Nov 7, 2019
In 1966, when Botswana gained independence from Britain, it was the world’s third poorest country. With a GDP per capita of around $70, a population of just over half a million people, and the fact that it was landlocked, Botswana’s economic prospects were very poor. There were fewer than 25 university degree holders and only 100 secondary school graduates in the entire country.
But since then, the country’s GDP per capita has grown to more than $7,500, putting it in the category of upper-middle-income countries with the likes of Brazil, Colombia, Malaysia, and Turkey. For this reason, economists including Daron Acemoglu and James Robinson, authors of Why Nations Fail, cite Botswana as a good example of a country that built its institutions and then reaped the developmental rewards. But over the past decade, Botswana has experienced increased unemployment —now at 20%—and the progressive decline of its previously strong institutions.
How could a country with such a strong foundation of economic and political institutions falter? A look at the driving factor in Botswana’s fragile economic growth provides a clue as to what went wrong and how the country can course correct.
In the beginning
At inception, Botswana won what I call “the governance lottery.” The nation’s first President, Seretse Khama, was not only a brilliant political strategist who set up the structure necessary for a thriving Botswana, he also negotiated the 1967 Mines and Mineral Act such that subsoil mineral rights were vested in the national government.
Whereas other leaders in resource-rich countries have chosen to loot their countries for personal gain, Khama sought to enrich the populace. As such, the funds accrued by the national government—mostly from the extraction of diamonds—were spent on improving institutions and infrastructure in the country such that average Botswanans received free education and healthcare. Khama ruled the country until 1980, after which his deputy, Quett Masire, succeeded him. He, and those who have followed, have effectively continued to implement similar policies. Unfortunately, despite decades of “development success,” Botswana’s luck is beginning to run out.
Diamonds aren’t forever
In our research, we characterize Botswana’s extraction of diamonds as an efficiency innovation. Efficiency innovations enable organizations (and nations) do more with less. They effectively reduce the cost of making a product, but not necessarily the price of the product. Because most products in extractive industries are commodities, their prices are often set on a global market. And thus, Botswana’s strategy of reducing the cost of extraction frees up cash flows for the country, but it doesn’t lead to widespread inclusive prosperity because efficiency innovations are designed to eliminate jobs.
Even though Botswana has a very small population and is the world’s second largest diamond producer (the first is Russia), Keith Jefferis, one of the country’s leading economists explains that unemployment is persistently high as the mining industry doesn’t create many jobs—consistent with other industries built around efficiency innovations.
Botswana’s problems are further intensified by the fact that synthetic, or lab-grown, diamonds are becoming increasingly popular. Given that diamond sales account for more than 75% of the country’s export revenues and constitute a large portion of public spending, Botswana’s economic prospects will continue to suffer if it doesn’t fundamentally revamp its economic development and innovation strategy.
Market-creating innovations can help turn the tide
Market-creating innovations transform complicated and expensive products into products that are simple and affordable, so many more people in society can afford them. In stark contrast with efficiency innovations, market-creating innovations create, rather than eliminate, jobs. Because these powerful innovations target people who historically could not afford existing products on the market, entrepreneurs must hire more people to make, market, sell, service, and advertise the new innovation. As others join the new market, they in turn create more jobs, a process which leads to increased incomes and prosperity.
An example of a company that’s transforming a complex and expensive product into one that’s simple and affordable is EarthEnable. By focusing on making flooring more accessible to millions of people who can’t access it, the Rwandan company has created hundreds of jobs and trained over a thousand people in just a few years. As the company grows, the number of jobs it creates will grow. And so will prosperity for the average Rwandan. Although the economic impact of this market-creating innovation may seem small now, consider what might happen when the affordable flooring industry expands as more competitors join the market.
For a glimpse of what that could look like, consider the mobile telecommunications sector in Africa, which was nonexistent 20 years ago as fewer than 5% of people in Sub Saharan Africa had mobile phones. However, as more and more entrepreneurs invested in creating new markets that democratized mobile phone access, this led to significant development. The mobile telecommunications industry now supports close to four million jobs and generates billions of dollars in taxes annually for African governments. As a result, virtually every African country now has a thriving mobile telecommunications sector.
Although it’s tempting to think that market-creating innovations are good and efficiency innovations are bad, robust economies require both types of innovation. The real lesson for Botswana’s leaders is to consider how investments in each type of innovation might impact the economy. For instance, if Botswana begins to focus on using the revenues it currently has from diamond extraction to create new markets across southern Africa, the country will have a better shot at reducing its unemployment and generating inclusive prosperity for the average Botswana. Diamonds alone won’t sustain Botswana’s economy, but perhaps their impact can.
Published at Thu, 07 Nov 2019 15:00:04 +0000