Africa's economic cheetah
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talkpoliticsBotswana is a small landlocked country in Southern Africa. Its population is just 1.5 million, 84% of its territory is desert, and only 4% of its land is arable. The GDP per capita (as per the parity of the buying force) is about 6000 $. But the economic growth for the last 30 years has been consistently higher than the average in most of the world, currently 8.2%. That makes Botswana the country with the highest sustained growth in the world. Other countries have also achieved high growth but very few were able to sustain it for 3 decades without interruption. The comparison is even more striking when you consider that the average growth of the countries in Sub-Saharan Africa has been negative for most of the recent 30 years. So what happened in Botswana? Do bear with me...
When it got its independence in the 60's, Botswana had only 12 km of asphalted roads, 22 citizens who had completed university and about 100 people with a secondary education. The country had zero universities and only 2 secondary schools. In 1971 the infant mortality was 100 in 1000. Then, in 1991 that figure dropped to 45 (two times). In 1999, 80% of the kids were already attending school (that means 319 thousand kids), 104 thousand attended secondary school and there were 5500 university students. The double-digit growth of secondary and higher education was coupled with a 5.2% sustained annual growth in elementary education for 30 years in a row. In the mid 80's up till the mid 90's, the income disparity slightly decreased from a 0.56 to a 0.54 quotient. The urban population increased from 8% to 50%, and the pie chart of the labour distribution respectively changed from its previous agriculture dominated orientation. Additionally, Botswana has enormous diamond reserves, but other African countries also have enormous natural resources that haven't changed things for the better for them, so this cannot be the main reason. In fact, according to Jeffrey Sachs and Andrew Warner, the countries with the big resources as a rule have a slower economic growth than the countries in similar political conditions where the resources are scarce (http://nber.org/papers/w5398)
When it gained its independence, Botswana didn't have an electric network, neither phone network, water supply network or a sewage system. But the government created state companies to provide these services. However, if you thought the government dominates the industry, you were wrong. In fact the state companies occupy 6% of the GDP, and in this respect it is the smallest share in the entire African continent. The state companies never became a big black hole sucking government subsidies, because their income was enough to cover their expenses, which is exactly what the World Bank requires from such countries. Botswana created a central development bank and a central cooperative bank, but after some time they both went banrkupt so the government got the point, and it appointed external managers in the former, and closed the latter altogether.
Immediately after its independence, Botswana joined the Southern Africa Customs Union, a thing that brought many benefits between these countries, while allowing them not to pursue policies of state protectionism for the local companies. This way, the economy was exposed to international competition, which provided a strong stimulus to improve the competitiveness of the local companies. The government expenses are growing much slower than the government income, because of the strict budget restrictions, so large surpluses were accumulated, including in currency reserves.
In the late 60's and early 70's the government income as a share of the GDP decreased to 20%. But later the share of the re-distributed income (through the budget) increased to 40% of the GDP (in 1995). A minimal salary was introduced, but the government maintained its real value at a stable level, this way avoiding the disproportionate fluctioations of the real minimal salary that could destroy jobs. Still, the very existence of a minimal salary had some negative effects on the labour force, particularly for the unqualified and young workers and the disabled. What's more, the government obliged the private firms to not offer salaries that are higher than those in the public sector, and this distorted the labour market and as a result unemployment is 20% now (this phenomenon was brought to the extreme in Greece).
Almost immediately after its independence, Botswana started registering growth rates that were much higher than those in other countries at such a stage of development. This changed with time, and in the recent 10 years the average GDP growth is 4.9%, somewhat lower than what other countries have achieved at this stage, but still the remarkable thing is the duration of the sustained growth - something unseen anywhere else to such extents.
During the colonial period, Botswana had relatively democratic institutions. The legal and judicial system worked reasonably well. The institutions of private property existed and this protected the property rights of the real and potential investors, and guaranteed that the political elite had its checks and balances even then. This particularly contrasts with neighbouring Zimbabwe, where ever since 1893 the property rights are respected only when they benefit the poltiical elite, whichever it happens to be. At the end of the 19th century it was the whites who stole the land of the Ndebele, and at the end of the 20th century it was Mugabe who in turn stole their land and gave it to his closest associates. In result of this constant stealing and re-distribution, the average income per capita of the Zimbabweans has collapsed in the last 5 years, many people are starving to death, even though Zimbabwe has so much fertile land that Botswana doesn't have.
Why am I telling you all this? There are several lessons that could be learned from this story:
1. In order to achieve a fast, but more importantly, stable economic growth, it is very important to have effective institutions defending private property. It is extremely important to have laws that guarantee and protect the sanctity of private property, especially from the hands of omnipotent politicians.
2. A sustained growth is not possible without an effective legal system and a system that enforces the contracts. In this sense, the presence of independent, impartial, and relatively efficient courts is extremely important. It's a problem most other African countries, and even some Western countries are having for years.
3. A high growth is possible to maintain for a long period even in those countries which, in their initial period of development, were extremely poor, didn't have any infrastructure or educated population. This shows that when people have the opportunity to work and develop a business without too much interference from the government, they could achieve a lot, despite the unfavourable factors. This also defeats the theory that people in the poor countries are less receptive and adaptable, and lazier. The truth is that in most poor countries the politicians are meddling into people's affairs too much, or outright usurping the products of their work (i.e. corruption is rampant). The key to success is not a government that touches everything, everywhere - it is the government that touches in the proper spots and in a proper way, i.e. a "smart" government that uses its brains and serves its people, instead of trying to rule them.
4. Sustaining economic growth is possible even if you are surrounded by poor countries with ineffective governments and constant political turmoil. When the politicians are explaining the slow development with the geographical location, the weather, or some other such thing, all they are doing is only trying to conceal their own helplessness and incompetence.
5. Participating in a trans-border customs union means that Botswana does not protect its producers through customs tariffs. It protects them by creating conditions for self-improvement, i.e. a competitive environment. Therefore they are forced to improve their productivity and quality, otherwise they would be kicked out of the market. They still have some minimum safety net, but they are not being led through the whole process by somebody else. Moreover, the very presence of international trade in the region increases the prosperity of the participant countries. This means that putting more obstacles to trade would hamper economic development, not enhance it. Again, the question is not in the absence of rules and regulations, the key is in putting the right rules and enforcing the right regulations in an effective way, instead of placing more of them just for its own sake. Meanwhile, I'm not talking about removing all rules altogether, either. A free-for-all is as bad as a suffocating government grip. Like in many other things, balance is the key.
6. With time, the more effective production will become more profitable, and the ineffective will die out. This leads to decreased employment in agriculture, and increased employment in industry and services, where the opportunities for increasing the productivity are much higher. Meanwhile, agriculture gets modernised and manpower is substituted by technology. The attempts to hinder this process through arbitrary subsidies of otherwise ineffective agricultural productions (even paying for not producing certain crops for market reasons), is putting a brake to the natural transformation of the economy from "agrarian" to a more urban and industrial model, and is slowing down the growth. Not to mention that the very presence of protectionism and subsidies means higher taxation of the production, i.e. higher product prices, and additional distortion of the market, i.e. no growth. But again, growth for its own sake should not be the goal, the key word here is *sustainable* growth.
7. Botswana refrained from giving excessive subsidies to its state companies, and this way the tax-payers were spared a lot of money. These funds were directed to a more efficient use, which increased economic growth and more importantly, created a stable basis for sustaining it. You can ask the Batswana middle-class. 30 year ago, it simply didn't exist. Now it has emerged and established itself as the driving force of the economy.
8. The presence of a minimal salary is a safety net that should exist, but it should reflect the current development of the economy. It shouldn't be established and tinkered with in accordance with the current political situation (pre-election period, post-election period, etc). A more long-term approach should be followed, and governments, regardless of their political colour should respect the principle of continuity, instead of reverting each other's policies once in 4 years.
9. The gradual increase of the share of the GDP that is being re-distributed through the national budget, is related to the gradual decrease of the growth rates. If this is being done deliberately, in order to put some brakes to the economic growth and protect it from "over-heating" (a thing China is considering now), then it is a good thing, but the government should be very careful to not go too far with it, because that would "spoil" the market and distort it to a level where it will be very difficult to shake off these habits later, at times of relative global prosperity. And that is a prerequisite for future crises.
10. An important factor for the sustained growth of the Batswana economy (despite its tendency to slow down to its present 4.9% which is still very high in comparison to other countries), is the fact that Botswana is in the top 40 places in the world (just behind South Korea and ahead of Israel) in terms of "Economic freedom". It has been demonstrated before, including in this community, that economic freedom and the presence of established democratic principles and working institutions institutions is crucial for a sustained economic development.
11. Lastly, observing a strict budget discipline is probably the most important condition for sustained growth. This is confirmed in the famous research by Stanley Fischer on "The Role of Macroeconomic Factors in Growth" (http://nber.org/papers/w4565)
I'd also recommend one more article: Daron Acemoglu, Simon Johnson, James A. Robinson, "An African Success Story: Botswana" (http://www.colby.edu/economics/faculty/jmlong/ec479/AJR.pdf)
When it got its independence in the 60's, Botswana had only 12 km of asphalted roads, 22 citizens who had completed university and about 100 people with a secondary education. The country had zero universities and only 2 secondary schools. In 1971 the infant mortality was 100 in 1000. Then, in 1991 that figure dropped to 45 (two times). In 1999, 80% of the kids were already attending school (that means 319 thousand kids), 104 thousand attended secondary school and there were 5500 university students. The double-digit growth of secondary and higher education was coupled with a 5.2% sustained annual growth in elementary education for 30 years in a row. In the mid 80's up till the mid 90's, the income disparity slightly decreased from a 0.56 to a 0.54 quotient. The urban population increased from 8% to 50%, and the pie chart of the labour distribution respectively changed from its previous agriculture dominated orientation. Additionally, Botswana has enormous diamond reserves, but other African countries also have enormous natural resources that haven't changed things for the better for them, so this cannot be the main reason. In fact, according to Jeffrey Sachs and Andrew Warner, the countries with the big resources as a rule have a slower economic growth than the countries in similar political conditions where the resources are scarce (http://nber.org/papers/w5398)
When it gained its independence, Botswana didn't have an electric network, neither phone network, water supply network or a sewage system. But the government created state companies to provide these services. However, if you thought the government dominates the industry, you were wrong. In fact the state companies occupy 6% of the GDP, and in this respect it is the smallest share in the entire African continent. The state companies never became a big black hole sucking government subsidies, because their income was enough to cover their expenses, which is exactly what the World Bank requires from such countries. Botswana created a central development bank and a central cooperative bank, but after some time they both went banrkupt so the government got the point, and it appointed external managers in the former, and closed the latter altogether.
Immediately after its independence, Botswana joined the Southern Africa Customs Union, a thing that brought many benefits between these countries, while allowing them not to pursue policies of state protectionism for the local companies. This way, the economy was exposed to international competition, which provided a strong stimulus to improve the competitiveness of the local companies. The government expenses are growing much slower than the government income, because of the strict budget restrictions, so large surpluses were accumulated, including in currency reserves.
In the late 60's and early 70's the government income as a share of the GDP decreased to 20%. But later the share of the re-distributed income (through the budget) increased to 40% of the GDP (in 1995). A minimal salary was introduced, but the government maintained its real value at a stable level, this way avoiding the disproportionate fluctioations of the real minimal salary that could destroy jobs. Still, the very existence of a minimal salary had some negative effects on the labour force, particularly for the unqualified and young workers and the disabled. What's more, the government obliged the private firms to not offer salaries that are higher than those in the public sector, and this distorted the labour market and as a result unemployment is 20% now (this phenomenon was brought to the extreme in Greece).
Almost immediately after its independence, Botswana started registering growth rates that were much higher than those in other countries at such a stage of development. This changed with time, and in the recent 10 years the average GDP growth is 4.9%, somewhat lower than what other countries have achieved at this stage, but still the remarkable thing is the duration of the sustained growth - something unseen anywhere else to such extents.
During the colonial period, Botswana had relatively democratic institutions. The legal and judicial system worked reasonably well. The institutions of private property existed and this protected the property rights of the real and potential investors, and guaranteed that the political elite had its checks and balances even then. This particularly contrasts with neighbouring Zimbabwe, where ever since 1893 the property rights are respected only when they benefit the poltiical elite, whichever it happens to be. At the end of the 19th century it was the whites who stole the land of the Ndebele, and at the end of the 20th century it was Mugabe who in turn stole their land and gave it to his closest associates. In result of this constant stealing and re-distribution, the average income per capita of the Zimbabweans has collapsed in the last 5 years, many people are starving to death, even though Zimbabwe has so much fertile land that Botswana doesn't have.
Why am I telling you all this? There are several lessons that could be learned from this story:
1. In order to achieve a fast, but more importantly, stable economic growth, it is very important to have effective institutions defending private property. It is extremely important to have laws that guarantee and protect the sanctity of private property, especially from the hands of omnipotent politicians.
2. A sustained growth is not possible without an effective legal system and a system that enforces the contracts. In this sense, the presence of independent, impartial, and relatively efficient courts is extremely important. It's a problem most other African countries, and even some Western countries are having for years.
3. A high growth is possible to maintain for a long period even in those countries which, in their initial period of development, were extremely poor, didn't have any infrastructure or educated population. This shows that when people have the opportunity to work and develop a business without too much interference from the government, they could achieve a lot, despite the unfavourable factors. This also defeats the theory that people in the poor countries are less receptive and adaptable, and lazier. The truth is that in most poor countries the politicians are meddling into people's affairs too much, or outright usurping the products of their work (i.e. corruption is rampant). The key to success is not a government that touches everything, everywhere - it is the government that touches in the proper spots and in a proper way, i.e. a "smart" government that uses its brains and serves its people, instead of trying to rule them.
4. Sustaining economic growth is possible even if you are surrounded by poor countries with ineffective governments and constant political turmoil. When the politicians are explaining the slow development with the geographical location, the weather, or some other such thing, all they are doing is only trying to conceal their own helplessness and incompetence.
5. Participating in a trans-border customs union means that Botswana does not protect its producers through customs tariffs. It protects them by creating conditions for self-improvement, i.e. a competitive environment. Therefore they are forced to improve their productivity and quality, otherwise they would be kicked out of the market. They still have some minimum safety net, but they are not being led through the whole process by somebody else. Moreover, the very presence of international trade in the region increases the prosperity of the participant countries. This means that putting more obstacles to trade would hamper economic development, not enhance it. Again, the question is not in the absence of rules and regulations, the key is in putting the right rules and enforcing the right regulations in an effective way, instead of placing more of them just for its own sake. Meanwhile, I'm not talking about removing all rules altogether, either. A free-for-all is as bad as a suffocating government grip. Like in many other things, balance is the key.
6. With time, the more effective production will become more profitable, and the ineffective will die out. This leads to decreased employment in agriculture, and increased employment in industry and services, where the opportunities for increasing the productivity are much higher. Meanwhile, agriculture gets modernised and manpower is substituted by technology. The attempts to hinder this process through arbitrary subsidies of otherwise ineffective agricultural productions (even paying for not producing certain crops for market reasons), is putting a brake to the natural transformation of the economy from "agrarian" to a more urban and industrial model, and is slowing down the growth. Not to mention that the very presence of protectionism and subsidies means higher taxation of the production, i.e. higher product prices, and additional distortion of the market, i.e. no growth. But again, growth for its own sake should not be the goal, the key word here is *sustainable* growth.
7. Botswana refrained from giving excessive subsidies to its state companies, and this way the tax-payers were spared a lot of money. These funds were directed to a more efficient use, which increased economic growth and more importantly, created a stable basis for sustaining it. You can ask the Batswana middle-class. 30 year ago, it simply didn't exist. Now it has emerged and established itself as the driving force of the economy.
8. The presence of a minimal salary is a safety net that should exist, but it should reflect the current development of the economy. It shouldn't be established and tinkered with in accordance with the current political situation (pre-election period, post-election period, etc). A more long-term approach should be followed, and governments, regardless of their political colour should respect the principle of continuity, instead of reverting each other's policies once in 4 years.
9. The gradual increase of the share of the GDP that is being re-distributed through the national budget, is related to the gradual decrease of the growth rates. If this is being done deliberately, in order to put some brakes to the economic growth and protect it from "over-heating" (a thing China is considering now), then it is a good thing, but the government should be very careful to not go too far with it, because that would "spoil" the market and distort it to a level where it will be very difficult to shake off these habits later, at times of relative global prosperity. And that is a prerequisite for future crises.
10. An important factor for the sustained growth of the Batswana economy (despite its tendency to slow down to its present 4.9% which is still very high in comparison to other countries), is the fact that Botswana is in the top 40 places in the world (just behind South Korea and ahead of Israel) in terms of "Economic freedom". It has been demonstrated before, including in this community, that economic freedom and the presence of established democratic principles and working institutions institutions is crucial for a sustained economic development.
11. Lastly, observing a strict budget discipline is probably the most important condition for sustained growth. This is confirmed in the famous research by Stanley Fischer on "The Role of Macroeconomic Factors in Growth" (http://nber.org/papers/w4565)
I'd also recommend one more article: Daron Acemoglu, Simon Johnson, James A. Robinson, "An African Success Story: Botswana" (http://www.colby.edu/economics/faculty/jmlong/ec479/AJR.pdf)
(no subject)
Date: 22/8/11 16:41 (UTC)(no subject)
Date: 22/8/11 17:00 (UTC)In a sense, the Batswana have been blessed by obscurity, remaining largely irrelevant amidst all the turmoil surrounding them. Something like the hobbits that no one cares about and is even unaware of their existence, until they pop up in the middle of Mordor with a strange-looking ring and scream "My precious!"
(I know you would appreciate the levels of geekiness in this comment!) :-)
Any relation?
Date: 22/8/11 18:34 (UTC)Diamond mining was one of those things that Cecil Rhodes was into. Diamonds are used industrially, as well as for purposes of jewelry. For example, diamond saws are used to make cuts in pavement for access to utility channels and such.
Re: Any relation?
Date: 22/8/11 18:42 (UTC)Ps. Itsi is awesome, period.
Re: Any relation?
Date: 22/8/11 18:46 (UTC)Re: Any relation?
Date: 22/8/11 18:53 (UTC)Re: Any relation?
Date: 22/8/11 18:45 (UTC)Re: Any relation?
Date: 22/8/11 18:53 (UTC)Re: Any relation?
Date: 22/8/11 21:16 (UTC)(no subject)
Date: 23/8/11 03:16 (UTC)I confess to have pretty much fallen in love with the country and people how they are presented in the books; but also confess not to have done any research as to not be disappointed. From your OP it sounds like I can...Thank You!!
(no subject)
Date: 23/8/11 04:52 (UTC)(no subject)
Date: 23/8/11 06:24 (UTC)(no subject)
Date: 23/8/11 22:02 (UTC)Thank you for an in depth analysis of what works and why. You stress the need for balance and moderation - not a free for all , or a government that stifles, but one that applies pressure as and where pressure is needed.
Botswana created a central development bank and a central cooperative bank,
Can you talk about the role of the Co operative bank, please?
Did it finance workers co ops, or was it a co op itself?