Botswana and a Dutch Disease - Essay Example

Download file to see previous pages... Cherunilam (2008, p. 166) defined Dutch disease as “the deindustrialization of a sector caused by the boom in another traded good sector”. Basically, a Dutch disease is present when there is an excessive utilization of its available natural resources. As a result, excessive use of natural resources can trigger a significant decrease in the overall production of goods among the local manufacturing companies. The rationale behind this particular economic situation is that the selling of these natural resources could make the country’s monetary currency stronger. Therefore, the exportation of finish products coming from the tradable sectors becomes less attractive in the world market (Pegg 2010). The overvaluation of a currency can cause long-term harm over the economic performance of each country. The presence of trade shocks can lead to serious market failures. Aside from causing market failures in less developed countries, Rodrick and Rosenzweig (2010) explained that a strong monetary currency can make the local manufacturers become less competitive in the world market. For this reason, a significant decrease in the demand for goods and services would mean a higher unemployment rate in the long-run. The real GDP growth rate in Botswana as of 2010 was 7.5% (U.S. Department of State 2011). However, this particular economic indicator alone is not sufficient to determine whether or not Botswana is suffering from the negative economic consequences of a Dutch disease. With regards to this matter, this report aims to carefully examine the economic variables which may suggest whether or not Botswana is currently experiencing a Dutch disease. In order to perform a full analysis of Botswana economy, this report will focus on observing historical changes in the value of Botswana’s currency (Botswana Pula or BWP), changes in the exportation growth, potential sources of capital inflows (i.e. exportation of natural resources, foreign direct investment, remittances from overseas workers or incoming of foreign aids), and high levels of unemployment rate. Economic Variables Suggesting whether or not Botswana is Experiencing a Dutch Disease A Dutch disease is often associated with the presence of abundant oil supply. In the case of Botswana, its natural resources are not dependent on oil but more on the presence of abundant supply of diamonds, copper, and nickel (U.S. Department of State 2011). Even though Botswana is highly dependent on mining, this particular industry only employs 8,000 workers (Pegg 2010). Within this context, we cannot clearly say that the mining industry in Botswana is booming since this particular industry does not literally extract resources from away from the manufacturing or agricultural sectors. The trend and value of Botswana’s currency is one of the main economic variables that one should carefully examine to determine whether or not Botswana is currently experiencing a Dutch disease. Even though the currency of Botswana Pulas is not pegged to a specific foreign exchange value, Botswana managed to maintain the exchange rate at the average of 7.3507 Botswana Pulas to 1 US dollar between the periods of September 2011 to March 2012 (Exchange-Rates.org 2012). In case Dutch disease is present, economists believe that a strong exportation of na ...Download file to see next pagesRead More