- A booming resource sector might appreciate domestic currency and crowd out manufacturing, labelled Dutch disease (DD).
- Diamond-producer Botswana, South African Customs Union member, is a rare success story of resource-based development in SSA.
- We examined diamond trade partnerships from 2006 to 2018 in separate NARDL models to see whether Botswana had the DD.
- A partial DD was identified: its effects are limited to specific trade partners and transmission channels.
- A partial DD and the South African Customs Union revenue-sharing formula makes diversification in Botswana strenuous.
Diversification of resource-driven economies has proven to be a very stubborn problem. Even relatively successful countries struggle to achieve a structural change towards manufacturing and high-tech industries. Botswana has been often cited as one of the few countries that escaped the resource curse and performed well in terms of economic growth. However, a significant share of the domestic output and most of the exports are still coming from the mining sector. In this paper we present the spending effect as a possible explanation for the lack of economic diversity. Using a nonlinear autoregressive distributed lag model, we investigate the cointegration of the diamond price index and the pula exchange rate against the currencies of Botswana’s main trading partners on monthly time-series data. Our analysis is based on a recent dataset that covers the period from the introduction of the crawling band exchange regime until 2018. The results highlight a partial Dutch disease phenomenon related to Botswana’s trade union partners: Namibia and South Africa.
Keywords: Diversification, Resource curse, Spending effect, Real exchange rate, Asymmetric cointegration, Nonlinear autoregressive distributed lag model
JEL classification: L72, P28, F31, R58