Monday, October 25, 2021

Manufacturing: An “alternative” source of jobs for Botswana

The year 2018 marks 11 years since the start of the global financial crisis in 2007, an event that shook global markets to the core and precipitated a changed market landscape for many commodities, including  diamonds from Botswana.

Today the diamond industry, where Botswana plays mainly the role of a ‘producer’, continues to navigate internal challenges, such as the advancement of lab-created alternatives, with an arguably more challenging structural backdrop of generational shifts in consumer preferences. 

Away from diamonds, Botswana was as recent as 2016, forced to shut down two of its key copper mines owned by the state while Liboam Holdings known as Mowana and Thakadu copper mines resumed operations during the second quarter of 2017 after being placed under care and maintenance in 2015 due to unfavourable commodity prices.

As a result diamond rich Botswana has been advised to move away from minerals and look for other sources of income ÔÇô the alternatives.

Econsult Botswana, an economic think tank believes that a shift away from mining by Botswana to the manufacturing sector should increase the overall labour share of income.

“Manufacturing has the highest labour share of income of any economic sector. It is also one of the few sectors that has experienced growth in the LSI over the period 2004 to 2016”, noted Econsult economists in their quarterly economic review (Q1; 2018).

LSI or Labour Share of Income is an important indicator of how the incomes generated from economic activity are distributed within the economy.

The indicator represents the share of overall national income (GDP) paid to employees in the form of wages or related social contributions or benefits financed by employers.

Econsult says over time, the labour share of income in Botswana has declined from 56.1 percent in 2004 to 36.4 percent in 2015, with the lowest share of 34.9 percent in 2014.

This represents an average annual decline of approximately 3 percent.

“What this means is that between 2004 and 2015, adjusted net domestic product (NDP) grew at an average annual rate of 13.3%, while total compensation of employees grew on average by only 9.0%”, reads part of Econsult Botswana economic review bulletin.

Led by Dr Keith Jefferies, young economists, Sethunya Sejoe and Kitso Mokhurutsi are of the view that as a country develops through industrialisation, individuals are expected to move from more labour-intensive sectors such as agriculture to more capital-intensive industries with greater returns to capital. This movement should result in a decline in the LSI.

“However, Botswana did not take the conventional path towards economic development”, continues the Econsult Botswana commentary.

Available economic data shows that after independence, Botswana experienced a rapid transition from agriculture to capital-intensive mining as the main source of GDP growth. Since that time, one of the main goals of the country’s economic development strategy has been to diversify the economy and move away from mining to other sectors that are more labour intensive than mining.

As such, Econsult Botswana advises that a policy push to boost the growth of the manufacturing sector in Botswana would help to address the problem of the falling labour share of income in the country.

The manufacturing sector is regarded as reasonably labour intensive, pays higher average wages than many other sectors ÔÇô and as such could help contribute towards job creation.

……the jobs alternative for Botswana

While manufacturing has been picked as the “go to” sector for Botswana, it has not performed well over the past years, and has grown more slowly than most other non-mining sectors of the economy over this period.

The official data from Statistics Botswana (SB), a government agency that gathers economic data amongst others, shows that the manufacturing sector’s contribution to national output remained low, at just over 5 percent in 2016.

Econsult attribute the cause of this decline to what it calls, the “Dutch Disease”. The Dutch disease is said to happen when increases in mining exports drive up the real effective exchange rate, which would make all non-mining exports, such as manufactured goods, more expensive to sell and possibly uncompetitive in international markets.

Jefferies and his team opine that while trade agreements can help, they may not be enough to boost the industry if it remains uncompetitive.

They gave an example of textile exports, a sub sector within manufacturing which have dropped significantly in recent years, despite duty-free access to the USA under the AGOA free trade agreement.

In 2015, the United States Congress extended the AGOA by another 10yearsÔÇöa move which meant goods from Botswana and the rest of eligible countries in Africa could be exported duty free to the US market. 

Despite a report that 300,000 direct jobs in eligible countries were created by 2015 since the inception of AGOA, Botswana’s textile exports to the US have declined. Pundits have been quick to point out that the drop in exports is a result of stiff competition from China and high production costs.

The country has also of late experienced an influx of imported second hands clothes which has taken part of the local manufacturing sector.

The Econsult team however maintains that the manufacturing carries a distinct advantage over service led industries such as tourism in that it provides a clear and well-defined pathway towards taking a country like Botswana from middle-income to high-income status.

“Increased investment in manufacturing industry would have a positive effect on the aggregate labour share of income in Botswana. Furthermore, it strengthens the export-led growth that is necessary for sustainable economic development along with providing a tried and tested development pathway”, reads part of the Econsult economic commentary.

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