What went wrong with Botswana?

What went wrong with Botswana?

 I dedicate this to my brother in law Thabo from Fancistown and who is a graduate of a good commercial tertiary institution in Botswana but with the exception of a couple of internships and short term contracts has been unemployed for five years. He is a very bitter and angry young man whose story is so painfully common in Botswana. May God help Botswana!

If you look at the university enrolment figures for Batswana at universities it is the highest rate in Africa. On average only 8% of Africans of the relevant age group go to a tertiary institution. In the developed world this averages 30% and Botswana, which is the best performer in Africa the number  was around 28%. Those from the international community  are effusive about Botswana’s education success but that is only because they can never bother with details and prefer ‘the big picture’ from Europe and America. In fact the high rate of tertiary enrolment in Botswana  is the starkest testimony to the nation’s utter failure to diversify its economic base and create jobs for the young. This university enrolment figure is as high as it is in large measure because the government gives cash grants to students but there is no relief once they graduate. They have internships but no almost no prospects for getting full time employment  so many continue to study as the only economically rational alternative to returning to the village or starving in town.

But why are there no jobs in Botswana? It is after all the same international community that lauds Botswana for its absence of corruption, for its fine economic policies and its excellent macroeconomic management. But in 2017 with the closure of BCL the country is now more dependent in diamonds for its exports that at any time since the opening of the Orapa mine in the late 1960’s.So what has gone wrong with the country that had so much going for it.

In 1979 President Masire began the FAP ( Financial Assistance Policy) which provided subsidies to those starting businesses that would diversify the economy away from diamonds. He was keenly aware that diamonds are not forever and that without diversification the next generation would have no employment prospects. The program failed completely because of abuse of the subventions provided, outright corruption and because Botswana was a completely uncompetitive . The program was abandoned in 2000 and replaced by CEDA ( Citizen Entrepreneurial Development Agency)

This is where Botswana’s problems began. President Mogae made a fundamental policy mistake. He accepted the advice that  the sort of highly interventionist assistance provided by the FAP was flawed and should be replaced only with  a sop to Batswana entrepreneurs starting out in business ie. CEDA. For the last 17 years there has been nothing that resembles a real industrial policy in Botswana, only empty policy documents. This was in effect a complete abandonment of industrial policy and neither President Mogae nor subsequently President Khama have done anything vaguely looking like a comprehensive diversification policy.

Corruption- what corruption?

What should have been done in 2000 is straight forward enough. The failure of virtually every industry developed under the FAP was a result of the fact that there was no reason to be located  in Botswana and whatever could be made in Botswana and provide jobs could be done cheaper somewhere else. Thus there was no attempt to address this problem of the fundamental cost structure of Botswana and as a result the subsidies would have to continue indefinitely which every beneficiary understood was impossible. The Ethiopians, unlike Botswana,  have tried to directly address their cost stucture. They are providing cheap electricity, cheap water and cheap labour to industry so that the fundamental infrastructure and costs make Ethiopia the sort of place where investors will come without significant subsidies. Instead Botswana tried to solve its water issues with  the North-South water carrier and Moropule B. The former was developed using plastic Corning pipes against all the technical advice of all the engineers and was such a dramatic failure during the recent drought. This was because one very senior politician had shares in the company. Moropule B  construction contract was given to a Chinese company that had never before built such a large power station.  It too was a failure and now the government intends to privatise the project. So corruption  is not a problem in Botswana but if ever there were honest investigations of these two key infrastructure projects then the myth of an honest public service driven by the public good would be exposed. But in Botswana it would never happen because the heads that would have to  roll after such an investigation are very big indeed and they are just too big to fall.

In  2010 I convinced the Ministry of Finance to ask an unthinkable question- why is the cost structure of Botswana so high that people do not wish to invest? And after years of research and a major international comparative study of costs  we found  that the main reason was not transport or even infrastructure though they did matter. The biggest reason  for Botswana firms being uncompetitive was the high cost of  professionals and management in Botswana and not the cost of unskilled labourers whose wages were, on average actually lower than India. We recommended policies that would break the cosy cartels of lawyers, accountants, architects and  engineers and managers that made Botswana so internationally uncompetitive. You could not do this by just training more Batswana, you had to bring in foreigners who had their qualification recognized unconditionally upon arrival because they would gladly undercut their local competitors. But to Botswana’s contented elite bringing in thousands of Zimbabwean and Zambian professionals to compete with them and lower their salaries was simply unthinkable.

When such microeconomic reform is not politically possible then there is a standard but far more brutal macroeconomic tool  that will deal with the same issue of lack of competitiveness. That policy is one of continual currency devaluation until the local prices, including wages and salaries, adjust downwards to the point where the country is internationally competitive and investment begins. But there is no institution that more typifies the contented Botswana elite than the Bank of Botswana. Its main aim is the containment of inflation, and  that it continually argues is its main contribution to the nation’s development. During the last three years of Zuma-induced rand devaluation, the pula has appreciated against the rand and inflation lowered in the country. But it has made Botswana even more uncompetitive ( in dollar prices)  against any of its  neighbours.

Botswana will never be internationally competitive until its elite and its people are willing to pay the very high price for competitiveness. It is not free and the journey will be ugly with no guarantee of success. But the contented elite want nothing of this. They have created what economists call an efficient economy where the country’s diamond revenue is relatively well managed and distributed to them. However,  in terms of dynamics, ie transformation of the country, the economic policies of the last 17 years have been a complete and utter failure.

Lies we tell our children

For years good parents have told their children a story that belongs to another age. ‘Study hard at school,  go to university, get a degree, get a good job and you will live happily ever after!’’ It is a story that was perhaps true in another time but in the 21^st century in Africa  in the age of robots  and automation and Chinese  competition to African industry  it looks more like a fairy story. But this myth is also the basis of Botswana’s development policy as it is through large swathes of mineral rich Africa. Just educate the youth with the diamond revenue and the next generation will create the opportunities that will bring Botswana even greater prosperity. This is the same advice given to mineral rich countries  all over Africa. And when you have temerity to ask the smug representatives of the international community where those opportunities might be, given the pace of automation and the impact of China on costs, the answer is invariably the ‘The market will provide’.

 But the unemployed university  graduates do not believe this. Instead they believe the north and west African version of the 20^th century fairy tale  which goes ‘’go to university, get a degree and then get on a boat to Europe  where, if you survive the crossing , you will  have the privilege  of doing the same menial low paid jobs for white people that Africa’s  ancestors, who were forcibly shipped across the Atlantic, did two hundred years ago”.

These are the views of Professor Roman Grynberg and not necessarily UNAM where he is employed.    

The World Bank and the De Beers Cloak of Secrecy

The World Bank and the De Beers cloak of Secrecy

          In early May, the World Bank took a rare swipe at Botswana, its star pupil in Africa. Mr Nils Handler, a consultant for the World’s Bank complained in his report ‘Botswana Mining Investment and Governance Review’ that Botswana kept its mining contracts secret and that even the country’s Auditor General was unable to review them. One could just as easily replace the word Botswana with Namibia and say precisely the same thing.

         But whose fault is this? After all De Beers was, until the Oppenheimer family sold its 45% share to  Anglo-American in 2011, a supporter and founder member of the Extractive Industries Transparency Initiative (EITI) , an international organization which supports openness in mining contracts. Anglo-American remains a member of EITI but supports the De Beers impenetrable cloak of secrecy that completely envelopes the diamond trade. When questioned De Beers  points out that countries are the real driving force in the EITI and none of the diamond rich countries in southern Africa have joined what is widely seen in the region as an ‘arrogant post-colonial instrument of European domination’. 
         The World Bank is a strong supporter of transparency but in this case it is completely missing the point. Assume the unthinkable and  tomorrow Namibia and  Botswana decide to publish the contract it has with De Beers. This of course assumes that De Beers would agree to what they would surely see as a reckless act of commercial folly. The simple fact is that it would make little  difference at all to the diamond revenues in either country because just about every other aspect of the international trade in diamonds is cloaked in such commercial secrecy that knowledge of the terms of the contract  does not make it easier to understand the trade.
         The secret 2004 agreement between Botswana and De Beers which lasts 25 years, is said to give Botswana 81% of the Free cash flow ( cash flow minus CAPEX) from its mines. One can reasonably assume that Namibia would not settle for a worse deal and that its agreement is virtually identical but if I am wrong I am happy to be corrected. In any other mining industry such a split of revenues (81%/19%) would seem absolutely brilliant and would show how well Botswana  and presumably Namibia negotiated their contracts with De Beers. 
         In diamond trade the first question one has to ask is 81% of what? The answer is 81% of whatever De Beers says the diamonds are worth. But in the diamond industry what the price is and what the volume are less than transparent. The De Beers Price Book is a commercial  secret. In 2014 there was a massive scandal in the diamond industry in southern African when the De Beers Price Book was leaked and the company threatened to take legal action.  To anyone in the minerals sector the idea that the price of a product is secret seems like a medieval throw-back  but diamonds  may be mined but they are  certainly not a mineral. There are over 5,400 varieties and grade of diamond and the De Beers Price Book remains to this day  the central commercial artefact of this opaque industry.  The competitors with De Beers such as Al Rosa and BHP Billiton time their diamond sales around the De beers sales. De Beers, since 2002, is no longer a cartel but it remains what economists call a dominant oligopoly in the diamond industry and still effectively controls price. 

          But the cloak of secrecy is not just around a price, it is also about the size of reserves and the quantity that is and will be traded. De Beers power stems in part from its on-going relationship with the countries that supply it with diamonds and this in turn depends on just how many diamonds are in the ground. In 2015 when reports were released that diamond production would come to an end in Botswana in the 2020’s a new ‘resource assessment’ was suddenly released by the government that in fact diamond production diamond production in Botswana would continue until 2050.The report said that Botswana would produce another 600Mcts of diamonds over and above what was expected.  Of course because this so-called 'resource assessment' was not compliant with the standards of the Johannesburg stock exchange where Anglo is listed meant it had to be  released by Botswana government officials and not by De Beers or Anglo American.
        Yet there is an even stranger and more difficult question that would undermine any assessment of what Botswana or Namibia actually get of the fabulous wealth that lies in both countries. The articles of association of De Beers in Luxenbourg from 2002 state that ‘DEBSWANA will be a Business Partner of the (De Beers) Group for so long as the DEBSWANA Group sells its entire annual diamond production (excluding, for these purposes, Special Stones)’

This implies that there was another marketing channel for ‘Special stones’ which are  considered the most valuable of diamonds( defined currently as diamonds above 10.8 carats) and this raises a question of how these diamonds were marketed and who benefited from this trade? Was there a similar and separate marketing arrangement for Namibia’s extremely valuable diamonds?

         But even if all the questions about the real price and quantity of diamonds were answered would knowing the contract make the slightest difference? Not really. The accounts of Namdeb are at least public but the accounts of the much larger Debswana in Botswana remain secret even following the 2015 EU Transparency Directive which obliged all firms like Anglo listed on European exchanges to publish their accounts and revenues this did not occur for Debswana.   At that time Anglo disclosed the revenues and profits from Botswana but not much else. What the Anglo American report of 2016 did state was that of the 94 De Beers related companies that it had inherited some 30 odd, were located in tax havens or countries with secrecy provisions. 
           They are very nice people in Washington at the World Bank and their calls for transparency in contracts are admirable but in the Byzantine world of the diamond trade we stand far from  the light because for almost 150 years De Beers and it cloak  of secrecy have stood as barriers to the people of Africa knowing the real value of their diamond wealth and it is likely they will never know. Secrecy creates market power and hence profits and will not be abandoned easily.
These are the views of Professor Roman Grynberg and not necessarily UNAM where he is employed.