Economic diversification: How much has been achieved to date?

03 Aug 2018

Aware of the primary challenge Botswana stood to face in the future as a mineral dependent economy, former President Festus Mogae in August 2005 established the Business and Economic Advisory Council (BEAC) as a advisory body to government in achieving its objective of accelerating economic diversification and sustainable growth, and in the process reduce Botswana’s dependence on mining, as the main source of government revenue and export earnings.

BEAC came out with a broad and detailed economic diversification and sustainable growth strategy, supported by an action plan to guide its implementation in an internally consistent and integrated manner.

 The implementation of the strategy required government to recognize the imperative of speedy diversification, as well as an internationally competitive economy. For success to be achieved, government had to be prepared to amend, or even abandon, those policies that may have proved to be unsuccessful in the past, and to embrace the principle of openness.

Openness under the strategy related to two-way flow between Botswana and other countries in the context of: trade; investment; information; technology; and skills flows as Botswana integrates with the international economy.

Government was tasked to lead in many aspects of the process of diversification and integration with the global economy, to pave way for the private sector. Effective approaches had to be developed to mobilize resources Botswana already possesses, and to focus them in a coordinated and mutually supportive manner with the strategy outlining clear proposals on how that had to be done.

Botswana has made significant strides since independence in 1966, in terms of the maturity of its democracy; good governance; strong institutional base; good physical and social infrastructure; consistently sound macro-economic management; and achieving one of the highest economic growth rates in the world over a long period.

Government realized that past achievements will not automatically translate into future successes, unless the country changed dynamically to meet new regional and global challenges. Competitive pressures resulting from globalization and regional dynamics continued to increase rapidly and in response the country had to adapt quickly to the changing world, so as not to lag behind in terms of development, competitiveness and international standing.

Economic and development models used in the past had their own .limitations and dictated that if Botswana wished to move to the next higher level of development in line with a diversified economy, then dynamic  structural and regulatory adjustments were imperative.

Continued success also required a significant shift in mindset on the part of government, business, and the population at large.

The economic diversification challenges faced were also captured by Dr Keith Jefferis in a research paper presented at a 27 - 28 August 2014 conference on “Are Diamonds there forever? –Prospects of Sustainable Development Model for Botswana” where he observed that mineral led economies are vulnerable to lack of diversification, with slow or even negative growth non-mining tradeables sectors such as agriculture and manufacturing due to lack of competitiveness.

Dr Jefferis said Botswana government had implemented a range of policies to counter such weaknesses, at both macro and micro economic levels. He observed that there was no single agreed interpretation of economic diversification. Often diversification is interpreted in terms of the structure of the GDP or production to which he posed the question of whether the Botswana GDP was dominated by a single sector or sectors or widely spread across a range of sectors.

Closely related to this is the composition of GDP growth – how much is this driven by a single sector. This approach to diversification is useful, but needs careful interpretation. As a mineral economy matures and the contribution of mining declines, an economy will inevitably become more diversified as the share of mining in GDP falls; similarly with the composition of the GDP growth.

Hence a focus on the composition of GDP, even if becoming les concentrated and more diversified, may not be a good indicator of more diversified growth, rather, simply an indicator of a mature, declining minerals sector.

In terms of economic diversification achievements, Dr Jefferis said GDP had become more diversified over the past 25 years and the peak time for lack of diversification was in 1988/89 when mining accounted for 51.5 percent of GDP. Since then the share of mining has progressively fallen, 22.4 percent in 2013.

Although the economy has become diversified since the late 1980s, and the share of mining has fallen, the non-mining sector is quite different now to what it was 40 years ago according to Dr Jefferis’ research paper.

In 1974/5, the agriculture and manufacturing sectors accounted for 45 percent of non-mining value added, but by 2013 this had fallen to 10 percent. The counterpart to this was that the share of services has risen sharply.

According Dr Jefferis, Botswana has also been successful in reducing its dependence on mining as the driver of growth – which corresponds to the reduction in its share of GDP. In the most recent decade (2004 -13) mining contributed negatively to growth, while the main driver has been services. So the sources of growth have perhaps become more diversified (certainly less dependent on mining); however, this has been associated with a gradual decline in a average growth rates, and a lack of export diversification, given that many services are non-tradeables.

The other area that showed improvement in terms of diversification relates government revenues which had fallen to 30 percent of GDP from around 60 percent in the mid 1980s. These figures have halved, and non mineral revenues make the majority (around 70 percent) of government revenues. So government is much less dependent upon mineral revenues than it was historically. However, this has been associated with generally lower revenues, a squeeze on spending and a move from budget surpluses to budget deficits.

According to Dr Jefferis, there has been much less success in diversifying exports, which remain totally dominated by diamonds. Even without taking account of the flows of diamond re-exports related to diamond aggregation, diamonds have become more dominant between 2008 and 2013, despite the impact of the global financial crisis.

This is largely due to the rapid growth of polished diamond exports – which marks a form of diversification, albeit a limited one. Other commodities have at various times in the past accounted for a significant share of exports, but have diminished sharply in importance – notably copper-nickel (21 percent of total exports in 2007), motor vehicles (14 percent of total exports in 1996), textiles (7 percent in 2007) and meat.

Dr Jefferies also posits that one of the objectives of diversification has been to stimulate employment creation, and therefore to spread incomes throughout the population. It has long been acknowledged that mining is very capital intensive, and creates few jobs directly.

One of the key components of Botswana’s development model has been to use the revenues from diamonds to create employment indirectly, through public sector employment, which is one reason why government is by far the largest employer in Botswana, accounting for almost 40 percent of formal sector jobs. However, sustainable diversification requires the non-mining private sector to take over from mining/government as the main source of jobs.

This has not generally been achieved. Unemployment, although imperfectly and irregularly measured, was at 20 percent of labour force in 2011. Formal sector employment only grew on average by 2.4 percent a year over the period 1994 - 2012, much lower than the average real GDP growth rate of 4.3 percent a year over the same period, even though there has been a move away from mining led growth. Employment growth needs to be faster than labour force growth for the employment rate to fall, but this has not been achieved.

In conclusion Dr Jefferis said while some diversification has been achieved, there has been no transformation to a sustainable future growth pattern. The challenge there is to achieve this structural transformation of the economy; from one dominated by (unearned) mineral rents, with non-mining activity focused on supplying the domestic market in general and government in particular, with little focus on costs and competitiveness, to one driven by exports of goods and services to the regional and global economies, which require competitiveness, productivity and efficiency.