Combatting the Dutch Disease: Learning from Botswana’s Success

Modern-day International Political Economy literature employs various theories to explain the rate of economic development in some countries versus others. A common quandary within these studies is the underdevelopment of nation-states with a large endowment of lucrative natural resources. The continent of Africa has received a lot of attention in this field. Why are living standards so low in many African countries when diamonds, oil, and other natural resources are abundant throughout the continent?

In 1977 The Economist named this dichotomous effect of natural resources on a nation’s economy the “Dutch Disease.”  Their case was named for the Netherlands, after its oil abundance was the causal mechanism to the decline in its manufacturing sector. The Dutch Disease (also called “the resource curse”) contends that if a nation-state is abundant in natural resources, its economy will center around that industry and not diversify in other sectors. As a result, the revenue from natural resources will be concentrated in a small portion of the population and stagnate other economic ventures, creating underdevelopment.

Social scholars have verified this theory using many case studies, but Botswana consistently acts as the exception to the Dutch Disease. Acemoglu, Johnson, and Robinson have even labeled Botswana an “African Success Story.”  Since its independence in 1966, Botswana has boasted peaceful, democratic institutions, high growth rates, decreasing child mortality and development of non-extractive sectors. Why has Botswana achieved this success while other resource-abundant nations have faced internal conflict and low growth rates? Acemoglu, Johnson, and Robinson report, “There is almost complete agreement that Botswana achieved this spectacular growth performance because it adopted good policies.”

Defining a ‘good’ versus ‘bad’ policy is a sub-debate within this literature that offers more insight for similarly-endowed African states. Jerven asserts that ‘good policy’ refers to the absence of bad policies, namely nationalizing the resource industry. After diamonds were discovered in 1987, DeBeers was created by Cecil Rhodes to manage diamond trading. Private investment developed the infrastructure in this sector, so public funds were not diverted in the process of diamond exploitation. While a small political elite often manages the revenues from resource extraction, DeBeer’s management prevented political leaders from having control of the diamond industry in Botswana. As a result, rent seeking and corruption were disincentivized and government revenues focused on national development.

Other exogenous factors led to Botswana’s growth success. Its regional trading partnerships, especially with South Africa, allowed the agricultural and manufacturing sectors to continue growing rather than being replaced by the diamond export industry. Inflation was avoided since the South African Rand backed Botswana’s currency.  Regardless of these other factors, Botswana’s government responded to their challenge of resource management with foundational policies for long-term growth.

Government Policies

While the Botswana government’s lack of involvement in diamond trading is beneficial from a free-trade perspective, policies have also been established by the government to maintain a high expectation of corporate social responsibility (CSR) with De Beers’ “Central Selling Association.” The Mines and Minerals Act of 1999 was established to ensure that the Botswana government ultimately manages the resources it was endowed with, and works in the interest of the people to act as oversight to diamond trading. As Robb points out in “A Diamond’s Wealth is Forever,” the Department of Mines, not the president, has jurisdiction over licensing. Additionally, the government revenues from diamond trading are fixed percentages of sales, rather than changing at the discretion of individual leaders. Robb also reports that the tax rate is moderately low to encourage investment, and royalties are tax-deductible. However, there is space for negotiation within these tax rates.

In terms of revenues, Hillborn writes that the government has a 50/50 deal with DeBeers, and has used this income to provide social programming and develop other industries. As mentioned previously, the private sector’s management of Botswana’s mines allows pubic capacity to be utilized in other endeavors.

Modern-Day Implications

The phrase “natural resources” often creates mental imagery of gold, copper, oil, and other lucrative luxury goods. However in our modern-day globalized supply chains, lesser-discussed natural resources have gained new attention.

In 2015, Newsweek revealed that the tantalum needed to produce iPhones often comes from the Democratic Republic of the Congo (DRC) in areas that may be managed by warlords. Tantalum could potentially provide large government revenues that, when managed effectively, would result in overall development per capita. However, the lack of governance in areas of DRC where Tantalum is abundant marks another missed opportunity for resource revenues. New technologies such as iPhones offer renewed opportunities for resource management. Minerals and gasses used in modern technologies have higher values and greater market revenues.

While these resources are finite, in many places deposits are still being discovered. These new discoveries give governments, especially in lesser-developed parts of Africa, incentives to change their policies. Botswana’s government approach of allowing private investment while offering oversight for its revenues is exemplary for modern-day cases.

In June, scientists in Tanzania discovered a large amount of helium below its surface.  While helium does not appear to be a luxury good, it is highly lucrative in today’s world. According to BBC’s report of this new discovery, helium is needed to operate MRI machines, rocket engines, and even laser scanners at grocery stores. Tanzania—a resource-rich country that still faces low living standards—has the opportunity to follow Botswana’s example and employ policies that will invite private investment, oversee the equity of these companies, and invest the revenue in sustainable development practices.

In combating the resource curse, Botswana does not have to be the “miracle” that social scientists idealize in development literature. Discoveries of natural resource deposits and the increasing value of minerals used in modern-day technologies offer two unique channels to combat the resource curse through responsible governance—for states and multinational corporations alike.


About Deborah Carey

Deborah is the Secretary for the World Mind, as well as the Contributing Editor for International Development, Sustainability, and Public Health Section. She is a senior in the BA/MA program for International Economic Relations.