Week 3 – Botswana case studyEconomic and Development Problems in Africa

13 Aug 2012

Case Study

“Botswana: A Diamond in the Rough” – HBS Case Study

1. Is Botswana a success? (provide reasons why and why not)2. What do you believe were the 3 main factors that made

Botswana successful?3. Do you think Botswana’s success is replicable elsewhere in

Africa? Why? Why not?

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.

• Importance of institutions

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

• Why study Botswana?Botswana has the highest sustained real output growth of any country in the world (>10% for 40 years) from $80$3600

Discussion• Is Botswana a success story?

Yes1. Amazing growth, averaging 10% per year over

four decades (Exhibit 4)

2. Fastest growing country in last 35 years

3. Other poor countries in region did not manage to grow (Exhibit 10)

4. Good fiscal/macro management of resources

5. Diamond returns invested in infrastructure, education and health

6. Democracy, free and fair elections

7. No civil war

8. Best social indicators among African neighbors

9. Ranked 24/101 countries on transparency International’s Corruption Index (Exhibit 11)

No1. Started from a low base – fast growth inevitable

(Exhibit 2)

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)

3. High unemployment – almost 15% according to some sources

4. 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

5. Lack of skilled labor

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?

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)

• An institution is any structure or mechanism of social order and cooperation governing the behavior of a set of individuals within a given human community. Institutions are identified with a social purpose, transcending individual human lives and intention by mediating the rules that govern cooperative human behavior.[1]

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”

Discussion• What accounts for this performance?

Institutions1. Kgotla: Tradition of prudence and consensus;

Democracy

2. Respect for the rule of law: Constitition: protect property rights

3. Market oriented – Investor friendly environment

4. Good bureacracy

Policies1. No nationalizations

2. Partnership with De Beers – • De Beers Maximize profits• Government invest in infrastrcutre,

health and education3. Fiscal deficits frowned upon: prudent

macroeconomic management.

4. 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)

Questions ???

1. Is Botswana’s performance likely to continue?

2. Would it be better or worse for the government if they found out tomorrow that the diamonds would run out in 2025?

3. Is it easier to grow if you start with nothing or if you are resource abundant? (Ex 9+10)

4. Is Botswana’s success replicable in other African countries?

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

Problem1. Diversify

2. Grow

3. Unemployment

4. AIDS

Solution

Attract FDI

More government?

IssuesWill 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?•Is the growth sustainable?

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?

- Groups of 6- 10% of FINAL mark (group-work mark)- 20 minutes (+10 min questions)- 3 present & 3 answer questions

Things to discussi. Brief history/backgroundii. Political environmentiii. Economyiv. Social + cultural contextv. 3 main problems (+Solutions?)

Countries1. Kenya (Week 4)2. Zimbabwe (Week 5)3. DRC (Week 6)4. Sudan (N+S) (Week 7)5. Ivory Coast (Week 8)6. Mozambique (Week 9)7. Ghana (Week 10)8. Zambia (Week 11)

Marking criteria: Presentation (20%), Content (50%), Interesting (30%)

15

10%

Group presentations