Sir, what is an average?

Sir, what is an Average?

This year I had one of my life’s truly shocking experiences at UNAM in my second week of class this year. I teach a moderately technical but compulsory course in Basic Microeconomics which covers 950 first year students enrolled in the faculty. At the end of the second class a young lady, fresh out of school asked me after the lecture, ‘Sir, what is an average’. This question was, to say the least, unexpected. My first reaction was disbelief that a high school graduate was asking such a question. Later camethe experience of shock, which I recognize so clearly from the experiences of my youth during the war in Indochina.When you suffer shock it is common that your visionnarrowsand all I could see was this young girl. I answered her question and then, as is so common with trauma, I simply put it to the back of my mind. It was only at 3 AM, the devil’s hour, that I woke up in a sweat and told my poor wife about the experience.She was not in the slightest amused about being woken up by a vexed teacher mumbling about a student who clearly understood almost no mathematics.

It is relatively easy to dismiss this as simply as one experience with one student at UNAM but unfortunately this was just one case and is symptomatic of a much bigger problem with the education system in Namibia. On the first day I arrived from Botswana to Namibia on a very cold day in June of last year I was put in freezing office with no heating- UNAM’s equivalent of ‘trial by refrigeration’. On my desk was a test from the previous occupant for a course called Business Mathematics which is a course taught to all first year students in the Faculty of Economic and Management Sciences. The test, like the young lady enquiring as to the meaning of an average, was a revelation. It contained questions like what is ½ +2/5? It was about the level of grade 7-9 arithmetic taught in many schools throughout the world. I went to the then Head of Department of Economics and asked what was a question paper like that doing at a university? He smiled at me and said ‘That’s not half the problem, some 80% of the students failed the course and they are up in arms about it’. I asked around about the course and found that it had been taught by three separate departments at UNAM, Mathematics, Management and now Economics. None had brilliant results and it had been, in the words of one of the teachers, ‘dumbed down’ to grade 9 level as the quality of students coming out of the school system worsened over the years.

The fact that 80% of the 800 odd students sitting such a course at this level  failed it was a clear indication of just how weak the nation’s secondary school system has become and how clearly it is failing the children of the nation and by extension, Namibia’s economy. Students who complete high school and do not know such basic arithmetic are almost certainly bound to end up unemployed or in low paid employment.

UNAM cannot be held responsible for this mess though the finger is frequently pointed in that direction. It is paid by government to educate the nation’s youth and can only take what the school system delivers to its doors. The fault as well as the solution clearly lies with the education system and thegovernment needs to recognize that the nation is suffering an education crisis. How does one deal with this? The first is to begin by recognizing that we are there is a math education crisis and that desperate times call for desperate measures. The Minister of Education has devoted considerable resource to in-service training of the many teachers who are not qualified to teach and therein lies much of the problem.

When I discussed this matter at UNAM I was told that these outcomes were a result of apartheid. As someone who saw apartheid at its ugliest and fought against it there is no doubt that it has left an indelible scar that will take a very long time to heal. But the struggle was fought for many reasons- principally for the dignity and equality of all men and women irrespective of race or color. However,there were also subsidiary objectives, one of which was to assure that Namibian (and South African) students got a first class and not an institutionalized third class education and,with the end of apartheid that Namibians would be able to determine and write their own history. Arguing that apartheid, which ended nearly a generation ago, is still responsible for all that we now see seems to be a denial of these two subsidiary objectives- giving Namibian children the right to a first class education and writing the nation’s history by a free citizenry, not by people who see themselves asthe eternal victims of a brutal history.

Once the denial of this problem ends providing schools with much more resources as well as temporary math teachers from abroad may well alleviate the problem of math education in Namibia. In time as more and more UNAM graduates will find it difficult to find well-paying jobs, as is happening throughout the region, teaching math will come to be seen as one of the few good employment opportunities and these foreign teachers will not be needed permanently. If we fail to address this issue of the quality of High School education now we will condemn an entire generation of young Namibian high school graduates to being unemployable. The school system is in effect, handing out permanent poverty and unemployment vouchers to the nation’s children and reform is essential.

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

Why we should tear up the EPA.... Eventually

 

Why we should tear up the EPA…… eventually

The Economic Partnership Agreement, a free trade agreement between the European Union and six SADC countries has finally been signed last Friday by in Kasane in Botswana. Six similar EPAs are being negotiated or have been singed amongst many of 76 members of the African Caribbean and Pacific group of nations. That is both the good and the bad news. It is good news for our farmers who export their beef and grapes and the fishers who export fish to the EU. It will mean that they will be able to sell duty free into Europe’s 26 members.It is also good news for everyone else who exports goods like steel and automobiles to the European Union because after ten years of tough negotiations Namibian exporters are able to export whatever they want to Europe without paying any duty. Unfortunately we have no steel and automobile industries but South Africa does and South Africa is by far the biggest beneficiary of a trade agreement that originally it was not even supposed to sign.

What Namibia got was a continuation of the status quo in terms of the access of our exports to Europe. We can continue to export everything we make duty free. But we had that before the EPA, you say so what extra did we get? The answer is almost nothing. The Europeans know it and those who signed on Namibia’s behalf almost certainly know it. They will trot out the benefits in improvement in rules but everyone knows that almost nothing was gained and it is unlikely that our limited range of exports will not increase one dollar as a result of the EPA agreement.

The bad news is what we had to pay a great deal to get nothing. For years the government of Namibia had quite rightly been one of the strongest opponents of the EPA. The reason was simple. Not only does Namibia now have to eliminate all its tariffs on goods from the EU which would make it even harder to compete with EU exporters it also has to comply  a whole new range of EU  provisions that are anti-developmental. What are these provisions? They include things like limitation on Namibia’s right to introduce new export taxes and the use of infant industry provisions which protect new industries.  The grand daddyof all conditions in the EPA is the so-called ‘most favoured nation’ provisions whereby Namibia and the SADC countries must grant to Europe whatever they might negotiate with large economies like Brazil or India. This is the so-called ‘’we shall never negotiate again provision”’ because it means that the EU can free ride on the back of other negotiations without having negotiate yet another treaty with small African states.

Europe is simply trying to stop Africa from using the very same laws and taxes that they used to develop for almost a hundred years ago. You may ask what sort of people are these to tell a sovereign nation what its laws and export taxes must be? If you listen to the European negotiators it is being done for development according to the European negotiators who say that all these rules that they used in the past are bad for us and we should not have access to them. That is good reason- the real reason is that it is good for Europe because it helps consolidate EU exports and maintain their access to our raw materials and stops us from trying to process them here.

Many think those who negotiated the treaty for Africa to be at very best,fools and some would use stronger words. But in fact the African negotiators have done much better than the Caribbean and Pacific negotiators who signed their own EPA in 2007. They gave up everything,  export taxes MFN and infant industry because they were true believers in the free market in the case of the Caribbean. Unfortunately their heads of government were not and they sacked them all and closed the Caribbean Regional negotiating machinery. In SADC the negotiations resulted in clear limitations on what we can do  but not the sort of outright bans that the Caribbean or the Pacific foolishly agreed to. In future we shall have to ask Brussels for permission to pass new export tax laws and they may not agree.

Fortunately  MinisterSchletwein has been cleverin dealing with the EPA. He recently  mooted export tax laws of 2% of the value of mineral exports  which will be introduced presumablybefore the treaty with the EU has to be ratified in October. The provisions of the EPA limit Namibia’s ability  to introduce new export taxes but they allow us to maintain old export taxes. In the long run the treaty mean that we will give Europe what  will effectively be able to effectively veto over our commercial laws.

So who benefits  from all of this. Swaziland keeps sugar access, Lesotho improves slightly the terms of its garment exports and we, along with Botswana get to keep our beef exports to Europe. But the world is as it always was,  and the big winner is of course the biggest country- South Africa which cleverly used its small neighbours to get better access for its wine and sugar, which is what Pretoria always wanted.

Ironically the biggest loser is not Africa but Europe because it has given Africa yet another reason to despise what they have done on this continent. Before when Europe was more generous during the days of the Lome Convention and the Cotonou Agreement  ie before the EU felt hreatened by the three-headed hydra of Indian service exports, Chinese manufactures and Brazilian agriculture we had generous trade arrangements.

The Chinese are much more clever than Brussels. They come with no repulsive treaty but with what Africa so desperately needs- investment and aid that is commercially oriented. This is precisely what Europe did in the beginning of the post-colonial era under the Lome and CotonouAgreements in the 1970’s but has since given up. The Chinese are now doing it bigger and better.

ThisEPA  is an odioustreaty that we will have to sign and ratify to protect our export sectors but there will come a day when Europe is no longer relevant to Africa’s future and we will be able to tear up this dreadful treaty which aims to determine our economic future as surely as European machine guns did 100 years ago.

These are the views of Professor Roman Grynberg and not necessarily those of his employer. The writer was, much to his subsequent shame and regret,  an EPA negotiator for the Pacific Islands.

Namibia's Solidarity Tax

The Namibian Solidarity Tax

Almost every quarter that goes by in Namibia the issue of the country’s income inequality comeshome to haunt the government in one form or another. Whether it is the land issue and Affirmative Repositioning Movement last year, or the ‘Struggle kids’ now, Namibia’s  unfairdistribution of income undermines the peace and stability of the nation and the government wants to address the issue. Namibia has the world’s second worst distribution of income- yes based on the so-called Gini co-efficient which economists use to measure income inequality (zero for complete equality and 1 for complete inequality) we have the amongst highest in the worldwith a Gini co-efficient at 0.6.

In terms of inequality, the country at the very top of the world’s inequality ladder is South Africa,with a Gini co-efficient of 0.69 in 2011. This is of course no coincidence as both countries suffered under apartheid and worse still Namibia, wasa colony of apartheid South Africa. This apartheid/colonialism narrative has been the basis for explaining Namibia’s current situation. In part this is correct but it runs head long into some really uncomfortable facts. The firstfact is that South Africa despite a long period of rapid economic growth and enormous amounts of money spent on social spending over the last twenty years such as income support for the poor, RDPhousing, health and education expenditure has, much to the horror of the ANC government, actually witnessed a worsening of its distribution of income since the end of apartheid. In Namibia the two estimates that have been made of Gini co-efficients show precious little downward movement as well. The reason is straight forward –  despite the very rapid economic growth up to 2009, which is supposed to decrease inequality,  and the very large amounts spent on social programs in South Africa and Namibia the rich have gotten richer as fast as the government has increased subsidies to the poor and sowhile poverty may in part be alleviated income inequality is not effected. Poverty alleviation and income redistribution are not the same thing, they are related but almost invariably confused in public discussion.

The second really uncomfortable fact in terms of Namibia’s colonialism/apartheid narrative is the existence of Botswana. Botswana was never colonized – it was a British Protectorate and was so poor and miserable that the British did not even bother building a capital  choosingrather to administer it form Mafeking in South Africa until just before independence. Botswana had no apartheid, no colonialism and very few white settlersand yet its Gini co-efficient is not that much lower that of Namibia. Now that is a problem if you believe that the only cause of Namibia’s inequality of income is its historic legacy.

The country with one of the worst distributions of income in Asia is Papua New Guinea and what all these four countries have in common is mining. The existence of mining and petroleum puts huge amounts of wealth in the hands of mine owners and the government. The former is not inclined to lose its income and in the case of the latter, most governments are incapable of developing the fine and delicate sort of policies which really alleviate poverty effectively.

Namibia’s Minister of Finance MrCalleSchlettwein, last year suggested the implementation of a new Solidarity Tax. He has said he will raise some $600 million in extra taxes on upper income individuals. Given the personal company and withholding tax revenue of the country was $14 billion in 2013/14 this tax measure constitutes an increase of some 4% of tax burden.  While details are scarce the tax will presumably be implemented through the income tax system though some flat rate taxes on corporations are also expected. This is a good proposal, which I as an economist and one of its intended victims fully support, but the devil will be not in the detail but what the minister actually intends to do with the money.What would make the new tax more convincing to a skeptical public is the creation of a fund that would ring fence this money specifically for poverty alleviation measures. That way the public would know that existing poverty alleviation measures would continue and that this tax would actually be over and above what is already being implemented.

The best means of poverty alleviation is to give money directly to the mothers as the Brazilian ‘bolsafamilia’ fund. In order to receive money women must assure that their children are regularly inoculated against diseases and attend school so they get a monthly lump sum payment. No bureaucrats stand in between the government and the beneficiary. The money goes straight to the bank accounts of the mothers. It is enormously empowering to otherwise impoverished women and children. No system has as yet been so cost effective in alleviating the poverty of so many and redistributing income in a country also known for its inequality. Under former Brazilian President Luiz Inácio Lula da Silva poverty was decreased by approximately 30% in three years from 2003 -2006 in large part because of the program. It is widely acclaimed across the political spectrum as an excellent way of dealing with poverty and variants should be considered here in Namibia.

But in making this proposal for a Solidarity Tax Minister Schlettwein has violated one of the cardinal rules of tax policy. If you are going to hit people with a new taxes the first thing you are supposed to do, even before the tax, is to tell them all the good things you are going to do with their money. This decreases resistance to tax increases. Otherwise the taxpayer may think that, because all money is fungible, the new tax is merely a way of soaking the taxpayer to pay for the widening and unsustainable government budget deficit. Minister Schlettwein knows full well the adage that labor has legs and capital has wings and so he must finely balance tax increases in Namibia against the risk that capital will fly if he pushes tax solution too hard. But he is caught between a global economic system that creates inequality, a middle class that is myopic and hates the proposed tax, and a large and restive poor that will mean continual instability if the issue of inequality is ignored.There are no easy and painless solutions to this, most vexing of Namibia’s long term economic problems.

How Namibia Subsidizes Botswna's Diamond Beneficiation

How Namibia subsidizes Botswana’s Diamond Beneficiation

If you were to ask most Namibians what is the main source of government revenue they would tell you that it is the profits and taxes on the diamond industry. They would be wrong. Many would also tell you that that the main source of revenue is actually import duty revenue from the Southern African Customs Union (SACU) which is only partially right. By 2014 SACU revenues derived by the government of Namibia was estimated at 37% of total government revenue. This is down from the peak of 47% of Namibian government revenue in 2007.

            But the problem is that most of that money is not from customs duties raised on imports coming into Namibia from outside the customs unions. A customs union like SACU exists when several countries get together and decide to set one common rate of tariff on all goods coming in from outside the member states. They then pool the tariff revenue on goods coming in from say the USA, the EU  or China and the normal way to distribute this revenue it in a customs union is based on what is called the ‘destination principle’. If 5% of total SACU imports went to Namibia then Namibia would get 5% of revenues. But SACU is special and has one of the strangest revenue sharing formulas of any customs union in the world. Under the SACU revenue sharing formula tariff revenues are distributed amongst the five members based on the share of intra-SACU imports. At the end of each year the five SACU members get together and decide what was imported the previous year and then share it out based on a formula that means that the four BLNS states (Botswana, Lesotho, Namibia and Swaziland) get the vast bulk of the revenue because they import almost everything from South Africa and South Africa imports very little from the four BLNS states. And so, depending on the year, some 80% of SACU customs revenue go to the four small BLNS and  South Africa which has 53 million people and imports the vast bulk of SACU’s foreign imports but gets less than 20% of revenue. To say the least the South African treasury, unions and much of civil society hate this arrangement which has remained more or less in tact since the apartheid era,  because they are in effect transferring about ZAR 20 billion a year to treasuries of the four BLNS states with Botswana, in particular,  having a higher GDP/capita than South Africa.

Looking at from Namibian perspective we are subsidized to import and not to produce. And on this basis SACU is extremely successful because Namibia and the other BLNS states have bloated governments but produce nothing while the allowing South Africa to produce virtually everything that is consumed in the region. The only things produced for export  in the BLNS states are minerals that generate  what economists call high ‘economic rents’ and  preference dependent products like sugar, clothing, beef,fish, grapes etc.

But suddenly something very new has happened in Namibia’s trade. From being a very minor trading partner where a few consumer goods came in from Botswana , it has suddenly become Namibia’s biggest destination market for its exports at somewhere close to $N11 billion in 2014. Those exports are almost entirely Namibia’s diamonds. In the past diamonds from Namibia used to go to De Beers head office at Charterhouse in London and sold to De Beers sightholders. But in the 2011 Marketing Agreement between De Beers and Botswana,  Botswana finally got from De Beers precisely what they had been asking for a very long time and De Beers moved its sites from London to Gaborone. Diamonds produced in the ‘De Beers zone’ i.e Botswana Namibia, South Africa and Canada would be traded out of Gaborone. For Botswana this agreement was the crowning glory of its diamond beneficiation policy. At last Botswana is the ‘go to’ place if you want mined diamonds and Batswana are rightly proud  of this development. This is certainly Botswana’s rightful place as the world’s largestmined diamond producer.

Namibia as a good neighbor, that also seeks to beneficiate its diamonds, should rightfully support Botswana’s beneficiation efforts. But right now Namibia and the other SACU members are paying a subsidy to Botswana for every dollar of Namibian, South African and Lesotho diamonds that areexported to Botswana because of the way in which the revenue sharing formula is written. The subsidy stems not from a commercial trade relationship where the parties are trading with Botswana because they wish to but as a result of an agreement between De Beers and Botswana. It is symptomatic of everything that is wrong with the SACU revenue sharing formula. Rather than encouraging intra-regional trade the SACU formula creates perverse distortions and incentives in behavior. From the perspective of the government revenue Namibia should be opposed to any exports to its SACU neighbors – whether it is weaners to South Africa or diamonds because this decreases Namibia’s SACU revenue.

One way to deal with this is simply by modifying the SACU revenue sharing formula. Gaborone should not expect a subsidy by virtue of its agreement with De Beers and should agree at SACU to a modification of revenue sharing that excludes the intra-SACU diamond trade. According to normally well informed sources, the agreement with De Beers and Botswana allows De Beers to walk out of the arrangement if other countries object and that would be a far worse outcome for Botswana than a slight modification in revenue sharing. SACU members spend much of their time trying to agree on what imports actually were in any given year and the value of diamonds would only complicate matters. But diamonds are merely the tip of the iceberg when it comes to distortions of the economy caused by SACU.

Namibians are as rich and as comfortable as they are only because South Africa subsidizes Namibians to import goods from them. In other words the Namibian government is paid a substantial subsidy by Pretoria to keep Namibia’s children unemployed. Every time a Namibian farmer exports a weaner to South Africa or a Namdebexports  a diamond to Botswana the Namibian treasury gets less money. This is what economists correctly call a ‘perverse incentive’ and it surely must come to an end.

These are the views of Professor Roman Grynberg and not necessarily those of the University of Namibia where he is employed. Next week- how to reform SACU and survive.

Nexit - Will Namibia be able to Sustain Rand Parity?

Nexit  – Will Namibia be able to Sustain Rand Parity?

Since 1993 when Namibia formally exited the Rand Monetary Areaand created the Namibian dollar the country has maintained  a policy of strategic parity between the Namibian dollar and the Rand. This was done for a number of reasons but principally to reassure business at the time of independence that the conduct of policy in Namibia was in safe hands and that when they invested in the country they could take out their profits at a fixed exchange rate. For over twenty years this has been at heart of macroeconomic and exchange rate policy in Namibia but now it looks increasingly under pressure.

On June the 17^th the Bank of Namibia  announced that the nation’s foreign exchange reserves had fallen to $N12.1 down from $15.7 just two months earlier. With its regular but increasingly perfunctory comments the Bank of Namibia’s Monetary Policy Committee  (MPC) added  its usual caveat that the reserves remain sufficient to sustain Rand parity. But are they? Certainly Namibia has enough foreign exchange reserves to cover imports for a period of approximately 7 weeks  given the most recent decline but it is certainly moving in wrong  direction. In 2012 Namibia foreign exchange holdings was enough to cover 4 months of imports. By international standards anything above three months is considered to be reasonably healthy. But by the end of last year the import cover had fallen to two months and the rapid decline of reserves in 2015 should be a wakeup call to policy makers that the country is on anunsustainable path of importing far more than it is exporting and that this will eventually lead toa foreign exchange crisis.

From the 1990’s up until the economic crisis of 2008 Namibia’s balance of trade was in balance with exports and imports of goods growing in tandem. Then with the beginning of the global economic crisis in 2008 imports started to balloon and while export growth has been adequate, especially in 2014 when diamond prices and returns, have been high it has not been enough to pay for the country’s growing appetite for imports. The Bank of Namibia’s MPC puts the blame squarely on the country’s appetite for imported luxury goods, in particular expensive cars. The data on imports of motor vehicles does show a rapid rise over the last few years but the figures are probably vastly underestimated given the growth of normally under-valued second hand cars. In 2014 Namibia is said to have imported someN$12.4 billion up by N$3 or 37.4% from the year before. Cars are by far the biggest import in Namibia and this figure probably massively undervalues second hand imports.

None of the options for  addressingthe trade imbalance are pleasant for the government or for the Namibian people. The politically safe approach to an impending balance of payments crisis in most countries is to use monetary policy to restrict access to credit i.e. a credit squeeze. This puts less blame directly on government and shifts it the Bank of Namibia. But a credit squeeze is a dull instrument that can often lead to the destruction of many an otherwise sound business..A similarly blunt instrument that the government has to restrict spending is the use of its fiscal policy to cut government spending and raise taxes. To say the least this a very unpopular approach to dealing with deficit problems- just ask the Greeks how much the people like this sort of approach.

So how should  the government react?If the Bank of Namibia is correct in its assertion that the purchase of luxury automobiles lies at the heart of the import surge a number of more focused monetary policies to push the banks to limit access to credit in these sectors is in order. But there are too many ways around credit restrictions to one sector or another. The other option is to impose a new series of taxes on automobiles coming into the country, especially the larger and more expensive ones. It is not possible to impose import duties on vehicles made in SACU Customs union but it is certainly possible to impose higher excise tax and a large scrappage or environmental fee on all new and second hand cars. With luxury new cars running from $N800,000 to well over a million many Namibians are moving to second hand imports. Many of these, especially the older vehicles coming from Botswana, are massively undervalued and the government needs to stop the process of VAT collection based on fictitious valuations. Instead taxes need to be imposed based on international ‘Blue Book’ values of cars.

Irrespective of what policy measures the government chooses to impose to deal with the unsustainable trade imbalance, it is running out of both foreign exchange reserves and time. The time for government to act is now before the reserves fall to what is often seen as a critical minimum i.e. approximately 4 weeks import cover. While 4 weeks is enough to cover imports it is commonly seen as the  point at which  investors will see the writing on wall for Namibian dollar – rand parity and start to move ever more foreign exchange out of the country. This will hasten a crisis. It is time to act before ‘Nexit’- an exit from Namibian dollar parity with Rand becomes inevitable and the currency has to be devalued. The immediate rise in prices of imported goods would not only lower living standards but in the long term it would weaken Namibia’s reputation as a safe place to invest.

These are the views of Professor Roman Grynberg and not necessarily those of any institution with which he may be affiliated. 

Will the extra 600 Mcts at Jwaneng and Orapa save Botswana?

Will the extra 600 Mcts at Jwaneng and Orapa save Botswana?

Up until about June of last year everyone believed that Botswana was going to fall off a fiscal cliff after 2029. This was at the heart of the economic thinking in the country’s 10^th National Development Plan.  When BIDPA presented the results of an analysis of Botswana after diamonds in November we were happily told that we were wrong and that diamond mining  would go on to 2050. According to the geologists there is enough diamonds at  Jwaneng and Orapa for these mines to continue for decades.

Few people seem to comprehend how far reaching the new deposits of diamonds announced by HE the president in his state of the Nation Address after the elections. He said quite clearly that the country will remain a major producer of diamonds until 2050. But what does that actually mean?  HE gave no figures and there is no way that Anglo-American or De beers will say until they have completed a bankable feasibility study that is compliant with its obligations to the stock exchange. Anglo cannot just bandy around numbers- they have to be technically verifiable. But this number is the most important one in Botswana. Fortunately, though Mr Masire of the Diamond hub indicated, in Zimbabwe late last year that Botswana will be producing at about the current level to 2050. That means around 24 Mcts per annum. That means that the current resource assessment will mean that we have an extra 600MCT more than we thought we had. What difference will 600Mcts really make to Botswana’s future and  most importantly the government’s finances which are reliant upon on the taxes and profits made by De beers and Debswana?

What is known in the quasi- public domain about these new reserves? The most important fact was stated quite clearly and publicly by the Debswana CEO at the National Business Conference in Maun last November. He made it quite clear that it will require massive investments to extract these resources from Jwaneng and Orapa. How much is the question and I am reasonably confident that as yet De Beers has not yet  done the technical studies for this expansion  but the answer is in tens of billions over  a very long period.  Cut 8 which will not deliver anything near 600 Mcts cost about P28 billion.

Given that we are not going to know for a while, if ever, what these resources are  it is vital for those considering the future of Botswana to model what will happen with the extra diamond reserves that we know are there. It has been said that there is one extra fact about the new reserves. Orapa has always been a more prolific mine than Jwaneng but the value of Orapa’s diamonds are low because most are  low quality industrial diamonds with only approximately 40%  being of gem quality.  Not only are there extra diamonds the expansion at Orapa will transform that  mine from one which produces 60/40 industrial diamonds to one that, at least for several years will be producing much more high value gem diamonds similar to those produced at the much richer mine at Jwaneng. Again how big and how much is not in the public domain.

The Orapa and Jwaneng mines are clearly nowhere near their end of mine life and no-one should be surprised if they continue to help the nation  for up to 100 years as was the case with other  giant Kimberly mine in South Africa. But how long these mines last  also depends on the value of diamonds. The bigger the hole you have to build the larger the capital cost in digging it and the higher the operating cost of extracting a carat of diamonds from the many tonne of ore.

If synthetic diamonds, which are better quality than the real thing and undistinguishable to the naked eye from the real thing penetrate the jewellery market, the fundamental economics of diamonds will change. Diamonds maintain their long term value because they are considered to be scarce. If they cease to be considered a rarity and become as cheap as bricks, being produced in some Chinese factory then there is no way Botswana’s diamond mines or its prosperity can be guaranteed.  

Right now the big diamond miners including Al Rosa, De Beers and Rio Tinto are discussing ways in which they can protect their mining assets. They are moving towards developing a new ISO standard for diamonds that may be able to protect the diamonds value changing from the illegal penetration by synthetics but unless this has the teeth of a legal process like the Kimberly process it will remain voluntary and ineffective.

What do you do when you are an economist and you do not know how much something is going to cost? The answer is simple enough- get rid of your problem by simply making  an assumption! Economists are infamous for their assumptions and when it comes to something like mine costs at such an early point they are no different. I, along with other economists did some analysis of what is likely to happen to government revenues as a result of these extra deposits.

I assumed that the  new 600 Mcts could not be extracted without a capital investment  equivalent in real terms to the equivalent of three Cut 8s i.e. about  100 billion real pula over and above what investment was likely to be in early resource assessment until the end of the mine in 2050. Even if you assumed that the quality of the Orapa diamonds would increase for a number of years the surprising result is that the revenue projection for Botswana is not that much different than that  which existed without these discoveries. There is still a decline in government revenue over the next  35 years but not a fiscal cliff.

This of course makes perfect sense if you understand the logic of mining. Operating costs and Capital expenditure (capex) is going to rise as the mine gets bigger and deeper. Under the 25 year contractual agreement between the Government and De Beers in 2004  the government of Botswana gets 81% of what is called ‘free cash flow’. Free cash flow is the operating profit minus the capital expenditure or Capex. So as the costs rise as the hole gets bigger government will get less revenue. One day even Jwaneng and Orapa will close and unless we have diversified the economy or created a Fund for Future Generation like the Norwegians and the Qataris then Botswana’s children could well be much poorer than they are today. But there is no fund for future generations and that is why economic diversification is so important. Unfortunately after 35 years of trying the government has not succeeded in diversifying the economic base of the country. Botswana is now as dependent, if not more,  on diamond exports than it was 30 years ago.  

The extra 600Mcts of diamonds will not save Botswana, they will increase revenues by several tens of billion pula over what we could have otherwise expected but it is unlikely to make that much difference. In my estimates the extra revenues are equal to approximately of P42 billion over 35 years. If the capital cost of  expanding Orapa and Jwaneng is significantly lower (50%) then the benefit of the extra diamonds will be a more significant at some P80 billion over 35 years and while it is a significant increase in revenue it is still not enough to turn the country around.

As much as those economists in the government enclave would like to avoid what so many of them say is the impossible problem of Botswana’s economic diversification they cannot because the increasing numbers of unemployed youth will find a way of reminding them. In the end the obligation of those who govern must be to diversify the economy is the one thing that will provide jobs and along with it the peace and stability of the nation.

These are the view of Professor Roman Grynberg and not necessarily any institution with which he may be affiliated.    

The State of the Botswana’s Minimum Wage and the Working Poor

The State of the Botswana’s Minimum Wage and the Working Poor

A very wise economist once taught me that if all that it took to eliminate poverty amongst working people was to pass good laws then they would have been passed by good men and women a long time ago. If we want to raise the standard of living of those at the very bottom of the nation’s wage structure then the solution lies is simply raising their wages and their poverty would go away. Right? Well many economists would argue that if you raise the minimum wage significantly then workers will be simply be laid off and replaced by machines or the businesses would simply close. In some cases this is absolutely true. In many businesses the cost of wages paid to workers on or close to the minimum wage is such a low proportion of total cost that it frankly almost does not matter. But an increase in minimum wages will also results in what economists call changes in wage relativities ie. the wage of the person at the bottom compared to those above that really is the main effect of raising minimum wages.   

Falling Real Minimum wages

Why do countries like Botswana have a minimum wage? It is for reasons of fairness and justice. As those at the bottom of the wage structure usually have no unions and no economic power to negotiate a living wage with their employers the only institution that can protect them from an exploitative wage is the state. While there is a conflict between the competing pressures on government of protecting the poor from exploitation and not leaving business uncompetitive Botswana has done poorly in terms of protecting the wages of  the weakest workers. Between 1993 and 2014 the minimum wage went up for most of the categories ( excluding agricultural workers , domestic workers etc) from P1.25 to P4.50/hr. If however, you are a domestic service worker the minimum wage in 2014 was  P2.5/ hr or P20 per day. This is slightly higher than the global level of absolute poverty of $1.25 (P12.5) per day but not by much.  But when you look at what has happened to  the minimum wage after you take into account inflation, the so-called ‘real minimum wage’ then the worker at the bottom is much worse than in 1993 and he or she can buy much less. It would take an increase of approximately P1.40 per hour just to get the people on minimum wages back to where they were 20 years ago. The whole world has become more unfair and more unjust than twenty years ago and Botswana is certainly no exception.

When I spoke to one senior government economist about this he said the reason is that during the recession that started in 2008 the government did not want to see more people lose their jobs so it capped minimum wages right up until 2012 when it began to note the obvious fact minimum wages had fallen massively in real terms after the 7-10%  inflation of this period . This meant a very substantial fall in real living standards of the poor during this time was evident. The real minim wage in 2013 was some 28% below the 1993 level after taking into account inflation. If the low minimum wage policy had been associated with a period of rapid employment growth then the policy may be understandable and perhaps forgivable but this has certainly not been the case. Employment has been pretty much stagnant between 2009 and the end of 2013 with 390,00 employed at the beginning of the period  and 399,000 at the end.  Economists who defend the low minimum wage policy argue that the results would have been worse if they had allowed minimum wage to rise.

Nominal and Real Minimum Wages in Botswana

Increased Wage Inequality

But how does the person on minimum wage actually compare with the average Motswana? It would not be quite so bad if everyone were suffering and all earnings were falling after taking into account inflation. But this is not the case. The average Motswana who is in paid employment was 34% better off in 2013 than in 1993 in terms of real cash earnings after taking into account inflation. So in other words while the average Motswana was better off over 20 years the people at the bottom of the wage scale became considerably worse off. What this means is the ratio  of the minimum wage ( when multiplied by a hypothetical 176hours of work per month) to the average monthly income  has been falling dramatically and so Botswana is becoming much more unequal. In 1993 the minimum wage would have given you a monthly  pay packet of P220 whereas the average citizen was making P740 in terms of average monthly earnings. In other words the minimum wage was some 30% of the average. Fast forward to 2013 and the minimum wage would have earned you a monthly pay packet of approximately of P792 as compared to the average citizen who was making cash earnings of P5,009. In other words by 2013 the minimum wage had fallen to16% of the average or just over half what it was in 1993. By this standard  Botswana has become much more unfair and this really needs to be resolved for the most important economic reason.

By any international standards Botswana has one of the lowest minimum wages in the world when compared to the average income. When comparing the minimum wage as a percentage of GDP/capita, a common measure of average income, Botswana comes out as one of the lowest  amongst the 192 members of the to that of other countries. (http://en.wikipedia.org/wiki/List_of_minimum_wages_by_country). Only four or five countries like Kuwait where the minimum wage only applies to foreigners or Uganda which is a least developed country have a lower ratio of minimum wage to average income than Botswana.

What sort of minimum wage policy in Botswana ?

Some economists will tell you that you will get rich if you work hard and save and yes while it is important the most important factor in assuring the prosperity of a nation is peace, order and good government so that the citizen and business can thrive. This sort of policy induced inequality harms Botswana because it undermines the basis of social cohesion and undermines the stability of the nation. To its credit the government has already started moving in the right direction slowly by raising minimum wages since 2012 but this is just not enough. If government is modest in its objectives a P1.40 increase in minimum wages is needed just to return the poorest workers to the 1993 levels of purchasing power. If the government wanted to maintain the same ratio of the minimum to average earnings as existed in 1993 the minimum wage would have to increase to about P9/hour.

Clearly these sorts of increases in one shot would result in unemployment. They need to be introduced with time to allow the private sector to adjust where the sector uses large numbers of unskilled workers who are paid wages that are close to the minimum wage. But the government equally must be seen to recognize that we have a problem that undermines social cohesion and  the peace of the nation. This it must do publicly.

In those industries where there are many workers who are close to the minimum wage and would be effected by an increase such as in diamond cutting which competes directly with India  the government needs to help the union and the employers introduce productivity bargaining and move the entire sector to a tax free export processing zone as is the case in Namibia. (Almost no diamond cutting firms pay corporate taxes so little would be lost in terms of government revenue).

Neither  charity nor good minimum wages … just good jobs!

In the end though the condition of the poor in the country can only be alleviated by sustained economic growth. Minimum wages must protect the weakest in society and the evidence is that they have failed to do so in Botswana which, according to international measures ranks amongst the most unequal nations on earth. In the end though, neither acts of charity nor good minimum wage will help the poor. Workers the world over know that it is good, productive and well paid jobs  that is the only thing that will eventually drag them out of poverty. And in this we have failed the most.

These are the views of Professor Roman Grynberg and not necessarily those of any institution to which he may be affiliated.