Lessons learnt Bolivia: Financing the extension of social protection

38 ESS-33 Historically, diamonds have accounted for more than 90 per cent of total exports, though after 2003 their participation decreased to 65 per cent in 2008 figure 15. This declining participation of diamonds in total exports was the result of two factors. First, the demand for diamonds on the international market fell sharply during the financial crisis of 2008. 9 Second, other exports from Botswana grew at very dynamic rates that were well above the performance of diamonds. While diamond exports increased by an average of 5.5 per cent annually between 2001 and 2008, exports of copper-nickel matte and textiles grew by 43 per cent and 49 per cent respectively. Figure 15. Botswana: Diamond exports as a percentage of total exports, 2001-2008 Source: AfDB et all, 2010. Two additional features characterize the economy of Botswana. The first is that the unemployment rate was estimated at 7.5 per cent in 2007, with some sources citing even a two-digit rate. For the years for which data are available, the average unemployment rate between 1990 and 2006 was 21.4 per cent. The second characteristic is the low inflation rates that have prevailed since 1997. With the exception of 2006 11.6 per cent and 2008 12.7 per cent, the consumer price index increased at an average of 8.4 per cent between 1997 and 2009. With regard to fiscal matters, from Independence to 1995 the economy experienced a great accumulation of international reserves and a sustained fiscal surplus. Despite fast-growing fiscal revenue mostly derived from diamond export taxes and accelerated economic growth, the Government maintained a cautious policy and no fiscal deficits were ever observed. By 2008 fiscal revenue accounted for 29.7 per cent of GDP, with an average of 35.7 per cent of GDP between 1995 and 2008 figure 16. The participation of the Government in the economy is also high for a developing country. In 2008 public spending accounted for 38 per cent of GDP, while between 1995 and 2008 the average participation of the public sector was 36.4 per cent. The 2008 figure suggests 9 See, for instance, http:www.nytimes.com20090220businessworldbusiness20iht- diamond.4.20339704.html. ESS-33 39 that public spending is recovering after three years in which it averaged 32 per cent of GDP. During the 1990s public expenditure stayed around 40 per cent of GDP. Figure 16. Botswana: Fiscal revenue and public expenditure as a percentage of GDP, 1991-2008 Source: Central Bank of Botswana, 2010; International Monetary Fund, 2010b. The Government of Botswana received most of its revenue from diamond exports. This strong source of income generation from the countrys most important product is the result of an agreed 5050 joint venture between the Government and the De Beers Botswana Mining Company Debswana. The initial arrangement, which set up a 2080 agreement, was later the subject of new negotiations and amendments, as a result of which Botswana increased its equity to 50 per cent by buying another 30 per cent of the company’s shares Gaolathe, 1997. Regarding the successful negotiations between the two parties, Maipose 2008, pps. 10-11 explains the situation in the following way: “One of the most important policy choices was the decision to negotiate for joint partnership with the mining companies. These agreements entailed leaving the management of the enterprises to private partners. Retrospectively, they can be viewed as the start of a “smart partnership” between the private and public sectors. ... Some observers wonder how the Government managed to negotiate such a good deal with a multinational company. T he explanation lies in the nature of Botswana’s political economy, the nature of the interests at work, and demonstration effects outside Botswana. Asset owning by the state is traditionally legitimate; negotiations leading to partial state ownership of mines reflected the s tate’s traditional role as a conduit for redistributive policies...The wind of nationalization sweeping across the developing world in general and Africa in particular provided both leverage for Batswana negotiators and a good reason for the foreign investor to want to circumvent nationalization. As a very poor country, Botswana risked scaring off foreign investors, who were perceived as crucial to development... Afraid of the consequences of nationalization elsewhere and in order to fortify what turned out to be a profitable business interest, the mining companies were willing to give more 40 ESS-33 shares to the Government … Thus the outcome of the negotiations reconciled the two sides’ interests.” ODA was a significant contributor to the creation of fiscal space in Botswana during the early years of independence; today, however, the inflow of grants and external resources is minimal when compared to those historical figures. As a proportion of the gross national income GNI, ODA averaged 10.9 per cent between 1970 and 1989, after which it started to decline sharply to an average of 1.8 per cent of GNI between 1990 and 2008. In 2008 ODA flows recovered and accounted for 5.4 per cent of GNI, due in large measure to external assistance in the fight against HIV and AIDS figure 17. The generally declining trend in ODA was, however, offset by rapid increments in exports, so in terms of fiscal space it is possible to talk of a “substitution effect” between the two flows of funds, given the strong link between exports and government revenues. Figure 17. Botswana: ODA as a percentage of gross national income, 1960-2008 Source: World Bank, 2010. Another relevant issue in terms of the generation of fiscal space was debt management, mainly characterized by prudence even during boom periods. External debt, for instance, fell from a maximum of 47 per cent of GNI in 1973 to 3.6 per cent between 2006 and 2008. As a result, the economy experienced high levels of gross savings, which jumped from 31.6 per cent of GDP in 1975 to 45.4 per cent of GDP in 2008. In addition, debt service payments fell considerably, to just 0.7 per cent of total exports in 2007 figure 18.