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How did Botswana’s economy manage to beat South Africa’s?

How did Botswana’s economy manage to beat South Africa’s?
An employee displays a 109-carat uncut diamond worth an estimated value $2-million in this arranged photograph at DTC Botswana, a unit of De Beers, in Gaborone. (Photo: Chris Ratcliffe / Bloomberg via Getty Images)

Here is a question South Africans rarely ask, but should: how did Botswana beat us?

Botswana is one of the world’s smallest countries by population and is consequently seldom a topic of discussion at the dinner tables of the developed world. And yet, I think it’s one of the most interesting, important and remarkable economic studies out there.

Just to clarify, the essential measure I am using here is per capita GDP. Batswana became richer on average than South Africans in 2019, and have stayed there.

Just as a measure of what happened in Botswana, consider that in 1964 when the country was “granted” its independence from the UK, the country had 10km of tarred road. And that is not all: it’s landlocked; at independence, it was surrounded on three sides by countries with belligerent white minority governments; it was one of the world’s poorest countries with a per capita GDP of around $70 a year.

It now has a per capita GDP of around $9,200, compared with SA’s $7,200. Cor, blinking, blimey.

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Obviously, per capita GDP is only one measure of a country’s prosperity, and lots of thought has gone into measuring welfare on a wider, more generic basis. But the problem with these measures is that you end up with a list that is very similar to a measure of countries by GDP per capita. The reason is obvious: the wealthier the population, generally speaking, the better the healthcare, education and so on.

Diamonds and De Beers

When you ask people how it is that Botswana did so well economically, the simplistic answer that comes back to you is, well, they have a small population and lots of diamonds. Yet, the answer is inadequate for all kinds of reasons.

The first counterfactual is that usually, having a single, dominant basic commodity is bad for a country, not good. There is an exception to that rule in the case of oil, but lots of countries with enormous natural endowments have gone horribly wrong. Hello Venezuela, which has the world’s largest known oil reserves and is still an economic basket case. Having access to a commodity is not the same as managing the commodity. Turns out the management is the tricky part.

Diamonds are of course Botswana’s God-given bequest, but the Botswana government did two things very early on that set the foundations for perhaps one of the most enduring government/business relationships in history.

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One of the government’s first actions was to pass the Mineral Rights in Tribal Territories Act, under which the various tribes voluntarily ceded their ownership of mineral rights to the new state of Botswana. The second was the establishment of the De Beers/Botswana government 50/50 partnership in Debswana.

It helped, I suppose, that De Beers’ geologists found the diamonds at Orapa and Jwaneng, the greatest diamond mine in history, giving the company some leverage in the negotiations that followed. But the crucial part was the decision made by the country’s first president, Seretse Khama, to allow De Beers a free hand in managing the mines. It hasn’t been an easy relationship and the Botswana government has made increasing demands of De Beers. But generally, the partnership has held, and diamonds are still around 60% of exports.

The dependence on diamonds became testing in 2008 after the financial crisis when diamond prices really came under pressure. Yet, the agreement endured, and diamond mining bounced back. Botswana is gradually reducing its dependence on diamonds, but truthfully, progress in that direction has been slow.

Pragmatism

The next counterfactual in Botswana’s history is that single-party dominant governments are inherently unstable and prone to corruption. There is no counterbalance, the theory goes. But the Botswana Democratic Party has now won 12 straight elections, despite former president Ian Khama breaking away in 2019 to form the Botswana Patriotic Front. I’m not an expert on Botswana’s politics, but you do get the impression that the BDP’s hallmark is pragmatism, and it always has been.

It does pose an interesting question: why is it that an effective one-party state has worked in Botswana but has been such a disaster in Zimbabwe? I don’t know the answer to that, but it’s massively important because the consequences for their populations are just enormous. Zimbabwe’s per-capita GDP is not really measurable, but the IMF estimates it at around a fifth that of Botswana. One obvious difference is that Zimbabwe’s political elite is extremely corrupt and Botswana’s political elite is not. But how did that happen? Was it just leadership? It’s hard to know.

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Population size

The third counterfactual has to do with population size. Generally, economists will tell you that a larger population is a boon to economic growth because it encourages capital formation, intensifies investment, and tends to diversify the economy. Botswana has none of that and SA has all of that. Yet, the net outcome is victory for the Batswana.

It’s worth noting that SA’s GDP per capita did fall behind Botswana’s briefly in the early 2000s, but regained the lead and held it through much of the first decade of the new century. This was the consequence obviously of the commodity boom through that period. It’s also worth noting that this is not all a bed of roses: Botswana’s citizens have got much richer, but on a global basis, they have not kept up with the developing world.

But still, respect. And just one other thing: Botswana now has around 20,000km of paved roads. BM/DM

*To receive Tim Cohen’s take on the big news of the day, sign up for his After the Bell newsletter.

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Comments - Please in order to comment.

  • Ryckard Blake says:

    GDP per capita does not tell the whole story, Tim.
    Has there been a serious, credible inequality survey in Botswana? What’s their Gini number?
    Many live with no prospect of employment, the San have been hounded around reserves, in abject poverty, and just a few live the lives of Brian.
    But for de Beers, most Batswana would still be trying vainly to lift themselves out of the Iron Age. The successive governments have done little by way of ensuring a future for the populace, once the finally kill off the Goose that Lays the Sparkling Eggs.
    Not that the SA govt looks beyond the next pay-check, either.

  • Jane Crankshaw says:

    Racist BEE policies are holding SA back from reaching its full potential again and should be scrapped. The time has come. The longer we languish in this political and economic doldrum the worse it’s going to get….for everyone!

  • Jon Quirk says:

    A very important factor was the freer capital controls of Botswana; this meant that, especially in the early days of Debswana, it benefitted De Beers to ensure that it’s entire diamond holdings, of almost it’s entire southern African diamond operations were held in Botswana, transferred at cost where necessary from South Africa, such that De Beers could maximise their USdollar earnings and get Minorco established on the World stage.

    De Beers could then more easily sell off their SA assets and externalise their core operations; that they were almost forced to do so, is a sad commentary on the abject economic performance, of course, of the ANC.

  • Andrew Newman says:

    Kind of similar to Ireland vs UK.
    In the 50’s the Irish were the indentured labour of British industry, 3rd class migrants.
    But now Irish per capita earnings exceed the UK.

  • Dennis Bailey says:

    Botswana beat SA by ignoring massive poverty and curtailing state corruption in middle classes- but you are not comparing apples with apples, Tim. Mugabe wrote off Zim in 10 short years. Zuma did the same chiefly in KZN but then developed a national franchise in poverty manipulation with the help of the ANC. Oligarchy thrives on poverty (in the fullest sense of economic/ education/ livelihoods). Viva, ANC, Viva.

  • Johan Buys says:

    A few factors might explain. One is Botswana is not communist or ultra socialist. Another is a largely homogenous population in terms of tribes. Yet another is they are not race-obsessed : their affirmative action debate is about women and minorities. They are also more equal than us, with Gini around 50, but that may be an outcome not a cause.

  • Ian McGill says:

    Botswana never had a liberation army, or any hint of a Soviet style ideology, unlike Zim and Co.

  • Sam van Coller says:

    There were a number of critical steps in the early years of nationhood. They chose to replace traditional leadership with democratically chosen leadership. Sir Seretse Khama was open to wise advice. I believe a Mr Steenkamp in particular played a critical role in the early years. They developed a win-win partnership formula with De Beers. They kept public service wages low so that what revenue they had could be used for development. Employers and unions had to obtain approval from government for any wage increases they negotiated so as not to impact on public service wage rates. They developed a food aid management system that ensured overseas food aid was delivered to those in need. They replaced low end South African tourists with high end overseas tourists and built the infrastructure to support this including licensing private lodges to function in National Parks. They invested in education including in rural areas. They maintained a tough criminal justice system. In the end they built pride in their nationhood. We travelled in Botswana regularly between 1985 and 2010 and witnessed the amazing transformation achieved by a good relationship between leadership and citizens

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