More Es for Economic Diversification

For decades the government of Botswana together with the private sector has been talking economic diversification. Numerous policies and strategies have been established towards this goal. The 2009 economic crises illuminated the fiscal issues, declining revenues which are a medium term phenomenon. Government revenues and Botswana’s GDP has been dominated by mining particularly diamonds, however,  mineral revenues contribution to GDP has over the years declined from highs of 40% to the current 27%.

In the pursuit of economic diversification, government has introduced some programs at various times such as Financial assistance policy (FAP), ALDEP, youth grants, manufacturing incentives, etc. Still with this massive investment towards this goal we haven’t been able to witness progress and the real benefits of economic diversification. Sound economic diversification shouldn’t only have high level macroeconomic results but should be felt on the ground by the layman through growth in economic opportunities particularly growth in employment opportunities, growing middle class and lowering disparities between the poor and the rich.

Some of the issues that keep coming up when discussing economic diversification are growth in the local private sector and Batswana participation.  Citizen Economic Empowerment (CEE) is widely accepted as an essential component of economic development and diversification and lately the CEE policy has been said to be tightly intertwined to the Economic Diversification Drive (EDD). We are yet again pushing for introduction of new policies and strategies without necessarily having properly evaluated the previously failed, the unimplemented and the ‘still in progress’ policies. What is it that CEE is going to introduce that FDP or ALDEP or LIMID didn’t do? Most of the programs before have always been citizen empowerment focused, for companies to benefit from CEDA loans for example need a Motswana majority shareholder. Question of-course is, since we have always supported Batswana owned enterprises and we haven’t seen any fantastic results aren’t we wasting our efforts on the wrong course? Should we perhaps follow EDD which talks to local enterprises which basically means for as long as an enterprise is based in Botswana it’s eligible for incentives such as access to finance? Is moving forward with CEE further fuelling the sense of entitlement that most of us feel is the down fall of Batswana? During one of my interviews on DumaFm, I was asked what I think of EDD and as honestly as possible, risk isn’t on how it looks on paper but largely on how it’s going to be implemented. I’m quite wary on promoting sub-standard quality goods, uncompetitive pricey goods through the government market. In the short term EDD is supposed to serve as infant industry protection which will in the long term produce internationally competitive enterprises.

We need to start looking at “empowerment through excellence”; pursued in a way that is consistent with participation in a global economy that requires openness to trade, capital flows and migration. We live in a global village and we need to start acting and working the part. How relevant are our policies and strategies in this competitive world, for sound economic growth and diversification we need to start thinking outside the box and looking outside the border; have an export led economy and attractive enough for FDI.

The Return of the Great

2011 was a very confusing year; excellent diamond sales in the first half of the year followed by a big slump in the second half, USA battled with debt ceiling, the Euro zone countries faced larger problems of defaulting, the jasmine revolution in North Africa and the Middle East, a tsunami in Japan, all these resulting in volatility in commodity prices, disruptions to supply chains and general uncertainty has impacted businesses across the globe, slowing the recovery in both mature and emerging markets.  Over the year, fears of a double dip recession got stronger and seemed on the brink of the 1930s calamity, the question now is, will we see the return of the great depression in 2012?

Earlier this year at the FNBB budget dinner, colleagues brushed off fears of a double dip recession. There have been signs that the ‘apocalypse’ may not be eminent after all, In Europe things are looking promising; the first sovereign default in a developed economy has passed off without a problem though not easy; Greece is restructuring its debt. In America firms are hiring more and consumers are spending more. Industrial output jumped in January after surging in December by the most in five years, auto sales are booming. Consumer confidence has reached its highest point in a year and even the housing market is showing signs of turning around.

In Botswana we remain very wary, diamond prices are uncertain; mostly leaning towards a decline. Copper prices and other metals prices are expected to rise and then remain steady in 2012. Government budget has reached surplus after 3 years of deficit and there hasn’t been much reduction to government spending to affect the domestic market drastically. There are estimations for lower inflation in the second half of the year.

But is this a call for us to done our blue, black, white and bring on a Zebras win cheer type celebration? Definitely not, the worst might be averted but we still expect slow economic growth in 2012. Oil prices are not expected to fall anytime soon, rather we expect a rise in local fuel prices, though they are not at the historic high prices of 2008, they remain high enough to worry.

As the IMF and World Bank have stated, European countries need to stop focusing so intently on austerity and instead do more to generate growth. Collective action can help set the global economy on a more robust growth trajectory by fostering global demand rebalancing; however, the greatest challenge for the global economy in this slow growth environment is to raise productivity without losing job opportunities for the millions who are looking for reasonably paid jobs to support their living standards. 

GLOBAL MUMBO JUMBO

While I prefer and rather enjoy writing on local happenings, I can’t help but join the rest of the world in gazing at the biggest markets, The United States of America and European Union, as they struggle with debt. Euro zone countries are battling with collapsing economies and debt ridden states while the US is in denial of a $14 trillion debt of which is in need of debt ceiling revision, otherwise, the US economy will face severe shocks pulling the global financial markets with it.

The EU is experiencing a situation of uncontrollable debt crisis; we have seen countries like Greece, Portugal, Ireland, Spain, all in huge debt and now Italy with one of the world's highest levels of public debt - at around 120% of gross domestic product, second only to Greece in the euro zone.

The US’s debt ceiling is ever changing, ranging from 60% as a percentage of GDP during Bill Clinton’s second term to 80% during George Bush’s term and now reaching a 100% of GDP. The US has a debt ceiling law which allows Congress to increase or lower the debt limit. The US is in this situation because the government spends more (than it receives) on bailouts, medicare, military supply, and social welfare and receives fewer taxes than can be attained. ‘The public debt is the people’s money, and today, the people are coming up short. Shrinking the public debt means shrinking more than just the services the government is expected to provide. It means shrinking the money supply itself, along with the ability to provide the jobs, wages and purchasing power necessary for a thriving economy.’ Ellen Brown, on the current situation of the US.
As per Wednesday 13/07/11, there was a deadlock on how the US would reduce its debt, there are basically 2 positions; 1. Punish the poor and save the rich or 2. Punish the rich and save the poor. It’s very clear that both wings need to come to a compromise to deal with this issue. In the mean time, we analyze potential problems facing the US and the rest of the world should a compromise not be reached soon.

If no agreement is reached, If the government subsequently admitted that it would be unable to meet some of its obligations, then confidence in the United States would evaporate overnight (the US losing its triple-A rating, leading to a massive crash in the dollar, dramatically higher interest rates (due to a loss of creditworthiness) and a crash in equities markets. Thus, global banking and financial market liquidity could dry up. Lending between institutions and people or businesses could possibly cease altogether or become cost prohibitive. Further, the US government will effectively start to run out of money to pay civil servants, government contractors, pensioners or holders of government debt.

The shock would quickly spread throughout the world and would very likely lead to a serious global recession, possibly worse than the one seen a few years ago. Lest we all forget the challenges brought forth by the crisis, but in case you forgot; most notable to us in Botswana is the tightening of consumer spending on luxuries, decline in diamond revenues and subsequently government revenues. Our economy is government driven and any cuts in government spending we have seen cause a big uproar from the civil servants and of course our local economy-tenderpreneurs suffer the most.

The debt ceiling is simply a cap on how much money the government can owe both locally and internationally. For instance, debt ceiling for Botswana is 20% of GDP, and currently we are around 18% and we know of  government efforts in trying to reduce the deficit by not only increasing revenues but by reducing government spending. Money is an inflow and outflow of debits and credits, the liabilities of the government are the assets of the private economy; the national debt is what backs the money supply. While this may be, we should be careful not to let it get out of control; many lessons are to be learnt from the ‘superpower’ economies.