Week 3 – Botswana case study Economic and Development Problems in Africa

For next week’s assignment “Botswana: A Diamond in the Rough” – HBS Case Study 650 words Due Tuesday 21 Feb 8-9AM lecture Arial, 11 font, 1.5 line spacing Answer the following three questions: Is Botswana a success? (provide reasons why and why not) What do you believe were the 3 main factors that made Botswana successful? Do you think Botswana’s success is replicable elsewhere in Africa? Why? Why not?

Case Study

Skills to learn Read for information – not all information is of equal value. Hence highlighting/underlining and labelling your document. Public speaking and being able to talk on demand. Extract information from data. Playing devil’s advocate – learning happens at the extremes not in the middle of the road. Don’t be afraid to take a position.

Botswana context Land locked country Drought prone Desert “Bad neighbourhood” Initially: little in terms of infrastructure and human capital Minimal British interference in protectorate Resource abundant Diamonds

Resource curse Angola – Congo – Nigeria – Saudi Arabia – Venezuela... Economy, exports, public finances extremely dependent on one good Decreases incentives to invest and to manage resources prudently Dutch disease – forex, exchange rates and manufacturing Patrimony – cf for later sessions!! Why did Botswana succeed were others have failed? In economics, the Dutch disease is a concept that explains the apparent relationship between the increase in exploitation of natural resources and a decline in the manufacturing sector. The mechanism is that an increase in revenues from natural resources (or inflows of foreign aid) will make a given nation's currency stronger compared to that of other nations (manifest in an exchange rate), resulting in the nation's other exports becoming more expensive for other countries to buy, making the manufacturing sector less competitive. While it most often refers to natural resource discovery, it can also refer to "any development that results in a large inflow of foreign currency, including a sharp surge in natural resource prices, foreign assistance, and foreign direct investment".[1] The term was coined in 1977 by The Economist to describe the decline of the manufacturing sector in the Netherlands after the discovery of a large natural gas field in 1959.[2]

Is Botswana a success story? Discussion Is Botswana a success story? Yes Amazing growth, averaging 10% per year over four decades (Exhibit 4) Fastest growing country in last 35 years Other poor countries in region did not manage to grow (Exhibit 10) Good fiscal/macro management of resources Diamond returns invested in infrastructure, education and health Democracy, free and fair elections No civil war Best social indicators among African neighbors Ranked 24/101 countries on transparency International’s Corruption Index (Exhibit 11) No Started from a low base – fast growth inevitable (Exhibit 2) Growth fueled only by diamonds – in 2000 diamond’s contributed 30% of the nation’s GDP, 70-80% of its exports and 50% of government revenues (Exhibit 3) High unemployment – almost 15% according to some sources 35.8% adult HIV/AIDS infection – The World Bank further estimates that in the next 10 years AIDS would reduce 20% off the government budget and bring about a 13% reduction in income of the poorest households Lack of skilled labor

Discussion What were the local institutions in Botswana? A – Tribal institution set up to discuss issues of public interest. It helped administrate the law and allocate assets. Need for accountability and consensus Transparency and voice (parallels with democracy)

Discussion Why were local institutions allowed to flourish? A- One of the main reasons why Botswana’s local institutions were allowed to flourish was that the British colonial powers had no interest in this ‘colonial backwater’...why? 1966: Botswana gains independence “Botswana is a poor country not only in terms of per capita income but also in terms of natural resources” 1968: Copper/nickel/diamonds discovered “Botswana is a poor country but it possesses sufficient natural resources to permit, with outside assistance, rapid development”

What accounts for this performance? Discussion What accounts for this performance? Institutions Kgotla: Tradition of prudence and consensus; Democracy Respect for the rule of law: Constitition: protect property rights Market oriented – Investor friendly environment Good bureacracy Policies No nationalizations Partnership with De Beers – De Beers  Maximize profits Government invest in infrastrcutre, health and education Fiscal deficits frowned upon: prudent macroeconomic management. Exchange rate management – keep competititve ER despite surpluses and growing diamond revenue Is it easier to grow if you start with nothing or if you are resource abundant? (Ex 9+10)

Is Botswana’s success replicable? Are institutions and policies transplantable? Washington Consensus? Stabilize Liberalize Privatize Which institutions are/aren’t transplantable? Does one need a De Beers to make a Botswana success story? Are they always around?

Challenges and solutions Problem Diversify Grow Unemployment AIDS Solution Attract FDI More government? Issues Will FDI come? (Exhibit 12) Will they stay? Will FDI hire unskilled labor? Will it help jumpstart domestic activity? Resources? Resources? Change culture? Is Botswana’s continued success dependent on De Beers and the continuation of the diamond cartel?

Conclusion Importance of institutions and policies (+ leaders!) Most African countries are well endowed with natural resources but are unable to convert this into sustained growth. Mutually beneficial partnerships (De Beers) Why did these particular institutions develop in Botswana and not elsewhere?

Group presentations 5% Things to discuss Countries 5% of FINAL mark (group-work mark) 20 minutes Things to discuss Brief history/background Political environment Economy Social + cultural context 3 main problems (+Solutions?) Countries Botswana (Week 3) Kenya (Week 4) DRC (Week 6) Sudan (N+S) (Week 7) Ivory Coast (Week 8) Ghana (Week 10) Zambia (Week 11)  Marking criteria: Presentation (20%), Content (50%), Interesting (30%) 5%