Latest / The Productivity Podcast with Fexingo: Output, Efficiency, and Long-Term Economic Growth / How Botswana Turned Diamonds Into a Sovereign Wealth Fund
Transcript
- Lucas: In 1966, Botswana was one of the poorest countries in the world. GDP per capita was about seventy dollars. Today it's over eight thousand. That's not a typo. Luna: That's roughly a hundredfold increase. And it's not oil — it's diamonds. Lucas: Right. And the reason Botswana escaped what economists call the resource curse — where resource wealth actually makes a country worse off — is that they built something most resource-rich nations don't: a sovereign wealth fund that actually works. Luna: Before we dive into the fund itself, it's worth noting that if walking through the economy with us has made something click — honestly, if this conversation is worth a coffee to you, that's the link. It's buy me a coffee dot com slash fexingo. No pressure, just a way to keep this ad-free. Lucas: Yeah, seriously. We don't do sponsors, we don't do ads, and listener support is the only reason that's possible. So if it's useful to you, that's the spot. Back to Botswana. Lucas: So the discovery that changed everything happened in 1967. A De Beers geologist named Jim Gibson was on a routine survey and found kimberlite pipes — the volcanic rock that often contains diamonds — near a place called Orapa. Luna: And this was just one year after independence. The timing was almost too perfect. Lucas: Exactly. But here's where the story diverges from the standard resource-curse narrative. Botswana's first president, Seretse Khama, understood that if the country just signed whatever contract De Beers put in front of them, they'd end up like so many other African diamond producers — with almost nothing to show for it. Luna: What did he do differently? Lucas: He hired a single outside lawyer — a British barrister named Charles F. T. R. — and essentially said, 'Renegotiate the deal from scratch.' The result was a fifty-fifty joint venture with De Beers called Debswana. That split meant the government got half the revenue, not a tiny royalty. Luna: And that's still the structure today, right? Debswana is still fifty-fifty? Lucas: It is. And that alone put Botswana in a completely different position than, say, Sierra Leone or Angola, where diamond revenues were siphoned off by elites or fueled civil war. But even with that revenue share, the temptation to spend everything immediately was enormous. Luna: That's where the sovereign wealth fund comes in. Lucas: Yes. In 1994, the government established the Pula Fund — 'pula' means 'rain' in Setswana, and it's also the name of the currency. The idea was to save a portion of diamond revenue for when the diamonds run out, and to stabilize the economy against commodity price swings. Luna: How much do they save? Lucas: There's a fiscal rule: the government can only spend a certain percentage of mineral revenue — it's been around 60 to 70 percent historically. The rest goes into the Pula Fund. That's not just a policy; it's embedded in the constitution in some ways. Luna: So they legally capped spending. That's rare. Lucas: Extremely. Most countries with resource wealth — think Venezuela, Nigeria, even Norway has had some slippage — they tend to treat the revenue as recurring income rather than a windfall. Botswana institutionalized the opposite view. Luna: What's the fund actually invested in? Lucas: The Pula Fund is managed by the Bank of Botswana, and it's pretty conservatively allocated. About 80 percent is in foreign government bonds, mostly U.S. Treasuries and European sovereigns. The remaining 20 percent is in global equities. No private equity, no real estate, no venture capital. Luna: That's a very different approach from something like Norway's fund, which has a big equity allocation and even real estate. Lucas: Very different. Norway's Government Pension Fund Global has about 70 percent equities. Botswana is much more cautious. But that's partly because the fund's primary purpose is stabilization, not intergenerational savings. Norway's oil will last decades more; Botswana's diamonds have a shorter horizon. Luna: What's the current size? Lucas: As of mid-2026, the Pula Fund is estimated at around eight billion dollars. That's roughly half of Botswana's GDP. For context, that's a higher ratio than almost any other African country's sovereign wealth fund. Luna: And returns? Lucas: In 2025, the fund returned 6.2 percent. Over the last thirty years, its annualized return is about 5.8 percent. Not spectacular by equity market standards, but remember — 80 percent bonds. That's a very solid risk-adjusted return. Luna: So the discipline paid off. But I want to push back a little: Botswana is often held up as a model, but it's also a small country with a relatively homogenous population and a functioning democracy. Can this really work elsewhere? Lucas: That's the billion-dollar question. Botswana's success is not just about the fund; it's about the institutional environment. The country has had a stable democracy since independence, low corruption relative to its neighbors, and a legal system that enforces contracts. Those preconditions are rare. Luna: Ghana tried something similar with its petroleum revenue, but it didn't stick. They had a fiscal rule, but it was revised multiple times. Lucas: Exactly. Ghana's Petroleum Holding Fund was established in 2011, but the government has repeatedly exceeded the spending ceiling. The difference is enforcement. Botswana's rule is not just a law — it's politically sacred. No major party has proposed dismantling it. Luna: There's also the question of opportunity cost. If you're saving 30 to 40 percent of diamond revenue, that's money not being spent on schools, hospitals, roads. Botswana's spending on health and education is actually quite good by African standards, but is it optimal? Lucas: That's a legitimate debate. Some economists argue that Botswana should have invested more in human capital early on, rather than accumulating financial assets. But the counterargument is that the fund provides a buffer. When diamond prices crashed in 2015, Botswana was able to maintain government spending without austerity. Countries without a fund — like Zambia with copper — had to go to the IMF. Luna: So it's a trade-off between current consumption and future security. Lucas: Right. And the Pula Fund has also played a role in managing the exchange rate. Because the fund invests abroad, it helps prevent the Botswana pula from appreciating too much when diamond revenues are high — avoiding the so-called Dutch disease. Luna: That's the problem where resource inflows make the currency stronger and hurt other export sectors. Lucas: Exactly. Botswana's non-diamond exports — beef, tourism, textiles — have remained competitive partly because the Pula Fund absorbs some of the foreign exchange inflows. It's not just a savings account; it's a macroeconomic stabilizer. Luna: What happens when the diamonds run out? Lucas: That's the existential question. Current estimates suggest the major mines — Jwaneng, Orapa, Letlhakane — have about twenty to thirty years of economically viable reserves left. After that, the fund will have to sustain the economy on its own. Luna: Is eight billion dollars enough? For a country with a GDP of sixteen billion? Lucas: Probably not indefinitely, unless the fund continues to grow. If they keep the savings rate and the investment returns steady, the fund could be worth twenty to thirty billion by the time the mines close. That's still a relatively small endowment for a whole country. Luna: So they need to diversify the economy before then. Lucas: They've been trying for decades. Tourism is growing, and there's some potential in financial services and mineral processing. But it's slow going. The Pula Fund buys time, but it doesn't buy a new economy. Luna: It's interesting that the fund itself is a kind of productivity tool — it makes the diamond revenue produce more value over time than if it was just spent. Lucas: That's a great way to put it. In a sense, the Pula Fund is Botswana's most productive asset. It's taking a finite resource — diamonds — and turning it into a perpetual stream of investment income. That's the definition of productivity. Luna: So the lesson for other resource-rich countries isn't just 'save your money.' It's 'build the institutions that make saving possible.'