Getting It Right In Botswana: Free Markets, Fiscal Rectitude, Record Growth

 

Going Against the Grain  

Back in 2013, Botswana was alone among African countries in its vehement rejection of the fraudulent election in Zimbabwe that kept the aging dictator Robert Mugabe in power.

An article in Bulawayo 24 [Bulawayo and Zimbabwe’s online news resource … Ed.] goes on to note that some critics in Botswana believe that the government is not entirely consistent in applying its foreign policy ideals. However, that shouldn’t detract from the fact that it very often finds itself alone in Africa when it is voicing its disapproval of injustice elsewhere on the continent.

 

okavango-delta-2

The Okavango Delta

Photo credit: Ross Serven

 

As Bulawayo 24 reported at the time:

 

“Alone among African countries, Botswana has rejected the results of the Zimbabwean elections. It’s a brave stand, bound to frustrate their neighbors, but not unexpected. Over the last few years, Botswana and its president have shown that they can think and act for themselves. As African countries and institutions fell over themselves to whitewash the results of the Zimbabwean elections, there was a lone dissenter among all the official voices.

In what’s becoming a regular occurrence, Botswana found itself out of step with its regional and continental allies – and unafraid to upset the applecart.

“There is no doubt that what has been revealed so far by our observers cannot be considered as an acceptable standard for free and fair elections in Sadc,” said Botswana’s ministry of Foreign Affairs in a statement. “The community, Sadc, should never create the undesirable precedent of permitting exceptions to its own rules.”

The statement continued by calling for an independent audit of the Zimbabwe results, and for the inconsistencies in the report of Sadc’s own election observers to be discussed at the Sadc summit later this month. As statements go, this one was undeniably brave and hugely embarrassing for South Africa and Sadc, who both have pronounced themselves satisfied with the poll. Both also play hugely significant roles in landlocked Botswana’s economy.

But the statement was not inconsistent. Over the last few years, Botswana has made something of a habit of doing its own thing in the foreign policy arena, shamelessly flouting the unwritten rule of African diplomacy that priorities consensus and a united front above all else.

 

(emphasis added)

 

Free Markets and the Rule of Law

A friend has pointed us to an interesting article by Ed Frank that recently appeared at the Daily Signal, which discusses Botswana’s impressive economic success. Africa is often considered a “lost cause”, a perennial basket case both politically and economically, although the situation has actually greatly improved in a number of countries (such as e.g. Ghana).

Still, Botswana is setting an especially noteworthy example. Its success shows that free markets and strong property rights will work everywhere. Economic laws are of course always and everywhere valid. Once a free market system is adopted, capital accumulation and growing prosperity will invariably follow. Botswana proves that economic freedom is far better at achieving development goals and raising living standards than the billions in foreign aid that have been wasted on countless developing countries over the years to little avail.

 

botswana-stock-marketThe Botswana Stock Exchange (BSE) Index – the BSE is actually Southern Africa’s third-largest stock market by total market capitalization. However, this is partly due to its listings of foreign stocks, which include several large companies based in South Africa – click to enlarge.

 

As Ed Frank explains:

 

“Western governments, well-intentioned NGOs and good-old-fashioned profit-seeking capitalists have been trying for decades to help bring development and prosperity to Africa, often unsuccessfully. But buried in the heart of Southern Africa lies a success story that could be a model for the rest of the continent—and the rest of the developing world.

When Botswana gained independence from the British in 1966, the new country’s insightful leaders did what so many others in the post-colonial world didn’t: they embraced democracy, free markets and the rule of law. In other words, economic freedom. The results speak for themselves.

While so much of the continent has remained mired in poverty and corruption, Botswana became the world’s fastest growing economy for three decades. Foreign direct investment and new construction can be seen everywhere in the capital city of Gaborone. Tourism to world-class destinations like the Okavango Delta has taken root and is expanding. And after starting off as the world’s third-poorest nation, with a per-capita GDP of $70 in 1966, today is has expanded dramatically to $16,377.

 

(emphasis added)

From a GDP of $70 per capita in 1966 to $16,377 today is indeed impressive (note that these figures are purchasing power parity adjusted). In fact, over the past 30 years, Botswana’s economy was probably the fastest growing in the world. Since 2003 alone, its economy has grown more than 3.5 times. Given the widespread prejudices about Africa, it is especially gratifying to see free market principles delivering such a resounding success in an African country. Note however the important role diamonds have played in Botswana’s development, which we briefly discuss further below.

The country’s public debt to GDP ratio is quite low at about 24%, but this is actually up quite a bit from the 6% to 10% range that pertained until 2007. Presumably the rise in indebtedness was largely a side effect of the global financial crisis. Nevertheless, Botswana continues to be considered Africa’s best credit risk.

Although it should be obvious, we would like to point out that it is not necessary to run huge government deficits and pile up mountains of public debt in order to achieve strong economic growth. In fact, Botswana’s history suggests precisely the opposite. Evidently Botswana’s policy makers have refrained from taking any advice from Paul Krugman.

 

Strong Property Rights, Low Taxes and Few Regulations

Readers should check out the short video that came with Ed Frank’s article, which we reproduce below. It features interviews with Temba Nolutshungu, a director of South Africa’s Free Market Foundation, and Leta Mosienyane, one of Botswana’s most acclaimed architects.

As one of the gentlemen explains, in Botswana government and the private sector tend to “get together to discuss what would work best for business”. The result of these discussions are extremely low corporate and individual tax rates, and what are considered the strongest property rights in Africa.

 

Why Botswana’s economy is doing so well

 

We want to add a few personal observations to this, since we have spent some time in Botswana ourselves and therefore have some first-hand experience (this was almost twenty years ago though). A number of things made quite an impression on us at the time. For instance, one thing that will immediately strike people who have visited various African countries as quite astonishing is that there is no corruption detectable in Botswana.

In most African countries corruption is deeply entrenched. In Botswana by contrast, civil servants won’t even accept a tip after whatever business one had to conduct with them has been concluded. As a knowledgeable local explained to us, this is due to the fact that the government is paying its employees well, while it is at the same time enforcing a strict anti-corruption policy. No-one wants to take the risk of losing his job due to getting caught taking bribes and even rank and file officials are striving to stay honest as a result.

In order to augment its civil service and help to make it more efficient, Botswana’s government has also imported a handful of experienced foreign administrators, mainly from the UK. If one needs to apply for a permit, one can rest assured that one a) won’t have to bribe anyone and b) that the permit will be issued fast, with little fuzz and at minimal cost. In fact, our personal impression at the time was that Botswana was superior to most European countries in this respect.

The only drawback we were aware of was that the capital Gaborone was a bit boring – there was for instance very little nightlife (this may have changed since then, but 20 years ago Gaborone seemed a rather sleepy town). However, boring can sometimes be a good thing. Not very far to the South of Gaborone is South Africa’s Johannesburg, a city boasting a bustling nightlife, that is however at the same time one of the most crime-infested places on the planet. Johannesburg isn’t even safe in broad daylight. The danger of getting robbed, mugged, or having one’s car hijacked at gunpoint is rather substantial (in fact, if someone were to tell us that he visited the place and wasn’t at least mugged once, it would mean he wasn’t there). In Gaborone nothing of this sort is likely to happen, regardless of the time of day.

 

Diamond Riches

It should be added to all this that the government of Botswana has always enjoyed a number of crucial advantages. The most important one is that it has a very large source of income from diamond mining. South Africa’s De Beers group and the government each hold 50% in Debswana, which operates four large diamond mines and a coal mine in the country. The revenues from diamonds are quite substantial – diamond exports contribute 50% to the government’s total revenues, which no doubt makes it a lot easier to keep taxes at a low level and pay civil servants well. In fact, Botswana is the world’s largest producer of gem-stone quality diamonds.

The country also has the advantage that it has a relatively small and ethnically cohesive population. Members of Tswana tribes make up nearly 80% of the population, with the remainder mainly consisting of Kalanga (11%, close relatives of the Mashona in Zimbabwe) and Kalahari Bushmen (3%). In many African countries ethnic strife is a major problem (just think of the Tutsi-Hutu conflict in Rwanda as an especially sad example). This is not the case in Botswana.

The country also has a flourishing tourism industry, due to the spectacular Okavango Delta. The Okavango river doesn’t flow into the sea. Instead it is either taken up by plants or evaporates in the Kalahari desert, with some of its water draining off into aquifers and Lake Ngami. Every summer, the delta is flooded by 11 cubic kilometers of water and expands to three times its permanent size. It is essentially a huge oasis in an otherwise arid place, and rich with plant and animal life.

However, it would be a mistake to conclude that Botswana’s economic strength is solely the result of its diamond riches. Quite a few African countries are extremely well endowed with natural resources. If natural resources were the most important factor determining economic success, there would be many more African success stories to talk about. When it comes to prosperity, economic freedom beats natural resources any day.

Lastly, below is a chart of the Botswana Pula vs. the South African Rand. In recent years, the Pula has weakened against the US dollar, along with many other emerging market currencies. However, as can be seen below, it has actually remained quite stable against the Rand and has even begun to strengthen a bit of late. The Pula/Rand exchange rate is probably more important for Botswana as it has deep economic ties to South Africa, which is its major trading partner.

Botswana is a member of the world’s oldest customs union (established in 1910) with South Africa, Lesotho, Swaziland and Namibia. The customs union in turn is part of the SACD free trade area, which currently includes an additional seven Southern African countries, with more expected to join in coming years. The Pula is a fully convertible currency, and Botswana has no foreign exchange controls – which is a bit of a rarity in Africa as well. Also, profits and foreign direct investments can be repatriated without any restrictions.

 

BWPZAR(Monthly)The Pula vs. the Rand, monthly – click to enlarge.

Conclusion:

Free market capitalism remains vastly superior to any other form of economic organization. It would be quite easy to fight poverty and increase living standards on the African continent. All African governments would need to do would be to emulate the policies implemented in Botswana.

 

wormsap26f-3-webA mopane worm – this edible caterpillar is a highly popular snack in Botswana. Don’t knock it before you’ve tried it.

Photo credit: Tsvangirayi Mukwazhi / AP

 

Charts by: Tradingeconomics, investing.com

 

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