Numerous studies have confirmed a statistically significant negative relationship between
natural resource abundance and economic growth. This has been labeled “The Resource
Curse”. In this paper we try to explain why Botswana, a country heavily dependent on its
diamond industry, has managed to generate sustainable growth. Economists have
advanced several explanations for the negative impact of natural resources on long-term
growth. This paper focuses on the following important problems: First, a boom in a
natural resource can pull resources away from other sectors of the economy, thus harming
their international competitiveness, a phenomenon called the Dutch disease. Second,
abundance in natural resources may lead to poor institutional quality in many countries.
Thanks to conservative fiscal policies and accumulation of foreign reserves the local
currency did not appreciate during the boom, and Botswana avoided the most severe
symptoms of the Dutch disease. Historical tradition of democratic procedures and sound
institutions at the time of diamond discovery has contributed to a high institutional
quality in Botswana.