__________________________________________________________________ Andrés Marroquín Gramajo Where did the Miracle Come From ? Exploring Institutional Formation in Botswana The African Continent is multifaceted . It includes countries such as the Sudan , where deep poverty and misery occur in a framework of a seemingly ever-lasting civil conflict , and , at the same time , countries such as Botswana , which has reached the highest rate of economic growth in the world . According to the data available , Sub-Saharan Africa is the only region in the world that did not grow during the second half of the twentieth century ( Gelb , 2000 ). This unfortunate situation has motivated several social scientists to explore the experiences of a few African countries that seem to be exceptional with the purpose of identifying the secret formula for growth in the continent . This is the case of Botswana . The economic performance of Botswana , however , is the result of an amalgamation of elements that include leadership , coincidence of economic interests , and particular characteristics of the country ( such as ethnic homogeneity ). This paper does not present the magic formula , but contributes to understand how the traditional ( and cultural ) structure of economic life Andrés Marroquín ( Ph . D ., George Mason University , 2006 ), is currently Professor of Economics at Universidad Francisco Marroquín . Preliminary versions of this paper have been presented in Montreal , at the 2006 meeting of the Canadian Association for African Studies ( CAAS ), and in New Orleans , at the 2005 meeting of the Public Choice Society . in Botswana affected the implementation of macroeconomic policies ( and the existence of institutions ) that have been regarded as key in the performance of the country ( Acemoglu et al ., 2003 ) 1 , and fiscal and monetary policies ( Beaulier , 2003 ) in particular . Large fiscal deficits can have negative consequences for short and long-term growth ( Baldacci et al ., 2003 ), which is evidenced by the recent crises in public finance in emergent markets such as Argentina . In Botswana , coordinated monetary and fiscal policies and restrains on spending , have contributed to the accumulation of reserves that have been a key 1 Acemoglu , Johnson and Robinson ( 2003 ) rightly identified important elements that have contributed to Botswana ’ s social and economic improvement : “ Our conjecture is that Botswana ’ s institutions reflect a combination of factors . These include tribal institutions that encouraged broad-based participation [ such as the Kgotla ] and constraints on political leaders during the precolonial period ; only limited effect of British colonization on these precolonial institutions because of the peripheral nature of Botswana to the British Empire ; the fact that upon independence , the most important rural interests , chiefs and cattle owners , were politically powerful ; the income from diamonds , and finally , a number of important and farsighted decisions by the post-independence political leaders , in particular Seretse Khama and Quett Masire ” ( p . 84 ). __________________________________________________________________ Laissez-Faire 45

__________________________________________________________________ element to palliate the volatility of the country ’ s revenues , which have been recently generated by the diamond industry . My field research suggests that there is a generalized mystique shared by many public servants regarding fiscal frugality . Direct interviews suggest that public servants are concerned with the harmful consequences of overspending and budget deficits . 2 This was summarized by Dr . Clark Leith when he referred to the current government party ( the BDP ), and the incoming elections at the time : The BDP has almost certainly got a very long time horizon . And so even if they are at risk for loosing the election this year , and nobody has indicated that likely to happen , but even if they were , their time horizon would suggest that they are looking at the long term , they have a discount rate much like any other political party in a committed democracy . 3 A senior officer of the Central Bank , regarding diamond revenues , supports this point : So they [ the Twsana people in general , and the authorities in particular ] managed to avoid these big white elephants … big national airports and jumbo jets … They said right from the very beginning , “ we are going to use this money , put it into a fund and it would be managed for development purposes only .” And then any recurrent spending budgets would have to be self-financed . In other words , if they built a hospital out of the funds , that they would have to have the income to be able to maintain it . So , they did not do anything unless they were sure they had the 2 Interviews conducted at the Department of Corruption and Economic Crime ( Gaborone , Botswana , July 2004 ). income and the means of running it on an ongoing base . 4 Another official expressed a similar opinion : Since the beginning all the mineral revenues were meant to be used for investment , not current spending . The aim has been to replace one asset with another asset . The mineral assets that are underground instead of being used for current consumption should be used to purchase other assets : physical assets , such as roads , school , and clinics , etc .; financial assets in the form of foreign exchange reserves ; and investment assets , like human capital to have better educated and healthier people . 5 Although there is agreement in the literature that attributes Botswana ’ s economic performance to the implementation of effective policies , little is known about the origin of such policies and of how these policies became institutionalized among public servants during the postcolonial period . An important exception can be found in Poteete and Marroquín ( 2005 ). They propose that the origin of current institutions is the overlapping interests of the government and cattle owners . This coincidence of interests has been instrumental in the avoidance of over-appreciation of the national currency ( the real exchange rate ), which is a requirement to avoid the so called Dutch Disease . In this article I build on this idea . Tiebout ( 1956 ) proposed that economic agents could move from one state to another to flee from excessive fiscal burdens . This implied that for states to 4 ibid . 3 5 ibid . ibid . __________________________________________________________________ Laissez-Faire 46

__________________________________________________________________ Figure 1 – REAL GDP GROWTH VS GOVERNMENT SURPLUS / DEFICIT ( 1975-84 ) SUB-SAHARAN AFRICAN COUNTRIES keep their taxable base they have to implement adequate fiscal policies , such as reasonable tax rates ( including the “ inflation tax ”) that do not encourage individuals to move out of their jurisdiction looking for better tax treatments . Based on Tiebout ’ s idea , I develop a simple gametheoretic model to shed light on the fiscal policy path that has been followed by Botswana ’ s authorities . For clarity , in some instances I also include and discuss data from Ghana as a suitable comparison country . The model explains the formation of institutions regarding two elements : 1 ) the movable characteristic of assets in pre- and post-colonial Botswana ; and 2 ) the overlapping economic interests of the government and the private sector . The overlapping of interests between the social elites and the bureaucracy was fundamental in the creation of a sound institutional capacity ( Poteete and Marroquín , 2005 ). The coincidence of interests suggests why the government implemented policies that favor the private sector elites , which had positive spill-over effects for the whole country . The two elements reinforce each other and have contributed to create the current mystique , widespread among Botswana officials , who tend to avoid government deficits . FISCAL DISCIPLINE AND GROWTH Fiscal deficits and economic growth are self-reinforcing ( Easterly and Schmidt- Hebbel , 1993 ). This means that higher rates of economic growth are usually associated with budget surpluses . Although a quantitative relationship does not mean causality , as Figure 1 shows , there is a positive association between the result of the budget and the real growth of the economy in Sub-Saharan Africa . 6 Between 1975 and 1984 none of the countries in the sample had negative growth and government surpluses ; budget 6 The source for Figure 1 is World Bank ( 2005 ). __________________________________________________________________ Laissez-Faire 47

__________________________________________________________________ surpluses in all cases where related with positive real growth rates . TABLE 1 — PER CAPITA GNP IN FIVE AFRICAN COUNTRIES FISCAL CONDUCT IN BOTSWANA In terms of its rate of growth , and the government surplus as percentage of GDP , Botswana stands out as exceptional . High rates of growth have been associated with budget surpluses . This result illustrates the effectiveness of macroeconomic policies that have been discussed in the literature on Botswana ( Acemoglu et al ., 2003 ; Poteete and Marroquin , 2005 ). There are different elements that might account for this rare result . The absence of predatory practices is usually associated with the figure of the first president of the republic , Seretse Khama , who , according to several civil servants , set the initial path towards good management and low corruption . 7 This culture of frugality has been present in Botswana since independence from Britain in 1965 , and helps explain Botswana ’ s economic performance compared with other African countries ( see Table 1 ). 8 7 Set of interviews conducted with retired civil servants in Gaborone , Botswana , June and July 2004 . 8 Before independence , however , there is evidence that without grants from the U . K . and the Colonial Development and Welfare Office , the government would have incurred in high deficits ( Republic of Botswana , 1966 , p . 8 , cited in Samatar , 1999 ). Annual Growth Rate 1960-80 1980-91 Ghana -0 . 8 -0 . 3 Cote d ’ Ivoire 2 . 8 -4 . 6 Nigeria 4 . 2 -2 . 3 Kenya 3 . 1 -0 . 3 Botswana 9 . 9 5 . 5 Source : Samatar ( 1999 ), p . 2 . MODEL To understand fiscal frugality in Botswana a simple model based on a decision tree is set up . Two arguments justify the use of this model : 1 ) Tiebout ’ s theory of state competition , and 2 ) the fact that the main assets in Botswana before independence were cattle , which is a movable commodity . In fact , cattle have been the main agricultural assets of the inhabitants of Botswana since pre-colonial times . Isaac Schapera , an anthropologist who studied the Tswana People , indicates in his classic A Handbook of Tswana Law and Custom that before the coming of the Europeans cattle were the most important medium of exchange , being accepted more readily in barter than any other commodity . They constituted the bogadi paid to a woman ’ s family at marriage . They were also the most suitable objects of sacrifice to the ancestral spirits , and so the means of securing supernatural protection and guidance . And probably most importantly , the mere possession of cattle was in itself a source of status , for a man ’ s wealth was estimated by the size __________________________________________________________________ Laissez-Faire 48