43816 Summary of Botswana Investment Climate Assessment Botswana has a reputation for excellent macroeconomic management, modest inflation, and extremely rapid growth. Others aspects of the Investment Climate also appear favorable. Firms complain little about many areas of the investment climate, such as regulation and infrastructure, and objective indicators usually confirm that Botswana compares favorably with other middle income economies in these respects. Although firms have concerns in other areas such as corruption, taxation, and macroeconomic instability, Botswana often compares favorably with other SACU economies and high performing middle income economies in these areas as well. Despite having a relatively attractive investment climate, firms in Botswana are not highly competitive. Both labor productivity and total factor productivity are low compared to the best performing middle-income economies, few firms export, and domestic firms sell a large share of their output to the Government. Given that with a few exceptions--most notable worker skills and education--the investment climate appears favorable, this suggests that structural problems (e.g., the small size and remoteness of the economy and the macroeconomic effects of mining on the rest of the economy) probably play an important role in affecting the firm competitiveness. The Botswana Investment Climate Assessment evaluates the investment climate in Botswana in all its operational dimensions to promote policies which will strengthen the private sector. The ICA uses two firm-level surveys covering small, medium, and large enterprises with 5 or more employees and microenterprises with fewer than 5 employees in the same sectors. Improving worker skills and education, improving tax administration, business licensing, and land allocation could help resolve Botswana's problems regarding evasion and informality. Macroeconomic Framework productive. Botswana's total factor productivity (TFP), which takes into Despite being one of the poorest countries account both labor and capital use, is in the world at its independence in 1966, higher than in all but three countries in Botswana has grown very quickly since sub-Saharan Africa ­ although it is this. Although this is partly due to considerably lower than in the best abundant natural resources (especially performing middle-income economies diamonds), good policies and strong (e.g., Chile, Malaysia, and South Africa). institutions have played an important role. Most growth, however, has been heavily concentrated in the mining sector while Labor Productivity manufacturing's share of GDP has Argentina declined modestly despite the Chile Malaysia government's concerted efforts to promote Mauritius economic diversification. SouthAfrica Namibia Swaziland Firm Performance & Lesotho Competitiveness Botswana $0 $10,000 $20,000 $30,000 Value-added per Worker (2005 US$) Productivity Compared to other sub-Saharan countries, Botswana's firms are relatively Key Investment Climate Total Factor Productivity Constraints Argentina Chile Malaysia Access to Finance Across the board, irrespective of size or SouthAfrica Namibia sector, enterprises cited access to finance Swaziland Lesotho as the most serious obstacle. Firms in Botswana finance about 10 percent of Botswana 0% 25% 50% 75% 100% working capital through bank financing. Although this is similar to other TFP (as % of TFP in South Africa) countries in the region, it is lower than in Chile, Malaysia, and Mauritius which Unit labor costs (labor costs as a percent finance between 30 and 35 percent. of value-added) are relatively low in Another aspect more specific to Botswana. Because wages and Botswana is the degree of government productivity are both lower than in most intervention in the sector. Firms are far of the middle-income comparator more likely to have loans from the countries, firms could potentially remain government than in any of the other competitive despite low labor SACU economies. productivity. Exports ed 100% nc 90% Because uncompetitive firms are often naif 80% 70% able to compete in domestic markets due ent 60% to natural barriers (e.g., remoteness) and 50% 40% policy barriers (e.g., tariffs and quotas) 30% to trade, the ability to compete on tmsevni 20% 10% international markets is an important of % 0% indicator of competitiveness. In this ana a ile respect, enterprises in Botswana perform Ch ntina Na mibiaazilandth Africa Malaysi Mauritiusge less well. Less than a quarter of Botsw Sw Sou Ar manufacturing enterprises in Botswana export and, on average, exports account Retained Earnings Bank Financing for only about 10 percent of output. This Trade Credit Other is lower than in any of the comparator countries. Macroeconomic Instability Macroeconomic instability is perceived Sales to the government, government as the second most restrictive factor to agencies and state-owned enterprises are the investment climate, despite more important in Botswana than in Botswana's reputation for excellent other countries, and are, on average, macroeconomic management, modest more important to domestic firms than inflation, and extremely rapid growth. exports. Together these provide strong The timing of the survey probably evidence that despite a favorable impacted the results, due to a burst of investment climate, firms do not appear inflation at the time of the survey due to to be highly competitive. the devaluation of the pula. Taxes security are relatively high. The median Tax rates typically rank among firm reports that the combined cost of enterprises' greatest concerns in crime and security is about $112 per investment climate assessments. worker per year or 0.6 percent of sales. Botswana, however, is known for its The cost in US dollars is lower than in favorable tax environment. The total Namibia or South Africa, but is higher company tax rates are lower than in most than in most of the middle income of the comparator countries, and broader comparator countries. measures of tax rates also suggest that the burden of taxation is low. Access to Land Although the government of Botswana Complaints may thus stem from the fact supported land market development and that manufacturing firms receive efficient use of land since independence, preferential tax treatment, resulting in access to land is still a major the perception that service enterprises impediment to private investment. carry an unfair burden. Despite low tax Fewer firms own their own land in rates, non-compliance is a problem in Botswana than in most of the middle- Botswana relative to other middle- income comparator countries and firms income economies. were more likely to say that attempted purchases had failed. Swaziland Thailand Labor Skills South Africa Lesotho Manufacturing firms tend to be more Chile Malaysia concerned about skills shortages than China firms in retail trade or other service Namibia Mauritius sectors. To the extent that the Botswana Argentina government would like to diversify the 0 10 20 30 40 economy towards manufacturing, Average effective tax rate (% of profits) workers skills and education might be a serious concern. One way that firms can deal with a skills shortage is to provide Crime firm-based training; however, only 38% Firms in Botswana rated crime, theft and of manufacturing firms in Botswana disorder as the fourth most serious provide training. This is fewer than in constraint. The direct costs of theft and most of the comparator countries. HIV/AIDS Swaziland HIV/AIDS has the potential to be a Botswana severe burden on the private sector in SouthAfrica Botswana. Botswana has one of the Namibia highest rates of HIV infection in the Mauritius Argentina world. Chile Malaysia Both firms and the Government appear 0.00 0.25 0.50 0.75 1.00 to have responded vigorously to the Losses due to crime ( % of sales) crisis. Botswana has the highest percentage of firms issuing HIV prevention messages (65%), the highest evasion appears to be relatively higher in providing anonymous HIV tests (20%), Botswana than in other middle-income and the second highest distributing free economies. That is, the concern might condoms (38%). Moreover, according to not be about informality as much as tax data from UNAIDS, the Botswana evasion by registered firms. Although government spends more on HIV/AIDS registration dies not seem to be the only per worker than in any other surveyed issue, the Doing Business report African country. suggests that registration procedures are quite burdensome. Reducing them might Botswana's low rate of absenteeism is further reduce informality therefore surprising, but this may reflect the strength of the national health sector Conclusions in comparison to its neighbors, who tend · Competitiveness is an issue: few to report higher worker absenteeism. firms export, domestic firms rely heavily upon sales to the Informality government, and productivity is low Many firms in Botswana are concerned compared to other middle-income about competition from the informal economies. As well as reflecting sector. Despite this, the evidence from structural problems, this might also the microenterprise survey suggests that reflect problems with worker skills informality is not particularly high in and education. Botswana; almost all (97%) of the · The government has been active in microenterprises reported being promoting diversification, but registered with at least one government domestic firms are heavily dependent agency, compared to only about 75% in upon the government for many other Sub-Saharan African countries. services. Because firms are likely to over-report · Suggested areas for improvement their registration status, this might include improving tax administration underestimate informality. However, to reduce evasion, improving this is also true in the comparator business licensing to reduce countries and so still suggests that informality, and improving land informality is probably quite low. allocation. One possible explanation is that tax HIV/AIDS Prevention HIV prevention messages margorp Free condom distribution 70 Anonymous HIV testing 60 thiws 50 40 30 20 mrfifo 10 0 % tswana gola a ssau DRC ia mb rundi An zilandUgand mibia uritania Bu Bo Ga Swa Guinea-Bi Na Ma