An Investigation of Economic Development and Economic Growth in Botswana

Abstract

By analyzing annual data from 1980 to 2020, the study sought to identify the main factors influencing economic growth in Botswana and empirically analyze the link between the interest rate, inflation rate, exchange rate, Foreign Direct Investment (FDI), trade openness, population growth, and economic growth. In order to explore the long-term relationships between variables, measure the short term dynamics of the model, and assess the causal relationships between variables, the study employed the Johansen-Juselius cointegration, Vector Error Correction Model (VECM), and Granger causality approaches. The results demonstrated that while exchange rate, interest rate, population growth rate, and trade openness are long term inversely related to economic growth, FDI and inflation rate had a positive and significant impact on economic growth. VECM results revealed that exchange rate and interest rate have a substantial role in explaining growth in the short run, whereas FDI and trade openness have a negative and significant impact. According to the Granger Causality test, in the long run, the exchange rate, inflation rate, and trade openness are the main drivers of growth. The Impulse Response Function(IRF) displayed that even after 20 years, economic growth still responds effectively to shocks in all variables. The policy recommendations from this study advise maintaining low inflation rate and open up more to international markets; development and implementation of new persuading and effective investment incentive packages to investors.