Botswana and a Dutch Disease - Essay Example

? Botswana and a Dutch Disease of Number Total Number of Words 503 Introduction It is a common misconception that a significant increase in the inflows of foreign currencies or foreign aids could bring in more economic prosperity than harm. In line with this, several authors explained that a constantly increasing exportation of natural resources (i.e. discovery of natural gas, oil, mining of diamonds, gold, copper, etc.), remittances from overseas workers or incoming of foreign aids can lead to a significant increase not only in the revenue but also in the aggregate demand for traded and non-traded commodities (Pearson 2011; Rodrick and Rosenzweig 2010). 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 natural resources could result to currency appreciation and an increase the foreign exchange reserves (Cherunilam 2008). In line with this, Hayami and Godo (2005) explained that an increase in the real value of Botswana’s currency can lead to a significant increase in the trade surplus. However, there are no clear signs that the exportation of Botswana’s diamonds and other mineral reserves will increase its foreign reserves or causes a significant appreciation of its currency (Bank of Botswana 2012; Exchange-Rates.org 2012). (See Appendix I – Historical Exchange Rates of Botswana Pula (BWP) and US Dollar (USD) on page 10; Appendix II – Trend of Botswana Foreign Reserves on page 11) With regards to exportation of tradable goods and natural resources, the recent global financial recession has led to a significant change with regards to Botswana’s importation and exportation practices. In the past, the exportation of Diamonds in Botswana contributes to at most 70% of its total exports (Economy Watch 2010). Over the past three consecutive years, the total exportation of manufactured goods contributes to the bulk of Botswana’s total exports. Even though the total value of Botswana’s exported merchandise goods has significantly decreased by almost USD1.25 million from 2008 to 2009 (OECD 2011), significant changes in the trend of Botswana exportation of basic commodities strongly suggest that the exportation of natural resources such as diamonds does not literally erode the price competitiveness of other sectors. (Appendix III – Botswana’s Trade Performance on page 12) Between the years 2000 to 2003, the unemployment rate in Botswana was as high as 40% (index mundi 2012). According to Cherunilam (2008), the presence of a high level of unemployment rate is an indirect sign of long-term effects of a Dutch disease. In other words, a 40% unemployment rate strongly suggests that Botswana was once facing the economic consequences of a Dutch disease. In line with this, Pegg (2010) explained that the main reason behind the high unemployment rate was because of the boom in mineral sector and the absence of pre-existing manufacturing sector. Through the use of effective fiscal and monetary policy, Botswana was able to counteract the negative economic consequences of such disease. Using effective monetary and government intervention, the unemployment rate of Botswana went down to 23.8% back in 2004 (index mundi). Although the government was able to keep its unemployment rate as low as 7.5% in 2007, the unemployment rate as of 2011 was reported to have increased up to 17.5% (Mabiletsa 2011). Therefore, the government should control the increasing rate of unemployment by using some of its collected taxes in creating new demand for basic commodities. (Appendix IV – Botswana’s Historical Trend of Unemployment Rate on page 13) Among the potential sources of Botswana’s capital inflows includes the exportation of natural resources, foreign direct investment, remittances from overseas workers, and the incoming of foreign aids. With regards to the exportation of diamonds, Norberg and Blomstrom (1993) revealed that “revenues from the diamond industry have been kept in foreign capital markets rather than invested or consumed at home and this policy has largely reduced the spending effect” [cited in Pegg 2010]. Since the revenues earned from the exportation of expensive diamonds does not literally go back to the mining sectors, the supply and demand for the agricultural and manufactured goods is not affected. In fact, the recent global financial crisis has triggered a significant decrease in the market prices of diamonds. Therefore, economic evidences show that there is a strong contraction in Botswana’s economy (OECD 2011). Between the years 2002 to 2007, the value of Botswana’s foreign direct investment fell dramatically. However, Botswana remains dependent on its financial inflows coming from remittances from overseas workers and financial assistance. In line with this, remittances from overseas workers were reported to have reached US$12.15 million in 2010 (Trading Economics 2012a) whereas it net official development assistance has reached US$ 279.6 million in 2009 (Trading Economics, 2012b). Even though the pre-conditions of a Dutch disease are present in the economic situation of Botswana, Hillbom (2008) revealed that this country is unlikely to suffer from a Dutch disease. Conclusion and Recommendations Although there are some economic variables that could suggest possible signs wherein Botswana is experiencing a Dutch disease (i.e. high unemployment rate), most of the research findings prove otherwise. Because of the recent global financial crisis, the market prices of diamonds had significantly decreased. This causes the demand for diamonds to decrease as well. A Dutch disease is often represented by appreciation of currencies. In the case of Botswana, its currencies were maintained at the average of 7.3507 Botswana Pulas to 1 US dollar between the periods of September 2011 to March 2012. This particular economic indicator strongly suggests that this country is not suffering from a Dutch disease. In general, there are several ways in which the government can control the negative impact of Dutch disease. Given that there is a temporary economic growth; Pingali and Evenson (2010) strongly suggest that need to stabilize not only the income but also the exchange rate. Basically, this can be done by imposing addition taxation on excess revenues. In case the economic growth is permanent, the government should implement changes in the structural transformation. For instance, the government can invest a portion of the collected taxes on the development of public infrastructure, developments in human resources (i.e. educational grants or provision of trainings and development projects), and/or improvements of technology for public use. References Bank of Botswana 2012. Foreign Reserves. [Online] Available at: http://www.bankofbotswana.bw/index.php/indicators/reserves [Accessed 8 March 2012]. Cherunilam, F. 2008. International economics. 5th Edition. New Delhi: McGraw-Hill Companies. Economy Watch 2010, June 30. Botswana Export, Import and Trade. [Online] Available at: http://www.economywatch.com/world_economy/Botswana/export-import.html [Accessed 8 March 2012]. Exchange-Rates.org 2012. Botswana Pulas (BWP) to 1 US Dollar (USD) [Online] Available at: http://www.exchange-rates.org/history/BWP/USD/G [Accessed 8 March 2012]. Hayami, Y. and Godo, Y. 2005. Development economics: from the poverty to the wealth of nations. Oxford, OX: Oxford University Press. Hillbom, E. 2008. Diamonds or development? A structural assessment of Botswana’s forty years of success. Journal of Modern African Studies 46(2), pp. 191-214. index mundi 2012. Botswana: Unemployment rate (%) [Online] Available at: http://www.indexmundi.com/g/g.aspx?c=bc&v=74 [Accessed 8 March 2012]. Mabiletsa, I. 2011, March 4. Mmegi online. Towards a better Botswana - a 2011/12 budget response Part 2. [Online] Available at: http://www.mmegi.bw/index.php?sid=10&aid=1473&dir=2011/March/Friday4 [Accessed 8 March 2012]. Norberg, H. and Blomstrom, M. 1993. Dutch disease and management of windfall gains in Botswana. In Pegg, S (ed) "Is there a Dutch disease in Botswana?" Resources Policy. 2010. 35, pp. 14-19. OECD 2011. AID FOR TRADE AT A GLANCE 2011. [Online] Available at: http://www.oecd.org/dataoecd/12/26/48321435.pdf [Accessed 8 March 2012]. Pearson, C. 2011. Economics and the Challenge of Global Warming. NY: Cambridge Uniersity Press. Pegg, S. 2010. Is there a Dutch disease in Botswana? Resources Policy 35, pp. 14-19. Pingali, P. and Evenson, R. 2010. Handbook of agricultural economics, Volume 4. Oxford, OX: Elsevier. Rodrick, D. and Rosenzweig, M. 2010. Handbook of Development Economics, Volume 5. Oxford, UK: Elsevier. Trading Economics 2012a. Workers' remittances; Receipts (BoP; US dollar) in Botswana. [Online] Available at: http://www.tradingeconomics.com/botswana/workers-remittances-receipts-bop-us-dollar-wb-data.html [Accessed 8 March 2012]. Trading Economics 2012b. Net official development assistance received (US dollar) in Botswana [Online] Available at: http://www.tradingeconomics.com/botswana/net-official-development-assistance-received-us-dollar-wb-data.html [Accessed 8 March 2012]. U.S. Department of State 2011, November 17. Background Note: Botswana. [Online] Available at: http://www.state.gov/r/pa/ei/bgn/1830.htm [Accessed 8 March 2012]. Appendix I – Historical Exchange Rates of Botswana Pula (BWP) and US Dollar (USD) Source: Exchange-Rates.org, 2012 Appendix II – Trend of Botswana Foreign Reserves Source: Bank of Botswana, 2012 Appendix III – Botswana’s Trade Performance Source: OECD, 2011 Appendix IV – Botswana’s Historical Trend of Unemployment Rate Source: index mundi, 2012 Read More