Aid Ownership & Relationship – The Botswana Example. (The North South Institute Conference – Does Aid Work?)

Aid Ownership & Relationship – The Botswana Example.(The North South Institute Conference – Does Aid Work?) Gervase S. Maipose University of Botswana

Purpose • The Main Purpose is to Explain Botswana’s effective Aid Management given a country’s Institutional context and initial conditions & Leadership quality. NB: Botswana is often cited as an exceptional development success story that has used its aid resources effectively; and has sustained one of the world’s highest economic growth rates; and is no longer aid dependent. Why?

Specific Objectives • To explain why Botswana owns Aid and Development policy - sustaining high growth rates since independence in 1966. • Explore Policy and institutional context of Aid ownership and growth experience.

Specific Objectives (cont’d) (3) To illuminate Leadership Aspect and developmental role of the Botswana state in explaining Aid ownership (4) To examine what can be done by aid dependent countries to establish or regain ownership in policy and institutional context; and (5) To explore how to adopt countercyclical instruments as an asset; and how to manage transition from aid dependence .

Specific Objectives (cont’d) NB It is, to a large extent, the story of exceptional state management of “good fortune”- initially aid from the international community and subsequently natural resources – while avoiding aid dependency and fortifying ownership against donor onslaught.

How were the main issues Addressed?Taking Policy regime orientation of Aid & Growth Management into three phases: 1960 – 1975; 1975 -1989; 1990-2005. 1. The First phase: 1960 - 1975 – Initial base creating, a transitional phase. • Significance the historical, socio-economic, and political context, especially survival of traditional Tswana political culture in colonial context and integration into modern institutions; • New ruling elite ultimately merged local interest into broader commitment to build a non-racial and unitary state.

Periodazation of growth performance (cont’d: • Start of Development Planning & its integration with the budgetary system • The pre-colonial Tswana culture regarding state leadership in the process of economic accumulation Vs property owning class. • Significance of some traditional institutions, such as the Kgotla for consultative process. • Policy stance that sought to maximize flow of foreign capital – aid and private investment; • Introduction of multi-party system of government under inherited market-based economy; • Development strategy entailed state-led development strategy similar with many other African states at independence; • Membership in SACU and RMA providing external agency of restrain in fiscal and monetary policies.

2. Second Phase 1975 to 1989: Consolidation of both market based & multi-party system. • Building a relatively strong and competent state that provides visionary leadership & management; • Mining sector clearly emerging and consolidating itself as the engine of growth; • Consolidation of development planning as well as its integration with budgeting & pragmatic approach to development management; • Creation of Strategic/Special Funds – including Countercyclical instruments as an asset for delayed/withheld aid or bad shock • Fastest economic growth, but limited structural diversification; • Noticeable changes regarding trends in Domestic savings & investment – the ratios of savings to GDP exceeding investment.

Second Phase Cont’d NB: By the end of the second phase, viable traditional and modern institutions of economic, political and legal restraint had been in place and relatively well consolidated. Development Planning and its integration with Budgeting system ensured that development projects were initiated locally, and donors funded projects that addresed government priorities

3. Third phase 1990s and new millennium • Reorientation from state-led to private sector-led development; and Managing a Transition from Aid dependency to independence. NB: Growth slackened and picked up again; and aid became insignificant in macroeconomic variables. What constitutes Private sector-led development Vs the Role of the State.

Third phase (cont’d) • Aid no longer a major factor in the national economy or even Public investment Vs increased effort to attract foreign investment. • Complex policy choices due to rapid urbanization; declining popular electoral support as well as competitive regional and global environment – leading to initial reduced rate of economic growth. • Renewed growth policy confidence following restoration of electoral support.

Significance of Periodization of Botswana’s growth performance NB: The institutional context and how interest of the key players were reconciled were crucial in explaining the forces behind some crucial development outcome, including how Botswana managed aid and coordinated donors .

WHAT ARE THE KEY FINDINGS? • Development Planning and its integration with the budgetary system has been the foundation of Botswana’s development Management Machinery and a basis for its resource management including aid . • State-led development has striven, with good effect, to minimize adverse consequences of the mineral-led economy’ syndrome – avoiding Dutch disease because the government has taken care not to spend more than the economy could absorb; • Reserve accumulation during boom periods and rapid response to adverse terms of trade shocks are two crucial facets of Botswana’s super-prudent macro-economic policy that treats diamond price increases as temporary and declines as permanent. The country’s development path has largely avoided both the Dutch disease and resource curse –signifying importance of prudent management – making it possible for a natural resource dependent country to enter into virtuous cycle . Thus success is due to effective state management under institutions of restraint. What is the evidence?

Evidence on Markets, Agents & Political Economy • Botswana is the oldest Liberal Democracy in Africa with a Market –based Economy. • Although Aid provided critical resources in the early years, the role of aid is now insignificant Vs domestic savings and investment. • It is basically a mineral sector led economy, while the share of manufacturing remained almost constant at 4 % and the share of govt. is relatively large. • Extreme shortage of skilled/educated manpower did not seriously affect economic growth partly due to increased inflow of aid in the form of technical assistance, and partly because Botswana avoided rushing into Africanization. • It is basically export-led growth mainly by FDI – setting in in motion a process of sustained growth, transmitted to the whole economy. • Govt. as conduit – functional – primarily on infrastructure and human capital under least corrupt system and leaders not prone to rent seeking.

Evidence on Markets, Agents & Political Economy (cont’d) NB: It is a story of export-led growth combined with economic & political stability with no predatory leaders & rampant corruption Major macro-economic puzzle relates to the fact that a growth rate of that magnitude, sustained for a long period, has had limited impact on structural economic diversification (especially for manufacturing) and the levels of unemployment and inequality in income have not been sufficiently reduced.

Evidence on Agents: State Resource Mobilization & Management • Government maintained open-door policy for & facilitated foreign capital (figure 1 & 2) • Govt. as the main domestic agent in savings and investment (figures 3, & 4) • Govt. was the major source of investible funds until quite recently (figure 4). • Govt. & private sector partnership, development, & citizen empowerment. • Cautious manpower localization policy with enhanced human resource development, and unreserved state direct intervention/support to deal with HIV/ADS.

. Evidence on Political Economy for Good Policies &Accountability The country’s political economy has had fundamental bearing on policy choices & Accountability: • Survival of multi-party system and how it ties relatively well with traditional consensus seeking approach that has deep roots in the Tswana culture. • Self interest in growth coincided with the interest of the Botswana ruling elite with roots in the cattle industry and in partnership with foreign investment. • Botswana developmental state managed the economy without itself getting excessively involved into “the nuts & bolds” of production. • Good structures for Public Accountability and Personal Responsibility with a less corrupt system and the blessing of leaders who are not prone to rent seeking.

Evidence on Political Economy & Accountability (cont’d) • The democratic system of governance appears to have enhanced good policies with national policies contested through regular elections and legislative roles, both enforcing a discipline of accountability for results that benefit the electorate more broadly. • Democracy has been in the interest of Botswana leaders – seen as magic wand with which to deliver a better public good by using it to attract foreign resources and also manage internal politics in which the opposition has been largely marginalized due to popular policies in place and democracy has worked to contain various interests and ensured social and political stability.

Significance of Good Management Factors Vs Good Luck • Significance of Tradition and History on Post-colonial Institutions; • Significance of National Development Planning and its integration with the Annual budgetary process as the foundation of development management machinery, including managing windfall gains mineral rent and aid. • Good governance record and quality of Political Leadership; • Degree of State extractive and saving capacities; • Prudent Macro-economic Management: good fiscal & monetary policies (such as pre-determined manpower and expenditure ceilings, good exchange & interest rates policies, and price stability –figures 7,8, 8). • Functional Judicial system – relatively independent of the legislature & executive, complemented with ombudsman-like institutions.

Significance of Good Management (cont’d) NB: The role of the state in Botswana is, in many respects, similar with the development success story of the “East Asian miracle" where the state has been strategically interventionist rather than crisis-driven under a capitalist market economic development formula/strategy. But the institutional context of rapid growth in Botswana – that is a multi-party democratic system of government – offers a sharp and refreshing contrast to authoritative and undemocratic regimes elsewhere ( including China and East Asian miracle economies) which do not have a history of democratic institutions until quite recently if at all.

Conclusion & Lessons for Policy In this case study, Botswana –illustrates the positive role the leadership can play in sustaining economic growth and development The essence of State-led development - depicted as an “indigenous developmental state”. It is basically a story of forty years natural resource export-led growth process in which: • A secure political elite (with an unimpeachable electoral support since independence) has pursued growth-promoting policies. • Developed or modified and maintained viable inherited traditional and modern institutions of political, economic, and legal restraint. • These institutions proved robust in the face of initial large aid inflow and spectacular mineral rents, producing a growth pattern that was both rapid and cautious.

Conclusion & Lessons for Aid. Botswana Case offers the following Lessons: • Significance of a locally initiated Development Planning and its integration with Budgeting. • Donors are asked to fund programmes and projects that are already identified in the plan as national priorities, possibly also to approach donors individually and also with sectoral specialization • .With the principle of development planning and how to identify priorities in place, the recipient can refuse aid that is not in national interest or is incompatible with national priorities. • The need to have/ develop Countercyclical instruments. • The importance of prudent Management for Growth as well as Public and Donors’ confidence rating. ent path that has largely avoided both Dutch disease and resource curse, and this resource-bases economy has been in a virtuous cycle since independence in 1966.

Conclusion & lessons for Policy (cont’d) Lessons for Ownership and Managing a transition are clear: 1.While Botswana’s historical and cultural context may be unique and may not be applicable elsewhere, it is imperative for aid dependent and resource based economies to strive with good effect to use Planning instrument to fortify ownership against donor onslaught; and also to minimize adverse consequences of “Dutch disease and resource curse to which many economies tend to be prone. The lesson applies to all. 2. Botswana’s super-prudent macro-economic policy of treating diamond price increases as temporary and declines as permanent – leading to reserve accumulation during boom periods and rapid responses – is internationally relevant, especially for resource based economies. 3. The importance of encouraging and attracting private investment applies to all.

Conclusion & Aid Lessons (cont’d) Botswana’s success story is not due to good fortune or good luck factors, but largely a result of effective/good management effort, pursued by a relatively strong and competent state that provides visionary and management role ( operating) under viable traditional and developed modern institutions of economic, political and legal restraint. Conducive policy environment, including institutional context of restraint, broad-based development planning, pragmatism, etc are necessary for growth and Managing a Transition from Aid Dependence to Independence.

Conclusion and Policy Lessons (cont’d) The above explanations seem to be consistent with political economic models in which policy makers who need to satisfy larger constituencies, who face checks and balances within the decision making process, who are subject to electoral reviews and who function in stable institutional environments are more likely to produce good policies for growth (Humphreys and Bates,2002; 2004). A more encompassing regime would choose to expand future productive capacity rather than maximize transfers to the narrow elite, while the political stability and well established democratic process of regime change or conflict management ( as is the case in Botswana) also helps to reduce the perception of higher investment risks or capital flights typically associated with violent regime change. NB. Botswana Case Illustrated by Global Fund Assistance to the HIV/AIDS Sector.

Table 2: Electoral Performance of Major Parties in Botswana 1965 – 19

Figure 4.1 Trends in Aid Flows, 1960-2005 • Source: OECD DAC statistics and World Development Indicators April 2007.

Figure 1: Government Expenditure and Foreign Aid

Figure 2: Gross Domestic Investments and Gross Savings as %GDP

Figure 3: Government and Private Sector Gross Investment as %GDP

Figure 4: Government Savings and Private Sector Savings as %GDP

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Aid Ownership & Relationship – The Botswana Example. (The North South Institute Conference – Does Aid Work?)