Over the recent years, Botswana has witnessed certain favorable developments in economic diversification. However, it is widely perceived that a challenge persists in the realm of the country’s exports, exerting a direct impact on the balance of payments.
According to Absa Bank Botswana economist, Naledi Madala, Botswana has experienced some form of diversification by looking at sectoral contribution to the GDP.
“Services have grown more in their contribution to the GDP than the mining sector,” Madala said on Thursday this week during Absa’s annual economic forum.
“But when you look at our exports, which have direct implications on our balance of payments, that is where the problem is.”
Madala said Botswana’s export composition today is almost similar to the one in 2011.
“The big question is how we solve this. Policymakers have long acknowledged and known that export diversification has a direct implication on growth and higher per capita growth,” she said.
“It also lowers volatility, meaning that if we have more sectors, we don’t become more anxious when diamonds are not doing well.”
Madala stressed that resources are finite and are not always going to be available. She highlighted that the problem that Botswana is facing in terms of diversifying its economy is its pursuit of export-led growth.
“This is not peculiar to Botswana. It’s a common occurrence for mineral resource-rich countries,” said Madala.
“Researches have been made to establish why it is difficult for these countries to change the situation.”
Citing one research from Harvard University, she said it has been established that as economies grow, they tend to change their comparative advantages.
“There is the evolution in their comparative advantage. If you look at Israel, back then it used to export oranges, but now they export IPOs of high-tech companies,” Madala said.
“The explanation is, they are able to acquire new productive capabilities and the know-how to do more diverse and valuable things.”
In essence, she said the kind of industries that they have a comparative advantage on allows them to prepare for the next things.
“The researchers are saying, for mineral-rich countries, the kind of industries that we are excelling in are not preparing us to move into other industries.”
Madala said this makes the case for export diversification for resource-rich countries much more difficult.
However, she said some mineral-endowed countries have done well in diversifying their exports, naming Chile as an example.
Chile is the largest producer and exporter of copper.
“Just like diamonds are important for us, copper is also important for the Chilean economy,” said Madala.
“There has not been a quite straight path to their success.”
Madala said Chile’s industrial policy has gone through different phases and reforms.
“If you look at the period between 1934 and 1973, that is when they we doing import substitution,” she highlighted.
“It didn’t work for them and the economy was not doing well.”
Further, she said the country also tried resource nationalisation which also failed.
“At some point, the country fell into a serious balance of payments crisis,” she said.
“But if you look at the set of reforms they started using from 1973 to 1989, that is when they adopted the method of trade liberalisation and open market reforms.”
According to Madala, because of Chile’s diversified export basket, the country can attract FDI into different sectors.
“The picture is different when it comes to Botswana,” said Madala.
“For Botswana, the FDI just flows into extractive industries. Until we get a different picture, this will not change.”
She said more than 70 percent of the FDI that comes into Botswana goes into the extractive industry. Madala, however, pointed out that Botswana has also gone through its industrial policies, one developed in 1984 and another in 1998.
“We have seen a lot of initiatives such as the Economic Diversification Drive,” she highlighted.
“But what worked for Chile is probably what we need to reflect on as an economy.”
She said Chile took deliberate steps to grow its non-mining industry by bringing in venture capitalists.
Without copying everything that Chile did, Madala said Botswana can pick some great lessons and adopt them. As Botswana aims to become a high-income country by 2036, Madala said once the country is granted such status, investors and the rest of the world will have high expectations.
These high expectations she said include the quality of infrastructure, healthcare system, and service delivery.
“This is what we are speeding against as a country,” said Madala.
“A high-income economy cannot be sustained on just diamond dependency.”