What Norway and Botswana Did Right

Norway and Botswana each have huge natural resource wealth. For Norway it’s oil and Botswana, diamonds.

Both have avoided Dutch disease.

Natural Resource Wealth

Norway

After years of unsuccessfully looking for oil, Norway discovered that it controlled massive reserves.

The bonanza could have been catastrophic. When countries focus all of their land, labor and capital in one area, other industries suffer. But Norway encouraged technological research that achieved 45% extraction–20% more than the average. Norway also was able to use the technology beyond the oil fields. Its spillover helped related industries to develop and grow:

On the spending side, the Norwegian government eventually exhibited considerable discipline through a sovereign wealth fund. Here, I like to think of Odysseus. Tied to the mast, he could resist the Sirens’ song. Somewhat similarly, Norway limited what it could spend. It said 4% of a normal return was the max it could directly receive. Otherwise oil revenue had to expand domestic production. And when it grew too large for that, they said it had to be used outside the country.

The result? Norway limited its dependence on oil and created an investing vehicle. Yes, it would suffer when oil prices plunged. But still, the country had a buffer.

Botswana

Here, our story starts and ends with an election. In Botswana, for almost six decades, the same political party led the government. Now though, through a democratic election, the opposition won, and the defeated politicians are currently assisting the transition. In Botswana, a commitment to democracy and diamond revenue boosted Botswana to the World Bank’s middle income group of nations.

When it declared independence from the UK In 1967, Botswana was one of the world’s poorest countries. With close to 20 kilometers of roads and 22 citizens that had attended a university, the country’s economy depended on livestock production. At first, recognizing the extent of the country’s illiteracy, they asked former government administrators to return. Then, ready for their own representatives, they elected a group that wisely managed a diamond bonanza.

When diamonds were discovered, the new political leadership initiated a domestic resource sharing agreement so that each part of the country was equally wealthy. Then, when the diamond firm De Beers arrived, the country established a partnership agreement. Yes, ownership was equally split but 80 cents of every dollar of revenue went to the Botswana government. From there, diamond revenue facilitated a low tax rate, healthcare, infrastructure, and education funding.  Aware of how it needed to be regulated, they established a currency called the pula and a sovereign wealth fund.

Ranked by weight for 2022, a list of the world’s rough diamond mining countries has Russia at #1 and Botswana, #2. However, for value, Botswana was #1:

Our Bottom Line: Dutch Disease

Norway’s oil and Botswana’s diamonds remind us what a commodity boom can do to an economy when it employs the best land, labor, and capital. As it blossoms, other industries wilt. At home it’s tough for non-oil businesses to pay for increasingly expensive resources. Abroad, a nation’s currency appreciates when international markets clamor for the new commodity. The problems start because that stronger currency makes other exports less attractive.

Then, it gets even worse when other industries disappear and government depends on resource revenue for social welfare spending. When the boom turns to bust, there are no replacement industries to fill the void, government money dries up, and the source of consumer spending and incomes contracts. It happened in the Netherlands’ natural gas industry during the 1960s and ’70s (hence the name Dutch disease) where a windfall became a natural resource curse.

But not for Norway and Botswana.

My sources and more: To start, FT had Botswana’s election story while the Harvard International Review, an IMF Blog, and this article, detailed its economic history. And finally for Botswana, this IMF article had all you could want to know about its sovereign wealth fund. As for Norway’s facts, I quoted most of a past econlife post where I noted my sources. Please note that Botswana’s Jwanengour diamond mine and an oil rig compose our featured image. Also, most of today’s Norway facts and our  “Bottom Line” were first published in a previous econlife post.