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 :)


Erzie said...

Hi Tom, I enjoyed reading your interesting blog post on Botswana's resource curse! It seems that Botswana is a typical case of the resource curse as economic growth increases but development decreases. You advise the government to diversify its economy away from diamonds as well as distribute diamonds rents more equally among the population. I agree with you that this would be a potential solution to the problem but I was wondering to what extent the government and other interest groups are willing to give up their diamond rents to redistribute equally among the population. I guess it just depends on the characteristics of Botswana's government, for example whether it is characterised by rent-seeking behaviour.

Haruka said...

First of all, thank you for your post on Botswana's situation regarding diamonds. I only knew that the country is praised as the ‘miracle of Africa’ which other African countries should imitate its economic model and did not know that Botswana's development index is so low. Having read your blog post, I have a few questions. You mentioned that the government should diversify the economy away from diamonds and distribute rents more equally. How can the government does that when the elites who rule the government dominate the rents from diamonds? What do you think would incentivize the elites to give up their privileges and share the rents with others? (In other words, elites are incentivized to keep the rent to themselves currently. What is the context behind such phenomenon?) On a sidetone, this post reminded me of a movie called "Blood Diamonds", which illustrates a conflict over diamonds in Sierra Leone.

Mike Nauheimer said...

Hey Tom! Really concise blog post on a very interesting topic. The resource curse has affected almost every developing country that has an abundance of natural resources, and in most the cases, this has hampered economic growth. Botswana is quite the interesting case study, as it is one of the few countries that has been able to mitigate the effects of this course, and actually grow its economy. As you mentioned this was due to their ability to successfully manage the extraction of diamonds and setting up a fund to manage the rents obtained from the resource. There are two points I would like to comment on. Firstly, seeing as the country was able to avoid the effects of the resource curse on growth, and was unable to follow with development you make a recommend that the government ought to take measures to diversify the economy away from diamonds, and increase equality of distribution. Whilst this does pose as a great solution for Botswana’s case how feasible do you think this would be. Given that Debswana is jointly owned by the government and De Beers its highly unlikely that the latter will agree to any changes in rent appropriation, and having a foreign multinational company leave the country due to potential changes might leave the country in an even more dire state. The second point I wanted to make was in reference to your first figure showing the effects of the increased production of diamonds on the country’s economic growth. Following 2010, whilst the production of diamonds decreased, GDP increased steadily over time. Does this mean that the country has slowly begun to focus on other industries such as tourism or agriculture, which also have potential and require further development?

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