Botswana – A case for nationalisation?

In the ANCYL Discussion Document, under the section “Nationalisation to increase the State’s fiscal capacity and better the working conditions”, Botswana is presented as a case “on why nationalisation of strategic minerals can benefit the South African State” However, it must be noted that Botswana’s mining operations consisted from the outset of a joint initiative between the private sector and government. The operations were not nationalised. The revenue sharing agreement within a predictable regulatory and tax environment has given both parties a stake in the continuing success of the mining operations. According to the Deputy Permanent Secretary of the President in Botswana, “All major mining ventures in Botswana have always been run as private companies in which Government has significant shareholding... In the case of Botswana, Government has had an arms length approach in the day-to-day operations of the mining companies”

Botswana’s current model, however, is not sustainable. Diamond mining accounts for over 38 per cent of GDP and over one-third of the government’s revenues. With the government receiving revenue from mining activities, a paradox has emerged where there is a high level of government expenditure but a low level of taxation. This leads the majority of people in Botswana to think that they are getting something for nothing. They do not realise that the services currently provided by the government are being funded by revenue from diamonds as opposed to taxes.

In an economy, private sector investment is the real driver of growth and employment. A government’s high levels of spending crowd out private sector investment and inhibit future economic development by perpetuating resource dependency. Moreover, now that diamond revenues have stabilised and are expected to decline within the next few decades, the current size and scope of Botswana’s public sector is not only unsustainable, but also undesirable if it is to switch to a more balanced and modern economy. Considering the low level of private activity in the economy and the resultant relatively low tax base, Botswana’s welfare hangs in a precarious balance. The government needs to diversify the economy by creating the conditions necessary for the private sector to thrive and to reduce its reliance on an exhaustible resource.

Author: Jasson Urbach is an economist with the Free Market Foundation. The above is an excerpt from the chapter, Problems with State Ownership of Enterprises, he wrote for the recently published FMF book, Nationalisation.

FMF Policy Bulletin/ 22 February 2011