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                                                                                         No. 161 June 2000




            Botswana: An example of prudent economic policy and growth



The growth record

Botswana is one of a small group of countries in the contemporary era --virtually the only African
country--that has sustained rapid economic growth over an extended period. Over the past three
decades, Botswana's real per capita income grew by more than 7 percent per annum, which is
comparable to rates of growth achieved by countries like Korea and Thailand. Remarkably, this growth -
facilitated by mineral wealth--led neither to isolated enclaves nor to profligate spending. Growth
continued to be high as a result of structural change within the economy as the growth in the of mining
and government sectors slackened.

Botswana's record in human development is equally impressive, with one important exception--HIV
infection. Major emphasis has been placed on providing basic education and primary health care
throughout the country. Primary school enrolment has gone from 66,100 in 1966 to 319,000 in 1995,
representing an average compounded growth rate of 5.4 percent per annum. Further, in recent decades,
the gender balance has consistently involved greater than 50 percent female enrollment. Meanwhile,
secondary school and university enrolment, from a much lower base, both grew at double digit growth
rates.

In health care, virtually all urban residents and nearly 83 percent of rural residents are within 15 km of a
primary care facility. There has been a dramatic fall in infant mortality--from 100 per 1000 live births in
1971 to 45 in 1991. Life expectancy (before accounting for the impact of HIV/AIDS) has risen from 50
years at independence in 1966 to the upper 60s in the early 1990s. The exception to the success story
has been the spread of HIV/AIDS as roughly one quarter of the sexually active population is HIV positive.




Conclusions from Botswana's experience

Three points stand out.

First, Botswana's record is indeed exceptional...

    ·   The record of three decades of rapid economic growth has few parallels in modern economic
        history. What is also exceptional is the fact that the initiating source of the growth was mineral
        wealth, for even fewer countries have been able to transform mineral wealth into sustained
       economic growth.

   ·   The growth of real incomes has been spread throughout the economy. Although relative income
       inequality has not been reduced, it has not worsened and, with real per capita GDP growth rates
       averaging nearly 8 percent over the past three decades, the poor are better off than before.

   ·   Economic growth has been accompanied by significant progress in human development. The
       population is now reasonably well-educated and, with the exception of HIV infection rates, is
       healthy.

   ·   Growth of formal sector employment has kept pace with real GDP growth and has outstripped the
       growth in the population. As a result, unemployment rates are relatively low by Sub-Saharan
       Africa standards, although youth unemployment has recently emerged as a serious problem and
       there continues to be shortage of skilled labour.




Second, the growth record is explained primarily by the economic policies which Botswana has pursued.
In each of the major policy areas, growth-promoting policies have dominated...

   ·   Minerals policy established mutually profitable arrangements with foreign investors, and
       participation in one of the few successful international marketing arrangements.

   ·   Trade policy kept the economy open to competition from imports, and maintained access to
       markets for some important non-mineral exports.

   ·   Money and banking policies, while not always optimal, generally provided stability to the
       macroeconomy and to the financial sector.

   ·   Exchange rate policy accorded stability to the tradable sector and avoided the peril of an
       overvalued currency commonly encountered following mineral discoveries.

   ·   Fiscal policy, on the whole, has been disciplined. To a large extent this is attributable to the
       institution of the national development plans, which has kept government expenditure from
       growing as fast as government revenues over the long term. The resultant accumulation of
       substantial government savings and foreign exchange reserves has provided an important
       cushion to enable the country to ride out the current downturns in the diamond market, while the
       careful management of those reserves has generated a significant return to the nation.

   ·   Labour market policies avoided both the extremes of an exorbitant real minimum wage and a
       bidding war for scarce talent. The government pursed a policy were wage and salary levels in the
       private and parastatal sectors should generally conform to those paid by the government to
       comparable grades of public employees.

   ·   State-owned enterprises played an essential role in kick-starting the modern economy. Further,
       they did not become employers of first resort. Yet, with changing circumstances, and changing
       technologies, there is no fundamental justification for the dominant role of many. The objective of
       phasing out redundant institutions or transforming them into growth- promoting organisations
       remains one of the key policy challenges.
Third, there is no single explanation for Botswana's remarkable policy performance...

    ·   Botswana does not have one single silver (or diamond) bullet that explains its economic record.
        Rather, it was the whole range of policies which, working together, proved growth promoting.

    ·   Minerals policy generated the rents which initiated the growth, but government's long-term
        development planning was crucial in channelling funds into investments that promoted both
        growth and human development, and in maintaining a modicum of fiscal discipline.

    ·   Given the fiscal discipline adopted, it was possible for the independent central bank to
        accumulate substantial foreign exchange reserves, and pursue a conservative monetary policy.

    ·   This combination of fiscal and monetary discipline, in turn, made it possible for trade policy to
        keep the economy open, and exchange rate policy to encourage the emergence of non-traditional
        exports and import-competing production.

Not all the policies promoted human growth and development. The shortcomings of current labour market
policies, the slow pace of reform of state-owned enterprises, and the large-size and unstable growth of
Government are all serious. Furthermore, Botswana has to deal with poverty and youth unemployment,
and the rapid increase in the prevalence of HIV/AIDS which may have a substantial implication for
progress in developing its human capital and improving productivity.

However, Botswana's ability to maintain one of the highest growth rates in the world and to transform
itself from one of the poorest countries in the world with a per capita income of roughly US$80 in 1966 to
a middle income country with a per capita of US$3600 in 1998 is truly remarkable.

For more information, please contact James Sackey, Rm. J11-137, World Bank, 1818 H Street NW,
Washington DC 20433. Tel. no. : (202) 473-2443;