Social protection financing and expenditure

52 ESS-33 c Reduced debt and debt service payments. The Government was able to reduce its external debt and debt payments in such a way that the latter constitute less than 1 per cent of current exports. 13 This situation strengthens the fiscal position of the Government and opens up the possibility of allocating more funds to development- oriented activities. d Declining dependence on ODA. The country also made strategic use of international grants. During the first years after Independence, massive amounts of ODA were critical to finance public projects. As Botswana progressed and its exports grew, the country started a substitution process between financial grants and export earnings. The result of this long-term process was an enhanced capacity of the Government to collect revenues and to expand its public spending. When compared to other African nations, revenue collection in Botswana is very much more efficient. With regard to public spending, expenditure remained very similar in GDP terms between 1995 and 2008. By 2008 government spending was 38.4 per cent of GDP, 1.2 percentage points below the 1995 level. Fiscal policy was characterized by strict discipline and prudence, despite the rapid growth of tax revenue collection during the last three decades. The enhanced financial capacity of the Government of Botswana was, in fact, accompanied by an increase in social spending allocations within the public budget. Although in net terms government spending remained practically the same from 1995 to 2008, social spending gained 1.9 percentage points of GDP and social protection 2.9 percentage points. 14 Despite the net increments in those areas, the level of social protection can be considered low, given the relatively higher GDP per capita that Botswana enjoys compared to its closest neighbours. In comparison with other nations with a much lower level of development, such as Cape Verde and Lesotho, social protection in Botswana is substantially lower. Cape Verde, with a per capita GDP 3.8 times lower than Botswana, allocated 7.3 per cent of GDP to social protection programmes, while Lesotho, with a per capita GDP 11 times lower, assigned 9.3 per cent of its GDP to social protection during the second half of the 2000s. Despite significant gains in investment in health between 1991 and 2008, for instance, current levels of expenditure on public health in Botswana 3.3 per cent of GDP lagged behind international recommendations around 5 per cent of GDP. There is still considerable room for increasing social insurance and social assistance, given that public spending on both is in the range of 0.8 to 1.1 per cent of GDP. This is clearly not enough for a country where 31 per cent of the population lives below the poverty line. In sum, the positive conditions experienced by Botswana after its Independence in 1966 created an appropriate environment for stepping up government spending. The Government took advantage of these favourable conditions and expanded revenue collection and public spending, with important allocations of resources to the social sectors. Expenditure on the social sector actually increased as a share of GDP and as a share of total spending, a reflection of strong political will. However, two important factors characterized investment in social protection: 13 International rating agencies usually evaluate Botswanas sovereign credit with an A. 14 Housing, on the other hand, decreased by 2.8 percentage points. ESS-33 53 a With the exception of education 8.5 per cent of GDP in 2008, the level of investment in other social areas has lagged behind optimal levels. In the specific case of social insurance and social assistance programmes, current allocations of resources are low considering the existing poverty conditions and high GDP per capita in the country. b The 2000s yielded a moderate performance in the creation of fiscal space for social protection. 4.4. Policy considerations and lessons learnt 4.4.1. Policy considerations Recent economic conditions, characterized by an international crisis that led to a significant decline in demand for diamonds, have created a climate that is conducive to a review of Botswanas overall social policy. The comparison of the countrys high GDP per capita with its moderate to high poverty rates provides the rationale for stepping up social protection allocations, particularly in the form of social assistance and social insurance. The experience of Botswana shows that rapid growth is not sufficient to reduce poverty, and it is therefore important to strengthen the Governments capacity to inject funds into social protection programmes. Given their current level, some of the typical fiscal space generators such as debt relief and ODA are likely to play a very limited role in the foreseeable future. Alternative policy measures to create additional fiscal space for social protection programmes might include: a a production diversification strategy. The decline in fiscal taxes following the decline in diamond exports is a signal that strong dependency on a single product is undesirable in terms of economic sustainability. Certainly the country is opening up other sectors, such as tourism and textiles, but mining still accounts for 44.7 per cent of GDP against 47.9 per cent in 2001. A review of the diamond agreement might also be considered. b the recent increase in the value added tax from 10 per cent to 12 per cent 15 , which is seen as an excellent opportunity for raising allocations for social protection. c the re-evaluation of existing social assistance programmes. The current system is highly fragmented, with multiple initiatives of a non-conditional nature and very different target groups. In some cases coverage is quite low. Some programmes may remain, but the country should start thinking in terms of a different generation of public programmes, including the conditional cash transfer type. This could be an interesting option for a country that ranks 125th in the Human Development Index and where poverty affects over 30 per cent of the population. The improvement of education and health conditions demands the implementation of more cost-effective programmes to improve the living standards of the population. A more integrated strategy would also yield benefits in terms of reduced administrative costs, better coordination and improved targeting. 15 http:www.finance.gov.bwindex.php?option=com_content1parent_id=334id=358 54 ESS-33 d the creation of a general social security pension scheme. This is a solution that the Government of Botswana might wish to take into consideration as a means of expanding its fiscal space.

4.4.2. Lessons learnt

Botswana is an example of economic growth and strategic fiscal policy combining to improve the allocation of resources for social protection. Between 1990 and 2008 expenditure on social protection grew faster than any other social category in terms of both GDP and GDP per capita. Total expenditure on the social sector, however, has remained stable over time, so that the increments in spending on social protection seem to be more the outcome of reduced spending on housing and education in GDP terms than of an expansion in every component. Compared with neighbouring countries that have shown slower economic growth, Botswanas allocations of resources to social protection are lagging behind – although it is important to recognize the significant efforts that have been made in the last two decades. Lesson 1 The case of Botswana shows that strategic fiscal management is essential for expanding fiscal space. This can be observed in two areas. First, the diamond agreement with De Beers was essential for the expansion and consolidation of fiscal revenue. Botswana proved that win-win strategies can be implemented in the kind of context that it enjoyed at the time and, even more important, that agreements can be re-negotiated in order to obtain more advantageous conditions. This is a good example for mineral-driven economies that decide to opt for joint ventures between the Government and the private sector to exploit their resources. Lesson 2 The second issue is macroeconomic boom management. Instead of expanding public spending in the same proportion as revenue collection, the Government of Botswana has opted for a prudent policy of expanded spending to generate fiscal surpluses. Lesson 3 Botswana has achieved important goals in the expansion of social protection, but more effort and political will are still required. The country has a wide and varied list of social programmes that target practically all the main vulnerable groups of its society. This is a good first step. However, the scope and coverage of some of these programmes such as home-based care are limited, while others such as the orphan care programme and old- age pensions performed according to their planned objectives although universal coverage has still not been achieved in the case of old-age pensions. Given the serious socioeconomic problems facing Botswana and the outstanding production dynamics it has enjoyed for almost four decades, the first impression is that in the countrys favourable output and fiscal circumstances additional funds should be allocated to social protection and social assistance. ESS-33 55 Lesson 4 One may hypothesize that macroeconomic management has perhaps been too prudent. With the exception of education, Botswanas social policy lacks the ambition to expand budgets in key areas such as health and social security, both of them critical for the development of the countrys human capital. This has occurred despite the fact that the share of social expenditure in total spending has risen, reflecting the existence of a strong political will but with tight limits. The most evident example of this situation is the absence of a contributory social security scheme, which could be oriented towards providing protection for the middle class, as well as to complement the current components of the social protection floor.