Friday, July 3, 2020

Dr. Jefferies prescribes a bitter dose for economic diversification

A few minutes into the interview, Keith Jefferies waxes lyrical, throwing details and statistics that all point to an economy that is on a rebound.

Gross Domestic Product has registered a near 9 percent growth, which when compared with the horrid situations as seen in other countries can only be described as miraculous.

Although not yet pre-recession levels, diamond sales have altogether recovered significantly.
While employment fell significantly in the mining sector, compared to other countries Botswana had little overall impact.

But despite the excellent performance and resilience as shown by the economy, Dr Jeffries’ mood is to my surprise somewhat subdued.

His lack of excitement stems from the fact that the good story that is music to many people’s ears may actually be concealing the painful facts lying underneath.

“Diamond retail markets remain weak. The danger is that the recovery we are seeing may actually be temporary.”

He is not at his happiest perhaps more crucially because, once again, the rebound is mining-driven; yet another proof of a failure by Botswana’s economy to diversify away from mining, especially diamonds.

“Mining took us into recession. It is now taking us out. Mining is very important but it employs very few people,” says Jefferies.

To further drive his point home he says while during the early days of recession non-mining sectors were not blighted, recent data indicates that even those sectors are now beginning to show some stress of hemorrhaging.

“They [non-mining sectors] are slowing down and we should be worried.”

There is only reason to explain why non-mining sectors did not immediately follow the mining sector into total collapse and are only beginning to show stress now ÔÇô government spending.
But even the wealthiest Government can’t keep spending forever. “At 10% of the GDP, Botswana’s deficit is the highest ever. And worse, government has been drawing very heavily on savings,” says Jefferies.

While that may be bad enough, there is still another factor that most worries Dr Jefferies. He says all conditions so far point to a growing diamond market that, sadly, may be headed for a correction.
“Probably early next year prices will fall.”

So far he has concentrated his attention on highlighting the pitfalls of an economy that relies excessively on just one sector ÔÇô mining, in our case diamond mining.

The solution, he says, lies on a future that is less dependent on diamonds and government spending, a future where the private sector is export focused and equally important, more resilient.
He says, as a small economy, Botswana’s growth potential is almost exclusively in the direction of exports.

Fragile recovery aside, there are other disconcerting signs.

Government spending currently stands at 40% of GDP, which includes public sector salaries and wages, which alone account for 11% of GDP, an anomaly that is in the long term unsustainable.
Not only is this big and unsustainable, it also compares very badly with other middle income countries.

South African government spending as a proportion of GDP stands at 27%. Mauritius, which Botswana likes to use as a yardstick to benchmark itself stands at an enviable 21%.
Government spending never used to be an issue because the highly profitable and highly taxed diamond industry easily delivered the goods.

But not any more.
“We are an economy in transition. If diversification fails this economy will fail. We need a small but more efficient Government,” says Dr. Jefferies as a matter of fact.

But just where do we start? Is the private sector weak because government is too strong, or government too strong because the private sector is too weak?

“Government has to gradually withdraw and make room for the private sector. Citizen firms have to be less dependent on government and they have to be more export oriented,” is the clearest answer Jefferies gives so far in our attempts to extract advice from him on the way forward.
And that’s not all. We also have to redefine economic diversification.

“Diversification does not mean forgetting about mining. Rather it is waking up to the fact that there is only Jwaneng and Orapa. What we need to do is to build on that.”

Competitiveness is one area that Botswana will have to face head-on if efforts to diversify the economy are to yield any fruits.

“We have never really had to be competitive and efficient. That has to change.”
Another area of focus will have to be our areas of strengths.

Government has in the past spent an arm and a leg on nurturing the manufacturing sector, but with very little to show for it.

“We need to be very open about this debate. Manufacturing will simply not succeed. We are far from the sea. This pushes transport costs too high, our labour costs are very high compared to our manufacturing competitors, water, like other utilities and inputs are very high. To be honest there is no way Botswana can compete with such countries like Cambodia and Bangladesh on such low margins, highly competitive sectors such as manufacturing. Of course, manufacturing will not be zero but it will struggle to run the economy,” says Jefferies.

Our area of strength, he suggests, is the services sector.

“We have the right type of work force for services than for manufacturing. Our school leavers are IT savvy, they don’t want to work in a clothing firm and they are computer literate.”
He points out that International Financial Service Sector was a great idea. The trouble, however, was that “Mauritius got there first.”

One area that warrants a policy shift is communications sector.

These include such things like call centres, back offices, outsourcing, processing and voice work.
With those, it does not matter if one is far or closer to the sea. All that matters is the quality of one’s communications infrastructure, especially the internet.

“Unfortunately we are not great at that either. Our internet is not good enough. We have invested more on roads and less on telecoms,” he says.

The prevailing economic trends show that while roads have a social value, they have less economic pay offs compared to the internet.

To underscore the economic value of the internet, latest statistics show that the internet contributed 100 billion pounds to the United Kingdom economy in the past year alone.

“That is where we have to go. Internet has to get cheaper and more accessible,” says Jefferies.
Even then things will not even start to fall in place unless we overhaul our immigration policy.

Jefferies says at the moment the policy is not transparent. It also lacks objectivity and consistency. The criteria for accepting foreign investors and workers are not very clear.
“We have to deregulate licensing. Some regulations do not serve any purpose other than to throw people trying to make a living into the streets.”

With a few exceptions as in the area of health and security, Government is going to have to loosen up for there to be headway in competitiveness.

He says contrary to facilitating investments into the country, some regulations are actually making it very difficult to do business in Botswana.

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Sunday Standard June 28 – 4 July

Digital copy of Sunday Standard issue of June 28 - 4 July, 2020.