FEW economies are better positioned than Botswana's to capitalize on the much-anticipated post-Apartheid market of Southern Africa.
Decades of stable government and financial prudence in this country have produced one of the continent's most enviable balance sheets. Botswana earned more than $300 million last year from its investment portfolio alone.
But rising urban unemployment may mark a weakness in the government's fiscal policy that some economists say could stunt the ability of Botswana's private sector to compete in an expanded regional market. Botswana lacks a substantial domestic manufacturing base. The country's membership in the South African Customs Union has largely undercut efforts to diversify the economy, according to diplomats here in the capital.
Despite extensive government promotion of commercial and industrial development, including equity financing, subsidized rents, and loan and overdraft guarantees, private investors have shied away from Botswana's small domestic market and the country's high interest rates.
Textile plants in the north produce jeans for Europe and the United States, but the economy remains dominated by diamond production.
With an unemployment rate approaching 30 percent, investors here in Gaborone say that looser foreign-exchange controls and an increased focus on export manufacturing are needed to create jobs.
"Export orientation is crucial to diversifying Botswana's economy," says one Western economist. "Considering the lack of sound investment opportunities, the government must restructure its incentive scheme to take advantage of opportunities in the South African market."
When South Africa officially becomes a part of the regional economy, the high tariff barriers under which South African industry has prospered will fall, business leaders here hope.
"It all depends on how the new South Africa deals with its own problems," said Baledzi Gaolathe, managing director of Debswana, Botswana's largest diamond producer that is owned by the government and DeBeers.
Mr. Gaolathe, a former permanent secretary in the Ministry of Finance, predicts that when tariffs are reduced, Botswana's financial-services sector and the strength of its currency (based on reserves of more than $3.5 billion) will make the country a magnet for investment in southern Africa.
No matter what happens in South Africa, Botswana may benefit. "It's a win-win situation for Botswana," according to a European diplomat. "If South Africa opens up its markets peacefully, business here will prosper. If change in South Africa is violent, investors looking for calm will make Botswana even more prosperous."
Some diplomats in Gaborone are concerned that majority rule in South Africa could result in the deportation of the 30,000 Botswanan miners employed there. But most observers discount that threat to the economy.
"There may be lots of trouble in new South Africa, but it's still an economic powerhouse requiring regional economic cooperation," a senior US official says.
The Southern African Development Coordination Conference, currently chaired by President Quett Masire of Botswana, will determine the future of economic relations in the region when the alliance lifts the last of its sanctions against South Africa.
For Botswana to capitalize on its infrastructure, ethnic stability, and relatively corruption-free civil service, diplomats here say the nation must still address broad development issues. At independence 26 years ago, the country ranked among the world's 20 poorest. But mineral wealth has provided Botswana with education and health-care programs that make it 1 of 5 African nations judged by the United Nations to have improving living conditions. Emergency public works programs supplement incomes withere d by the ongoing drought in the region.
But average annual incomes of $3,000 are skewed by massive diamond profits and do not reflect the standard of living for many Botswanans who herd cattle along the edge of the Kalahari.
An 8 percent annual urban growth rate has strained municipal services and inflated housing costs. Staple food prices are up more than 45 percent since the drought began, and inflation could reach 15 percent by the end of the year, according to Barclays Bank.
While Botswana is a de jure multiparty democracy, the governing Botswana Democratic Party is firmly in control.
Political observers here say the disorganized opposition could increase its three seats in Parliament to five or six in the next election.
Unlike Zambia, where the bulk of the country's copper wealth was squandered by the former government, Botswana has been well served by conservative budgets that avoided showcase construction projects and unprofitable state-owned industries.