Botswana: A Diamond in the Rough

1) The Harvard case, Botswana: A Diamond in the Rough, describes the exceptional case of Botswanas sustained economic rise from near absolute poverty to a country with a 10% average annual GDP growth for more than four decades. This case shows that healthy economic gains can be achieved by a mixture of formal institutions and ad hoc substitutes for missing institutions.

When Botswana gained its independence in 1966, the country lacked many of the institutions deemed essential for economic growth by most prosperous developed nations. These absent institutions included a central bank, a national currency, basic administrative structures, market institutions, and the ability to connect to the global markets and apply external tariffs. Yet, Botswana was unique among its neighbors in that it held institutions such as a stable, democratic government supported by a charismatic leader and a constitution which upheld the liberties of a free press, legal transparency, and property rights. Botswanas institute of government also lacked the discriminatory practices and internal strife present in many of the neighboring countries.

Botswana was able to supplement its lack of many formal institutions with substitute ad hoc solutions which filled many gaps. The countrys initial lack of its own central bank and national currency was supplemented with the countrys use of the South African Monetary Union until Botswana was able to establish its own currency and central bank in 1976. Similarly, Botswana relied on the South African Customs Union (SACU) for application of import tariffs used to raise tax revenue and protect infant domestic industries.

Gaps left in the countrys infrastructure by weak public funding and an underdeveloped private sector were patched with help from financing and administration given by multinational firms, development institutions, as well as the creation of some of its own formal institutions. The most prominent of these situations was the countrys brokered relationship with the DeBeers Corporation which provided the country which technical expertise in a highly profitable industry, the establishments of diamond townships complete with working infrastructure, as well as a much needed source of revenue. Botswana also used funds derived from development aid organizations and the financing agents such as the World Bank and the Canadian International Development Agency to substitute for its lack of private equity markets and banks. In addition, the country used the publicly traded company, Botswana RST, to attract foreign investment to aid in fully exploiting their natural resource potential. Investors in this company included multinational mining firms including AMAX and Anglo-American. Botswanas history of stability and protection of intellectual property rights also contributed to private foundations and major drug companies such as Harvards AIDS Institute, Bill and Melinda Gates AIDS initiative, and Merck helping to combat the brutal onslaught of the AIDS virus in the country.

Botswana used a series of national development plans established by its Ministry of Finance and Development to guide future government spending. Contributions and returns from foreign investment were reinvested into infrastructure and education, while budget surpluses were stockpiled to hedge against sudden drops in revenue caused by potential downturns in the diamond market. Institutions such as the Mineral Right in Tribal Territories Act vested mineral rights in the central government rather than the hands of the tribal leaders while the two special funds, the Public Debt Service Fund and the Revenue Stabilization Fund, were established to funnel mining revenues into loans for local authorities and parastatal bodies. The Botswana Housing Corporation was a formal institution which used diamond revenues to finance construction projects while the Botswana Power Corporation and the Water Utilities Corporation were created to serve similar functions for electricity and water. The Botswana Development Corporation, National Development Bank, and the Botswana Enterprise Development Unit were charged with allocating diamond revenue to diversify the economy.

Botswana's institutional development was a process. It began with virtually no formal institutions. Informal solutions led to the development of formal institutions, which allowed for Botswana's idiosyncratic economic stability.

2) The most evident pro of nationalizing Botswanas diamond industry would be to achieve the short-term gains by selling stockpiled diamonds. Unfortunately, doing so would cost Botswana years of established credibility as it would require the country to renege on their previous agreements with the DeBeers Corporation. Such an action would deter future investors into Botswana, as well as cause the loss of their largest foreign investor, DeBeers. Loss of the DeBeers connection would cost Botswana the future gains associated with continued expertise in the field of diamond mining, infrastructure improvements historically provided by DeBeers in areas servicing the mines, and also the administrative capability of a major international corporation. The most significant con would likely be the loss of DeBeers as a steward of the cartel practices necessary to preserve the price premium associated with stockpiling diamonds. If left to navigate the sales and stockpiling of diamond by itself, the country would face the historically difficult task for a poor government that relies heavily on commodity sales to self-regulate commodity sales, and thus government revenues, while still balancing the demands of maintaining the cartel.

3) The extent to which Botswanas model is replicable outside of Botswana would certainly depend on a variety of factors some within the control of central governments, and others environmentally or socially determined.

The presence of an extremely valuable natural resource(s) is a key component in Botswana growth model. While other countries also share this component, many lack the peace and stability associated with a stable government body and a tolerant society. Botswanas government offers stability and social climate free of the restrains presented by ethnic, tribal, and religious conflicts. Additionally, mining interests are centrally controlled and not subject to regional battles over mineral wealth. Likewise, discrimination between groups is not a prevalent issue in this country.

Botswana also benefited from Tsekedi Khamas strong leadership in bringing new policies to the forefront and unifying the countrys economic policies among the various tribal groups. The countrys adherence to prudent social and macroeconomic policies also held a large role in the creation of an atmosphere of growth and foreign investment. The credibility established through years of sound economics practices, legal transparency, property rights, stable government, and free press created a more welcoming environment for foreign investment than many other developing nations.

The extent to which this model is replicable outside of Botswana depends on the level of faithfulness to the social and macroeconomic policies described above and a working mix of formal institutions and adequate substitute organizations. Although a full range of formal institutions are not necessary to achieve continued economic growth, substitutes must arise where the institutions are lacking to provide the necessary functions lost by their absence.