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How can Botswana Keep its Sparkle without its Diamonds?

With its diamond reserves predicted to run out in 20 years, diversification is crucial if Botswana is to continue to be an 'African success story'.
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Diamonds in the rough: a diamond mine in Jwaneng, Botswana. Photograph by Esther Dyson.

“Even in the absence of the global economic downturn, we would be living through challenging times as we wean ourselves away from overdependence on raw diamond revenues”, proclaimed Botswana’s President Ian Khama in his State of the Nation address this November. “Dependency on anything is never healthy.”

President Khama was not wrong, not least because Botswana’s diamond resources, which account for nearly half of government revenue and 70-80% of the country’s export earnings, are due to run out in 20 years.

Precious stones and progress

Botswana’s diamond reserves were discovered shortly after it gained independence in 1966, at which time it was amongst the poorest countries in the world. To exploit the newfound resources then President Seretse Khama, Ian’s father, struck a crucial and intelligent deal with the South African diamond giant De Beers.

Under the agreement, diamond mining would be a 50/50 joint venture between Botswana’s government and De Beers, allowing the country to directly share in its revenues rather than simply tax them. The partnership came to be known as Debswana and is today the world’s leading producer of diamonds in terms of value. Botswana is now responsible for over a fifth of global diamond production and is the world’s leading producer of gem-quality diamonds.

These precious stones combined with internal stability allowed Botswana’s GDP per capita to grow from under $80 in 1966 to around $6,500 today. The income and foreign currency reserves gained in exporting diamonds has also allowed the country to maintain a degree of economic policy independence from international organisations. Along with continued political stability and improving human development indicators, prior to the devastating AIDS epidemic, many commentators described Botswana as an ‘African miracle’.

Diamonds aren’t forever

All this is highly impressive. But, as Ian Khama and many others have stressed, Botswana maintains its heavy dependence on diamonds at its peril. Despite some growth in sectors such as banking and high-end tourism, diamonds are still crucial to Botswana’s economy. This is worrying not only because reserves are predicted to run out in two decades, but also because it leaves a central part of Botswana’s economy openly at the mercy of the global market.

The drop in diamond-revenues due to the recent global economic downturn acted as a sharp reminder of the country’s diamond-dependence and vulnerability to market fluctuations. Revenues have recovered somewhat since 2009 and prices are predicted to remain relatively high in the near future as global diamond production remains lower than demand, but the impact on Botswana’s economy by events far out of its control thrust the dangers of single-commodity dependence into focus. Furthermore, despite some recovery, the relatively low mining output this year forced the government to revise its projected 8% economic growth for 2012 down to 3.5%, and the sector’s output is not expected to grow over 2013.

The worrying spectre of ‘Dutch disease’ is also ever-present, and although the government tries to contain inflation, it has risen above income growth and presents a problem for households struggling with rising living costs.

If things do not change, the long-term looks even less secure. National reserves could be fully depleted in 20 years. Major discoveries are rare, and new finds take around 4 to 13 years to develop. And Russia’s Alrosa recently announced it had discovered huge reserves in eastern Siberia. Reserves of such a scale, depending on the timing and quantity of their exploitation, could affect global diamond prices and, in turn, Botswana’s mining revenues.

The future: keeping the sparkle?

The need for diversification is thus clear. Indeed President Khama has lamented Botswana’s single-commodity dependence, and there has been some measure of diversification, with a degree of growth in manufacturing, construction and services.

For some, tourism is seen as a particularly promising future cornerstone of the economy and its contribution to Botswana’s GDP in recent years has increased. Botswana’s unique Okavango delta, various nature reserves, and the Kalahari Desert certainly provide ample opportunity to draw tourists, and the industry is fairly labour-intensive and jobs tend to be relatively low-skilled. The high spill-over effect also has the potential to generate employment in related fields. The government will have to be careful to ensure tourism is sustainable, that environmental considerations are addressed and that the land rights of minorities such as Basarwa are respected. But tourism seems to provide more scope than the capital-intensive diamond sector to address Botswana’s high unemployment and socioeconomic inequalities.

The financial sector has also seen growth, in particular the Bank of Botswana and the Southern African Customs Union (SACU), which has led to increased employment in urban centres. However, as is also the case for government-powered construction, the importance of diamond revenues to the government-owned Bank of Botswana does still leave it somewhat intertwined with the fate of Botswana’s mining.

Another avenue being explored is to move up the value-chain within the diamond industry and to process diamonds in Botswana rather than simply export the raw product. In fact, De Beers recently agreed to move sorting operations from London to Botswana’s capital Gaborone. However, developing sectors which themselves depend on diamonds appears only a temporary fix, as they too face decline with the resource’s demise, and are vulnerable to global market fluctuations. Rough diamonds from elsewhere may be sent to Botswana for processing in the future, but this would still put Botswana in competition with other more established players such as India and South Africa. Furthermore, it is uncertain if moving to processing would be enough to replace the lost revenues from extraction, which has the highest margins of any part of the diamond value chain.

One lasting benefit from the move to processing, however, could be that it encourages the expansion of other manufacturing industries in Botswana.

One sector that has been largely neglected is agriculture, which plummeted as a share of GDP with the discovery of diamonds. This low agricultural growth has meant that Botswana has to import large quantities of its food. Developing the agricultural industry, on which many Batswana already rely, is important for food security, pro-poor job-creation, and economic independence and sustainability.

Impressive though Botswana’s economic development has been, to continue to be an economic ‘miracle’, Khama’s government will have to address inequality and reduce its reliance on the resource that fuelled the economy’s ascent. The ruling Botswana Democratic Party (BDP) has been in power since independence and the opposition remains relatively weak. But given that much of the BDP’s legitimacy derives from its provision of public goods, made possible thanks to diamond revenue, if Khama and the BDP do not make sufficient plans to diversify the economy and ensure future growth, perhaps somebody else will.

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Comments

It is not all about Khama and BDP. It is all about us changing our mindset and work towards diversifying the economy of this country. True diamonds are not for ever, but what are we doing with our education system? If we still teach the same concepts, the same way as from old, in the same environment, using the same people kind of leadership? what new mind will we get from that? Nothing will ever change until we change our thinking system and not change the government. Lets have education with training and not just a name(and skills development). Right now there are ten regions, what difference have they made so far? Policies are launched with no input from school heads. Do you know that schools heads dont know anything about the back to school program? Do you know that they dont know about Education mentors and what is expected of them? Do you know that they dont know about taking eduaction to the people? But they are labled MANAGERS everytime things blow hot. Lets go back to schools and teach Project and Programme Management, let there be hands-on in our education.  

Very interesting reading. With the advantage (some would say disadvantage...:-)), of being native Norwegian who has spent his childhood years in the Botswana educational system , i recognize a few similar challenges. Norway has for the past 3 decades relied in the income of North Sea crude oil, and we are now facing the challenges of depleted oil wells. The oil industry was also developed as a similar joint venture between the industry and the government of Norway, similar as the diamond industry in Botswana.Having had this joint venture has enabled the Norwegian state to build up wealth on behalf of the population, in addition to ensuring that all the population has access to higher education to secure the future once the oil wells are depleted. The wealth has been invested in a trust fund which has invested different global industries. The fund has not been allowed to invest in Norwegian native industries in order not to drive native inflation, and the government is not allowed to withdraw more than 4% of the fund’s annual earnings to finance the operational cost and new projects. Because of this, we should be in good shape when the wells run dry because non-oil related industries has managed to develop and exist alongside the oil industry.Obviously, once the oil is depleted the fund will open wider, but we all realize that if the government consumes from the actual shares of the fund, this will also be a temporary fix where the source of the income also will be depleted. It is as such vital that other industries exist.I still do remember my Botswana school years, especially the emphasis from the teachers to motivate all the kids to study harder and qualify for higher education. Interestingly, in the Norwegian school system there was never so much emphasis from the teachers, perhaps because an attitude to chase higher education had already cemented itself among the post war population and this may have become the norm. Not having visited Botswana in a few decades, I am not sure how this emphasis has cemented itself among the newer generations, but I do hope the Batswana has managed to become as well educated as we have here up north.One big difference though, from the article: Agriculture and self-sufficiency on agricultural products may be an option for Botswana. This, I’m afraid, is not an option for Norway. Reason being, we have nature against us! Sub-zero temperatures for a large portion of the year, and mountainous terrain might be good for tourism, but it makes industrial agriculture prohibitively expensive. Unfortunately, crowing crops seems to give the farmer too much time on his hands, which he seems to spend wisely in the government to ensure high toll barriers for importation and high subsidies for himself...This unfortunately reminds me of the story of BMC in Lobatse, which was (at least partially) financed by Norwegian development aid . Once the factory was completed, Norway closed its borders against Botswana meat by applying extortionately high toll barriers. I guess you can only be a Norwegian farmer to understand that logic. I guess similar stories can be told from many parts of the African continent, in relation to European states and agricultural imports. For sure, this is not something to be proud of.