Botswana joins global top thirty in Economic Freedom

11 January, 2006
Botswana joins global top thirty in Economic Freedom

THE latest, 2006, "Index of Economic Freedom" has listed Botswana among the world's top thirty economies. With an improved overall score of 2.29, Botswana is now ranked alongside Norway and Portugal and ahead of 131 other countries [including 20 European states] that were examined in the report.

Botswana has also once more been rated as Africa's freest economy, a position it has held for all but one of the last eight years [in 2002 Botswana was ranked second to South Africa on the continent. The "Index of Economic Freedom" report is published annually by the Heritage Foundation in collaboration with the Wall Street Journal. This year's report, the twelfth in the series, was launched this morning in Hong Kong, which was once more ranked as number one in the survey.

The 2006 Index examined 161 countries, measuring their performance according to fifty variables grouped within 10 broad categories, being: trade policy, fiscal burden of government, government intervention in the economy, monetary policy, capital flows and foreign investment, banking and finance, wages and prices, property rights, regulation and informal (or black) market activity.
Scores for each category were translated to a scale of 1 to 5 with lower?scores being preferred.

According to its authors, the resulting composite global statistics once more show a strong correlation between economic freedom and relative prosperity, with those nations with the highest economic freedom ratings overtime also enjoying higher standards of living and per capita incomes.

Botswana's overall score has improved since the first, 1995 survey, from 3.33 to 2.29. This latest score places Botswana a point behind global leader Hong Kong (1.28). The global top five, with composite scores:

1. Hong Kong (1.28)
2. Singapore (1.56)
3. Ireland (1.58)
4. Luxemburg (1.60)
5. United Kingdom (1.74)
6. Iceland (1.74)

Botswana's continued lead over most other countries has not come without stiff competition. The 2006 report notes that out of the 157 countries graded in this year's report [four countries failed to be graded], 99 have improved their scores over the past 12 months. According to the report, although Africa as a whole still lags behind other regions, its overall level of economic freedom has been improving. Africa's top five performers are all now listed as being among the world's "mostly free economies".
Africa's top five in the Index for 2006, with composite scores:

1. Botswana (2.29)
2. Cape Verde (2.69)
3. South Africa (2.74)
4. Madagascar (2.75)
5. Uganda (2.95)

The report further contains profiles of each of the countries surveyed.
Part of the Botswana profile:
From 2006 World Economic Freedom Report: Botswana

Rank: 30
Score: 2.29
Quick Study
Trade Policy 1.5
Fiscal Burden 2.9
Government Intervention 3.0
Monetary Policy 3.0
Foreign Investment 2.0
Banking and Finance 2.0
Wages and Prices 2.0
Property Rights 2.0
Regulation 2.0
Informal Market 2.5
Population: 1,722,468
Total area: 600,370 sq. km
GDP: $6.1 billion
GDP growth rate: 5.4%
GDP per capita: $3,532
Major exports: copper and nickel, diamonds, textiles, meat products
Exports of goods and services: $2.8 billion
Major export trading partners: UK 66.5%, SACU 10.4%, Zimbabwe 2.4%?(2001)
Major imports: machinery and transport equipment, textiles, petroleum products
Imports of goods and services: $2 billion
Major import trading partners: SACU 76.6%, Zimbabwe 3.9%, UK 2.7%?(2001)

Foreign direct investment (net): $43.7 million ?Botswana has Africa's oldest continuous, multiparty democratic system of government, dating back to independence in 1966. Elections are routinely free and fair. The country's market-led economy, rated Africa's freest in the 2005 Index, encourages private enterprise and has enjoyed one of the world's highest average growth rates during the past four decades.

Despite ongoing difficulties in restraining government spending, Botswana retains an investment-grade rating from both Moody's and Standard and Poor's that places it on par with, or above, countries like Israel and South Africa. Botswana is among the world's biggest diamond producers; diamonds remain the source of over 75 percent of export income, 50 percent of government revenue, and one-third of GDP despite efforts to diversify the economy through lower tax rates, the elimination of exchange controls, and other foreign investment incentives.

HIV/AIDS threatens the country's economic future: Estimates indicate that up to one-third of Botswana's adults are infected. The economy has also been hurt by instability in Zimbabwe that has led large numbers of illegal immigrants to flee that country. As a landlocked country with a small population, Botswana depends on its neighbours and is an advocate for regional integration and free trade. Botswana's fiscal burden of government score is 0.5 point better this year, and its government intervention score is 1.5 points better. As a result, Botswana's overall score is 0.20 point better this year.

Trade Policy : Score: 1.5
Botswana is part of the Southern African Customs Union (SACU) with South Africa, Lesotho, Swaziland, and Namibia. The World Bank reports that in 2001 (the most recent year for which World Bank data are available), the SACU had a weighted average common external tariff rate of 3.6 percent. According to the U.S. Department of Commerce, "There are very few tariff or non-tariff barriers to trade with Botswana, apart from restrictions on licensing for some business operations, which are reserved for [Botswana] companies." Based on the revised trade factor methodology, Botswana's trade policy score is unchanged.

Fiscal Burden: Score: 2.9
Botswana has one of Southern Africa's lower tax burdens. According to the International Monetary Fund, the top income tax rate is 25 percent. The top corporate tax rate is also 25 percent. In 2003, reports the African Development Bank, government expenditures as a share of GDP fell 0.5 percentage point to 44.5 percent, compared to a 3-percentage point increase in 2002. On net, Botswana's fiscal burden of government score?is 0.5 point better this year.

Government Intervention: Score: 3.0
According to the World Bank, the government consumed 35.5 percent of GDP in 2003. During the period from April 2003-March 2004, based on data from the Bank of Botswana, Botswana received 6.9 percent of its total revenues from state-owned enterprises and government ownership of property. Based on revised data on revenues from state-owned enterprises, Botswana's government intervention score is 1.5 point?better this year.

Monetary Policy: Score: 3.0
From 1995 to 2004, Botswana's weighted average annual rate of inflation?was 7.57 percent.

Foreign Investment: Score: 2.0
Botswana is encouraging foreign investment, particularly in the non-mining sector. According to the U.S. Department of Commerce, the government has "abolished all exchange controls...has undertaken largely successful efforts to combat crime, including corruption, and to improve the delivery of the judicial system...[and] has instituted low corporate tax rates, the increasingly speedy processing of applications for business ventures, a stable macroeconomic environment, and a commitment to transparency."

The International Monetary Fund reports no restrictions on capital transactions of foreign exchange accounts."Foreign investors have access to credit on the local market. Botswana banks may lend to non-resident controlled companies and other non-resident owned business entities in Botswana without specific approval from the Bank of Botswana. In fact, foreign investors generally enjoy much better access to credit than local firms," notes the U.S. Department of Commerce.

"With the elimination of exchange controls, foreign investors may now participate in this bond market."
The government restricts foreign investment in some areas reserved for Botswana citizens, including butchery and produce, petrol filling stations, bars and liquor stores, supermarkets, and retail. The U.S. Department of Commerce reports that "there is a brief list of enterprises reserved for ownership by citizens and a minimum value for foreign investment in a number of industries, but these restrictions are not a meaningful impediment to serious foreign investment."

Banking and Finance: Score: 2.0
Botswana's banking system is competitive and advanced. There are five commercial banks, and all are foreign owned (two British, two South African, and one Indian). The government is involved in the banking sector through several financial parastatals-Botswana Development Corporation, the Citizen Entrepreneur Development Agency, the Botswana Building Society, and the National Development Bank. The insurance sector and the stock market have been growing strongly in recent years. There are no barriers to foreign banks, no restrictions on credit or interest rates, and no evidence of government influence on private banks. According to the U.S. Department of Commerce, "The abolition of exchange controls has allowed the further development of Botswana's?financial markets through the creation of new portfolio investment options.... The country's policies facilitate the free flow of financial resources. Credit is available on market terms."

Wages and Prices: Score: 2.0
Price controls have been eliminated, but the government exerts some influence over the price of livestock and agricultural goods. Local farmers receive extensive government relief in drought years in some cases, to such an extent that profits increase during drought, according to the Economist Intelligence Unit, which reports that "Cattle farmers?receive significant financial support and generous tax treatment." The minimum daily wage, determined by the Cabinet with advice from government, labor, and private-sector representatives, was extended to domestic workers in 2002.

Property Rights: Score: 2.0
The constitution provides for an independent judiciary, and the government respects this provision in practice. According to the U.S. Department of State, "The Botswana constitution provides for a judiciary, which is independent of both the executive and legislative authorities.... The legal system is sufficient to conduct secure commercial dealings." However, "the judicial system did not [always] provide timely fair trials due to a serious and increasing backlog of cases."

Regulation: Score: 2.0
Regulation is transparent and evenly applied. The U.S. Department of Commerce reports that the "government adheres to transparent policies and maintains effective laws to foster competition and establishes clear rules for operation." In addition, "Business licenses are issued following a routine review of proposed commercial activities, which is?carried out in a transparent and non-discriminatory manner." The government has made some efforts to make it easier for small businesses to open and operate, creating a one-stop shop for investors to avoid unnecessary bureaucratic steps to start a new business. According to the U.S. Department of Commerce, "Investors with experience in other?developing nations describe the lack of obstruction or interference by government as among the country's most important assets."

Informal Market: Score: 2.5
Transparency International's 2004 score for Botswana is 6 [latest indicator 5.7]. Therefore, Botswana's informal market score is 2.5 this year. "With the elimination of exchange controls, foreign investors may now participate in this bond market." The government restricts foreign investment in some areas reserved for Botswana citizens, including butchery and produce, petrol filling stations, bars and liquor stores, supermarkets, and retail. The U.S. Department of Commerce reports that "there is a brief list of enterprises reserved for ownership by citizens and a minimum value for foreign investment in a number of industries, but these restrictions are not a meaningful impediment to serious foreign investment."

Informal Market:Score: 2.5
Transparency International's 2004 score for Botswana is 6 [latest indicator 5.7]. Therefore, Botswana's informal market score is 2.5 this year.

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