Natural Resources: Curse or Blessing?

For Botswana, the clue to this riddle may lie in the reform of the constitution, writes

While this is not a new story, it is forever topical and the jury must still be out as to whether sitting on vast amounts of natural resources has advanced or hindered development of Africa.

Like Botswana, the economies of 24 African countries are dependent on a single mineral. Our mining sector accounts for about 35 percent of GDP, with diamonds contributing about 94 percent of the total mining share of GDP. Without diamonds, the economy would be only 67 percent of its current size or even less, given the multiplier effect. Botswana’s diamond resources generate about 60 percent of public revenue. Without diamonds, the public sector would be less than half the size that it is today and 75,000 public sector workers would lose their jobs if the diamonds were not there.

The story is the same story for Algeria where the oil and gas sector provides the backbone of the economy, accounting for about 20 percent of GDP and 85 per cent of total exports. Similarly, Angola’s economic growth is driven by the oil sector where oil contributes to 50 percent of the country’s GDP and about 90 percent of exports (OPEC 2020). Libya too is almost totally dependent on its oil sector, which represents about 69 percent of export earnings. Moreover, the oil and gas sector accounts for about 60 percent of total GDP.  Zambia is highly dependent on copper exports, which has accounted for up to 35 percent of GDP. The same applies to the DRC where mining is the backbone of the national economy, with a contribution of up to around 30 percent of GDP.

Unemployment and poverty rates in these and other commodity-dependent countries are high. Despite Lybia’s massive reserves and production of oil and gas, 53% of assessed households reported that they were unable to afford all of their basic needs, according to a recent study. In Algeria, the number of people living in poverty was reported at its highest in the last four years at 1.9 million as of 2021. Based on the new benchmark survey (IDREA 2018-2019), the incidence of poverty in Angola is at 32 percent nationally, 18 percent in urban areas and a staggering 54 percent in the country’s less densely populated rural areas. Over 60 percent of the population live under the poverty line in Zambia, and despite being one of the world’s fastest growing economies, Zambia remains one of the poorest. A similar situation obtains in Nigeria which, despite being a large oil producer, as many as four in 10 people live below the national poverty line while unemployment in rose to 35 percent in 2021, according to the World Bank in 2022. In oil and gas producing Algeria, Libya and Angola unemployment is 14 percent, 19 percent and 33 percent respectively.

Botswana’s basic poverty headcount ratio PHCR was 21.9 percent in 2018 (less than $1.90 per day) whilst the relative poverty index RPI (less than $5.50 per day), increased from 56 percent in 2009 to 65 percent in 2021. The RPI is arguably more important than the PHCR since it represents the minimum a household needs to save money or have disposable income, without which there is little consumption to drive the economy.

While it would be unscientific to link wealth in material resources with poor socio-economic performance, the data does not suggest the opposite, which is that resource-wealthy African nations are doing well, because clearly they are not. Of course, our government has been well aware of the situation for many years as Pillar One of Vision 2036 confirms. The pledge to diversify the economy was confirmed by the fifth president in 2019 who “promised to drive a transformation of Botswana’s economy, creating more jobs and countering excessive dependence on diamonds that threatens to knock it off course”. Economic diversification is proving to be a very hard nut to crack.

Retreating further into history, let us be reminded that the Special Economic Zone Authority (SEZA) was set up in 2013 to promote the development of eight SEZs. These remain in place, or have at least been demarcated. However, their impacts and effectiveness are not at all obvious. When SEZA was created, the target enterprises were beef, tourism, crafts and jewellery. In retrospect, these seem to be anachronistic subjects, as if the modern world of technology was somehow expected pass Botswana by. One of the key challenges identified was a dire lack of access to market information. As a result, the Market Intelligence Information System (MIIS) was set up. To say a cursory look in the Business Botswana MIIS window today shows that the site is not up to date is an understatement. The latest market intelligence is as follows: Agriculture: 2018/2019, Arts and Crafts: nothing, Manufacturing: nothing, Tourism: 2016, Transport and Logistics: nothing, while five years ago was the latest market intelligence for the rapidly advancing services sector. Searching the Business Botswana web site for e-commerce or solar energy yields no results at all. If the MIIS is meant to showcase our contemporary knowledge-based economy, it fails dismally. Is it possible that would-be investors are put off by out-of-date websites? But let us leave the question hanging.

Investment is a good guide to diversification. A cursory look at foreign direct investment FDI shows it has reduced substantially from $286 million in 2018 or 1.5% of GDP to about $90 million in 2020 or 0.5% of GDP, noting that almost all Botswana FDI is in mining and not in technology. For the reader’s information, Rwanda FDI in 2018 was three times more than Botswana’s, comprising 4% of GDP in 2018 and, in the absence of any mining, Rwandan FDI goes into manufacturing, services and agriculture, which quite the opposite of Botswana. The proportion of GDP in the potential growth areas of agriculture, manufacturing and logistics have actually decreased in Botswana, not increased, over the last 15 years. Moreover, spending on research and development – a critical driver of diversification – is negligible, as indicated by the number of WIPO patents awarded to Batswana – only two in 20 years.

To return to our theme of whether having natural resources is a blessing or a curse, it seems it is very difficult to change the structure of the economy, as if it reflects the personality of its government. Though reluctant to suggest, is it possible that there is a case of easy money corrupting easily? By corruption, it is not meant in the normal sense but the way it affects domestic policy priorities and foreign investment decisions. Domestic economic diversification strategies still seem to focus on mining coal, copper, iron ore and also oil and gas – expecting, of course, all the investment to come from foreign sources. This is the easy money that is being referred to.

But the difficult truth is that there is not going to be any flow of foreign investment into Botswana in sectors other than mining and tourism to generate the much-needed diversification. If tech and industrial and agricultural value-added processes are to be developed in Botswana, funding will need to be local and Batswana will have to take the commercial plunge. But given the penchant for the quiet, traditional pastoral life and not the tough world of commerce, such risk-taking by Batswana is not likely to happen. So it would seem that in the long-term, having an abundance of minerals will appear to be a curse than a blessing. The question remains, as ever, how to purge the house of the evil spirit of its natural resources and to really transform Botswana into a 21st Century knowledge-based economy? The clue to this riddle relates to the reform of the constitution.