KATHMANDU UNIVERSITY SCHOOL OF MANAGEMENT (KUSOM)

Balkumari, Lalitpur

DEVELOPMENT ECONOMICS

Case Review

African Success Story at Risk: Botswana

Submitted to: Submitted by:

Mrs. Anupama S. Panta Anamika Shakya

Visiting Faculty- Economics Roll no. 18785

Reg No: 023670-18

Section- C

BBA Year II/ Semester III

Date: November 22nd, 2019

Synopsis

The case talks about the success story of Botswana in attaining the highest average per capita

growth rate despite of having high population growth, geography constraints and stricken by an

outrageous disease.

Identification of core issues

1)Despite Botswana being one of the poorest nation with high population growth, geographical

constraints, how has it been able to achieve progressive economic growth?

2)What are some of the challenges that Botswana is still facing in attaining development in the

country despite having good institutions?

Facts on Core Issues

Issue 1

Botswana having high population and being a land locked country with very only 4 percent of

land being cultivated is still moving forward in attaining good economic performance due to

various reasons. Growing foreign direct investment is one of the reason for its purring economic

growth. Similarly, Botswana is gifted with the wealth of diamonds. Favorable contracts were

achieved with the De Beers diamond cartel that resulted in fully half of diamond profits going to

the state in tax revenue. Government has played a constructive role in the economy by providing

infrastructure, extension services, and subsidized veterinary services and other support for the
development of the cattle industry. Government has also constructively managed relationships

with mining interests, encouraging exploration by foreign companies and demanding and getting

a share of profits. Good institutions, effective governance and proper allocation of resources has

played a huge role in achieving favorable conditions for economic development in Botswana.

Issue II

Despite having good institutions, effective governance role there are still some challenges and

obstacles faced by Botswana in achieving growth with development. Botswana is facing high

income inequality as well as high unemployment which are the major challenges for Botswana to

achieve meaningful development. Similarly, Botswana suffers from the incidence of an

outrageous disease i.e. HIV AIDs. According to UN reports, the HIV prevalence rate is as high

as 24% of the adult population aged 15–99—and a stunning 33% among pregnant women. About

60 percent of youths do not have access to proper reproductive health. One third of the working

force population is infected with this disease which has decreased productivity and has

negatively impacted in the economic development of the nation.

Analysis

Foreign direct investment and tax revenue

Foreign Direct Investment (FDI) is the investment of funds by an organization from one country

into another, with the intent of establishing ’lasting interest’. Foreign direct investment plays a

great role in boosting the economy of any country. In the case, Botswana’s diamond wealth is

vast and government has also given much focus in the mining sector of Botswana encouraging

foreign companies to invest in this industry. In turn the government could receive the share of
profits without losing the investors. As mentioned in the case, favorable contracts were achieved

with the De Beers diamond cartel that resulted in fully half of diamond profits going to the state

in tax revenue. This means that the foreign direct investment has may benefits as it creates

employment opportunities in the country, creates skilled human capital, technological

advancement takes place through diversification, generates tax revenue from FDI due to

establishment of industries and factories as well as from the employees. Therefore, it helped the

government of Botswana to collect tax revenue which can be effectively invested in the

development activities of the nation that would ultimately raise the national income of the nation.

The figure illustrates the laffers curve. When government focuses on the foreign investment and

with the optimal charge of tax rate it may be able to attract more foreign investment in the
country which in turn leads to optimal collection of tax revenue by the government. As in the

case Botswana is favorable for mining industry due to abundance of Diamonds. The government

of Botswana has focused in encouraging foreign countries to invest in this sector as a result it has

led to establishment of industries creating the employment opportunities in one hand and the

government of Botswana receiving revenue on the other hand which has been invested in the

development activities of the nation.

2)Human capital Formation

Capital and land are passive factors of production but human-resource is active factor of

production, which utilizes capital and naturals resources. The skills and knowledge are the

important tools for effectively utilizing the physical capital. Education is regarded as the national

investment and helps in formation of human capital. Without investment in human capital no

economic development can be achieved in the underdeveloped countries.

As in the case we can see that government has put many efforts for increasing FDI in the country

which also creates the opportunities for providing better skills and training to workforce and

helps in the effective human capital formation. Similarly, the tax revenue which has been

collected by the government of Botswana from the foreign direct investment in mining sectors is

being utilized and is invested in the education sector heavily as mentioned in the case. Botswana

has attained essentially universal primary education which is a rare achievement in Africa, and

more than half of children are enroll in secondary education which is twice the average

elsewhere in sub-Saharan Africa. This indicates that the revenue collected from FDI has been

invested effectively in the education sector by Botswana which means that the country is

investing to achieve the social development in the nation. With the effective investment in the

education sector better and well trained human capital can be formed which will help to increase
the productivity of the nation as a whole which is one the reason for Botswana moving towards

economic development

3) Aggregate demand

a) Consumption

In the case we can see that Botswana’s government played a good role in encouraging the

foreign direct investments. The policies like property protection rights, encouragement of exports

of diamonds increased the foreign direct investment in the country. With the increase in FDI,

factories and industries are built that in turn created employment opportunities which increase

the disposable income of people of Botswana and increases the consumption.

b) Investment

Increase in foreign direct investment leads to increase in incentive for government to invest in

development activities like in the case the increase in foreign direct investment created incentive

for the government to invest its wealth in the education sectors, providing extension services,

support for the development of cattle industries. So investment in development activities has

been increased rapidly in Botswana.

c)Government expenditure

As the FDI created the job opportunities and incentives for investments. The government is able

to collect the optimum tax revenue from these development activities; as a result, the government

expenditure also increases. As seen in the case the government of Botswana is spending its

revenue for supporting cattle industries, developing infrastructure, supporting the education
sector and encouraging the exports too. This shifts the aggregate demand upward and increases

the national income of the country.

d)Exports

In the case we can see that government of Botswana is supporting foreign companies to invest in

the mining sector of the country as, it is rich in diamond resources. The government has

encouraged the exports of these diamonds to foreign countries. As a result, there is inflow of

foreign currency in the nation. Thus increase in exports of diamond from Botswana shifts the

aggregate demand and increases the national income of the nation.

The figure illustrates the upward shift in the aggregate demand from AD to AD1 due to the

positive effect of the foreign direct investment to increase consumption, investment, government
spending and net exports in Botswana. The shift in the aggregate demand increase the national

income from Y to Y1 which indicates the economic growth of the Botswana.

4)Human Development Index

Botswana’s per capita growth rate has been remarkable. The growth rate was 8.4 percent per

year over 1965 to 1990, 6 percent in 1990-2005. It is one of 13 countries identified by the Spence

Commission as having ever experienced a 25-year period averaging at least 7% growth rate. But

the problem of high income inequality is still prevalent due to which the richest 20 percent

receive the highest share of national income whereas the poorest 20 percent receive the lowest

share of national income. It creates a huge gap between rich and poor which is one of the main

reason of creation of poverty trap where the rich become richer while poor become poorer.

The literacy rate is also improving. People of Botswana is suffering from the incidence of HIV

AIDS due to which the mortality rate is high. The HIV prevalence rate is as high as 24% of the

adult population aged 15–99—and a stunning 33% among pregnant women. The life expectancy

of people in Botswana is expected to be 55 years only due to the incidence of AIDS.

The HDI rank of Botswana is 98th out of 159 countries listed on the 2010 Human Development

Index which is 38 points lower than its GDP rank would predict. Botswana’s human

development is significantly lower than predicted by its level of real per capita income. The HDI

of Botswana has been better than the sub Saharan Africa but it could have been better if the

epidemic disease AIDS could have been controlled. The incidence of this disease is one the main

challenge for Botswana in attaining economic development.

 5)Labor market

LS2

Wage rate LS1

W2

W1

Q2 Q! Quantity of skilled and healthy

labor

The figure shows the labor market where the x axis represents the quantity of skilled and healthy

labor supplied and the y axis represents the wage rate. In the case we can see that people in

Botswana is suffering from the incidence of the epidemic disease that is HIV AIDS due to which

the life expectancy at birth is low only 55 years. According to UN reports, the HIV prevalence

rate is as high as 24% of the adult population aged 15–99—and a stunning 33% among pregnant

women. It means that there is decrease in the supply of skilled and healthy labor as people are

suffering from AIDS and are not being able to work due to health issues. Due to the shift of

supply of healthy and skilled labor to the left while demand remaining constant, the wage rate of
the available labors increases. This increases the labor cost increasing the cost of production for

the firm as well as due to large pool of youths being a victim of AIDS, they are not being able to

utilize the resources of the country. As a consequence, the productivity decreases which hampers

the development process of Botswana. So, the incidence of HIV AIDS in Botswana is one the

major obstacle for Botswana to attain meaning development in the country.

Solutions

1. Health education and sex education should be provided from the school level so that

youths could be made aware about HIV AIDS so that it could be prevented and cured at

time. Government should implement and invest in the health sector in order to control the

incidence of HIV AIDS in the country.

2. Government should attract and encourage more foreign direct investment by

implementing progressive tax in the country. So that FDI could be encouraged as well as

the country could collect optimal tax revenue that could be invested in the development

activities in the country.

3. Botswana being a landlocked country should also invest in the agricultural sector through

which income could be generated by attaining the food needs of the country as well as it

can also export the agricultural products which would increase the inflow of foreign

currency that could be reinvested in development of the industries.

4. Government policies should focus in creating effective job opportunities by the proper

investment of the tax revenue in economic activities with a target of raising the per capita

income of poor so that the degree of inequality could be reduced.

 5. Government should invest in the education sector with the aim of formation of skilled

human capital that would help Botswana to receive economic growth with meaningful

development.

Managerial Implications

From this case we can learn good institution and good policies plays a great role for the

development of any organization as seen in the case of Botswana. The case talked about the role

of effective utilization of resources in attaining better economic performance in Botswana.

Similarly, for a company to achieve success and better performance, the company must utilize

the available resources to the optimum level. Equal opportunities and good incentives should be

provided to the employees so that the employees are dedicated to work for the betterment of the

company. Several challenges and obstacles are faced by every organization. The challenges

should not be taken as weakness but with the mutual cooperation of each department, an

organization can easily curtail any challenge and obstacle that takes place while working.

Reference

Michael P. Todaro, Stephen C. Smith-Economic Development, 11th Edition (The Pearson Series

in Economics) -Prentice Hall (2011)

Honor code

On my honor as a student, I pledge that I have neither given nor received aid on this assignment.

Anamika Shakya