Economic Background BOTSWANA. Remember - per capita Gross Domestic Product the per-head value of final goods and services produced within a nation’s boarders

Economic BackgroundBOTSWANA

SOURCE: AFRICAN ECONOMIC OUTLOOK

Remember - per capita Gross Domestic Product the per-head value of final goods and services produced within a nation’s boarders over a given year

◦ is a measure of national income / national output and national expenditure produce in a particular country.

per-capita Gross National Product the per-head value of final goods and services produced by the people of a country over a given year

◦ GNP = GDP + Net property income from abroad◦ This net income from abroad includes, dividends , interest and profit.

GNP includes the value of all goods and services produced by nationals whether in the country or not.

per-capita Gross National Income is the sum of value added by all resident producers plus any product taxes (fewer subsidies) not included in the valuation of output plus net receipts of primary income (compensation of employees and property income) from abroad.


Where have they been?

Botswana: 125% increaseUS: 16.6% increase


Where have they been?

Average Growth Rate 1960-2013Botswana: 5.8%

US: 2.0%


Botswana is 2.28x as big as

Minnesota

SOURCE: BOTSWANA AT A GLANCE

Botswana: Big Picture

Variable BotswanaSub-Saharan

AfricaCountries

Upper-Middle Income

Countries7 County

Metro Minnesota

Land area 582,000 km² 7,689 km² 225,181 km²

Population (Millions) 2.0 911 2391 2.8 (2010) 5.25 (2013)

Population growth 0.9 2.7 0.8 0.8 0.7

GNI per capita (US$) $7,650 $1,350 $6,969 $50,260 (2012) $47,028 (2012)


Botswana: Big PictureVariable Botswana Sub-Saharan Africa

CountriesUpper-Middle Income

Countries

Life expectancy at birth 47 years 56 years 74 years

Infant mortality (per 1000 live births) 41 64 16

Child malnutrition(% under age 5) 11% 21% 3%

Access to improved water sources (% of population) 97% 64% 93%

Literacy (% of population age 15+) 85% 60% 94%

Gross Primary Enrollment (% of school age population)

106% 100% 111%


Botswana: Big Picture

Variable 1992 (annual growth) 2002 2011 (annual

growth)2012 (annual

growth)

Agriculture as a % of GDP 5.2 (-1.1%) 2.6 2.8 (-22.9%) 2.9 (10.2%)

Industry as a % of GDP 55.8 (3.7%) 47.0 40.2 (5.0%) 35.2 (-1.0%)

Manufacturing as a % of GDP 5.5 (7.5%) 6.5 6.4 (10.1%) 6.4 (1.8%)

Services as a % of GDP 39.0 (6.8%) 50.4 57.0 (9.5%) 61.9 (6.7%)

GDP per capita growth 2.6% 5.2% 3.3%


Botswana’s economy today As of 2013, Botswana saw increased GDP growth to 5.4%

◦ Drivers: service sectors (trade, transportation and communication), public and financial sectors.◦ Rebounding mining sector (diamonds)◦ Problems: water and electricity shortages◦ Non-mining sector? This is a key sector to watch due to the increased importance of economic

diversification away from diamonds.◦ New diamond sorting and sales industry. What are possible impacts?


Botswana’s economy today - inequality

Ray (1998)

"economic inequality is the fundamental disparity that permits one individual certain material choices, while denying another individual those same choices."

"economic inequality is a slippery concept and is intimately linked to concepts such as lifetimes, personal capabilities, and political freedoms."





The Lorenz Curve



Lorenz Curve

0

20

40

60

80

100

120

0% 20% 40% 60% 80% 100%

Cumulative Percentage of Population

Cum

ulat

ive P

erce

ntag

e of

Inco

me

Lorenz (Equal) Lorenz (Less Equal)


Lorenz Curve

0

20

40

60

80

100

120

0% 20% 40% 60% 80% 100%

Cumulative Percentage of Population

Cumu

lative

Perce

ntage

of In

come Lorenz (Equal)

Lorenz (Less Equal)

B

Gini Coefficient

A

Gini = A/B

If A = 0, then G = 0(Perfect Equality)

If A = B, then G = 1(Perfect Inequality)

B

Botswana’s economy today – inequality



Middle income status, but challenges remain.◦ Gini coefficient of 0.61 (in US it is 0.41)

◦ The Gini coefficient measures the extent to which the distribution of income among individuals or households within an economy deviates from a perfectly equal distribution.

◦ A Gini coefficient of 0.5 to 0.7 suggests a relatively high degree of income inequality.

◦ Implications?◦ Limited access to credit markets◦ Limited capacity to save◦ For Botswana, what may credit and saving market failures result in?

GNI per capita (2011

PPP)

Share of poorest 20%

Share of richest 20%

Romania 17,433 8.9 36.3Botswana 14,792 2.8 65


Botswana’s economy today - Poverty

◦ Poverty Line◦ a critical threshold of income, consumption, and/or access to goods and services below which individuals are declared to be poor.◦ Represents the minimum level of acceptable economic participation in a given society at a given point in time.◦ Often national poverty lines are based on own criteria:

◦ US: 3x minimum budget for food requirements◦ Botswana?

◦ Head count ratio: HCR◦ Yi = income of person i, n = number of people in society, P = poverty line◦ Head Count = HC = number of individuals i such that Yi < p or the sheer number of people below the poverty line (# of poor)◦ Head Count Ratio = HCR = HC/n

◦ Poverty lines are often expressed in terms of Purchasing Power Parity or PPP Conversion ◦ PPP can be defined as the number of units of a country’s currency needed (pula) to buy the same amount of goods and services

in that country (Botswana) as one U.S. dollar would buy in the United States◦ Ex: A poverty line may be $1.25 a day (PPP). This means someone earning “$1.25 a day” does not literally earn this much,

instead it is the equivalent of what 1.25 U.S. dollars could buy in the United States.


Botswana’s economy today- Poverty

◦ Poverty: 18.4% of the population lives below the national poverty line.◦ 2009 WDI Data

◦ Poverty headcount ratio at $1.25 a day 13.4%◦ Poverty headcount ratio at $2 a day 27.8%◦ Poverty headcount ratio at national poverty line 19.3%◦ Rural poverty headcount ratio at national poverty line 24.3%

◦ 14.5% live of Americans live below the US national poverty line. US Poverty line was about $24,000 for a family of 4 in 2013


Botswana’s economy today - HDI

Middle income status, but challenges remain.◦ Unemployment rate of 17.8%◦ HIV/AIDS prevalence of 23.4%◦ Human Development Index of 0.683, ranked 109th in 2013

◦ HDI ranks all countries on a scale of 0 (lowest human development) to 1 (highest development) based on the goals or “end products” of development:◦ (1/3) longevity: life expectancy at birth◦ (1/3) knowledge: expected years of schooling & mean years of schooling ◦ (1/3) standard of living: real per capita income adjusted for the differing PPP of each country’s currency

Botswana’s economy today - HDI

Source: World Development Indicators and UN Human Development Report

Life Expectancy at birth

Expected years of

schooling

Mean years of

schooling


PPP)

HDIValue

HDI Rank

2000Romania 70.5 11.7 9.9 9,796 .706Botswana 48.7 11.7 7.5 9611 .560

2013Romania 73.8 14.1 10.7 17,433 .785 54Botswana 64.4 11.7 8.8 14,792 .683 109


PPP)

Share of poorest 20%

Share of richest 20%

Romania 17,433 8.9 36.3Botswana 14,792 2.8 65


Recent Developments in industries

Diamonds◦ Sector grew by 6.9% in 2013.◦ DeBeers relocated its Diamond Trading Company’s aggregation, quality assurance and sight-preparation

operations from London to Gaborone.◦ Diamonds account for over 70% of export earnings

Non-mining (primarily service sectors) ◦ Slower growth in 2013 due to water and electricity shortages


Government Policy Monetary policy: type of stabilization policy that involves changes in the quantity of money in circulation or in interest rates or both

Fiscal policy: type of stabilization policy that involves changes in taxation or government spending, or both

◦ Real GDP = C + I + G + (X-M)◦ Use of either govt. spending (govt. purchases of final goods/services and gov. taxes) or tax policy to

stabilize the economy.


Fiscal Policy Botswana is known to have a ‘strong’ fiscal policy

◦ Government revenues have been strong due to diamond export revenue,◦ Prior to the 2008 global financial crisis, they have run government budget surplus.

◦ Botswana’s central government is a major employer ◦ 20% of total employment, compared to roughly 9% in U.S.◦ The government’s wage bill accounts for about 50% of government expenditures.

◦ Relatively sound tax policy. Key features:◦ Value Added Tax (VAT) of 12%

◦ A type of consumption tax that is placed on a product whenever value is added at a stage of production and at final sale. VAT is most often used in the EU. The amount of value-added tax that the user pays is the cost of the product, less any of the costs of materials used in the product that have already been taxed.

◦ Ex: when a television is built by a company in the EU, the manufacturer is charged a value-added tax on all of the supplies they purchase for producing the television. Once the television reaches the shelf, the consumer who purchases it must pay the value-added tax that applies to him or her.

◦ Progressive income tax. ◦ Progressive tax takes a larger percentage of income from high-income groups than from low-income groups and is based on the concept of

ability to pay. ◦ Ex: tax low-income taxpayers at 10%, middle-income taxpayers at 15% & high-income taxpayers at 30%. The U.S. federal income tax is

based on the progressive tax system.


Monetary Policy Monetary policy objectives are to achieve a targeted inflation rate between 3-6%.

◦ During the first half of 2013, the inflation rate rose above 6%, but has fall back to “normal range”◦ The currency in Botswana is the pula (means "rain" in Setswana)◦ They employ a crawling-peg exchange rate regime.

◦ Crawling-Peg: A system of exchange rate adjustment in which a currency with a fixed exchange rate is allowed to fluctuate within a band of rates. The par value of the stated currency is also adjusted frequently due to market factors such as inflation. This gradual shift of the currency's par value is done as an alternative to a sudden and significant devaluation of the currency.

◦ Currently◦ e1 = price of a foreign currently ◦ e1= $0.104/ per 1 Pula ◦ e2 = price of US dollar◦ e2 = 9.62 pula/ per $1.00


How a crawling peg works

Billions of pula

e=$/pula =price of pula

$/pula from e1 to e2 Depreciation of the $ against the pula Appreciation of the pula against the $

o Rise in price of pula

$/pula from e1 to e3 Depreciation of the pula against the $ Appreciation of the $ against the pula

o Fall in the price of a pula

A change in the exchange rate: an appreciation of one currency and depreciation of the other!

Q

Spula

Mkt for pula

Q

e1=$1/pula

e2=$2/pula

Q

e3=$.50/pula

$ ap

prec

iate

aga

inst

pul

a pu

la d

epre

ciat

e ag

ains

t $



Billions of Pula

e= $/Pula price of Pula

Dp

Mkt for Pula

Sp

Par value $.10/Pula

Mkt value

Pula

dep

reci

ate

agai

nst $

• If Botswana has an overvalued exchange rate ) Botswana’s government wants to keep the value of the pula high or defend against depreciation.

• Why? May want a “strong” Pula to purchase imports

• Thus Botswana may use a crawling get to “peg” the currency at about 9.6 Pula per $.

• Botswana may intervene to defend this value against depreciation.



Billions of $

e= Pula/$ price of $

Botswana fixes the exchange rate to 9.6 pula per $ with a band of +- 3% (roughly .10 pula)

However S&D pressure are trying to push the rate to 10 pula/$

o Doing so will depreciate the pula o Take more pula to buy 1$

Intervention: monetary authorities intervene o Sell $ ( S$): sell 20 billion $ into the

foreign ex mkt at the rate of 9.9pula/$ o Buy pula: $20(e) =$20(9.9/$) = 198 pula

from the foreign ex mkt.

40

D$

Mkt for US$ S$

10.50

20

9.60 9.90

9.30

Pula

dep

reci

ate

P

ula

appr

ecia

te


Regional cooperation and trade Botswana is a member of the South African Customs Union (SACU)

◦ A customs union is a type of trade bloc which is composed of a free trade area with a common external tariff◦ Members: Botswana, Lesotho, Namibia, South African and Swaziland◦ This is the oldest existing customs union (1910)

Botswana is a member of South Africa Development Community (SADC)◦ Main objectives of SADC: achieve development, peace and security, and economic growth, to alleviate

poverty, enhance the standard and quality of life of the peoples of Southern Africa, and support the socially disadvantaged through regional integration, built on democratic principles and equitable and sustainable development.

◦ Members: Angola, Botswana, Democratic Republic of Congo, Lesotho, Madagascar, Malawi, Mauritius, Mozambique, Namibia, Seychelles, South Africa, Swaziland, United Republic of Tanzania, Zambia, Zimbabwe

Major trading partners:◦ South Africa is Botswana’s largest source of imports (63% in 2012) followed by the UK (17%).◦ The UK is Botswana’s largest destination for exports (60% in 2012) followed by South Africa (13%)◦ Diversification??

1. Free trade area

2. Customs union

3. Common market

4. Economic Union

Same Internal barriers

x x x XSame External barriers

X x xFree factor mobility x XCommon monetary Policy

x

Regional cooperation and trade – 4 types of preferential trade agreements

Customs Union2. Customs union

•Eliminates barriers to trade in goods between or among its members•Adopts a common external tariff that all members of the customs union apply to trade from countries outside the union.

• The common external tariff must on average be no higher than the pre-union tariff

•Ex: • Andean Group currently: Bolivia, Venezuela,

Colombia, Ecuador • The Southern African Customs Union:

South Africa, Botswana, Lesotho, Namibia and Swaziland

Same Internal barriers

xSame External barriers

XFree factor mobility

Common monetary Policy


Natural resources Botswana is a signatory to a number of international environmental agreements and has developed many national policies on sustainable resources.

◦ 1/3 of Botswana’s landmass is under some form of conservation ◦ 17% national parks and game reserves◦ 20% wildlife management areas◦ 1% forest reserves.

Botswana is subject to drought◦ 77% of Botswana’s landmass is The Kalahari Desert

Land degradation and pollution are also problems



Political environment 1965: Independence

◦ Free and fair elections have been held since that time◦ Botswana Democratic Part (BDP) has largely remained in power since that time


Building Human Capital Education: Botswana provides free basic education

◦ Universal Primary Education: 90% of students age 7-13 were in school in 2011◦ Literacy rate: increased from 34% to 83% from 1996-2010

◦ Still a ways to go!

◦ Education expenditures: 25% of total budget.

Health◦ HIV/AIDS prevalence rate of 23.4%◦ Universal access to anti-retroviral therapy (96% of those eligible, received it)◦ Government funds about 77% of HIV/AIDs programs◦ 95% of population live within 15km to public health facility◦ Other challenges: high birth rate, young structure of the population, tuberculosis (TB), malaria.


Combating Poverty Poverty had declined between 2002/2003 and 2009-2010

◦ National poverty line: fell from 30.6% to 19.3%◦ Extreme poverty (below 1$/day): fell from 23.4% to 6.5%

◦ Rural extreme poverty: 8.4%◦ Urban extreme poverty: 2.7%

◦ Unemployment rate: 17.8% is persistent◦ Youth unemployment rate (20-24 years of age): 34%◦ Reflection of mismatch between education and employment opportunities.◦ Government steps: programs to revise school curriculum, provide internships, temporary job program.


Gender Equity in Botswana The Constitution guarantees equality of all persons regardless of gender. To help ensure this, the government has signed and ratified many international conventions on gender equality.

Challenges: violence against women and lack of political representation


Global Value Chains Key points

◦ Diamonds: Botswana’s exports in diamonds (mostly raw) accounts for the strong majority of total value of exports in 2012.◦ Govt. has used revenues to finance infrastructure and human capital development◦ Mining may also be responsible for environmental degradation and ill health. ◦ Relocation of Diamond Trading Company from London to Botswana and other efforts to increase local processing is expected to

help boost export value.

◦ Textiles and vehicles: Important for job growth, but these industries have weak prospects for growth. Why? Import cost of raw materials are very expensive and the value added by local labor is very low.

◦ Beef: exports to EU◦ The Botswana Meat Commission (BMC) is a state monopoly with the sole responsibility for marketing beef outside Botswana. This

monopoly is regarded as a problem…

◦ Tourism: Important for growth◦ Challenges: diversifying away from wildlife, service capacity and retaining revenue within Botswana


Industry work groups Now: gather in your small industry groups

◦ Agriculture P. 73-77: Libby Abby, Kacie Pahl and Jordan Skeie◦ Mining P 78-80 and Energy P 80-82: Ben Bridell, Rachel Langhough, Mitchel Thurner◦ Manufacturing P 82-84 and Services P 84-end (Services focus on tourism): Kaitlyn McGinnis and Jacob

Moren

◦ As a group compile what you know and develop a short presentation for the class. ◦ Key features?◦ Challenges? ◦ Opportunities?◦ What questions will you bring to Botswana?

Documents

Economic Background BOTSWANA. Remember - per capita Gross Domestic Product the per-head value of final goods and services produced within a nation’s boarders