Trade policy holds and the 'economic transformation' question
Bakang Ntshingane | Friday February 7, 2020 13:07
The fundamental question from Dr. Matsheka’s maiden delivery is: What will it take to truly transform the economy, and does the budget demonstrate that appetite? If we judge the budget entirely on the resource allocation and reallocation metric, the verdict is wobbly.
Dr. Matsheka’s speech was true to form in terms of following the template of government constructed budgets. It was also a gloriously painted picture of positive rhetoric dashed with a serious expression of concern for state-owned enterprises and their inefficiencies.
We can gather that the government has a deeply seated interest in using industrial policy as a broad guideline in its economic policy regime. I was particularly struck by the centrality of the import-substitution industrialisation approach and export-promotion strategy as instruments of economic diversification. Rightly so, there’s an urgent need to refocus and have a deeper conversation punching on the pertinent questions around the economy and trade policy as a key contributor to Botswana’s broad economic development strategy. This will not be an argument on the merits of free trade; if anything, that case has been long made and won by its proponents since the advent of globalisation.
The main thesis of the speech was that government would be refocusing existing policies to drive them towards its main agenda of economic transformation. There was also a lot of focus on mentioning private sector-led growth. The simple rationale for this is Botswana’s dire need to correct the structural flaws in its economy, particularly the diversity of its income base.
The country has been heavily dependent on the mining sector. In addition, Botswana is heavily dependent on imports and as a result is battling a negative trade deficit. The ideal picture of any economy in the context of globalisation, jobs growth etc., is that we must at least be self sufficient in basic products without having to resort to importing everything.
Basic economic and trade theory provide guidance in this manner. We must imagine: if the world had no free trade and Botswana was closed off, we would have no choice but to produce our own food, clothes and everything else. Then as societies begin to get more complex and countries begin to open up we would find ourselves in a position to begin trading and exchanging goods with our immediate neighbours, based on each other’s ‘comparative advantages’, as economic theory would put it. Botswana and many other developing countries weren’t fortunate enough to reach a state of full productive capacity and self-sufficiency before the wave of globalisation hit in the 1960s and 80s.
At the risk of confining this to too much theory, the real question that the Botswana government must ask itself following the reading of the budget in Parliament is how the import substitution strategy will work. The heavy focus on import substitution and export promotion is a brilliant way to use economic policy to fix and correct the structurally flawed economy we find ourselves stuck with. It is also an instrument that has proven to work many times over in industrialised countries. But for that to happen, contrary to what the President said about his role in the jobs creation debate, we cannot always leave industrialisation and job creation to free market forces all the time.
Sometimes, government must intervene through a mixture of heavy hand-holding. By choosing an import substitution strategy, this is a deliberate trade and economic policy move that will drastically reduce foreign imports and (hopefully) substitute them with more domestic production.
We agree that Botswana should as a matter of urgency and in the interests of creating more jobs, attracting more substantive FDI and growing local industries, reduce its import bill and import dependency. In order to do this, the state will have to be somewhat protectionist to a certain extent and incubate newly formed or already existing domestic industries to allow them to fully develop into very competitive and productive sectors. Former Minister Bogolo Kenewendo’s term had a string of decisions that banned imports of bottled water to protect local bottled water industries. Although there isn’t any empirical data to speak to this, from observation, the decision was an effective one.
In that same breath, trade policy can and should be used as an instrument of industrial policy to support development of industries. It can also apply to the cluster development approach that Dr. Matsheka mentioned.
Although successful in several ways and for so many industrialised countries, the implementation of this strategy has not always given the expected outcomes. It has failed in some Latin American and African countries, leading to high inflation and other economic problems. Korean economist Ha-Joon Chang has a whole body of work that delves deeper into the experiences of the developing world on free trade and globalisation.
On the other hand, the “Asian Tigers” Indonesia, Malaysia, Thailand and spectacularly then on to China and other East Asian economies all had striking results that have been used as points of reference for shifting to export-led growth. They committed to rapid growth of export manufacturing, pushing for more exports combined with a coordinated set of macroeconomic and structural policies designed to boost industrial exports.
Botswana is a very open economy and only ‘moderately’ protected by tariffs. We rank relatively well in FDI openness. With that said, there is no “perfect” model to follow. A series of calculated interventions will have to be made: opening up and closing borders to certain products, alternating between measured protectionist and liberalisation policies, import quotas, export subsidies etc.
The government also shouldn’t jump into complex industries that require intense skills and advanced human capital. As a small country, and perhaps to echo former Minister Kenewendo on this one, we should look into the huge potential that lies in becoming a manufacturing hub of intermediate goods and identifying the sweet spot in value-addition sectors.
*Bakang Ntshingane is a writer and political analyst with interests in politics, foreign and trade policy