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Did Botswana escape from the resource curse?

IMF Working Paper

Atsushi Iimi1
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June 2006

SARPN acknowledges the International Monetary Fund (IMF) as a source of this document.
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Introduction

Botswana, which is one of the most resource-rich countries in the world, has experienced remarkable growth for several decades. Its abundance of diamonds seems to have contributed significantly to Botswana’s strong economic growth. The average growth rate since the 1980s has been 7.8 percent, about 40 percent of which can be explained by mining, though recent economic diversification has slightly reduced that contribution (Figure 1). However, it is commonly accepted that resource-abundant economies tend to grow less rapidly than resource-scarce economies—the phenomenon often referred to as the “resource curse.” This paper casts light on the question of whether and why Botswana has succeeded in transforming its diamond wealth into growth and development.

Figure 1 - Botswana: Growth Contribution by Mining, 1980/81–2003/04 (Percent change)
Botswana: Growth Contribution by Mining, 1980/81–2003/04
(Percent change)
Source: Botswana authorities

One of the pioneer studies addressing the relationship between natural resource richness and economic growth is Sachs and Warner (1995). They find that developing countries with abundant primary resources are likely to grow slowly when initial income levels and differences in macroeconomic policies are controlled. Papyrakis and Gerlagh (2004), focusing on the transmission channels through which resource richness affects economic growth, show that the indirect, negative effects through macroeconomic policies, such as trade openness and educational investment, outweigh the direct, positive resource effects. Leite and Weidmann’s evidence (1999) also supports the resource curse hypothesis. Capitalintensive resource industries tend to induce more corruption, hampering economic development.

Theoretically, however, abundant natural resources could promote growth, since resource richness can give a “big push” to the economy through more investment in economic infrastructure and more rapid human capital development. Therefore, any resource-rich country must attain higher growth rates (Sachs and Warner, 1999; Murphy, Shleifer, and Vishny, 2000).

Various reasons have been put forward for failures to effectively transform natural resources to growth. One of the most crucial, when attention is paid to the importance of governance in facilitating economic development, is that natural resource wealth sows the seeds of discord and conflict among domestic stakeholders, such as politicians, developers, local tribes, and citizens (also known as taxpayers).2 They are naturally motivated to seek unfair resource rents, quickly depleting natural resources and wasting resource revenue.

A model of political evolution for analyzing a resource-rich country shows that high resource dependency, concentration of government control over resources, and government’s ability to tax the opposition, such as private entrepreneurs, all inhibit the development of democracy and provoke insurrection. As the result, natural resources may impede economic growth (Shahnawaz and Nugent, 2004).3 One implication of this is that because of their high earnings from natural resources, resource-dependent countries have less need for tax revenues and are therefore relatively relieved of accountability pressures.

Resource rents tend to bring about not only conflict but also corruption. Leite and Weidmann (1999), modeling the effects of anticorruption policies, show that strengthened monitoring can reduce the steady-state shadow price of capital, producing a higher growth rate during the convergence.

From the viewpoint of government fiscal management, in developing countries large resource rents may have the same negative impact as massive foreign aid inflows. As described in the aid fungibility literature (e.g., Devarajan and Swarrop, 1998; Gupta and others, 2003), resource wealth may relieve governments of tax collection pressures and reduce fiscal discipline. It is natural that populists tend to pander to the insatiable wish of citizens to reduce taxes. Bacon (2001) mentions that oil-producing countries are likely to charge lower domestic gasoline prices, implying that natural resource rents obtained from upstream royalties are subsidizing domestic downstream consumption.

An intuitive but important policy implication from all this is that government resource management could catalyze resource endowment to produce economic prosperity. Resource abundance would be advantageous to any economy whose government has a sound long-term plan for extracting natural resources and an effective mechanism for spending revenues on the social and economic infrastructure needed for sustained growth.4 If governance is poor, resource earnings tend to be unevenly distributed and unfairly dissipated, leading the country into economic stagnation. In Latin America, in fact, high income inequality stemming from uneven distribution of resource returns has ended in failure to accumulate social and human capital, interfering with sustained growth and economic diversification (Leamer and others, 1999).5

From the economic perspective, the other possible reason for stagnation in resource-rich countries is the Dutch disease problem. In resource-exporting countries, sectors other than natural resources (typically manufacturing) are likely to suffer from real appreciation of the national currency, because natural resource earnings are in part absorbed by the domestic nontradable sector (e.g., Corden and Neary, 1982). In the context of slow growth in Africa, Sachs and Warner (1997) interpret the estimated negative growth impact of natural resources to be part of the dynamic Dutch disease syndrome. In general, however, it is rarely easy to see such a direct effect of large resource exports on the terms of trade—which is one of the major measures of external competitiveness (Figure 2), though there are other measures, such as factor costs, composition of exports, and national economic productivity.

Figure 2 - Natural Resource Abundance and Terms of Trade, 1998–2002
Natural Resource Abundance and Terms of Trade, 1998–2002
Sources: Botswana authorities, World Economic Outlook database, and World Integrated Trade Solution database.


In addition, the natural resource sector is generally capital-intensive and asset-specific. Extraction of minerals requires large, durable, location-specific investments (often referred to as site specificity). Once sited, the assets are almost immobile. Such investments in facilities and equipment tend to be unique to a particular mine and region (Masten and Crocker, 1985; Joskow, 1987). Thus, natural resource development brings about few positive externalities to forward and backward industries (Sachs and Warner, 1995). For the same reasons, the learning-by-doing effect is not expected in this area, either.

Based on the viewpoint of political economy that natural resource abundance is linked with economic growth through governance, this paper examines whether Botswana has succeeded in escaping the resource curse. The Dutch disease syndrome is only partly taken into account. Section II illustrates the relationship between resource richness, growth, and governance, with particular attention to Botswana. Section III describes the empirical model and the data and econometric issues. Section IV presents the estimation results. Section V discusses the policy implications.


Footnotes:
  1. I am most grateful to Mr. Paul Heytens for his insightful suggestions throughout this research. I also thank Messrs. Aart Kraay and Marshall Mills, the Bank of Botswana, and the IMF’s Office of the Executive Director for the Africa Group I Constituency for their helpful comments. The views expressed in this paper are not those of the IMF or the Bank of Botswana.
  2. For the argument on governance and growth, for example, see Tanzi and Davoodi (1997), Tanzi (1998), Burnside and Dollar (2000), Easterly, Levine, and Roodman (2004), and most recently, Glaeser and others (2004). While Burnside and Dollar show that governance is a key in promoting growth in the context of foreign aid, Glaeser and others emphasize the risk of failing to measure institutional qualities and suggest that human capital is a more basic source of growth than political institutions.
  3. The model also indicates that there is another equilibrium at which the government can induce the opposition to be cooperative by offering higher profitsharing, a lower tax rate, and higher capital spending on new resource discovery (the “repressive government” equilibrium). The “democracy” equilibrium may exist somewhere between the cooperative solution and the civil war outcome.
  4. The areas where resource rents should be used vary from country to country. Typical are electricity and water distribution networks, primary schools, and hospitals.
  5. Income inequality is in general associated with slow economic growth. Banerjee and Duflo (2003) find that changes in inequality in any direction are associated with lower future growth rates. The World Bank (2005) claims that inequalities resulting from the failure of capital and insurance markets as well as market imperfections for human capital development may also distort allocation and undermine economic growth. In many Latin American countries, opening to trade has increased inequality in earnings, and so there must be complementary measures to provide infrastructure and safety nets for stable growth.


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