The main objective of this paper is to analyse how industrial development goes hand in hand with economic diversification in the context of Botswana. The dissertation seeks to explore the literature surrounding the economic diversification and industrial development in a resource abundant country which is economically mineral rich. Industrialization has been pursued in the context of the industrial development policy designed to engage in targeted entrepreneurial development incentives and support mechanisms to promote industrial growth. Due to globalisation, Botswana faces stiff competition from more industrialised economies of South Africa and others because of the intensity of free trade promoted by the SADC, SACU and other organizations and trade agreements (Kapunda, Beyond the Impasse of African Industrial Development , 2007). Despite all the challenges and problems the industrial sector is still regarded central to economic development. From an economic standpoint, diversification involves spreading the risks and benefits across commodities/enterprises to guard against the negative impacts of fluctuations encountered in exchange economies (Solomon, 2000). Diversification efforts in Botswana have mainly been geared towards reducing the economy’s dependence on minerals particularly diamonds due to the risk and uncertainty of the mining sector. Economic diversification strategies in several countries have thus emphasized promoting industrialization, and so has Botswana (Kapunda, Beyond the Impasse of African Industrial Development , 2007)
Before independence, Botswana was considered one of the poorest and least performing countries in the world (Sekwati). The country’s only manufacturing enterprise was the Botswana meat commission .Botswana has been considered among the best performing economies in the world and hailed as a beacon of success in economic management compared with most African states (Sekwati). The economy is largely dependent on the diamond mining sector which contributes a large portion to the GDP. Botswana over an extended period since independence and the establishment of its diamond mining industry, managed its mineral wealth carefully and has used taxes, royalties and dividend revenues to fund managed structural change within its economy, infrastructure and society (Solomon, 2000). The country is yet to diversify its economy to the extent that is not critically dependent on its diamond revenues.
According to(Solomon, 2000), the government is very active in its efforts to diversify the economy beyond and has come up with a wide range of investment incentives to achieve this end with instruments such as the Financial Assistance Programme(FAP) and other initiatives. The FAPs provide for the following incentives in establishing new businesses;
• A direct subsidy of p1000 per job created
• Subsidies on unskilled labour wages from 80% in the first 2 years scaling down to 20% in the fifth and final year of the assistance.
• Grants of up to 50% for approved training programmes.
This programme has resulted in the establishment of at least 2 significant projects in the Selebi Phikwe Industrial Park which are the garment factory employing 900-1000 employees and a jewellery factory with 650. As the FAP programmes have a limited 5 years lifespan, the future of these operations is in question, and the garment industry currently has been closed. (Solomon, 2000) cited other incentives as the establishment of the Export Processing Zones (EPZs). Fiscal incentives provide for one of the most competitive tax rates in Africa. It is interesting to note that the investment policy in Botswana puts forward a common investment offering to all sectors as opposed to many other mineral endowed countries that offer preferential treatment to mining companies. All sectors qualify for the similar investment incentives.
The efforts of diversification to date have been focused on developing the manufacturing base and the tourism and financial services sectors (Solomon, 2000). Other incentives have been the institution of highly competitive tax regime and a very liberal system of exchange control. Company taxation is pegged at 25% while manufacturing companies are subject to only 15% taxation. The marginal income tax rate is also very low at 25%. Foreign exchange is freely available to investors for procurement of goods and services and there are no institutional obstacles to the repatriation of profits. Investors may operate foreign exchange accounts at Botswana banks. Exports incentives also feature in the range of diversification imperatives. The competition policy for Botswana has been put in place as an initiative for economic diversification according to (Kapunda, Industrial and Development Economics- An African Perspective). Its main objectives were as follows;
• To enhance economic efficiency and support economic growth and welfare
• to prevent and redress unfair practices adopted by firms against consumers and small businesses in Botswana
• To prevent and redress anti-competitive practices in the Botswana economy and remove unnecessary constraints on the free play of competition in the market.
At independence, Botswana was coming to the end of a severe drought cycle that had lasted for more than five years the industrial sector continues to make a significant contribution to the country’s economy. With respect to diversification, the industrial sector managed to diversify from only meat and meat products to include other consumer goods, intermediate as well as capital goods. According to (Kapunda, Industrial and Development Economics- An African Perspective) the growth of the industrial sector between 1996/97 and 2002/03 was actually higher than that of mining sector over the same period. Despite diversification initiatives, Botswana remains dependent on diamond revenues (Gylfason, 2001). Development economics has long held that industrialization is an essential component of development and growth in that it provides greater potential for long-term income growth compared with resource-based economies (Gylfason, 2001). In 1974, the government introduced the Industrial Policy(IP) to create a framework for the development of the Industrial Development Policy of 1984 (jefferis, 2014) whose basic threat was to diversify the economy through import substitution that the government thought was appropriate for the then closed economies of Southern Africa. However Botswana was forced to revise its industrialization strategies due to the growing international competition thus the focus was shifted from import substitution to promoting export based industries, based on to the extent possible on local natural resources, but integrated with foreign markets (Modungwa, 2017).
The 2010-11 global competitiveness report noted a poor work ethic, inadequately educated labour force, access to financing, inadequate supply of infrastructure, and restrictive labour regulations as the most problematic factors of doing business that slow down growth in Botswana. However some positive review has been identified according to (Sekwati) which outlined that Botswana’s development has been associated with strong adherence to national development planning and budgeting principles, with little or no external influence.
Various national development plans, including the Industrial Development Act of 1968 can be used to promote industrialization in Botswana. The act provided the basis for the subsequent policies on industrial development (Sekwati, Botswana). The industrial development policy acknowledges privatization though the pace has been slow, in promoting industrialization. Limited product diversity according to (Sekwati, Botswana), remains one of the key challenges facing the industry. He further argued that policies have been fragmented and uncoordinated which contributed to implementation and monitoring problems in a number of implementing agencies, including government departments. (Sekwati, Botswana) argued that for a long time, there has been serious duplication of effort, and uncoordinated operations among these institutions, sometimes resulting in rivalries, undermining the very objective that they were established for.
In 2010, government directed ministries and stakeholders to increase the intensity efforts to diversify the economy through the Economic Diversification Drive (EDD) Short-term strategy and the EDD Medium to Long-term strategy (Industry, 2011). The main aim of EDD short-term strategy is to diversify the economy and reduce an increased import bill, the EDD Medium to Long-Term Strategy wants to enhance the globally competitive sectors, diversify exports and its markets through through a vibrant private sector, manufacture and develop goods and services which are domestically and international standards.
ANALYSIS OF FACTS AND FIGURES
Economic growth slowed in 2005-2008 and turned negative in 2009 as a result of Great Recession, contracting by 5.2% according to (Modungwa, 2017). This was made worse by a major global turn down in the industrial sector. However Botswana managed to revover from the recession and made strives. The current nominal GDP stands at $18.19 billion and purchasing power parity GDP stood at $63.33 and the GDP growth as of 2018 stands at 3.0%.the revenues stand at $18.199billion (Modungwa, 2017). The unemployment rate in 2017 stood at 17.7% which is bit high.
In 2015 the major contribution to GDP of 65% was from services followed by 32.9% from industry and the least was only 3% of contribution from the agriculture sector despite the fact that it still provides a livelihood for more than 80% of the population (Dr.B.Natarajan, 2017). It is important to note that Botswana is generally covered by geologically old, highly leached, poorly unstructured and infertile soils with limited vegetation (Modungwa, 2017). The estimated total area suitable for agriculture is only at about 5% and only 1% is cultivate yearly, surface water for irrigation is scarce while groundwater sources are limited and expensive to exploit for irrigation hence agricultural sector remains weak and underdeveloped. On the other hand, tourism which is a booming sector has been identified as the major conduit for economic diversification. It has become an increasingly important sector in Botswana contributing to almost 12% of GDP since a number of national park and game reserves with their abundant wildlife, and wetlands are major sources of tourism attraction in the country. Botswana is also participating in community based natural resource management projects trying to involve villagers in tourism.
According to literature Botswana has a growing financial sector ant the country ‘stock market, the Botswana Stock Exchange which continues to be pivotal to the country’s financial system, has been given the responsibility to operate and regulate the equities and fixed interest securities market (Dr.B.Natarajan, 2017). To date, it is still one of the Africa’s best performing stock exchanges averaging 24% aggregate return in the past decade. (Kapunda, Beyond the Impasse of African Industrial Development , 2007) noted that given Botswana’s lack of exchange controls, stable currency and exceptionally performing stock market, the financial sector has attracted a host of investors seeking better returns.
In studying and understanding how industrial development and economic diversification can inter-relate in the case of Botswana, we have learnt that industrial development is a crucial aspect in an economy’s diversification process. The foundation of Botswana’s impressive economic record has been built on diamond mining, prudent financial and technical assistance and a cautious foreign policy (Solomon, 2000). The external investment has grown unexpectedly and foreign investment and management have been welcomed in Botswana. The advantages of international competition and globalisation should be used to promote industrialization, and being more conscious of the quality of goods and services thus better improved efficiency, productivity and profitability (Kapunda, Beyond the Impasse of African Industrial Development , 2007). Even though Botswana managed to achieve so much over decades, there has been stumbling blocks such as poor work ethic, inadequately educated labour force and others. Government should guide the free market forces. The current rising levels of free trade and globalization may be misused by profit-seekers and monopolists against industrial development thus the intervention of the government can promote fair competition. Also the government must take the lead in ensuring the development of large strategic industries which private investors are not giving priority because of the long profit earned period thus government giving incentives such as long tax payment holidays or engaging on joint ventures with private investors will promote foreign investment (Kapunda 2003;15). Lastly using the benefits of economic integration will be essential in industrial development as well as economic diversification. However, these challenges did not weigh down on the development but pushed us to greater heights.
Botswana has recently garnered analytic attention as an exception to the industrial development and economic diversification in the world. The discovery of the country’s most important diamond mines in Jwaneng has helped make Botswana one of the most popular diamond producers in the world. Despite the challenges encountered, industrialization and economic diversification still remain as the main priorities of Botswana. By influencing the incentives to promoting economic diversification and industrialization, Botswana elites on policies such as FAP, Industrial Policy and IDP. The paper identifies the strategies employed for the success of industrial development and diversification, the challenges and motives to overcome them.