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Botswana: A Development Success

How has Botswana fared in its economic development efforts with the IMF?

September 27, 2002

How has Botswana fared in its economic development efforts with the IMF?

There are alternatives to IMF-style programs. These programs may involve a reasonable level of sacrifice, but one which is not based on market fundamentalism. Better yet, such programs have had positive outcomes for some developing countries.

A good example is Botswana, located 2,300 miles south of Ethiopia. It is a small country of 1.5 million, which has managed a stable democracy since independence.

At the time Botswana became fully independent in 1966 it was a desperately poor country. Like most of the other countries in Africa, it had a per capita annual income of $100. It was largely agricultural, lacked water — and had a rudimentary infrastructure.

But Botswana is one of the success stories of development. Although the country is now suffering from the ravages of AIDS, it averaged a growth rate of more than 7.5% from 1961 to 1997.

Of course, Botswana was helped by having diamonds. But countries like Democratic Republic of Congo (formerly Zaire), Nigeria and Sierra Leone were also rich in resources.

In those countries, the wealth from this abundance fueled corruption and spawned privileged elites that engaged in internecine struggles for control of each country's wealth. Botswana's success rested on its ability to maintain a political consenus, based on a broader sense of national unity.

That political consensus, necessary to any workable social contract between government and the governed, had been carefully forged by the government, in collaboration with outside advisers. These came from a variety of public institutions and private foundations, including the Ford Foundation.

The advisers helped Botswana map out a program for the country's future. Unlike the IMF, which largely deals with a country’s finance ministry and central bank, these advisers openly and candidly explained their policies as they worked with the government to obtain popular support for the programs and policies.

They discussed their program with senior Botswana officials, including cabinet ministers and members of Parliament, with open seminars as well as one-to-one meetings.

Part of the reason for this success was that the senior people in Botswana's government took great care in selecting their advisers. When the IMF offered to supply the Bank of Botswana with a deputy governor, the Bank of Botswana did not automatically accept him.

The bank's governor flew to Washington to interview him. He turned out to do a splendid job. Of course, no success is without blemishes. On another occasion, the Bank of Botswana allowed the IMF to pick somebody to be director of research, and that turned out — at least in the view of some, to be far less successful.

The differences in how the two organizations approached development were reflected not just in performance. While the IMF is vilified almost everywhere in the developing world, a warm relationship was created between Botswana and its advisers.

This closeness was symbolized by the awarding of that country's highest medal to Steve Lewis, who was a professor of development economics at Williams College at the time he advised Botswana. (He later became president of Carleton College.)

That vital consensus was threatened two decades ago when Botswana had an economic crisis. A drought threatened the livelihood of the many people engaged in raising cattle. And simultaneous problems in the diamond industry had put a strain on the country's budget and its foreign exchange position.

Botswana was suffering exactly the kind of liquidity crisis the IMF had originally been created to deal with — a crisis that could be eased by financing a deficit to forestall recession and hardship.

However, while that may have been John Maynard Keynes's intent when he pushed for the establishment of the IMF, the institution does not now conceive of itself as a deficit financier, committed to maintaining economies at full employment.

Rather, it has taken on the pre-Keynesian position of fiscal austerity in the face of a down-turn. It doles out funds only if the borrowing country conforms to the IMF's views about appropriate economic policy, which almost always entail contractionary policies leading to recessions — or worse.

Botswana, recognizing the volatility of its two main sectors, cattle and diamonds, had prudently set aside reserve funds for just such a crisis. As it saw its reserves dwindling, it knew that it would have to take further measures.

Botswana tightened its belt, pulled together — and got through the crisis. But because of the broad understanding of economic policies that had been developed over the years and the consensus-based approach to policy making, the austerity did not cause the kinds of cleavages in society that have occurred so frequently elsewhere under IMF programs.

Presumably, if the IMF had done what it should have been doing — providing funds quickly to countries with good economic policies in times of crisis, without searching around for conditionalities to impose — the country would have been able to make its way through the crisis with even less pain.

(The IMF mission that came in 1981 quite amusingly found it very difficult to impose new conditions because Botswana had already done so many of the things that they would have insisted upon.) Since then, Botswana has not turned to the IMF for help.

The assistance of outside advisers — independent of the international financial institutions — had played a role in Botswana's success even earlier. In particular, Botswana would not have fared as well as it did if its original contract with the South African diamond cartel had been maintained.

Shortly after independence in 1966, the cartel paid Botswana $20 million for a diamond concession in 1969, which reportedly returned $60 million in profits a year.

In other words, the payback period was four months. A brilliant and dedicated lawyer sent to the Botswana government from the World Bank argued forcefully for a renegotiation of the contract at a higher price, much to the consternation of the mining interests.

De Beers (the South African diamond cartel) tried to tell people that Botswana was being greedy. They used what political muscle they could, through the World Bank, to stop this lawyer.

In the end, they managed to extract a letter from the World Bank making it clear that the lawyer did not speak for the Bank. Botswana's response: That is precisely why we are listening to him.

Ultimately, the discovery of the second large diamond mine gave Botswana the opportunity to renegotiate the whole relationship. The new agreement has so far served Botswana's interests well — and enabled Botswana and De Beers to maintain good relations.