Industrialization in a small open mineral-based economy : the case of Botswana

Galebotswe, Obonye

Industrialization in a small open mineral-based economy : the case of Botswana

Master Thesis

1997

Publisher

University of Cape Town

Department

School of Economics

Faculty

Faculty of Commerce

Abstract

After more than two decades of phenomenal economic expansion, Botswana now faces the challenge of slowing economic growth, rising unemployment and increasing poverty. The minerals sector, which dominated economic growth since the late seventies, has served the economy well in the past, but social and economic developments have reached a juncture where the broad strategic direction of the economy needs to be re-evaluated. The need to diversify the economy to reduce its reliance on mineral commodities has long been acknowledged by government. One of the sectors of the economy earmarked for diversification was the manufacturing sector. However, in spite of government efforts to promote this industry, the sector's contribution to Gross Domestic Product (GDP) has remained small and even declined in recent years. An investigation into those structural features of the economy which are responsible for this record and impose limitations on the sectors' future development is therefore of great relevance. This study attempts such an investigation by focusing mainly on one aspect of the problem: those features related to booms in the minerals sector. More specifically, the study examines the effect of the real exchange rate and real wage rate movements. It also uses case study and survey data to gain insight into other major factors responsible for industrial development and to corroborate the conclusions reached on the basis of macro-economic data. The data collected suggest that Botswana has managed its mineral windfalls relatively well. It shows that the major effects through which mineral windfalls corrode competitiveness of industry -- real exchange rate appreciation and real wage rate increases have been successfully avoided. It is argued, therefore, that the country's industrial backwardness does not necessarily arise from booms in the mining sector. This conclusion is supported by the firm survey which found that low productivity, high utility costs and the lack of skilled labour to be the major impediments to industrial development. The study is intended as a contribution to understanding of the impact of mineral windfalls on the industrial development process in Botswana, but it also offers some policy prescriptions. The major policy recommendations that emerge are that wage rate increases should be tied to productivity improvements, productivity should be raised to international levels through training and the exchange rate be managed in such a manner that it does not undermine the ability of industry to compete in the Southern African Customs Union market.