Economists offer numerous explanations for why Botswana has failed to diversify its economy. One hotly contested explanation for the failure to diversify is the evidence of Dutch disease i.e. an appreciation of the real effective exchange rate but, as ever; there remains considerable disagreement amongst economists. The second argument is the existence of the broader condition commonly referred to as the ‘Resource Curse.’ One particular manifestation results from rapidly rising wages and salaries.
A report on Export Diversification finds strong evidence that, “salary levels in Botswana are not only high by regional standards but are responsible for a significant proportion of Botswana’s cost disadvantage in industry.”
Botswana experienced two periods of economic diversification in its post independence era. The first was in the mid 1990’s when the country developed an automobile industry which was terminated by the closure of the plant caused by both poor management and pressure from neighbouring South Africa. The second period has been over the last four years following the domestication of diamond cutting and polishing. The only sector of diversification that was largely market based as opposed to government lead was the development of the tourism sector.
A summary of recommendations in the economic diversification report suggest that “Botswana needs to reform its tax incentive system or it will not attract any kind of investment, so the creation of tax free export processing areas would be an important first step.” This comes after the realisation that Botswana’s tax incentives are no longer competitive with its neighbours which are pursuing what International Monetary Fund (IMF) researchers have referred to as a ‘partial race to the bottom’ in terms of tax incentives.
Whilst the private sector in Botswana is moving to invest in extraction of base and energy minerals such as coal bed methane and uranium, the industrial policy in Botswana appears unconnected to the range of developments occurring in the mining sector. The report suggests that, possibilities for backward and forward linkages exist and will not be exploited unless there is a range of new policies and actions to avoid the export of unprocessed raw materials.
The economic diversification report further recommends that for the economy to become a success story, “it needs to lead consistently at the highest levels of government and implemented by an elite cadre of highly professional, well paid individuals that are motivated by the transformation of the country.”