Wednesday, December 8, 2021

Prudent fiscal policy guides inclusive economic structural transformation

The fall in the IST index implies that Botswana experienced a decreased achievement level of inclusive structural transformation compared to its counterparts, especially South Africa and Namibia according to a 2019 Botswana Institute for Development Policy Analysis (BIDPA) research study titled “Structural Transformation and Fiscal Policy in Botswana”.

The study, undertaken by Kelesego Mmolaiyana covering the period 1990 to 2015, found that “deliberate government development policies, to a large extent, play a major in promoting structural transformation”.

Between 1993 and 2002, the index grew because of increases in manufacturing sector employment from 0.48 to 0.63 points; share of medium to high tech industry (0% value added) from 0.20 to 0.60 points; and human capital contribution from 0.45 to 0.60 points.

The down fall of the IST index from years 2002 to 2015 was a result of decreased access to improved water sources, manufacturing employment, export of manufactured goods and commercial services, expenditure on research and development, share of the medium and high tech industry value added as well as the poor performance of gender inclusiveness, climate and environmental protection measures amongst others.

Despite the aforementioned decline, the country has a lot of potential and opportunity to use its fiscal policy more effectively efficiently to promote an inclusive structural transformation that leads to a sustainable economic growth.

Sectoral value added as a share of GDP shows that Botswana’s service sector has positively transformed the economy over the years compared to other sectors. The growth of the service sector is mainly a result of the spillover effects from the mining sector.

In 2012, a diamond hub was relocated to Botswana from London and this move has led to increased need for services especially in the hotels and restaurants by foreign buyers and investors.

Growth in the services sector value added to GDP was also driven by employment increase of locals in diamond sorting sales; activities which were previously done abroad. Thus, Botswana’s efforts to achieve positive results from structural transformation (though not sufficient) can be explained by its value added chains in the mining sector that significantly led to the growth of the services sector.

According to the research study, the country’s over-reliance on mineral proceeds exposes Botswana’s economy to unpredictable external shocks and it is worrisome especially in the wake of the 2008 global recession when demand for luxury goods like diamonds hit an all-time low.

Prior to and post the independence era, Botswana’s structural transformation has been “government led as opposed to being market led”. This is evidenced by the fact that government policies play a pivotal role in the country’s structural transformation process through human capital development, industrial development facilitation (by ensuring both hard and soft infrastructure development), industrial upgrading, efficient market mechanisms (regulations) and continuous technological innovations. 

In Botswana, there are specific fiscal measures taken by government to monitor public spending and to manage revenue. These measures are: annual total government expenditure must be 40 percent of GDP; recurrent budget should not exceed 70 percent of total expenditure whilst development budget is limited to 30 percent and annual public debt is limited to 40 percent of GDP of which 20 percent must be internal debt and 20 percent external debt.

The report observes that Botswana has over the years complied with the 40 percent rule of government expenditure as a share of GDP, demonstrating management discipline, responsibility, accountability and expenditure sustainability.  

It is further reckoned by the research study that significant expenditure allocations from 1990 to 2016 have been made towards general services including defence and security, education, health, infrastructure and social welfare. This expenditure allocation demonstrates government’s commitment to service delivery and national security as enshrined in the country’s vision.

According to the research study, “a secure economy has an advantage of attracting foreign investors since they are assured of their human and property rights enforced by the rule of law”.

Education expenditure share was 17 percent in 1990 and 23 percent in 2016 whilst expenditure on health stood at four percent in 1990 and 11 percent in 2016. Both expenditures in health and education are a testimony to the country’s commitment to its human capital development.

Botswana has provided free access to education and health to its citizens since independence and continues to advocate for an inclusive quality education and health systems. Notwithstanding, such huge investment is expected to payback higher returns to the local economy in the long run.

As for expenditure allocations, it is acknowledged that allocations towards infrastructure (electricity and water) moved from three percent in 1990 to nine percent in 2016. Public infrastructure investment enables growth of economic activities from both government and the private sector.

Social welfare expenditure on the other hand grew from one percent in 1990 to three percent in 2016 implying an inclusive growth. Such social development expenditure contributes towards enhancing standard of living and to a larger extent reduces abject poverty mainly related to remote area dwellers in the country.

“A worrisome trend of insignificant expenditure allocations towards environment, research and development, innovation and creativity in Botswana is observed. There is need to increase financial commitment towards economic activities in order to promote a sustainable and inclusive growth”, study advises.

Another challenge is that Botswana is faced with project implementation capacity issue which results in under and or over-expenditures of annual budgets. This trend of poor project implementation might be an indication of weak project planning and management system in the country and needs urgent attention by all stakeholders.

 Structural transformation must be socioeconomic, demographic as well as environmentally inclusive in order for it to promote a sustainable economic prosperity for all.

The BIDPA report acknowledged that deliberate government development policies, to a large extent, play a major role in promoting structural transformation. In particular, fiscal policy shifts, as depicted by changes in expenditure, revenue and debt positively enhance structural transformation in the country.

As a matter of confirmation, empirical estimates in the study also establish that structural transformation responds positively to fiscal policy shocks. It is further established by the study that government expenditure explains more than 50 percent of changes in structural transformation and the positive outcomes are not without challenges of undiversified revenue base away from diamonds and growing budget deficits.

“Amongst other tools used to transform the structure of Botswana’s economy, prudent fiscal policy can be used as a major strategic tool. Given her significant mineral proceeds and various economic development policies, Botswana should strategically transform the economy towards industrialization, services, technology and innovation whilst ensuring climate and environmental protection”, advises the study.

The study observes that this transformation may be achieved through efficient public-private-partnerships (that cushions government funding) and diversified revenue base away from diamonds.

Moreover, emphasis on deriving return on investment should be placed on service delivery, especially from public sector infrastructure investments, which get the bigger share of the budget like education and health. All in all, “Botswana should continue to promote fiscal prudence since it has proven resilient over time to transform the country’s economy”, the research study advises.

According to the study, some of the indentified means to achieve an inclusive structural transformation are trade (industrial) policy, fiscal policy, monetary policy, financial development, foreign capital and human resource development.

Through trade and finance policies, incentives (for example, tax incentives, easy financial access, research and development, patent systems, large public procurements and export subsidies) can be used to attract investments from the private sector and might result in profitable public-private-partnerships.

Furthermore, ensuring mechanisms and continuous technological innovations may help “transform economies for the good of all”. Fundamentally, human capital development is a necessity for any economy to experience sustainable growth.

Fiscal policy in particular has a dual role in economic structural transformation of providing public goods and mobilizing resources and therefore critical for advancing an inclusive structural transformation.

It is argued that prudent fiscal policy promotes macroeconomic stability and helps economic recovery for sustainable developments and resource-rich countries are advised to ensure that a major share of their commodities revenue is allocated towards human capital, infrastructure, social capital and compensation for first time movers in new non-resource sectors in order to facilitate an inclusive structural transformation.

Fiscal policy should be equitable, effective and efficient in order to enhance optimal distribution of limited resources to all sectors of the economy and avoid allocation distortions. Thus, “government has power to change public spending allocations and enact various revenue collection instruments that they deem fit for any given economic era”.

Notwithstanding, “announcements of new fiscal reforms and implementation thereof have potential to induce shocks that can transform the economic structure of any given country both in the short and long run”.

There is visible evidence regarding the impacts of fiscal policy shocks on popular macroeconomics variables like GDP, private consumption, prices, interest rates, exchange rate, inflation, stock market, credit, real wages and employment.

It is argued that most often commodities revenues for resource-rich countries are mostly stored in sovereign funds and invested in foreign equity markets “instead of using a large portion of such commodities revenues for financing domestic or regional projects that stimulate developments of new manufacturing industries, economic diversification, provide employment and have potential for continuous upgrading.

Similarly, Botswana’s sovereign fund is mainly invested in off-shore markets. It remains to be seen if significant withdrawals will be made from this fund and invested domestically to achieve the envisaged structural transformation mainly driven by knowledge and innovation towards a high income status by 2036”.

There are two fundamentally important questions to be answered, these being: How far is Botswana in achieving structural transformation? What did Botswana do to achieve such transformation?

The answer provided is that Botswana’s success story of economic transformation is to a large extent traceable to the country’s prudent trade and fiscal policies which contributed immensely to Botswana escaping the “resource curse” largely associated with mineral base economies in the continent.

Proceeds from the country’s international trade of diamonds led to accumulated foreign reserves and cash balances which enabled the realization of national development plans over the years.

The study also notes that the World Bank in its 2017 data acknowledged that the service sector contribution in Botswana grew more than both agriculture and industry sectors between the years 2006 and 2016. In 2006, the industry and service sector value added as a share of GDP stood at 48 percent and 50 percent respectively but in 2016, industry value added decreased to 35 percent whereas service value added grew to 63 percent.

RELATED STORIES

Read this week's paper