SECTION A (50) Read the article below and answer ALL the questions in this section BOTSWANAS ECONOMIC POLICY AND DEVELOPMENT Introduction Botswana is a landlocked country situated in Southern Africa, with a population of about two million people. Despite initial adverse conditions, which include minimal investment by the colonial authorities during the protectorate period, being surrounded by hostile minority-ruled racist countries, and being prone to drought, agricultural pests and animal diseases, Botswana is counted among the top economic performers in the world for the record it has achieved in the last forty years. At independence in 1966, the country was one of the poorest in the world with a GDP per capita income of about USD 100; and there was only 6 kilometres of tarred roads. By the early 1990s, however, Botswana had attained middle income status with a GDP per capita income of about USD 6000, and there are many thousands of kilometres of bituminised roads. Botswanas Economic Development Botswana is renowned for its consistent sound macroeconomic policy, good governance and for its diamond industry, being the worlds largest producer by value. The role of diamonds in economic development is addressed below. Much of the progress made in economic, social and political development is measured and reflected in statistics on GDP, per capita income, employment rates, foreign exchange reserves, levels of poverty, educational enrolment and attainment, literacy rate, mortality rate, life expectancy, access to health facilities, potable water and electricity, indices of human development, and ratings on transparency, governance and credit-worthiness. Observers have also noted that Botswanas record of close to four decades of rapid economic growth has few parallels in modern economic history. Even more notable is the fact that Botswana has not succumbed to the resource curse, which has often derailed resource-rich countries from transforming mineral wealth into sustained economic development. Botswanas exceptional record of growth derives first and foremost from the sound, growth promoting economic policies which the country pursued. These policies were shaped by leaders who had their origins in, and were conditioned by, traditional society. Their leadership style reflected the broader interests of the democratic nature of Botswana society. The backbone of economic policy management is the institution of National Development Plans (NDPs), the first of which was in place even before independence. Thus, the pre-requisites for sound policies were in place well before diamonds became an important factor. The first Bechuanaland Protectorate Development Plan, 1963-68 reported that minerals contributed only 5.5 percent to national exports, with the bulk coming from asbestos. Encouraging prospects for both copper and coal were reported, but diamonds were not mentioned, partly because prospecting had not yet yielded a desirable result. The process of preparing NDPs has served to keep government expenditures from growing faster than government revenues over the long term. Surplus revenues have resulted in the accumulation of government savings in the form of foreign exchange reserves, which are currently equivalent to approximately 30 months of import cover of goods and services. This saving of government revenues in good years has provided an important cushion that has enabled the countrys policy makers to deal with intermittent downturns in the diamond market, without having to resort to structural adjustment programmes and major contractions in planned government expenditures. It is important to note that Botswanas approach to financial prudence was developed in the context of limited resources. Even when converted into todays prices, average annual expenditure by the Government in the period 19661970 was approximately P800 million (about USD 130 million), or less than three percent of the amount announced in the 2008 Budget Speech. In the same period, donor grants averaged 60 percent of annual revenues, and the first fiscal objective was to achieve financial independence by eliminating reliance on grants for recurrent funding. This was achieved not long after independence and, by the early 1970s, the special funds to service public debt and cover revenue shortfalls were established. It is clear from these early initiatives that the principles of fiscal sustainability were standard practice in Botswana before they became widely fashionable elsewhere. Forty years on, the situation has changed favourably. Since the early 1980s, the annual budget has been in surplus on all but three occasions, and fiscal policy has evolved to keep the principle of prudence relevant to changing circumstances. Fiscal policy is now based on some rules aimed at limiting total public expenditure, containing budget deficits within reasonable limits, and ensuring that the revenues from diamonds, which is an exhaustible resource, are put to productive use. 2 Monetary & exchange rate policies Since 1976, monetary independence has been a part of the policy mix. For many years the objective has focussed on maintaining inflation at low, predictable and sustainable levels. But, as with fiscal policy, the conduct of monetary policy has evolved over time and will continue to do so. The objective of achieving and maintaining price stability has proved a challenging assignment for the Bank of Botswana. The economy is open and very susceptible to external inflationary shocks, such as the recent experience of rising oil and food prices. In addition, there have been domestic price shocks, such as the introduction of Value Added Tax (VAT) in 2002 and the 2004 and 2005 currency devaluations, which were followed by the adoption of the crawling band exchange rate regime. It may be asked if the central bank is not helpless in the face of such developments. The answer is that, while the initial price shock must be absorbed, there is much that can be done, through monetary policy, to control how shocks affect the economy more widely. In this respect, a key component of monetary policy in Botswana has been the annual Monetary Policy Statements and the mid-year reviews, which help to explain recent policy developments; they also influence expectations on future inflation trends and help contain second round effects. Closely related to monetary policy, there is the hotly-debated question of setting an appropriate policy for the value of the exchange rate (Pula). This debate will never end in universal consensus, for the simple reason that people buy and sell currencies for diverse reasons. However, in the context of Botswana, it is difficult to argue against the priority accorded to maintaining the real effective exchange rate at a level that is supportive of the competitiveness of local industry. This has meant taking measures to avoid what is referred to as the Dutch disease, where allowing the exchange rate to be determined by large inflows of diamond revenues would have severely compromised external competitiveness. In any case, even when appropriately set, the exchange rate cannot, by itself, ensure competitiveness. Ultimately this requires attention to the more fundamental issues of productivity. The economic role of diamond mining The role of diamonds in developing Botswanas economy is largely self-evident, particularly for those familiar with the country. The development of the capital city, Gaborone, is a good case in point. The original town planners thought that the population of the city would grow to 30 000 by the late 1980s, but it had grown far beyond the number at the time. In fact by 2001 the population had risen to about 190 000, and this does not include those living in suburban areas around the city. Currently, diamonds contribute approximately 50 percent to government revenue, 30 percent to GDP and comprise about 80 percent of exports. The economic forecasts for NDP 6 (1985/861990/91) assumed that diamond output had already reached a plateau at around 15 million carats per annum; but production more than doubled in 2007 to about 33 million carats. In reality, the much-talked-about failure to diversify the economy is in large part due to the continued success of diamond mining rather that a lack of growth in other sectors. The Government is the single most important mechanism linking the mining sector to the rest of the economy. This is done by channelling diamond revenues to other sectors of the economy through investments in human capital formation, infrastructural development and incentives for non-mining activities. The substantial human development has transformed a largely rural, agrarian population into an increasingly educated and trained urban labour force. While the scourge of HIV/AIDS threatens to turn back much of the human development progress, there continues to be investments in health and skills development. Although income inequality, as measured by the Gini coefficient, is high and has not been reduced over the past two decades, the growth of real incomes has been spread throughout the economy, and a substantial portion of the population has been rescued from poverty. The one area where diamonds have not directly contributed in proportion to the importance of the sector is employment. According to the most recent estimates, mining accounts for only 4 percent of total formal sector employment, and many of these employees work for non-diamond mining operations. Indeed the creation of additional employment opportunities is a principal objective of the ongoing beneficiation initiative. Conclusion Recent indicators of renewed growth in the non-mining private sector are encouraging; and some opportunities exist across a range of Botswanas economic sectors. First, benefits from diamond mining should spread through manufacturing into increased demand for related services. Second, mining is rapidly diversifying away from diamonds to a variety of other minerals, with potential for supporting major energy-related projects to serve the region. Last but not least, recent studies have indicated tremendous potential for diversified development of the tourism sector. There is no doubt that, in order to seize these opportunities, Botswana must be fully aware of the constraints that need to be overcome, and some of them require taking difficult policy decisions. In recent reviews, both Moodys Investors Service and Standard & Poors have made it clear that Botswana needs to step up at least one gear if there is to be an upgrade. It goes without saying, therefore, that a lot of progress still needs to be made to maintain the current sovereign credit ratings. Those tasked with maintaining sound macroeconomic policies also face challenges. The 3 Government needs to plan for a situation where revenues from diamonds will start to slow down. This will require a proper control of spending programmes and possibly a build-up of adequate foreign exchange reserves or savings. For the Bank of Botswana, the challenge of containing inflation, and ensuring that it is low, stable and predictable is unending. Discernible progress is being made on all these fronts, and this should secure good prospects for Botswanas economy. Adapted: Linah K. Mohohlo, Governor, Bank of Botswana, Gaborone; Botswanas economic policy and development QUESTION ONE (25) Botswana is counted among the top economic performers in the world for the record it has achieved in the last forty years. By 1990s, Botswana had attained middle income status with a GDP per capita of about USD6000 and many thousands of kilometres of bituminised roads. 1.1 In that regard, research on the main macroeconomic policies that have led Botswana to be ranked among the top economic performers in the World. (15) 1.2 During the 1990s Botswanas per capita (in USD dollars) was more than 10 times larger than the per capita GDP in Mozambique. Does this mean that everyone in Botswana was at least 10 times better off than everyone in Mozambique during the 1990s? Research and substantiate your answer with relevant statistics. (10) QUESTION TWO (25) Botswana recorded close to four decades of rapid economic growth and it is extremely well endowed with minerals (diamonds) and other natural resources. 2.1 Using the given article research on whether natural resources are a necessary or sufficient condition for economic growth? Substantiate your solution with facts in the article and any other examples in the World. (15) 2.2 Botswana is a good case of how good economic management policies can make Africa a better place to be. In that regard, discuss possible economic lessons that can be drawn from the article. (10) SECTION B (50) Answer ALL the questions. QUESTION THREE (25) One of the main macroeconomic objectives of any country in the World is economic growth as measured by the gross domestic product (GDP) per capita from one year to the other. 3.1 Research on the various sources of economic growth in your country and highlight the key drivers of economic growth in your country. (10) 3.2 Critically evaluate the effectiveness of the current economic policies ultilised by your country to improve economic growth and make recommendations on how to improve these policies. (15) QUESTION FOUR (25) 4.1 In many developing countries government intervenes in the setting of prices through price ceilings. Research on the rationale of setting price ceilings in an economy using evidence from three different countries. (10) 4.2 Discuss the FIVE (5) categories of price elasticity of demand and show how elasticity of demand concept can be used in setting prices for consumer goods, at Shoprite Supermarket, in Durban South Africa. (15)