Doing Business in Africa: Botswana
Located in the center of southern Africa, landlocked, sparsely settled and mostly desert Botswana is by all accounts an amazing success story. Since independence from Britain in 1966, the country has featured a strong, democratic political system with a strong emphasis on the rule of law and human rights.
Each election Botswana has had to date has been documented to be free and fair and its political system is widely considered to be the least corrupt and most open on the continent.
In turn, this remarkable post-colonial history has created a society that is one of the most prosperous on the continent. Unlike all its neighbors, Botswana’s stability and complete lack of civil or foreign armed conflict has meant its government and people have, since independence, focused exclusively on social development and poverty reduction, in the process building a prosperous society that is one of the richest and freest in all of Africa.
Botswana is thus a country without the usual litany of significant problems typical of most countries on the continent.
Ease of Doing Business
Given this, what are business conditions like in Botswana? According to the World Bank, Botswana currently ranks 52nd out of 183 countries on its Ease of Doing Business Index – a measure created by the bank to gauge the degree to which commercial enterprises encounter regulatory hurdles, legal threats to property, and the time and money spent on things such as registering a business, ensuring right of title to property, and acquiring licenses.
By way of comparison, the United States ranks 4th on ease of doing business, right after Singapore, Hong Kong, and New Zealand.
What does this ranking mean? Take, for instance, the bank’s measure of how easy it is to start a business, which is depicted in Figure 1 below. From the figure one can see that the bank defines business-creation costs as consisting of the time and money outlays involved in the series of legal steps necessary for the entrepreneur must take in order to legally establish an in-country firm. Using this framework, the bank then tasks researchers to go through this process in order to establish in-country averages.
When this metric is applied to Botswana, the bank finds that Botswana ranks 90th out of 183 in ease of starting a business, making Botswana a fairly moderately easy place to start a legal commercial enterprise. To start a business in Botswana, one has to complete ten bureaucratic procedures that take a total of 61 days at a total cost of about $137, with no minimum capital requirement.
Figure 1:
How the World Bank Measures Ease of Starting a Business
Using similar metrics for other aspects of business operations, the bank has ranked Botswana in a number of other areas. To obtain a construction permit, for instance, Botswana ranks 127th out of 183 as it takes the completion of 24 procedures, which takes on average 167 days at a cost of $16,276, or about 2.6 times per capita income. Clearly, this is a significant problem and a major obstacle to business creation and expansion in this southern African country.
Continuing in its assessment, the World Bank has determined that in order to obtain and register property, Botswana fortunately ranks much better at 44th out of, again, 183 countries measured. To register property in Botswana, the bank finds, it takes the completion of five bureaucratic procedures that takes, on average, 16 days and costs five percent of the property’s financial value in fees and other costs to complete.
Botswana does equally well when it comes to obtaining credit, where it ranks 46th out of 183 – making the country one of the easier places in the world to obtain credit. Here, as depicted in Figure 2, the bank examines the legal rights of creditors and borrowers in secured transactions and bankruptcy law as well as the strength of credit information bureaus and exchanges.
When lenders have both strong legal rights and easy access to a wide variety of information about the client’s creditworthiness, reasons the bank, the more available credit will be. When information on borrowers is significantly lacking – as is the case in most of Africa – legal protections for creditors must in turn be very strong.
In Botswana, creditors have fairly strong legal rights and private credit bureaus hold information on a little over half of the country’s adult population.
Figure 2:
How the World Banks Conceptualizes Credit Acquisition
When it comes to protecting investors and minority shareholders Botswana continues to do very well. Here, the country ranks 44th out of 183 countries – making the country a good one for shareholders. Botswana received this score because it has strong disclosure requirements for corporate officials, has very strong director liability laws, and is a moderate place to bring shareholder lawsuits.
Botswana does even better when it comes to paying taxes. The World Bank estimates that pleasing the tax man in Botswana requires a total of 19 payments over the course of a year which, in turn, takes up to 152 hours to complete and can consume up to 19.5-percent of a company’s profits. Accordingly, Botswana’s tax burden is ranked 21st out of 183 nations – one of the best in the world in this category.
Unfortunately, when it comes to engaging in cross-border trade, Botswana receives a much lower score – largely due to its landlocked geographic location. In Botswana, to import goods into the country one is required to have nine documents for customs’ officials to inspect. On average, it takes a total of 41 days to import goods into Botswana with the cost amounting to $3,390 (excluding tariffs) per container shipped into the country.
The cost to export goods, though still bad, is somewhat smaller as Botswana requires six documents to be inspected by customs’ officials, while the total cost (excluding tariffs) is $3,010 per container, with delivery taking up to 28 days from point of origin. Compared to global averages this nets Botswana a ranking of 151st out of 183 on ease of engaging in cross-border trade.
Botswana does better when it comes to contract enforcement, where it ranks 70th out of 183 countries ranked on this issue by the bank. On average, reports World Bank analysts, it takes a total of 29 legal procedures to take a contract from dispute to resolution, at the cost of 625 days spent in court or otherwise attending to legal issues. The financial cost of pursing a contract claim, says the Bank, typically accounts for 28.1-percent of the value of the claim.
Finally, in terms of closing or liquidating a business Botswana returns to form. In this area the country ranks 27th out of 183 countries. Here, it takes 1.7 years to close an estate at a cost of 15-percent of the value of said estate, for a recovery rate of 63.7 cents on the dollar.
Table 1 presents a summary of these rankings as well as Botswana’s overall ease-of-doing business rating. Clearly, Botswana does well in a number of areas, but excels in the area of tax and closing out businesses and estates. It does less well in the area of trading across borders – not unexpected given its geography – and in the area of construction permits. Overall, however, Botswana is exceedingly business friendly and one of the easiest countries to do business in all of sub-Saharan Africa.
Table 1:
World Bank Ease of Doing Business
Assessment and Rankings: Botswana
Prospects
Botswana, as one of the most prosperous countries in Africa, has unsurprisingly had an impressive history of solid, steady growth. Between independence and 1999, for example, growth averaged nine percent per year as the developed world ate up the country’s diamonds, nickel, and gold – all of which continue to be the bedrock upon which Botswana’s modern economy is built. More recently, as the figure below shows, growth has dipped somewhat, averaging just over four percent over the past decade largely due to the deleterious effects of the global economic downturn since 2008.
Figure 3:
Botswana Economic Growth,
Percent Increase, 2003 – 2013
While the country remains heavily dependent on diamond and mineral extraction for its wealth, the recent global downturn has forced something of a reassessment of the economy.
This has led to a renewed effort to develop other sectors and, as a consequence, tourism, finance, and a light manufacturing sector aimed at servicing the large South African consumer market just over the border is beginning to develop. Also important, the cattle business – long part of traditional Botswanan society, remains an important part of the economy.
Combined with prudent macroeconomic policies that have kept both government debt in check and inflation at bay, things certainly look bright in this southern African country. There are, however, a few dark spots on the horizon that are worth discussion and which, if left to fester, could potentially cause significant problems for Botswana going forward. These problems are its geography, environment, and present near-total dependence on diamonds.
First, in terms of its geography, a quick reading of the significant shipping costs associated with engaging in cross-border trade in Botswana discussed above highlight the problems associated with growing a landlocked economy. Fortunately, Botswana has benefited from having its principal population center – the capital, Gaborone – situated just across the border and a short distance away from the South African cities of Johannesburg and Pretoria.
While Botswana benefits from South Africa’s markets and transport infrastructure, it is also ultimately very dependent upon what goes on its southern neighbor – in a way very much like the relationship that exists between Canada and the United States.
Unlike Canada, however, Botswana has no access to the sea independent of South Africa and is surrounded on its east, west, and north with much less stable states with far less developed infrastructure and which that pose significant national security risks.
The economic and political chaos in neighboring Zimbabwe, for instance, has led to an increase in illegal immigration from that country. Botswana, therefore, is very vulnerable to both political and economic changes in its immediate neighborhood – especially in South Africa.
Second, Botswana’s fragile ecology also has the potential to hurt economic growth or political stability in the future. The Kalahari Desert, for instance, covers a vast swath of the country’s northern regions and is widely considered to be an ecological treasure. Human encroachment, however, has led to problems with poaching of endangered wildlife while cattle ranching and other human activities has increased the rate at which desertification – the transformation of productive pasture land to unproductive desert – is taking place.
In the future these trends will likely only get worse as global-warming induced climate change put increased pressure on the country’s environment and water resources.
Finally, even though Botswana’s prosperity and small population has allowed the country to establish itself as one with a respectable standard of living, much of this is dependent upon economic rents produced from the country’s diamond-mining and mineral-extraction operations.
The country’s diamond reserves, though ably managed by the government, could begin to become exhausted as early as the 2030s – only sixteen years away. In turn this could put immense pressure on the economy and force the government to significantly cut back on its provision of social services – one of the most extensive such systems in all of Africa.
Still, the existence of a strong civil society, long-history of democracy, and a tradition of social cohesion and consensus seeking in the country should allow Botswana to weather these problems. There will be challenges, to be sure, but with nearly fifty years of progress behind them, the citizen of Botswana are likely to find that their future, like their diamonds, will be as glittering as their past.
Jeffrey Cavanaugh holds a Ph.D. in political science with a specialization in international relations from the University of Illinois at Urbana-Champaign. Formerly an assistant professor of political science and public administration at Mississippi State University, he writes on global affairs and international economics for AFK Insider, Mint Press News and BAM South.