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UNCTAD/UNDP UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT UNITED NATIONS DEVELOPMENT PROGRAMME OCCASIONAL PAPER GLOBALIZATIONAND SUSTAINABLE HUMAN DEVELOPMENT: PROGRESS AND CHALLENGES FOR BOTSWANA Charles Harvey, Happy Shiphambe and Eagilwe Segosebe UNCTAD/EDM/Misc.127 i This is the third in the series of country assessment studies undertaken within the framework of the UNCTAD/UNDP Global Programme on Globalisation, Liberalisation and Sustainable Human Development. It was undertaken by a team of consultants led by Dr. Ajit Bhalla, Sidney Sussex College, University of Cambridge. The team of national consultants consisted of Professor Charles Harvey, Botswana Institute for Development Policy Analysis (BIDPA), Gaborone,Dr Happy Siphambe, Department of Economics, University of Botswana, Gaborone, and Dr Eagilwe Segosebe, Department of Environmental Studies, University of Botswana, Gaborone. The views expressed by the author do not necessarily represent those of UNCTAD or UNDP. ii Table of Contents EXECUTIVE SUMMARY ............................................................................................... 1 1. Introduction................................................................................................................ 15 2. Indicators of Globalization over time ........................................................................ 17 3. Exchange Rate Policy and Economic Diversification .............................................. 24 4. Financial Liberalization and Financial Contagion.................................................... 29 5. The Asian Crisis and Trade Effects: Botswana's Response...................................... 33 6. International Trade Agreements Affecting Botswana ............................................... 34 7. Policy Design and Economic Performance................................................................ 50 8. Government Policy and Foreign Investment ............................................................. 52 9. The Impact of Globalization on Growth, Labour Productivity, Poverty, Women, income inequality, and employment....................................................... 59 10. The impact of Globalization on the Botswana Environment................................... 75 11. Lessons for other African countries......................................................................... 85 12. Summary of conclusions and recommendations...................................................... 86 References....................................................................................................................... 92 iii EXECUTIVE SUMMARY 1. At the time of its independence in 1966, Botswana was one of the poorest countries in the world. It is now a middle-income country with GDP per head in 1998 of US$3080. 2. Botswana has maintained at all times a relatively liberal set of economic policies. The Botswana Government has not undertaken a major change of direction of economic policy, from a closed to an open economy. It has not had to adopt a World Bank/IMF structural adjustment programme. 3. Botswana does and does not have an open economy. On the one hand, Botswana has always had free trade with South Africa, and the other members of the Southern African Customs Union (SACU, the other members are Lesotho, Swaziland and Namibia). On the other hand, SACU as a whole has been highly protected. Botswana is therefore affected by globalisation of trade only at second hand. It does not have an independent trade policy, except to the extent that choosing not to leave SACU can be said to have been a policy. 4. Thus, Botswana is an interesting case study on whether regional integration (customs union) will act as a stepping stone towards globalization in the long run. Currently, Botswana is affected more directly by regional trade integration than by globalization. Globalization affects Botswana more through its impact on South Africa than through any direct impact on Botswana. Having to be competitive with imports from South Africa and achieving some limited success in exports to South Africa may prove beneficial for Botswana’s global competitiveness. On the other hand, one cannot rule out the possibility that the protection provided by the common external tariff under SACU has prevented Botswana producers from becoming competitive enough to be able to export outside the region. 5. The situation as regards financial liberalisation is slightly different. From the time when they were introduced in 1976, Botswana's exchange controls tended to be more liberal than those of South Africa. Thereafter, they were gradually liberalised further, ending in complete abolition of all exchange controls in February 1999. 6. Botswana has very underdeveloped financial markets, and so is relatively immune from the direct effects of financial contagion. There has been little inflow of short term and speculative finance, and domestic financial markets are illiquid so that short term outflows are not practical. 7. Even if short term outflows of finance were possible, Botswana is protected in present circumstances from any possibility of damaging effects from short term financial contagion. The foreign exchange reserves are more than three times the domestic money supply. 1 8. Botswana is also well protected from the second stage of financial contagion, that is, the collapse of the banking system. The commercial banks in Botswana are soundly managed, and well supervised by the Bank of Botswana. Moreover, the Botswana commercial banks are all subsidiaries of much larger international banks. 9. A possible future problem is that Botswana is trying to develop its financial markets further, which would expose the economy to short term financial contagion. New policies for preventing short-term financial contagion may then be needed. 2. Indicators of globalisation over time: Ratio of foreign trade to GDP 10. Table 1 shows that the ratio of imports to GDP changed very little in the first 20 years after independence, but exports began to grow very rapidly. The trade deficit became a surplus by the early 1980s. Until the mid-1980s, the economy remained roughly as dependent on imports as it had always been. Table 1. Exports and imports as a percentage of GDP, 1966-98 (percentages) 1966-71 1972-76 1977-81 1982-86 1987-91 1992-96 1997-98 Exports/GDP 25 43 50 58 58 43 51 Imports/GDP 57 54 58 56 47 34 38 Trade/GDP 82 97 108 114 105 77 89 Source: Bank of Botswana Annual Reports, various years. 11. Since the mid-1980s, the development and diversification of the economy have reduced the ratio of imports to GDP from nearly 60%, to less than 40% at present, a major structural transformation. Ratio of Foreign Direct Investment (FDI) to GDP 12. Botswana has been relatively successful in attracting foreign direct investment, although initially most was in the mining sector. Initially, capital inflows paid for all of the capital goods required by the mines, and for infrastructure: foreign direct investment in the case of the mines, and Government borrowing for infrastructure. 13. The Botswana economy's dependence on foreign capital inflows has since changed completely. The extraordinary growth of diamond export earnings has completely eliminated financial dependence on foreign capital inflows. 2 Diversification of export destinations, and non-traditional exports 14. Botswana has not succeeded in diversifying export destinations. Diamond exports (80% of the total) all go to London. Most beef exports go either to Britain or to South Africa. Non-traditional exports, mostly manufactured goods, go either to Zimbabwe or South Africa. Some manufactured exports go to Europe and the United States, but only because of quota limitations on exports from countries with lower costs than Botswana. Non-traditional exports have grown fast, keeping up with the very rapid growth of diamond exports. 15. The question that remains to be answered is whether Botswana manufacturers can make a further step. The first step was shifting from import substitution to exporting to South Africa. The second step would be exporting to the rest the world. 16. At best, Botswana manufacturers will use South Africa as one stage in their development, leading eventually to global competitiveness. At worst, Botswana manufacturers will turn out to have been overprotected by the SACU common external tariff, and will not prove able to compete with imports as tariff protection is reduced, and still less to export to the rest of the world. 3. International trade agreements affecting Botswana 17. Analysis of Botswana's international trading arrangements is complicated by the fact that most of them are currently being renegotiated, or are about to be renegotiated. (a) Southern African Customs Union (SACU) 18. SACU dates from 1909. It has never had a central secretariat. All substantive decisions have been made by the South African government without consultation with the smaller member states. This has become increasingly unacceptable to the BLNS governments. 19. BLNS receive revenue based on their imports, regardless of the size of the total revenue pool. As a result, South Africa's share of the common revenue pool has steadily decreased, which is increasingly unacceptable to South Africa. 20. Only about 17% of total Botswana government revenue is from SACU, and Botswana normally has a budget surplus. Botswana would lose SACU revenue, if reform were to give Botswana a fixed share of the total revenue pool, as is being discussed in the current negotiations,