And we will live like Swazis

17 Nov 2014

Virtually every economist who has studied the country, and there are literally hundreds of them, have told Botswana what every Batswana already knows in their heart of hearts- that despite the marketing slogan, diamonds are not forever. One day the great diamond mines at Jwaneng and Orapa will close and then what will happen if the country has not diversified its exports then Botswana will simply become much poorer.

But how much poorer and when? If the modelling estimates that have been presented this week by BIDPA and BOCCIM are anywhere near correct then our GDP/ capita will fall by approximately 48%. What does that mean in practical terms? At present Botswana’s GDP/capita which is the standard measure used by economists to measure a country’s income is US$ 7,300 in 2013 according to the World Bank. If our GDP/capita fell by roughly 48% as the modelling estimates suggest we will live slightly better than Swazis who have a GDP per capita of US3,100.

Now what the modellers have done is work out what would happen to Botswana if the diamonds come to an end. Fortunately this is not going to happen any time soon and most of the estimates indicate that we will be producing some diamonds until 2050. While diamond production will continue the estimates are that a very large portion of the diamond revenue will start to fall off after 2027. Much of the effect of the decline in diamond revenue will be felt by Botswana after that date and it is no doubt part of the reason why the government has moved to establish a fund for future generations which will see savings rise substantially in the coming years.

Beware of good news merchants The first response to telling people bad news (‘you are going to die a long and painful death’, for example) is usually complete denial. The second response, as I know at my peril, is to ‘shoot the messenger’ if you can. One senior economist in government has told me that ‘your work is completely wrong - how can GDP per capita fall by 48% if the diamond mining sector is only responsible for some 20% of Botswana’s GDP’.

The answer is pretty straight forward – diamonds might only add 20% to Botswana’s GDP but they are over 80% of foreign exchange earnings. Without foreign exchange earnings the whole economy will grind to a halt. Another banking economist told me that these results fly in the face of all the future projections from the international financial institutions which say that Botswana will have future economic growth rates of 4%- no need for a fund for future generations or these projections that simply panic people. All this assumes that the diamonds will be there… but they are not forever. In a similar vein one ‘futurologist’ in Pretoria said at a workshop

I attended last week that African countries do not have to worry about mining i.e. digging holes in the ground because Africa’s economies are now so diversified. Many of these good news merchants peddle the same economics as I got here in Gabs but the brutal reality of Botswana and throughout Africa is that digging holes in the ground is what underpins everything else in the African economies and those who forget it imperil future generations who have to live with the consequences of those who do not understand the economic consequences of resource depletion. Export of Die! Is there really anything that Botswana can do to avert the dramatic declines in income and living standards that are expected with the end of diamonds. The answer is and has always been that the only way to avert this disaster is through diversification- not diversification of GDP but of exports. In other words when the diamonds run out Botswana needs other sectors that will generate the foreign exchange the country will need to buy imports. But ever since the opening of Jwaneng in 1982 the government has maintained a policy of export diversification but without success.

Botswana’s exports are now even more dependent upon diamonds now than they were 30 years ago in no small part because of the cutting and polishing of diamonds is now our largest manufacturing sector with exports of P6.8 billion of cut and polished diamonds in 2013. The reasons that Botswana has failed to diversify its export sector for over 30 years is complex but it is certainly not for want of trying or throwing money at the problem. The Financial Assistance Policy for over 20 years spent tens of millions of pula subsidizing industry to employ people to almost no sustainable effect until it was finally ended in 2000. The unavoidable fact is that industry in Botswana has been uncompetitive on a cost basis and there has never been sufficient attention ever paid to the very un-sexy job of increasing the nation’s productivity and lowering production costs. BIDPA and BOCCIM commissioned an international cost study of where our costs are highest by doing a comparison between 9 SADC countries and three Asian countries (India, China and Malaysia). What was found was that the area with the biggest cost disadvantage was in the area of highly skilled labour costs, professionals and management.

What was found, much to our surprise, was that at the bottom end of the wage scale amongst those who earn the lowest wages, that their wages were on average lower than that of India. The conclusion of the work was that if Botswana does not lower salaries at the top end, lower company tax rates for exporters to meet our competitors in Africa and dramatically improve transport costs then export oriented firms will never locate there. Botswana can compete! There is absolutely no reason that within the context of the 60 million people in the SACU market that Botswana cannot be a strong and competitive exporter.

There is no doubt that South Africa, in both the case of Botswana’s attempts to export electricity and automobiles, has acted to undermine our efforts but the nation can diversify if there is the recognition and the will to face a national emergency that is at hand and recognize that living standards will drop massively unless we become competitive. This is an incredibly unpopular message and everything I know about people in denial, tells me that it will be forgotten almost immediately the report is received. But if policy makers do not like this message that those on high salaries need to sacrifice current high living standards to be internationally competitive so that the next generation will be able prosper then just wait 20 years or so and market forces will give you no choice once the diamonds run out … because the diamonds, like our current living standards, are not forever.

These are the Professor Roman Grynberg and not necessarily any institution with which he may be affiliated