The following appeared in July’s Business Diary Botswana:

Speaking at a seminar in October 2006 devoted to the country’s efforts towards economic diversification, Happy Fidzani, Executive Secretary of the Botswana Institute for Development Policy Analysis (BIDPA), warned that the government’s “heavy confidence” in its mining sector–namely rough diamond extraction through Debswana, the joint-venture mining firm operated in partnership with South Africa’s De Beers and dating back to the late 1960s–had created a welfare-like, “parasitic” dependency for revenue upon which the nation’s non-mineral sector was habitually tied. Largely unaware of just how prophetic his words would soon turn out to be, Fidzani told the audience that shocks originating from the mining industry were still “easily felt” across the economy, and that the government, despite its ceaseless rhetoric and campaigning about the importance of diversity, was as reliant as ever on just one resource. Less than three years later in March 2009, and some time into a calamitous and synchronized global recession that left no market or asset unscathed, Moody’s, an international credit rating agency, downgraded its credit (bond) ratings outlook for the country as well as for the currency (pula), citing the downturn in diamond exports to which the central budget is largely tied. This came on the heels of Standard & Poor’s decision to cut its own outlook for Botswana to negative, while warning of worsening public finances. And in June, the African Development Bank announced its biggest ever loan facility–a $1.5bn loan–to Botswana, the country’s first such borrowing from the bank in seventeen years, and in the face of a budget deficit equal to 13.5% of gross domestic product (GDP) in the current financial year and an estimated growth slump this year of 2.6% (2.9% next year), down from 3.9% in 2008. The bank noted that while Botswana was still regarded as “one of the best-managed economies in Africa,” it had not escaped the financial crisis because of falling commodity prices, particularly in diamonds.

So why hasn’t Botswana’s economy yet diversified? The answer is somewhat confounding because, in a sense, it has. Studies done in the early part of this decade by both the Bank of Botswana and by BIDPA, for instance, used the Herfindahl index, which measures the size of firms in relation to a given industry as well as the amount of competition among them, to show that since the mid 1980s Botswana’s economy has markedly reduced its dependency on minerals. Among other findings, the reports showed that mining contributed only one-third to real growth since 1975, and also that the 9.1% growth rate during that same period by the overall economy was matched by the non-mining sectors as a whole, excluding agriculture. Yet their conclusions were muddled. “The foundations of this diversification are lacking in depth and remain fragile, and results in terms of providing employment opportunities have been less than hoped for,” the Central Bank remarked. To date, efforts at diversification have focused on export-oriented industries such as the manufacture of textiles, leather, glass, and jewelry, as well as the establishment of an International Financial Services Center, the promotion of Information and Communications Technology, and tourism. Additionally, the government would like to see the resurgence of agricultural activity, which, outside of livestock, largely remains languid. Increased production would help decrease the need to import from South Africa. When Botswana gained independence in 1966, the agriculture sector contributed roughly forty percent to GDP and ninety percent of total employment in the domestic economy. However, by the mid-1990s, the sector’s share of GDP and employment had fallen to four percent and sixteen percent, respectively. Yet despite all of the economic development and apparent political will to change course, many observers point out that the thrust of diversification still resides within the mining sector—namely, the exploration and extraction of copper, nickel and coal. For instance, according to Kristin Lindow, Moody’s Senior Vice President, “efforts to diversify the economy have been paying off, [although] they mainly led to the expansion of other mineral resources, the prices of which, except for gold, have [also] dropped precipitously [in recession].”

One proposed theory for the dearth of real economic diversity is that from a political standpoint, mining has represented a perpetual haven–a means whereby to grow reserves, subsidize education and health care, and generally sustain and nurture an average quality of life more or less unknown before anywhere on the continent. Oupa Tsheko, an author and professor of economics at the University of Botswana in Gaborone, commented to a UN information network in April that diamonds fund government expenditure. Therefore, he says, declining diamond revenues would have a “huge impact” on the country’s development. And politicians have all but embraced the lynchpin role that diamonds still play. “There can be no doubt that diamonds have played a major part in the transformation of our country’s fortunes and the lives of our citizens,” Botswana’s then president, Festus Mogae, told parliament in 2006. “For our people, every diamond purchase represents food on the table, better living conditions, better healthcare, portable and safe drinking water, more roads to connect our remote communities, and much more.” According to The Economist, a 2008 Growth Commission report identified Botswana as one of just 13 countries (and the only African state) to have achieved sustained economic growth over decades. In fact, the country grew 8.9% annually between 1960 and 2005, making the once third-poorest nation in the world its fastest growing one over that time period, while helping its population realize real per capita income four times that of the SADC average, per a 2002 World Bank report. During that period, diamonds at their peak became the base of over three-quarters of Botswana’s export revenue, two-thirds of the government’s tax revenue, and around forty percent of GDP. Which imprudent elected official would ever jump in front of that train? As Bert Lance, a one-time advisor to U.S. President Jimmy Carter famously said, “if it ain’t broke, don’t fix it.”

Further complicating matters is the position put forth by Chaim Even-Zohar, an analyst for Tacy Ltd., a diamond industry think tank, who opines that the gem’s long-term fundamentals are attractive, especially since global diamond jewelry retail demand is only expected to shrink 10-15% this year, and that demand for rough diamonds will again grow in the second or third quarter of 2010 (he admits concurrently, however, that it may take four years for GDP per capita to rise in the U.S.; said figure is considered a benchmark for measuring diamond jewelry retail consumption growth). Moreover, Even-Zohar argues, given the oligopoly of rough diamond’s supply structure, and the fact that of late annual rough diamond supplies into the value chain have consistently exceeded demand, the “downstream diamond pipeline” (i.e., rough and polished traders, polished manufacturers, jewelry manufacturers, jewelry distributors and retailers) currently holds some $45-50 billion worth of diamonds, or enough to assuage consumer demand for between two to three years. Because of this inefficient glut of working stock, he continues, inventories must now be reduced accordingly. Demand destruction will take its toll across all parts of the supply chain—finally culminating in a 50-60% drop in rough demand this year, per estimates. It’s this “stabilizing” period of adjustment in which stocks, prices and supply and demand find a new equilibrium, that will be the most painful for Botswana’s industry, admits Even-Zohar. “The cutting centers will take the greatest hit, but they will also experience the fastest growth in an upturn,” he concludes. Gareth Penny, Managing Director of De Beers, agrees, and like Even-Zohar, is bullish on the industry’s underlying, bounce-back prospects. “In the long term rough and polished prices will increase,” Penny says. If you look at historical data, it is clear that, immediately following a recession, the [response] in rough diamond prices has been dramatic, and we would expect to see a similar situation soon after the current recession is behind us.

News of the gem’s long-term price and demand viability are welcome news to those pundits who maintain that bona fide economic diversification in Botswana is simply not practical. As The Economist Intelligence Unit glumly noted in February, Botswana’s current economic predicament may indeed be proof that “even when governance and policies are good, it is extremely difficult for a small, landlocked African economy to diversify, especially if it has an industrial powerhouse such as South Africa (whom it is heavily reliant on for imports) on its borders.” Critics maintain that manufacturing is not feasible because of the high cost of imports and exports, and that South Africa already has a competitive advantage in service-based industries. Particularly in the short-to-mid term, observers point out, Botswana will need the revenue from a post-recession, mineral resurgence if it is to orderly pay down or refinance debt that it is assuming in the present. And if the economy is to ever be truly diverse, they maintain, an entire cultural mindset must be transformed and entrepreneurship must be taught from an early age. Such paradigm shifts must be planned, and will take time. In the interim, there is still further scope for the mining sector to provide economic benefits. Plans by De Beers to move its “sight aggregation” (where blending takes place to provide overall consistency) functions from London to Botswana (Penny says the switch is imminent), for instance, will be a further form of diversification, albeit within the same sector. Sometimes, some things are too good to let go.

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