Growth Paths Based on the Use of Rents

4At the time of independence, Mauritius (1968) and Botswana (1966) were among the poorest countries in the world and had well-known vulnerabilities. Mauritius had an agricultural economy that was heavily focused on sugar, which accounted for 20% of GDP and over 60% of export earnings, and that was vulnerable to terms of trade shocks; it also displayed high population growth, ethnic tensions, and a very high unemployment rate, all of which resulted in high volatility. In 1961, and again in 1972, two Nobel Prize winners (Meade for economics and Naipaul for literature) predicted that Mauritius’s economy would never take off. In Botswana, the economy was limited to the role of providing a low-cost labor pool to apartheid-era South Africa (Tsie 1995). The country imported all its consumption and exported all its production (Harvey and Lewis 1990), and social indicators seemed extremely unfavorable to economic development. When the colonial authorities left Botswana in 1966, their mindset, in the words of former President Masire, could be summarized as, “Nothing happens there.”

5Despite this pessimistic outlook, between 1980 and 2009, average GDP growth was 5% in Mauritius and 6.8% in Botswana (the highest in the world) while average per capita GDP growth was 3.8% and 4.3%, respectively, or approximately a three-fold increase in per capita income over that period. In terms of per capita income, Botswana and Mauritius were ranked 66th and 67th, respectively, in the World Bank’s 2010 world rankings, behind a single African country, Gabon, which, unlike these two countries, benefited from rising oil prices without suffering the impact of the international crisis. [2] In terms of human development, Mauritius ranked 78th in the 2011 world rankings, ahead of all other countries in Africa and the Indian Ocean with the exception of the Seychelles and Libya, while Botswana was ranked lower, taking 118th place in the world and 6th place in Africa. [3] Finally, in terms of governance, the Ibrahim Index ranks Mauritius 1st and Botswana 3rd (behind Cape Verde) in Africa. [4] The prediction by Meade et al. (1961) and Naipaul (1972) and President Masire’s comment seem ironic in the light of these results and are often cited in support of the “miraculous” nature of the development of both Mauritius and Botswana. [5]

The Miracle of Development in Botswana and Mauritius: Contrasting Diversification GDP Breakdown by Sector in %

The Miracle of Development in Botswana and Mauritius: Contrasting Diversification GDP Breakdown by Sector in %

6In both countries, this miracle was made possible by decades of structural transformation. The Mauritian economy, which was initially centered on agriculture and in particular sugar cane farming, diversified significantly. After the country first embarked on industrialization, a competitive service sector emerged with, in particular, the introduction of the free trade zone (“Export Processing Zone,” FTZ) in 1980, inspired by the Taiwanese model, and tourism. In 2009, sugar represented less than 3% of GDP, while textiles exceeded 5% and tourism 10%. The FTZ, which in the meantime had become an offshore, or global business sector, now numbers more companies exporting services (financial services and outsourcing) than companies specializing in the trade in goods. This structural transformation emphasizing trade was accompanied by a rapid increase in trade openness.

7In Botswana, while the share of agriculture in the economy exceeded 40% at the time of the country’s independence, it represented only 2.2% of GDP on average during the 2000s. Although livestock farming played (and continues to play) a key role in the country’s social structure, it has become marginal in the breakdown of GDP. Mining emerged following the country’s independence with the successive discovery of three diamond deposits. [6] According to Dunning (2005, 2008), diamond exports increased in value by an average of 30% per year between 1974 and 1994, and the mining sector has made up 40% of GDP over the past ten years or so. Finally, unlike in many countries that based their growth on the mining of raw minerals, strong growth has not been limited to the mining sector; although the manufacturing sector has remained modest, the growth in services (financial, communications, transportation) now makes it possible to limit the impact of exogenous shocks experienced by the country. Nonetheless, it would be hard to dispute that the diamond sector is at the heart of the factors that made the path to development possible.

Botswana: Diamond Resources and Development

Botswana: Diamond Resources and Development

8The cultivation of sugar cane and the textile industry in Mauritius and diamond mining in Botswana seem to have triggered the take-off of economic growth in both countries. Each of these sectors benefited from an exceptionally favorable market position, created by international agreements that seem to have played a key role in the external competitiveness of Mauritius and the success of the diamond industry in Botswana. In 1976, the Lomé Convention extended to African, Caribbean, and Pacific (ACP) nations price guarantees offered by the (then) European Economic Community (EEC) to European sugar producers, with matching import quotas. Mauritius’s quota was exceptionally favorable (at 491,039 metric tons of “white sugar equivalent”), and the guaranteed price ended up averaging 90% higher than the rate on the international market over the thirty years that followed. The market distortion induced by the Sugar Protocol in the Lomé Convention generated, according to Pareto’s definition, an economic rent that Subramanian and Roy (2001) estimated to be an average 5.4% of GDP each year between 1977 and 2000. Based on the same scenario, in 1974 the United States and the EEC introduced a system of international quotas called the Multi-Fiber Agreement (MFA) that aimed to limit textile imports from Asia. To take advantage of unused quotas, foreign investors set up part of their production in African countries, including Mauritius. Subramanian and Roy estimate that the rent generated by these quotas gradually increased, reaching 3.5% of GDP in Mauritius.

9According to Jefferis (1998), in 1966 De Beers was buying nearly 80% of the world’s rough diamonds. The three diamond mines discovered in Botswana were so rich (with 44% of the rough diamonds that passed through De Beers’s central sales office in 1988 coming from Botswana) that in order to maintain its position as a quasi-monopsony, the company was forced to agree to significant concessions vis-à-vis the government, with 50% capital investment in Debswana, the joint venture in charge of mining activities, and 50% of the profits related to that activity. From the point of view of the Botswana government, diamond mining generated an economic rent, as defined by Hotelling.

Mauritius benefitted from European Union (EU) and US support to the sugar and textile industries

Mauritius benefitted from European Union (EU) and US support to the sugar and textile industries

10While the appropriation of rents in countries with the same factor endowments has been the subject of violent conflict elsewhere, the distribution of rents in Mauritius and Botswana instead played a decisive role in triggering two exceptional paths to economic growth. To a large extent, it is the public sector that has benefited from diamond mining in Botswana. [7] Being capital-intensive and having little connection to the rest of the economy, the diamond industry did not induce much private activity, but has been the source of 40% of government revenues since the 1980s. The government has thus been able to implement a more proactive fiscal policy than its neighbors. Although it is somewhat volatile, this level of public spending is significantly higher than the average, even for developed countries. Originally focused on the livestock and mining sectors, public spending gradually shifted its focus to education (which has become the top item in public spending), national defense (to address the risk posed by the instability of neighboring countries), and basic healthcare.

11By contrast, in Mauritius, an accommodating tax system allowed for private appropriation of sugar rents. The failure of the South African “financial rand” policy is testimony to the fact that it would have been impossible to prevent the capital flight resulting from sugar rents. However, the opportunities offered within the FTZ appear to have encouraged landowners to reinvest the profits of the sugar industry locally, particularly in the textile sector, whose growth was very rapid after 1982 (Subramanian and Roy 2001; Sandbrook 2005). Thus, even taking into account the period of economic instability in the early 1980s (during which Mauritius went through two devaluations, in 1979 and 1981), investment remained at an average of 24.5% of GDP since 1975, a high level for the region.

12However, both of Mauritius’s historical rents have dried up in recent years. First, the MFA’s textile quota system was eliminated in late 2004, and then the EU unilaterally denounced the Sugar Protocol in 2007 (going into effect in 2009), while gradually lowering guaranteed prices and expanding the regions that benefited from quotas. Thus, the system of investor incentives that had characterized the growth pattern of the previous three decades disappeared. After several years of current account surpluses at the start of the decade, the Mauritian government boosted public investment and encouraged private investment in order to cope with the withdrawal of international investors from the textile sector. However, its low level of savings appears to have prevented Mauritius from maintaining the dynamic economy it enjoyed over the previous thirty years. In addition, the onset of the international crisis has further obscured the results of the stimulus policy. As a result, it remains difficult to assess the overall success of the new growth model in post-rents Mauritius.

13Likewise, the crucial importance of diamonds in the history of Botswana’s development is also its main vulnerability. In 2008, the diamond sector accounted for 40% of government revenues, 35% of GDP, and 62% of exports. However, the international financial crisis revealed the weaknesses of this growth model. According to available data, the decline in the value of diamond exports led to a decline in GDP of 5% in 2009 (before a rapid recovery in 2010). Meanwhile, 20% of foreign exchange reserves were consumed between August 2008 and May 2009 to compensate for the deficit in the balance of payments (before a recovery of accrual).

Mauritius: An economic success story founded on the sugar industry

Mauritius: An economic success story founded on the sugar industry

Two Countries Spared the Resource Curse

14Both Botswana’s and Mauritius’s paths to economic growth seem to have been triggered by the successful exploitation of a rent, associated with mining in one case and to the agricultural sector in the other. Engerman and Sokoloff (2000) showed that economic history paints a negative picture of the abundance of raw materials, and Sachs and Warner (2001) even empirically established the existence of a negative relationship between the level of raw material exports and subsequent growth. The roots of the “tragedy of African growth” brought up by Easterly and Levine (1997) are thus perceived as resulting from its rich subsoil. Botswana and Mauritius are just about the only countries in Africa to have escaped what appears to be the curse of raw materials.

15Among the various theoretical explanations available, some usefully shed light on the specificities of the two countries. Exporting an abundant natural resource can lead to an appreciation in the real value of the currency, which is detrimental to the competitiveness of the tradable goods sector (the sector that competes on international markets), relative to that of the non-tradable goods sector, a mechanism known as the “Dutch Disease.” As such, the reallocation of productive capacities in favor of this natural resource can be seen as refocusing on a comparative advantage, but one that is capital-intensive with little connection to the rest of the economy (an effect that has already been discussed previously, for example in the work of Perroux and that of Hirschman [8]), generates little technical progress and offers few economies of scale. As a result, this reallocation is less likely to generate sustainable growth. Although it has apparently not been affected by the resource curse, Botswana has nevertheless exhibited two symptoms of the Dutch Disease: high unemployment, which was probably due to the low number of jobs generated by the mining sector (4% of employment, but 40% of GDP), and a decline in productivity in the tradable sector in relation to the productivity of nontradable (Deléchat and Gaertner 2008; Iimi 2006). By contrast, in Mauritius the textile industry and the service sector have expanded significantly, thus establishing that the country has not been affected by Dutch Disease since its independence. [9]

16For its part, the political economy offers two categories of explanation. First, by reducing the immediate need for the state to develop its fiscal capacity, the public appropriation of rents could eventually weaken fiscal policy. Second, and most importantly, rent-seeking behavior, in other words the struggle to appropriate rents, often generates sub-optimal situations, either by leading to destructive conflicts or by promoting corruption. In fact, some countries with similar factor endowments have seen their development process blocked, including Angola, Congo, Sierra Leone, Venezuela, Nigeria, and the Democratic Republic of Congo, compared to Botswana and Mozambique, and the Comoros and Madagascar compared to Mauritius. Finally, other countries have become rich without a development process based on exploiting a mineral rent (Gabon, Equatorial Guinea). Via the political economy of rents, Botswana and Mauritius were therefore two strong candidates for the resource curse. Instead, they experienced dynamic and sustainable development and set themselves apart with their political and social stability. In addition, Acemoglu, Johnson, and Robinson (2002) highlighted their political and economic institutions as being of a high order. In fact, Mauritius is the only country in Africa to boast an unassailable history of democracy since independence, while Botswana is also beyond reproach, even if, unlike Mauritius, the country has never faced the challenge of democratic change, since the opposition has yet to win a national election.

17It seems unlikely that the conjunction of democracy and development in Botswana and Mauritius is a coincidence. Though Przeworski (2004) has empirically demonstrated the difficulty of establishing a causal link between the two, the hypothesis of a common explanation is more convincing. Tsie (1996), Samatar (1999), and Acemoglu et al. (2002) identify several factors that may have jointly contributed to economic development and democracy in Botswana: the inclusive nature of political institutions inherited from the pre-colonial era (itself explained by the ease of defection from a livestock economy and relatively high ethnic homogeneity), the benefit derived by the elites from the institutional strengthening of private property, and diamond rents high enough to discourage anyone from running the risk of challenging the status quo.

18Unlike their neighbors, the two African countries most readily described as economic success stories have therefore benefited from the timely articulation of the interests of social groups in order to develop economic and political institutions usually associated with development. This specificity is based on a characterization of the social structure of the economy, as economic agents able to mobilize resources to be invested in productive activities can also spend those resources in an attempt to take power. Under this interpretation, the intensity of unskilled labor in the sugar and textile industries lowered the stakes for political competition, making a peaceful distribution of rents possible. By contrast, the stakes associated with the control of the diamond industry remain very high, as evidenced by the frequency of conflicts over such networks and by the substantial inequalities that continue to be a reality in Botswana. However, Botswana differs from its neighbors in terms of the economic structure of its society, which is highly centralized around one political party and an individual with irrefutable legitimacy; no opposition has yet been able to challenge the authority of those in power.

Contrasting Policies of Diversification

20The involvement of the state in the structure of the economy (in all its forms, including the Soviet model of a planned economy, the Japanese model of research funding and financial control, the Korean model of control of the allocation of capital, the policy of import substitution characteristic of Latin America, and tools for export promotion) has been the subject of a highly polarized debate. Bates (1981) and Krueger (1993) substantiate the skepticism of many academics with respect to the effectiveness of a policy of diversification, a view largely shared by multilateral institutions, including the World Bank (1993). Meanwhile, arguments in favor of public intervention in the structure of the economy fall into two categories: diversification and economies of scale. While this subsection aims to examine the diversification policies implemented in order to address the vulnerabilities associated with a narrow productive base, the discussion of economies of scale and decreasing costs, justifying a period of protection for infant industries from international competition, [10] is deferred to the subsection “Unconventional trade policy and external buffers.”

21Two industries have played a distinctive role in Botswana’s development: livestock and diamonds. Botswana society’s economic structure traditionally revolved around the possession of livestock, so it was only natural that the first government’s priority was to use diamond wealth to finance the livestock sector. At independence, there was only one industrial activity present in Botswana: a public slaughterhouse that had been established in 1947 as a first step toward structuring the livestock sector. The Botswana Meat Corporation (BMC) was thus transformed under the leadership of the government to become an institution that was effective (as testified to by a twenty-fold increase in the capacity of Botswana slaughterhouses between independence and 1994), legitimate (as seen in the preservation of preexisting social relationships in the industry between large landowners and agricultural workers), and secure (through the establishment of a stabilization fund and a guaranteed outlet for livestock farmers)—in other words, a model of a well-run public company in Africa. The direct management of these two industries by the state thus demonstrated its effectiveness in both cases (Samatar 1999; Owusu and Samatar 1997).

22However, incentives offered by the Government to the private sector did not meet with the same success. Prior to 1982, the Government limited its intervention to the establishment of a favorable environment for private investment by guaranteeing the sanctity of private property and the recognition of international contract law, trade and monetary integration with South Africa’s economy, tax concessions on profits and capital transfers, and encouraging the employment of expatriates to compensate for the lack of local human capital. Most importantly, it set up moderately specialized financial institutions. These included the Botswana Development Corporation (BDC), created in 1970 to build the public infrastructure needed to develop and support the creation of businesses, the Botswana Enterprise Development Unit, which from 1973 provided access to credit and services for small and medium-sized businesses, and the National Development Bank, which supported the development of new industrial zones in suburban areas. In 1982, faced with the lack of private enterprise ready to take over its activities, the Government published its White Paper No. 1, which defined industrial policy in Botswana for the first time [11] and additionally created the Financial Assistance Policy (FAP) with its multiple objectives, which has proved effective for financing small textile companies but whose performance has been disappointing overall.

23Services (especially financial) are the sector that has most benefited from these policies, exceeding 50% of GDP in 2009. At 10% of GDP (a level generally considered low given the country’s potential and proximity to South Africa), tourism is now the third-largest sector of the economy. This policy has also generated jobs in the industrial sector and facilitated the transfer of part of the means of production to national entities, even if manufacturing activities have in fact decreased since the country’s independence, accounting for only 4% of GDP in 2007 versus 8% in 1966. Thus, unlike Asian countries, it would seem that the diversification policy has met with only a limited degree of success in Botswana, probably because it was stymied by effects of the Dutch Disease type. Despite a moderately interventionist policy, the productive structure remains narrow and vulnerable to external impacts at a time when several sources agree on the potential [12] depletion of diamond resources sometime between 2020 and 2030. [13]

24For their part, the Mauritian authorities contributed substantially to the establishment of the infrastructure and institutions necessary for various activities (known as “pillars” in government parlance) that were particularly strong (Sandbrook 2005). They began by securing the sugar industry (the first pillar) during the negotiations that led to the Lomé Convention. Shortly after independence, the government also helped set up the public infrastructure and the training institutions necessary for the development of the tourism sector (the second pillar) as well as tax and financial incentives to attract investors. It then created a free-trade zone (the third pillar), initially in order to promote the international competitiveness of the textile industry. The development of an offshore sector (the fourth pillar), which was characterized by substantial tax incentives and by numerous institutions designed to provide support services to companies, helped expand the scope of the FTZ to include a variety of industrial and commercial activities. Finally, the 2000s were marked by the emergence of the fifth pillar: taking advantage of the bilingual capabilities and quality education of its people as well as the existing communication infrastructure, the Government decided to invest heavily in the infrastructure necessary for developing an outsourcing sector with the aim of making Mauritius a regional center for information and communication technology. This approach has been successful, as evidenced by the growth in the island’s productive structure. In 1976, agriculture accounted for over 20% of GDP, manufacturing 15%, and services 52% (the earliest data available on the website of the Central Bureau of Statistics [14]). However, in 2009, agriculture accounted for only 4% of GDP, with manufacturing remaining fairly stable at 19% (25% of that being the textile industry), and the service industry exceeding 73%.

25The loss of trade preferences in the textile industry, reforms to the Sugar Protocol, and the simultaneous increase in the price of oil all combined to have a major impact on the terms of trade, which in particular required a restructuring of the textile industry that has not yet been completed. In Botswana and to a lesser extent in Mauritius, the economy remains highly vulnerable to exogenous shocks affecting one or two export commodities that have historically played a major role in development but are not activities with high added value (Ndikumana et al. 2009). In Mauritius, the exchange rate policy (the topic of the next subsection) probably contributed to the success of diversification policies. In Botswana, by contrast, diversification policies did not enjoy the same complementarity.

Exchange Rate Policy and Support for Competitiveness

26Two types of indicators are generally used to describe the competitiveness of a productive sector depending on whether one favors an approach based on production costs or on the outlet for its products (household spending and consumer prices). In the absence of more accurate data to characterize cost-competitiveness in Africa, the World Economic Forum (WEF) and the World Bank use surveys to measure the cost of doing business. According to data collected by these two institutions, Botswana and Mauritius are among the few African countries that are regularly ranked well in the world. In terms of outlets, both the IMF and the WEF calculate real effective exchange rates (REER), [15] and the World Bank publishes terms of trade in its world development indicators, [16] which provide a useful perspective on the evolution of a country’s competitiveness over time.

27In 1994, the Mauritian authorities introduced a floating regime managed by the Bank of Mauritius, aimed at supporting the country’s external competitiveness. During this period, the Mauritian rupee depreciated steadily. According to Ndikumana et al. (2009), between 1995 and 2008, it lost 40% of its nominal value, 10% of its real value against the basket of importing countries, and 20% against the basket of exporters, giving the country a persistent competitive advantage vis-à-vis its trading partners.

28Botswana’s exchange rate policy was implemented to reflect the volume of South African imports. The South African rand was the currency used in Botswana until 1977, when the government introduced the pula, which, despite an episode of appreciation in 2002 (that was quickly corrected), has remained largely at par with the rand ever since. But while South Africa accounts for 80% of Botswana’s imports, it is the recipient of only a small fraction of its exports. Thus, thanks to the depreciation of the rand, the pula has substantially depreciated against its major export markets. The result was a slight loss of competitiveness with respect to imports (coming mainly from the rand zone), which clearly contributed to effects of the Dutch Disease type, including disadvantaged domestic producers compared to their regional competitors and low attractiveness for industrial investors compared to countries in the region still using the rand. However, important competitiveness gains appear to have been to great advantage for exporters.

29While Johnson, Ostry, and Subramanian (2007) determined that a significant overvaluation of the exchange rate of a country impedes its economic growth, Rodrik (2008) showed that undervaluation of the exchange rate promotes economic growth thanks to the competitiveness gains benefitting exporters. In this sense, the exchange rate policy of Botswana and Mauritius may well have benefited the overall development of both countries. However, the mechanism proposed by Rodrik puts into perspective the profit Botswana was able to achieve: the tradable sector is generally more sensitive than the non-tradable sector to institutional failures (as regards property rights and enforceable contracts) and market failures (affecting credit and labor markets, and gaps in terms of upstream, downstream, and lateral opportunities), which are more common in developing countries. Conversely, undervaluation of the currency increases the price of tradable goods relative to non-tradable goods, offsetting this disadvantage by a “second-best,” quasi-industrial policy.

30The atrophied tradable sector in Botswana does not seem to have benefited from the overall undervaluation of the pula. While diamonds are exported to the dollar and euro zones and thus benefit from the real depreciation of the pula (which is anchored to the rand) with respect to these zones, the primary natural outlets for the country’s other exports are the markets of the rand zone. Because of the percentage they represent in the makeup of the country’s exports, diamonds have contributed to blurring the different reality encountered in other markets. In fact, it is likely that the capital-intensive diamond industry has helped increase the cost of labor in Botswana, resulting in an imbalance in the labor market (characterized by a very high unemployment rate) and a lack of competitiveness in the tradable sector. Meanwhile, the industrial sector has shown only weak growth, even though the fiscal and institutional environment was favorable to foreign investors. Thus the undervaluation of the exchange rate was simply an illusion.

31As regards the development of the Mauritian tradable sector, particularly in the context of the FTZ, it seems to have been favored by the undervaluation of the Mauritian rupee implemented by the Bank of Mauritius. In reality, several competing factors combined to promote the growth of the FTZ (which now represents 25% of GDP and 36% of employment in Mauritius), and it is difficult to determine which was dominant as, ever since the inception of the zone in 1971, the companies operating there have been exempted from customs duties, have enjoyed substantial tax incentives, and have taken advantage of legal arrangements that ensure a more flexible labor market. The fact remains that the mechanism proposed by Rodrik is essential to understanding the history of Mauritius and Botswana, with the tradable sector in Mauritius becoming competitive and growing, while Botswana’s low level of competitiveness has meant that it has atrophied there.

Unconventional Trade Policy and External Buffers

32Policies in support of external competitiveness are part of the larger framework of an economic policy in which trade policy plays a key role. Mauritius has often been cited as one of the best examples of success associated with very strong growth in trade flows. Among the various mechanisms meant to explain the role of trade policy, Subramanian and Roy (2001) take issue with two of them. In their view, the Mauritian economy is far from being as open as Sachs and Warner (1997) have claimed, and foreign investments are not significant enough to explain a technology transfer that would have triggered Mauritius’s growth path. However, Subramanian and Roy emphasize the coherence in the mechanism proposed by Rodrik (1999), according to which the creation of the FTZ made it possible to isolate the export sector from the rest of the economy, both fiscally and in terms of the labor market, while this policy of strong support for a highly competitive export sector has simultaneously made the implementation of import substitution policies possible. In fact, it is not unlike the policies implemented in Korea, Taiwan, and Japan.

33Does the history of Botswana’s trade openness make it possible to discriminate between these three theories? The binary index of trade openness constructed by Sachs and Warner (1997) indicates that Botswana trade policy opened up in 1978, which in their opinion contributed to the country’s economic growth. However, the construction of this indicator raises several concerns, and the history of the SACU does not seem to indicate that Botswana has in fact been particularly open with respect to trade. Similarly, technology transfers do not explain Botswana’s success. While the country is indeed attractive to international investors, investments have been concentrated in the mining sector, which by any measure generates very little technical progress. Although the low level of diversification and industrialization of the economy qualifies its success somewhat, Botswana’s trade policy is in fact based on the same principle as that of Mauritius, namely protection of the non-tradable sector and support for and exposure of the tradable sector to international competition.

34Finally, one last commonality should be mentioned. In both countries, an exogenous element helped secure revenues associated with rents in the face of external impacts. In Mauritius, quota and guaranteed price policies secured revenues related to sugar and textile rents. In Botswana, it was the market power generated by the abundance of diamonds that played a key role, with Botswana authorities effectively having enough reserves to maintain international diamond prices at a high and stable level over the long term. Combined with selective trade liberalization, we thus have two of the key elements in the commercial success of both countries.