Call for tax reforms to attract FDI
Isaac Pinielo | Tuesday November 18, 2014 15:52
Professor Roman Grynberg, a senior research fellow at the Botswana Institute for Development Policy Analysis (BIDPA) said creation of tax-free export processing zones would be an important first step for the country.
He however cautioned that to reform the tax system without addressing the underlying causes of lack of competitiveness of firms located in Botswana would not result in long-term sustainable investment.
“This has certainly been the experience of Namibia. Thus, Botswana has to address its skilled professional and labour costs, transport costs and its interest rates,” he advised.
He stated that opening the middle and top end of the labour market in Botswana to international competition for professional and highly skilled workers and managers will have the effect of driving down costs.
Grynberg also said that dismantling the restrictive trade practices of professional associations in the recognised professions in Botswana is also vital, stressing that eliminating the barriers to increased competition in trucking and removing restrictions that raise the transport costs of getting containers to ports is essential.
He indicated that the building of new and low cost railway to the coast is essential for the development of the coal and low value base metal sectors. He however warned that this would be very expensive despite enabling a transformation of Botswana.
“It will also lower the cost of container shipping to the coast. There should also be conduct of a selective low interest rate policy for projects of national importance,” he said.
According to Grynberg, Botswana has a combination of vast potential energy resources and what are emerging as very substantial deposits of base metals. He advised that the country needs to develop synergies between these resources in line with the sort of policies used in Malaysia, South Africa and other countries to provide strong incentives for firms to locate.
The professor further pointed out that no matter how well the country manages industrial policy, it will always be disadvantaged by virtue of being small and landlocked. Nevertheless, he said Botswana can compensate investors for that disadvantage by providing electricity, the source of which it has in abundance, by pricing at marginal cost to strategic industries in its export processing zones.
He mentioned that the reason Botswana has failed to diversify is due to the so-called ‘Dutch disease’, a phrase referring to the negative consequences arising from large increases in a country’s income.
The mechanism is that an increase in revenues from natural resources will make a given nation’s currency stronger compared to that of other nations, resulting in the nation’s other exports becoming more expensive for other countries to buy, and imports becoming cheaper, making the manufacturing sector less competitive. Another reason, he said, is the ‘resource curse’, which refers to a paradoxical situation in which countries with an abundance of non-renewable resources experience stagnant growth or even economic contraction. The resource curse occurs as a country begins to focus all of its energies on a single industry, such as mining, and neglects other major sectors.
“Dutch disease in only one manifestation of the broader concept that resource intensive economies tend to suffer from a number of economic and policy phenomenon,” he explained.
He stated that both the World Trade Organisation (WTO) and the Environmental Protection Agency (EPA) do provide serious limitations on policy options, noting that it would not be legal to use some of the subsidy programmes used by Malaysia in the past.
Professor Grynberg also revealed that Botswana’s cost strengths lie in low energy costs, commercial property rental and unskilled labour costs. Its greatest weaknesses, he added, are in cost of skilled labour, professionals and management, as well as transport costs and nominal interest rates on loans.
“Only in low transport cost and energy intensive projects does Botswana approach the middle ranking of countries as a destination for investment,” he said. Given its current cost structure and tax system prevailing, the professor asserted that Botswana is uncompetitive in this range of industries.