Reforms needed to avoid middle income trap � BoB
Brian Benza | Friday May 29, 2015 15:22
Botswana, which attained Middle Income Country (MIC) status as far back as 1992, has seen slowing growth, while productivity has declined in recent years leading to fears that the country has been locked in a MIC trap.
While still positive, economic growth has slowed in Botswana, as previous growth drivers weaken and the rise in per capita income wanes.
Addressing the media in Gaborone this week, Deputy director of the monetary and financial stability division, Mathew Wright said that tackling the constraints to transition from MIC status encompasses recognising that established institutions and procedures, however successful in the past, may not be sufficient to maintain the momentum to the next level.
“At the same time, an agenda focused on economic development should promote inclusive growth; the pursuit of inclusive growth fosters greater social cohesion, which enhances effective marshaling of available resources.
“For this to be achieved however, it is crucial that measures to bring about inclusiveness are closely aligned with considerations of economic efficiency as well as coherence and consistent application of policies,” he said.
The World Bank defines a high-income economy as a country with a GNI per capita above US$12,746.
Botswana’s Gross National Income (GNI) per capita currently stands at around $7700.
Other international development institutions such as the IMF and AFDB have also observed that Botswana and several other African middle-income countries need to implement momentous reforms to avoid a ‘middle income trap’, as economic growth rates gradually drop while per capita income has stagnated.
From high growth rates averaging over eight percent in the past decades that were responsible for the country’s quick rise from a least developed country to an upper middle-income economy, economic growth measured by real GDP has stabilised at around four percent in recent years.
Botswana’s economic growth, which ranged around at an average of 8.7 percent in the period 1996-2001, slowed down to 4.4 percent during 2002-2006, before further easing to an average 3.9 percent during the period 2007-2013.
According to Wright, a unity of purpose is also required for Botswana to discard incongruous policy objectives that emerge from competing interests.
“The successful earlier transition from LIC to MIC could have resulted in a diverse mix of competing interests in an economy, with potential to undermine the unity of national purpose required for the next stage of development, and resulting in diffuse and sometimes contradictory policy objectives,” he said.
In a 2015-2019 Botswana Country Strategy Paper (CSP) released this week, the African Development bank (AFDB) also has the same advice for Botswana, urging the country to review past policies to make the case for a national transformation to avoid a middle-income trap.
According to the CSP, the need to transform the structure of the economy has long been recognised, but the sense of urgency seems higher now than in the past.
“An ambitious agenda for new sources of economic growth and employment needs to be set. High and sustainable growth would require a productivity-driven economy. This approach will reduce the crowding out of the private sector, while seeking to support private-sector activity through investment in high impact infrastructure, and regulatory and other structural reforms,” stated the AFDB.
While the AFDB has said that it cannot address all facets of Botswana’s middle-income trap, the Abidjan-based bank said it could provide support in priority areas related to the Bank’s experience and knowledge at both sector and thematic levels.
Echoing the AFDB’s advice, IMF researchers noted that Botswana must commit to finding new engines of growth to thrust the country into a high-income status, while vigorously pursuing policies to diversify the economy.
According to the pundits, returning to an era of strong growth and accelerating Botswana’s convergence to higher income levels would require policies to reinvigorate productivity growth. These include improving the quality of public spending, notably in public investment projects and education to ensure the transformation of diamond wealth into sustainable assets.
The concept of a middle-income trap grew from the observation that middle-income countries graduated to high-income status far less often than low-income countries became middle-income countries.
From 1960–2012, fewer than 20 percent of middle-income countries—and none from sub-Saharan Africa—became high-income states, compared with more than half of low-income countries graduating to middle-income status.
The seven small middle-income countries facing this trap in sub-Saharan Africa are Botswana, Cape Verde, Lesotho, Mauritius, Namibia, Seychelles, and Swaziland.
“Returning to an era of strong growth is necessary to achieve high-income status,” reckons the IMF researchers. But the question, for Botswana in particular is: what will be the source of future economic growth?