9 May 2018

Botswana's resource curse means that growth ≠ development

Tom writes:*

Botswana is often deemed as the ‘miracle of Africa’ due to its rapid economic development. After gaining independence in 1966, it was the world’s fastest growing economy until 1989. However, this growth does not equal development. In fact, Botswana was the only country to experience a drop in its Human Development Index in period of rapid domestic economic growth. Reasons for this drop were high levels of HIV/AIDS, income inequality and unemployment. In this post I will discuss Botswana’s high levels of both economic growth and income inequality, and will attribute them to its diamond abundance.

The first diamonds were discovered in 1967, in the region of Orapa, by the South-African company De Beers. Today, diamond mining is mostly dominated by Debswana, which is jointly owned by the Botswana government and De Beers. The discovery of diamonds had a significant impact on the economy, which can be seen in the figure below. Diamond rents contributed to Botswana’s rapid economic growth.
Botswana’s diamond production and GDP (Dunningdiamondproducers.comUSGS and World Bank)
However, these rents seem to have negative effects on the country’s development and, more specifically, inequality. This is illustrated in the figure below. The more diamonds Botswana produces, the more unequal the country seems to get.
Botswana’s diamond production and Gini coefficient (United Nations University)
In explaining this contradiction of rapid economic growth and rising income inequality, literature on the ‘resource curse’ might provide an answer. The presence of resources in a country is argued to negatively influence a country’s economic growth and development. Nevertheless, Botswana in part avoids these effects through successful management of its diamonds, which includes setting up funds to manage the diamond rents.

However, the resource curse still seems to apply to inequality, which can be attributed to two reasons. First, only a minority elite seems to benefit from these diamond rents. Second, inequality seems to be caused by so-called ‘Dutch Disease’, which argues that the presence of resources draws capital and labour away from other sectors of the economy towards the resource sector. This crowds out the other sectors. Research [pdf] argues that on one hand, because of equally spread human capital across society, wages in non-resource sectors will be more equal. On the other hand, due to competition for the rent created by natural resources, wages in this sector will be unequal. Drawing labour away to the resource sector will therefore result in inequality.

Although the Botswana government has successfully avoided the effects of the resource curse on growth, it did not avoid the effects on development. The government should take measures to diversify the economy away from diamonds, and distribute diamond rents more equally among the population.

Bottom line: The resource curse in Botswana illustrates that growth does not equal development. Diamonds have helped Botswana’s economic growth, but also resulted in large income inequality due to unequal rent distribution and wage inequalities in the resource sector. Diversifying the economy might be a potential solution to the problem.

* Please help my growth and development economics students by commenting on unclear analysis, other perspectives, data sources, etc. (Or you can just say something nice :)