Page 1 of 17

Journal for Studies in Management and Planning

Available at http://internationaljournalofresearch.org/index.php/JSMaP

e-ISSN: 2395-0463

Volume 01 Issue 05

June 2015

Available online: http://internationaljournalofresearch.org/ P a g e | 1

Exports Multiplicity and the Dutch Disease

Mpho Bosupeng

University of Botswana, Botswana

mbosupengmpho@gmail.com

Abstract

Following the principles of

macroeconomics, an increase in exports

should raise the Gross Domestic Product

(GDP). However, the extant literature

regarding comovement and causality

between exports and GDP has not been

consistent. Previous studies mostly

attempted to link exports with GDP without

attempting to relate each individual export

commodity with economic growth. This

study attempts to fill this gap using statistics

for the Botswana economy by examining the

country’s major seven export commodities

namely: diamonds, gold, beef, soda ash,

vehicles, copper-nickel, and textiles for the

period 2006Q1-2013:Q4. The evaluation

uses the popular Granger causality test and

the Johansen cointegration procedure to

examine statistical drifts between each

merchandise and GDP. While the

expectation was that all export commodities

would trend together with GDP for the

period under examination, the cointegration

test only affirmed long run affiliations

between GDP, copper- nickel and textiles.

The Granger causality test results were also

not consistent in terms of causal relations,

revealing causality only between GDP,

textiles and Gold. The study then goes ahead

in providing several recommendations for

the Botswana scenario particularly

considering Dutch disease effects.

Keywords: exports multiplicity; GDP;

economic diversification; Dutch Disease

JEL: E23; F14; F17; F31; F41

Introduction

International finance analysts have

postulated that a country can raise its

national output by increasing export

production. This statement has some

implications of course. Firstly, for any

economy to produce diverse commodities

there is a need to inject more capital. Extra

labor, energy and technology are also

needed to propel this production. Countries

like Botswana whose main exports

commodities are mineral resources have to

exercise extra caution and prudence in the

extraction and exportation of these resources

because they are finite. Even though

Botswana’s economy is robust, a large

proportion of her export merchandise is non- renewable and a large share of export

income is attributed to diamonds (nearly

80%). This has created a state of

dependency on diamonds to an alarming

extent. Recently, the country’s authorities

have been in full swing promoting the

Economic Diversification Drive plans

(EDD) which aims to make Botswana a

diverse exporter of commodities. Currently

Botswana’s chief exports are seven namely:

diamonds, soda ash; gold; vehicles; textiles;

beef and copper-nickel. Botswana’s

Page 2 of 17

Journal for Studies in Management and Planning

Available at http://internationaljournalofresearch.org/index.php/JSMaP

e-ISSN: 2395-0463

Volume 01 Issue 05

June 2015

Available online: http://internationaljournalofresearch.org/ P a g e | 2

dependency on diamonds was witnessed

during the past Global Financial Crisis

(GFC) which left Botswana’s mineral

resources particularly diamonds exhibiting

poor sales.

The aim of this study to a reasonable extent

is to explore exports variety and economic

growth for the Botswana economy. The

second aim is to determine the extent to

which mineral resources such as diamonds,

gold, soda ash, and copper-nickel contribute

to Botswana’s economy. The aim rises from

the fact that mineral resources are finite and

dependency on them may be catastrophic for

the nation in a long run framework. The

other aim of this paper is to determine if

Botswana may be suffering from the Dutch

Disease where a resource rich economy

underperforms because a large proportion of

its resources are channeled to that particular

economic activity. The other issue is to

determine if it is highly compelling for

Botswana to accelerate the economic

diversification plans. In general, literature

supports a positive relationship between

exports and GDP growth while the causality

between GDP and exports of most

economies has been incongruent. Previous

studies attempted to determine causality

between exports and GDP while

overlooking the contributions of each

commodity or merchandise to the GDP. This

paper addresses this glitch by focusing on

each individual export commodity and its

unique relations with the GDP for Botswana

scenario.

The rest of this paper is as follows. Next is

the literature review which summates major

findings of the previous studies. This will be

followed by the research hypothesis, data

description, and research methodology.

Logically, then follows hypothesis tests

results and discussion of the findings.

Finally a conclusion of the study with

practical implications will close the

objectives of this report.

Literature Review

According to Sheridan (2014) the general

expectation is that since exports are a

component of GDP, increasing exports

should subsequently raise the country’s

productivity levels. Sheridan (2014) argues

that an emphasis on exports in addition to

increasing GDP directly, may also lead to

positive externalities in the non-export

sectors in the form of knowledge spillovers,

and production techniques (Grossman &

Helpman, 1991; Edwards, 1993). Drawing

from Sheridan (2014), intuitively exports

should provide the foreign exchange needed

to purchase inputs which may provide

beneficial effects on economic growth

(Thirlwall, 2000). Crespo-Cuaresma, &

Worz (2005) in consequence, have argued

that significant positive externalities accrue

to the exporting countries as a result of

competition in international markets,

including increased returns from spillovers;

increased innovation and other efficiency

gains all of which should logically increase

the rate of economic growth. As a

magnitude, many studies document a

positive relationship between exports and

economic growth (Balassa, 1978; Edwards,

1993; Crespo-Cuaresma & Worz, 2005).

This paper analyses the extant literature by

Page 3 of 17

Journal for Studies in Management and Planning

Available at http://internationaljournalofresearch.org/index.php/JSMaP

e-ISSN: 2395-0463

Volume 01 Issue 05

June 2015

Available online: http://internationaljournalofresearch.org/ P a g e | 3

considering two perspectives: studies in

affirmation of the export-GDP relationship

and the potential problem of the Dutch

Disease for the Botswana economy.

Evaluation of the Exports- Economic

Growth Relationship

Sheridan (2014) has postulated that many

developing economies are heavily dependent

on primary exports products as their main

source of export revenue. In addition,

several studies maintain that countries

emphasizing manufacturing products will

grow than those that emphasize primary

products (Hausmann, et al 2007; Jarreau &

Poncet, 2012; Crespo-Cuaresma & Worz,

2005; Berg, et al 2012). The underlying idea

is that countries that export particularly

highly technological commodities benefit

from positive externalities that help the

economies grow. From this premise,

Pistoresis & Rinaldi (2012) attempted to

explain the nexus between trade and

economic growth in Italy which has been

debated by historiography. The study

contributed to the literature by investigating

the relationship between exports and GDP

from 1863-2004 through cointegration and

causality analysis. Pistoresis & Rinaldi

(2012) suggested that the variables co-move

in the long run but the direction of causality

varies from time to time. The wide data

interval reported that in the period prior to

the First World War, imports growth led

GDP growth which in turn led exports

growth. On the other hand, the post Second

World War period demonstrated a strong bi- directional relation between imports and

exports consequent on the increase in intra

technology. Nonetheless, historiography

explanation of the late industrialization of

Italy was that the economy was restrained

by some fundamental facts among which

was the limited size of the domestic market,

constraints on capital, and lack of natural

resources (Romeo, 1959; Sereni, 1966;

Michaelv, 1977; Amatori & Colli, 1999).

Italy however, recovered after the Second

World War which saw the country

increasing its percentage of the international

market until the 1970’s. This was explained

as “the export-led economic growth”

(Kindleberger, 1967; Stern, 1967; Graziani,

1998a; 1969b).

Feenstra & Kee (2008) contributed to the

literature by attempting to provide evidence

on monopolistic competition with

heterogeneous and endogenous productivity

using data from 48 countries for the interval

1980- 2000. Al-Mulali & Sheau-Ting,

(2014) aimed to explore the bidirectional

long run relationship between trade, energy

consumption, carbon dioxide emission and

several other interdependencies. The study

examined 189 countries from six different

regions and proved the positive relationship

between the trade variables and carbon

dioxide emission relations with other

economic variables. In contribution to this

affirmation, Sheridan (2014) aimed to

examine why developing countries still rely

on primary goods as their main source of

income while there is ample evidence that

there could earn higher returns from

exporting manufactured goods. The study

used data for a cross section of countries

over the period 1970-2009 and found out

that although increasing manufacturing