recent study by Botswana National Productivity Centre, the productivity trends in manufacturing, which have been negative since NDP 8 period (1997-2003), have worsened in recent years (see Table 7). Both labor and capital productivity declined significantly during this period. While output grew only about 5.8 percent from 1998 to 2003, employment increased by 31.2 percent and the average monthly wage by almost 50 percent in nominal terms.

Table 7.

Average Annual Growth Rates of Multifactor Productivity by Sector 1/

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Source: Botswana Productivity Statistics, 2005

Multifactor productivity is derived using a chain-based index involving weighting of labor input, capital input and real output.

Reference years pertaining to NDP are as follows. NDP 5: 1979-85, NDP 6:1985-91, NDP 7: 1991-97, NDP 8: 1997-03, and NDP 9: 2003-09.

Provisional.

56. Higher costs mean that potential employers offer fewer jobs than they otherwise would. They also discourage the inflow of FDI, since in addition to its small market and high utility and transportation costs, Botswana’s labor force may be less attractive to foreign investors than the labor force in countries where people are willing to work for less. Hence, FDI continues to be concentrated in the capital-intensive mining sector, which does little to generate employment and reduce poverty.

G. Conclusion and Policy Implications

57. This paper argues that in Botswana, unemployment and slow economic diversification are two sides of the same coin, arising from rich endowment of natural resources and large government. Sizable revenue from diamonds may have made it difficult for the government to follow through on painful labor market reform. Instead, the government has been the largest employer both in size and in wages as a share in the economy. This, combined with financial support from extended families, may raise the reservation wage of workers. Low productivity is another factor; it raises production costs and discourages inflow of FDI, an important source of knowledge spillovers and diversification. Thus, despite strong overall growth, in Botswana a pattern of dependence on diamond revenue and high unemployment persists.

58. Botswana’s twin problems can be solved only by long-term strategies to transform the economy. These must be directed to (i) reducing the size of government, (ii) expanding education and vocational training programs to raise the skill level of workers and to meet labor market demands, (iii) enhancing the efficiency of social welfare programs and devising exit strategies, and (iv) creating incentives for FDI inflow by reforming the labor market. While these categories are by no means complete, they could be a good start. Recognizing the needs, the government has already begun to formulate and apply remedial policies.

Reducing the size of government

  • Reducing the total number of government employees is particularly important for local governments. The authorities have begun to limit the growth of new positions by hiring new employees only when an existing post becomes vacant. They also indicated that government wages would be adjusted by only half the inflation rate from 2006

  • The government might continue to actively pursue outsourcing of services, especially those that require less lower skill.

Education and vocational training adapted to labor market demands

  • Labor and education policies might be designed to increase the number of experts and technicians with skills industry needs. The government is proceeding with plans to establish a university specializing in science and engineering.

  • More vocational schools should be established and technical programs developed to attract youth.

Social welfare program efficiency and exit strategies

  • The government could aim to better target the beneficiaries of welfare programs to reduce dependency and the cost of programs. Welfare programs should be means tested and should provide incentives to graduate from them.

Labor market reform to attract FDI inflow

  • Improvement in labor productivity is key to attracting foreign investors. Both public and private sector entities might introduce the Performance Management System already implemented in certain government positions to enhance competition among workers. The government could also implement social campaigns to improve the perception of blue collar jobs and improve the work ethic.

  • Acemoglu D., S. Johnson, J. Robinson, 2001, “An African Success Story: Botswana,” MIT Department of Economics Working Paper 01-37

  • Bank of Botswana, 2004, Annual Report (Gaborone).

  • Bank of Botswana, 2005, Annual Report (Gaborone).

  • Botswana National Productivity Centre, 2005, Botswana Productivity Statistics (Gaborone).

  • Botswana Institute for Development Policy Analysis, 2005, BIDPA Briefing, 1st Quarter (Gaborone).

  • Citizen Entrepreneurial Development Agency, 2005, CEDA Annual Report (Gaborone).

  • Minister of Finance and Development Planning, 2006, Budget Speech (Gaborone).

  • Minister of Finance and Development Planning, 2006, Mid-Term Review of NDP-9, March 2006 (Gaborone).

  • Ministry of Local Government Lands and Housing, Social Welfare Division, 1998, Short-Term Plan of Action on Care of Orphans in Botswana, 1999-2001 (Gaborone).

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  • Transparency International, 2005, Corruption Perceptions Index (Berlin: Transparency International)

  • World Bank [IABD], 1993, The East Asian Miracle-Economic Growth and Public Policy Bank (Washington: World Bank).

5

Prepared by Jung Yeon Kim.

6

While absolute poverty is likely to have decreased since 1993 in light of Botswana’s high growth rate, the increase in the unemployment rate and the only modest decline in the Gini coefficient suggest that high levels of relative poverty exist.

8

Standard and Poor’s and Moody’s have both rated Botswana’s sovereign credit at A (highest in Africa).

9

Global Competitiveness Report, 2004 by World Economic Forum.

10

World Bank, 2006 World Development Indicators.

11

Prior written notice of termination must be given unless the employee is paid per day, is in the probation period, or is guilty of serious misconduct.

12

As a rule of thumb, when this ratio rises above 25 percent, governments risk reducing their effectiveness by squeezing nonwage expenditure for goods and services, maintenance, and capital investments.

13

This is common in developing countries where the number of dependents per wage earner is large, trained labor is scarce, and the standard of living is low.

14

“The East Asian Miracle-Economic Growth and Public Policy”, 1993, The International Bank for Reconstruction and Development, The World Bank.

Botswana: Selected Issues and Statistical Appendix
Author: International Monetary Fund