analysisBy Liam Anderson
With its diamond reserves predicted to run out in 20 years, diversification is crucial if Botswana is to continue to be an 'African success story'.
"Even in the absence of the global economic downturn, we would be living through challenging times as we wean ourselves away from overdependence on raw diamond revenues", proclaimed Botswana's President Ian Khama in his State of the Nation address this November. "Dependency on anything is never healthy."
President Khama was not wrong, not least because Botswana's diamond resources, which account for nearly half of government revenue and 70-80% of the country's export earnings, are due to run out in 20 years.
Precious stones and progress
Botswana's diamond reserves were discovered shortly after it gained independence in 1966, at which time it was amongst the poorest countries in the world. To exploit the newfound resources then President Seretse Khama, Ian's father, struck a crucial and intelligent deal with the South African diamond giant De Beers.
Under the agreement, diamond mining would be a 50/50 joint venture between Botswana's government and De Beers, allowing the country to directly share in its revenues rather than simply tax them. The partnership came to be known as Debswana and is today the world's leading producer of diamonds in terms of value. Botswana is now responsible for over a fifth of global diamond production and is the world's leading producer of gem-quality diamonds.
These precious stones combined with internal stability allowed Botswana's GDP per capita to grow from under $80 in 1966 to around $6,500 today. The income and foreign currency reserves gained in exporting diamonds has also allowed the country to maintain a degree of economic policy independence from international organisations. Along with continued political stability and improving human development indicators, prior to the devastating AIDS epidemic, many commentators described Botswana as an 'African miracle'.
Diamonds aren't forever
All this is highly impressive. But, as Ian Khama and many others have stressed, Botswana maintains its heavy dependence on diamonds at its peril. Despite some growth in sectors such as banking and high-end tourism, diamonds are still crucial to Botswana's economy. This is worrying not only because reserves are predicted to run out in two decades, but also because it leaves a central part of Botswana's economy openly at the mercy of the global market.
The drop in diamond-revenues due to the recent global economic downturn acted as a sharp reminder of the country's diamond-dependence and vulnerability to market fluctuations. Revenues have recovered somewhat since 2009 and prices are predicted to remain relatively high in the near future as global diamond production remains lower than demand, but the impact on Botswana's economy by events far out of its control thrust the dangers of single-commodity dependence into focus. Furthermore, despite some recovery, the relatively low mining output this year forced the government to revise its projected 8% economic growth for 2012 down to 3.5%, and the sector's output is not expected to grow over 2013.
The worrying spectre of 'Dutch disease' is also ever-present, and although the government tries to contain inflation, it has risen above income growth and presents a problem for households struggling with rising living costs.
If things do not change, the long-term looks even less secure. National reserves could be fully depleted in 20 years. Major discoveries are rare, and new finds take around 4 to 13 years to develop. And Russia's Alrosa recently announced it had discovered huge reserves in eastern Siberia. Reserves of such a scale, depending on the timing and quantity of their exploitation, could affect global diamond prices and, in turn, Botswana's mining revenues.
The future: keeping the sparkle?
The need for diversification is thus clear. Indeed President Khama has lamented Botswana's single-commodity dependence, and there has been some measure of diversification, with a degree of growth in manufacturing, construction and services.
For some, tourism is seen as a particularly promising future cornerstone of the economy and its contribution to Botswana's GDP in recent years has increased. Botswana's unique Okavango delta, various nature reserves, and the Kalahari Desert certainly provide ample opportunity to draw tourists, and the industry is fairly labour-intensive and jobs tend to be relatively low-skilled. The high spill-over effect also has the potential to generate employment in related fields. The government will have to be careful to ensure tourism is sustainable, that environmental considerations are addressed and that the land rights of minorities such as Basarwa are respected. But tourism seems to provide more scope than the capital-intensive diamond sector to address Botswana's high unemployment and socioeconomic inequalities.
The financial sector has also seen growth, in particular the Bank of Botswana and the Southern African Customs Union (SACU), which has led to increased employment in urban centres. However, as is also the case for government-powered construction, the importance of diamond revenues to the government-owned Bank of Botswana does still leave it somewhat intertwined with the fate of Botswana's mining.
Another avenue being explored is to move up the value-chain within the diamond industry and to process diamonds in Botswana rather than simply export the raw product. In fact, De Beers recently agreed to move sorting operations from London to Botswana's capital Gaborone. However, developing sectors which themselves depend on diamonds appears only a temporary fix, as they too face decline with the resource's demise, and are vulnerable to global market fluctuations. Rough diamonds from elsewhere may be sent to Botswana for processing in the future, but this would still put Botswana in competition with other more established players such as India and South Africa. Furthermore, it is uncertain if moving to processing would be enough to replace the lost revenues from extraction, which has the highest margins of any part of the diamond value chain.
One lasting benefit from the move to processing, however, could be that it encourages the expansion of other manufacturing industries in Botswana.
One sector that has been largely neglected is agriculture, which plummeted as a share of GDP with the discovery of diamonds. This low agricultural growth has meant that Botswana has to import large quantities of its food. Developing the agricultural industry, on which many Batswana already rely, is important for food security, pro-poor job-creation, and economic independence and sustainability.
Impressive though Botswana's economic development has been, to continue to be an economic 'miracle', Khama's government will have to address inequality and reduce its reliance on the resource that fuelled the economy's ascent. The ruling Botswana Democratic Party (BDP) has been in power since independence and the opposition remains relatively weak. But given that much of the BDP's legitimacy derives from its provision of public goods, made possible thanks to diamond revenue, if Khama and the BDP do not make sufficient plans to diversify the economy and ensure future growth, perhaps somebody else will.