Wednesday, December 8, 2021

Stuck in ‘ineffective’ extractives and public sector driven growth model

The traditional Botswana growth model which has involved diamond revenues channeled through government, with subsequent high investment in infrastructure, health and education has served the country well, delivering sustained, high growth over many decades.

The World Bank’s Botswana: Systematic Country Diagnostic Report 2015 acknowledges that the country’s traditional growth model “has been poor in generating jobs, contributing to high inequalities. It has also created a strong dependence on the state, both as the main investor and employer in the economy.

“Indeed, the formal private sector created just one job for every six new entrants to the labour market over the past decade, and the non-farm, informal sector remains small and lacking dynamism”.

The down side of the economy and the traditional growth model’s failure to generate adequate jobs has had its own challenges of failing to help alleviate poverty and reduce the high income inequality that the country faces.

The report reckons that poverty has fallen sharply, with the national poverty rate down from 30.6 percent in 2003 to 19.4 percent in 2010 and now extreme below 14 percent.

While all demographic groups experienced improvements, “growth was strongly pro-poor over the past decade. The largest declines in poverty were in rural areas (where it fell by almost 21 percentage points), in the regions furthest from Gaborone, and among the elderly, women and children”. 

The report quickly laments that “poverty is still high in rural areas, remote communities, and in households headed by females, and by those with low levels of education. Most notably, “poverty is concentrated among children and youth, which has important implications for inclusion and inter-generational transmission of poverty. Moreover, while many have escaped poverty and have progressed through the income ranks, there are still a large number people just marginally above the poverty line and at risk of falling back into poverty. This is particularly a risk for smallholder households in rural areas”.

The report observes that “high rates of poverty in Botswana are tied closely to the country’s extraordinary high inequality, which has restricted the extent to which growth contributed to poverty reduction”.

Inequality has fallen over the last decade, with the national Gini coefficient (of per capita consumption) down from 64.7 to 60.5. But this still leaves Botswana among the most unequal societies in the world.

Declining inequality has been driven mainly by substantial regional convergence – inequality in Botswana is no longer simply a spatial story, “but instead is explained primarily by within group differences, most importantly by access to productive livelihoods. Indeed, the most important driver of poverty and inequality reduction has been employment, although most of this has come through heavily subsidized smallholder agriculture”.

According to the report, building upon poverty reduction efforts of the past, Botswana has a huge opportunity to eliminate extreme poverty and reduce inequality. To achieve this will require a broad set of integrated measures including the deepening of inclusive growth and improving the targeting and efficiency of social protection spending.

Inclusiveness will require broad-based job creation, enhancing productivity, and changing the structure of growth. Effectively, this will require a fundamental shift in Botswana growth model, from one dependent on extractives and the public sector to one based on a diversified, competitive private sector.

The report further notes that Botswana has achieved substantial diversification over the past decade, with the services sector and household consumption becoming the largest contributors to gross domestic product (GDP). Bu the substantiality of the diversification and of the growth is of concern for three reasons.

First, maintaining the pace of consumption growth will become increasingly difficult in an environment of weak job creation, slow wage growth, and growing household debt. Second, growth through public investment-led capital deepening will continue to be constrained by fiscal tightening, low productivity, and poor returns on public investment.

 Finally, failure to diversify exports will heighten the risk of external imbalance, which will seriously restrain growth, perhaps even triggering a GDP contraction. On a positive note, “demographics should offer a boost to growth in the medium term, with the dependency ratio expected to fall by 40 percent between 2000 and 2040”.

Moreover, while total factor productivity has been a drag on growth over the past 15 years, evidence suggests non-mining (labour) productivity, particularly in the services sector, is increasingly contributing positively to growth.

The paper further submits that diversification in the mining sector offers potential to support external and fiscal balances, but it is not the solution to sustainable poverty reduction due to its limited job creation potential.

Instead, what is required is the development of a more competitive, outward-looking private sector, particularly in employment –intensive sectors (like nature-based tourism and some high value-added business services) where Botswana can exploit global or regional comparative advantage.

With a small domestic economy, successful development of the private sector will depend crucially on export markets. This requires improving the integration of Botswana’s firms into regional value chains which, in turn, requires addressing the trade policy and trade facilitation barriers that impedes regional trade and investment.

“Delivering a new growth model for Botswana will require the private sector to lead in investing and developing competitive, outward-oriented firms. At the moment, while entrepreneurs are emerging, the private sector remains shallow.

“Encouraging entrepreneurs to invest in export-oriented activities will require reforming the existing inward-looking investment environment which raises the relative returns of focusing on domestic non-tradables and government contracts”, stipulates the report.

The shift will also require addressing the high costs of operating in Botswana. Progress is being made on many aspects of the ‘Doing Business’ agenda, but firms remain weakly competitive.

 Improving productivity through investment in workforce development (skills; training; and work ethic) and the adoption of technology will be critical to developing more competitive firms.

So too will be improving connectivity by improving the trade facilitation environment (promoting value chain integration), improving air transport links, and improving the quality and cost of ICT infrastructure. It may also require re-focusing industrial policy on sectors where Botswana’s comparative disadvantages are less binding, including modern commercial services and tourism.

The report further recognizes that “Botswana faces a broad range of constraints in achieving the transition to this new growth model, and subsequently in making continued, rapid progress toward eliminating poverty and delivering shared prosperity”.

The other important raised by the report is that improving outcomes in Botswana will require a significant reform and modernization of the public sector, “which is increasingly seen as a source of weakness rather than strength”. Poor outcomes in public investment have been most viable, but the problems appear to run across the board.

Reforms will require improvements in planning, procurement, and management processes. They will also require far greater attention to monitoring and evaluation, but more than anything, they will require a new approach to government – a mindset that focuses on efficiency and accountability. This, in turn, will require improvements in capacity (human capital), as well as adoption of modern technologies and techniques.

Support for a more effective public service, as well as more informed policymaking, requires substantial upgrading of statistical capacity to ensure access to more regular, consistent, and comprehensive data.

According to the report, Botswana does many things well, but it also faces many constraints to achieving the goals of sustainable poverty elimination and shared prosperity: constraints to achieving jobs-intensive, private sector driven growth; to ensuring that all Batswana can contribute to and share in the gains from growth; and to balancing competing demands to ensure sustainability of natural, and institutional resources.

The report prioritizes broadly-defined priorities for implementation in the following order: facilitating a competitive, export-oriented private sector by aligning incentives and improving connectivity; increasing the returns of self-employment by raising productivity of smallholders and microenterprises; improving health and education outcomes by reducing the disease burden, and raising and aligning skills;

Others include ensuring improved access to water and sanitation; reforming social protection to reduce fragmentation and improve targeting, efficiency, and linkages; modernizing the public sector through improved technology, management, and systems of accountability; and mainstreaming the management of scarce natural resources.

It is also reckoned by the report that “not only is Botswana close to reaching the goal of poverty elimination, but it has a social protection system which has the scale and breadth to deliver it”.

It is further acknowledged that Botswana’s social protection system has the potential of virtually eliminating extreme poverty without additional resources implications. Beyond this, it has the potential to build an effective bridge to addressing many other aspects of the inclusion challenge, including health, education, and labour markets.

In this sense, prioritizing social protection reform in the short term seems an obvious first step to addressing the twin goals. Among the priorities for the reform of social protection include adopting technologies and processes to improve targeting efficiency, consolidating the fragmented programmes and introducing conditional interventions to promote behavioural changes, and more effectively linking social protection with public works and active labour market programmes.

In summary, the report states that Botswana has a genuine opportunity to eliminate extreme poverty in the coming years. But the real challenge will be making this sustainable and, most critically, to reduce the extreme levels of inequality that still hinder macro level growth and micro level inclusion.

This will require a change in Botswana’s growth model built on an export-looking private sector underpinned by higher skilled, more productive, and more entrepreneurial individuals, households, and firms. It will also require balancing competing demands for limited natural resources, particularly water. Underpinning all of this is the imperative for a more modernized and effective public service.

While Botswana has made substantial progress in poverty reduction over the past decade, “both poverty and inequality remain extremely high for a country of its income level. Fundamentally, this is because the nature of growth in Botswana has not been conducive to reducing poverty and inequality in a substantial way.

“Therefore, at the heart of the challenges Botswana face is the need for a new growth model, one that is employment intensive and driven by a competitive and export-oriented private sector”.

RELATED STORIES

Read this week's paper