INEQUALITY IN SOUTHERN AFRICA: AN ASSESSMENT OF THE SOUTHERN AFRICAN CUSTOMS UNION COUNTRY BRIEF: BOTSWANA1 Botswana is one of the most unequal countries in the world, with inequality in per capita consumption more than 30 percent higher than the average for upper-middle-income countries. However, it has moderately reduced inequality in recent years, faster than the rest of SACU. The main sources of inequality are inequality of opportunity and disparities in factor markets, with access to jobs and land being severely constrained and uneven. The country’s high spending on transfers and social services partially mitigates inequality, although transfers could be targeted better. Moving forward, Botswana needs to: (a) improve access to quality services to promote equality of opportunity across races and disadvantaged groups; (b) enhance conditions for private job creation, including by reducing barriers to entrepreneurship and self-employment and by enhancing access to productive assets (skills and land); and (c) continue investing in the capacity of the social protection system to respond to shocks, especially in view of the growing climate-related risks, while improving targeting of safety net programs. A. Inequality is high but has decreased Botswana is among the most unequal country in the The country has made some progress in reducing world, ranking in the top 10 among the 164 countries inequality. Between 2010 and 2015, its Gini coefficient in the World Bank’s global database of Gini coefficients, decreased from 60.5 to 54.9, or by 5.6 Gini points in five which measure inequality of per capita consumption (or years. This was the highest annual reduction in inequality income, depending on the country). The most recent data in SACU. put Botswana’s Gini index at almost 55 in 2015, over 30 percent higher than the average for upper-middle-income countries. Figure 1. Inequality remains the second highest globally a. Regional comparison of Gini coefficients b. International inequality comparison 70 68.40 68.77 80 South Africa, 2018 65 66.96 66.52 60 Namibia, 2015 61.60 Botswana, 2015 60.50 Eswatini, 2016 60 Lesotho, 2017 Gini coefficient 59.30 40 Gini coefficient 55 53.20 51.80 54.90 50 20 50.90 45 45.10 0 Countries ordered from lowest to highest Gini 40 Lesotho Eswatini Botswana Namibia South SACU Africa Region* Around 2001 Latest estimate Source: World Bank 2022. Note: Panel a presents the Gini coefficient of consumption for the whole SACU region, based on the earliest and latest rounds of household surveys from member countries. 1 This brief is largely drawn from a SACU regional report on inequality prepared by the World Bank and co-authored by Victor Sulla, Precious Zikhali, and Facundo Cuevas. The report uses the framework highlighted in Box 1: World Bank. 2022. Inequality in Southern Africa: An Assessment of the Southern African Customs Union. Washington, DC: World Bank. 1 B. Jobs, education, and demographic patterns are key contributors to inequality Disparities in employment outcomes are the primary tertiary attainment. Disparities in higher education, which contributor to inequality. Differences in labor market is key to human capital accumulation, account for about attributes (labor force status, industry of employment, 24 percent of overall inequality. However, the significance and occupation type) account for 36 percent of overall of these disparities has decreased, as tertiary education inequality. Among these attributes, differences in among adults increased from 16 percent in 2010 to 21 occupation type (such as senior managers, professionals, percent in 2015. Still, the levels of human capital remain and clerks), which reflect skills differences, contribute most relatively low. The World Bank’s Human Capital Index (HCI) to inequality. The “industry in which people work” does not estimates that a child born in Botswana in 2020 would on seem to affect inequality significantly. average reach only 41 percent of its potential productivity as an adult. This is lower than expected given the country’s Differences in educational attainment are another per capita GDP. key driver of inequality, especially in post-secondary or Figure 2. Decomposition of inequality a. Contribution of selected factors to inequality (%) b. Breakdown of the contribution of selected factors to inequality, percentage points 40 39.1 3.2 Gender 2.3 35.1 35.6 11.3 Demographics Hh Size 8.3 Age 24.6 27.9 17.4 30 Contribution to Inequality -4.1 25.9 Secondary -0.7 Education Primary -1.8 2.4 20.3 Post-Secondary 24.2 41.0 20 -0.1 Labor Industry 0.9 3.9 market Participation 6.0 10.6 Skills 16.4 10 28.8 Urban 0.2 -0.3 Location Region 5.3 10.8 0 Demographics Education Labor market Location 0 10 20 30 40 Contribution to Inequality 2010 2015 2010 2015 Source: World Bank 2022. Note: Panel (a) reports the contribution (%) of spatial, demographic, education, and labor market factors to overall inequality. Panel (b) disaggregates the contribution of each of these four factors into its various subfactors. Demographic factors contribute significantly to affects the capacity of a household to engage in economic inequality through the age of household members, activities. In that sense, households with more members of with an aggregate contribution to overall inequality of 28 working age, and fewer dependents, have a “demographic percent. This is largely because the age of its members dividend”. C. Inequality and the cycle of income generation It is useful to analyze the process of household expected inequalities in income distribution even before income generation to identify the sources of high and people interact with factor markets. The second component persistent inequality. The first step focuses on the pre- looks at the primary income distribution—how inequality income distribution, which is the inequality of opportunity is affected by access to factor endowments (or assets), that arises from differences in circumstances at birth and such as education, skills, land, and capital, as well as their during childhood, such as gender, race, location, parental use and returns from interaction with markets. The third education, and family wealth; these differences create explores the secondary income distribution, assessing how 2 inequality is influenced by taxes and government transfers. for the role of social services (such as education, health, and Finally, the fourth component relates to the tertiary income infrastructure). distribution—the disparities that remain after accounting Box 1. Framework to assess sources of income and consumption inequality The SACU regional inequality report uses an innovative framework built around the process that underlies household income generation to identify sources of high and persistent inequality. The framework is organized into four sequential components, presented in Figure 3. Figure 3. Framework to assess sources of income and consumption inequality Pre-income distribution: Inequality of opportunity Arising from circumstances at birth or family backgroung (including gender, race and parental education). Primary income distribution: Inequality of pre-tax income Influenced by differential access to, use of, and returns to assets (such as education, labor, land and capital). Secondary income distribution: inequality after taxes and transfers Affected by the structure, implementation capacity and incidence of fiscal policy. Tertiary income distribution: Inequality after social services Resulting from the provision of and access to public services (such as health, education and infrastructure). Source: World Bank (2022). High inequality of opportunity Children in Botswana face stark differences in life Children from low-income households tend to grow prospects depending on their circumstances at birth up without access to key services, which reduces and during their early years. Their opportunities are their opportunities later in life and so perpetuate unequal because of circumstances they inherit and cannot inequality. Region of residence and living in urban areas control, such as gender, region of residence, and parental are important because of their association with access to characteristics. Inherited circumstances account for 20 services. Children raised in lagging regions and rural areas percent of inequality in consumption per capita;2 and this are deprived of access to services that are critical for their number has doubled since 2010. Region of residence and development, such as water, sanitation, and electricity at living in urban areas account for almost all inequality of home, as well as early childhood care and education. opportunity, overshadowing circumstances such as gender and age. 2 This figure should be taken as a lower-bound estimate of inequality of opportunity, since it captures the role of only a subset of circumstances—those that were available in the household survey. 3 High wealth inequality limits the socio-economic 70 percent of land is under customary tenure, ruled mobility of new generations. The richest 10 percent of by traditional leaders or structures that are largely households own 57 percent of all assets and 61 percent unregistered. There is widespread use of communal land, of financial assets, while the poorest 50 percent own only which is highly degraded, overgrazed, and vulnerable to 4.2 and 3.3 percent, respectively. As wealth and assets are bush encroachment. Farmers on communal land are less passed on from one generation to the next, such inequality likely to have land titles, which makes it difficult for them to limits the scope for upward mobility among the next access financing and contributes to low productivity. generation. Taxes and social spending play an important Inequities in access and returns to productive role in reducing inequality assets (labor and land) Taxes and transfers contribute significantly to lower A lack of job creation and skills mismatches hamper inequality. Driven primarily by high spending on education the ability of disadvantaged households in urban areas and health services, complemented by progressive personal to generate income, and so limits the reduction in income tax and social assistance programs, Botswana’s inequality. Unemployment remains high, at 20.7 percent fiscal interventions help reduce inequality. Without social of the labor force in the last quarter of 2019; it is almost twice transfers and social spending, inequality would be about as high among young people. Disparities in labor market 10.3 Gini points higher. This redistributive fiscal impact is outcomes stem from bottlenecks that limit the capacity among the highest in the world, at least among countries of firms to create jobs and from barriers that constrain in which comparable studies have been done. the ability of workers to access such jobs. Although many The impact of social assistance could be increased factors are at play, one stands out: having post-secondary with better targeting. Spending on social assistance and tertiary education is vital both for getting a job and for programs is high by international standards. But the main getting better wages once employed. social assistance programs use categorical targeting, rather High wage inequality fuels overall inequality. Given than a measure of economic need; this limits their capacity the limited number of skilled workers, returns to post- to reduce inequality. Redirecting resources towards secondary education are high, which in turn increase lower-income households would have a larger impact on wage disparities. The gender wage gap is also substantial: inequality without requiring additional resources. among people with similar education, backgrounds, and Social protection was swiftly mobilized to respond occupations, men earn on average 24 percent more than to the COVID-19 crisis. The pandemic has wrought women. unprecedented socio-economic challenges across the Land ownership in rural areas is highly unequal, world. The safety net system responded with the relatively and land is subject to low productivity exploitation. swift introduction (by April 2020) of the Food Hampers Unequal access to land and the lack of titling are critical program, which assisted more than 400  000 households issues underpinning disparities in rural areas. Over with food packages and agricultural products. D. Policy considerations to accelerate the reduction in inequality Improve access to quality services to promote equality effective area of action. Investing in young children in their of opportunities across races and disadvantaged first 1,000 days has lifelong implications and could help groups. Spending on social services is high by international break the intergenerational cycle of unequal chances. standards, but results are often below those of other Consider better targeting of flagship social assistance countries with similar development levels. The policy programs. Social grants provide important benefits to agenda could focus on elevating the quality of public low-income households, but their categorical targeting education and health services, improving basic services approach is not the most cost-effective. Tweaking their such as electricity, and addressing coverage gaps for design and eligibility rules to reduce the transfers that reach disadvantaged groups and regions. In education, the focus high-income households could increase their impact on should remain on enhancing early childhood development inequality without the need for additional fiscal resources. programs and improving basic education at all levels, in terms of both enrollment and learning outcomes. Early Revitalize employment creation and remove barriers childhood development initiatives offer a particularly cost- to jobs for disadvantaged populations. Although the 4 structural reform agenda aims to resume a path of growth framework. In rural areas, addressing land titling issues will and employment generation in the economy, removing be important for improving productivity and enhancing barriers to self-employment and entrepreneurship and economic opportunities. strengthening programs to boost employability will help alleviate the lack of job opportunities. Relaxing regulatory Continue strengthening the responsiveness of the constraints and simplifying legislation could help boost social protection system to shocks, with attention entrepreneurship, self-employment, and small businesses, to climate risks. The system demonstrated its adaptive all sectors with untapped potential. This could help get capacity to weather the COVID-19 crisis. Going forward, as people working, as it does in other developing countries, part of the strategy for adapting to growing climate risks, instead of staying unemployed, becoming discouraged, ongoing investment is needed in the responsiveness and and depreciating their human capital. To enhance the efficiency of the system for horizontal and vertical expansion. inequality-reducing impact of this option, low-skilled This would allow it to reach new affected populations entrepreneurs could be supported with business skills, (horizontal expansion) and/or increase support to existing socio-emotional competencies, and grant financing beneficiaries (vertical expansion). Digital technologies and to address constraints that go beyond the regulatory mobile payments could support such initiatives. References World Bank. 2022. Inequality in Southern Africa: An Assessment of the Southern African Customs Union. Washington, DC: World Bank. 5