Case study: Public Debt and Economic Growth in Botswana
Objective:
The pedagogical objective of this empirical assignment is to explore the relation between data that are gathered by a survey for a developing country and the variables that are employed in published studies.
You are given the following details for Botswana:
Country's Profile
Government type: parliamentary republic Independent since 1966 (British colony) Capital: Gaborone
Population: 1.949 million Currency: Pula
GDP per capita:$13,100 in 2010 Income: upper middle
Growth rate (2009): -5,6% (generally positive &high)
Life expectancy: 54 years/ 2nd in the world in cases of HIV (ages between 15-49) Land: Kalahari desert covers 85% of the country-only 15% is inhabited
Economy: diamonds(3rd in the world-the world's most diamond-dependent economy), tourism, agricultural sector accounts for only 4% of GDP (due to droughts)
Infrastructure: satisfactory → lack of workers with technical/managerial skills → difficult to diversify the economy
Switzerland of Africa, continuous peace/political stability helped Botswana to be ranked as the country with the greatest economic development in the world-9.2% on average-for the period 1966 - 1997
In the current report of World Bank, it is emphasized the need to further:
1. Reduce the public sector from 40% to 25% of GDP
2. Ameliorate infrastructure
Botswana and IMF
*Joseph Stiglitz (who used to work for IMF and WB) in his book Globalization and its Discontents (2002) he points out that Botswana's success rested on its ability to maintain a political consensus, based on a broader sense of national unity.
*Government & outside advisers that came from a variety of public institutions and private foundations, were the main reason why the country made it on its own way.
*Unlike the IMF these advisers explained their policies to obtain popular support for the programs and policies( open seminars /one-to-one meetings with cabinet ministers and members of Parliament)
*IMF →1981: the organization found it very difficult to impose new conditions because Botswana had already done so many of the things that they would have insisted upon. Since then, Botswana has not turned to the IMF for help.
Following the right path
Botswana's economic development has been financed by domestic resources rather than by capital or aid inflows from abroad. National saving has been relatively high and has steadily increased over the years, thanks to the robust growth in diamond revenue until the recent crisis and to the government's sustained effort to build up reserves by running fiscal and current account surpluses. As a result, national saving has not been a constraint on the financing of domestic investment.
Please do the following:
1. Review the paper [Iime, A. 2006, "Did Botswana Escape from the Resource Curse?", IMF, African Department, pp. 1-33] and write a brief summary (maximum 2 pages) addressing the following: Research Question, Data, Identification Strategy, Methodology, Results, Conclusions. This step fills the section "Evidence from Research".
2. An excel data file is available to you (Data.xls). Import the data to Eviews and save the file as 7021X_LastName_FirstName.wf1. Be sure to specify your data series by YEAR.
3. Generate new variables for the growth of the real GDP (at constant prices), the growth of labor force and the ratio between external debt and real GDP.
4. Generate natural logarithms (log in Eviews calculates the natural logarithms) of the growth of the real GDP (at constant prices), the growth of labor force, the ratio of the investment share of real GDP and the ratio between external debt and real GDP.
5. Show Descriptive Statistics (obs, mean, std dev, min, max, etc.) of your variables for Individual Samples.
6. Show the Histograms for each of the following variables: growth of the real GDP (at constant prices), the growth of labor force, the ratio of the investment share of real GDP and the ratio between external debt and real GDP.
7. Show the Correlation Matrix (from Covariance Analysis) of the following variables: growth of the real GDP (at constant prices), the growth of labor force, the ratio of the investment share of real GDP and the ratio between external debt and real GDP.
8. Show the Histograms for each of the following natural-log versions of the variables: growth of the real GDP (at constant prices), the growth of labor force, the ratio of the investment share of real GDP and the ratio between external debt and real GDP.
9. Show the Correlation Matrix (from Covariance Analysis) of the following natural-log versions of the variables: growth of the real GDP (at constant prices), the growth of labor force, the ratio of the investment share of real GDP and the ratio between external debt and real GDP.
10. By checking the histograms that you created, comment on the nature of the distributions (symmetry, asymmetry, tails) between the regular variables and their natural-log versions. Based on your answer, decide between a linear functional form of your model and a natural-log functional form and choose which one you are going to use. *Hint: Another way to answer this question is to compare between the two models by model-building tools.
The following questions are based on the model you chose at Step 10.
11. Graph the time series plots of each of the following variables: growth of the real GDP (at constant prices), the growth of labor force, the ratio of the investment share of real GDP and the ratio between external debt and real GDP. Comment on each of the plots you graphed. Can you make a connection of the highs and lows that you observe with historical events?
12. Graph the scatter plot between the growth of the real GDP and the ratio of the investment share of real GDP (with fit line: regression line).
13. Graph the scatter plot between the growth of the real GDP and the growth of labor force (with fit line: regression line)
14. Graph the scatter plot between the growth of the real GDP and the ratio between external debt and real GDP (with fit line: regression line).
15. Comment on each of the scatter plots in Steps 12, 13, 14 regarding the correlation between each group of variables.
16. Regress the growth of the real GDP (at constant prices) on the ratio of the investment share of real GDP, the growth of labor force and the ratio between external debt and real GDP.
17. After you regress the model in step 15, plot its actual, fitted, residual graph.
18. Plot the actual, fitted, residual graph for each of the following variables separately: the growth of labor force, the ratio of the investment share of real GDP and the ratio between external debt and real GDP.
19. Test significance at a 5% significance level of each independent variable on the dependent variable of your model in Step 15. Comment on the power of the significance of each independent variable on the dependent.
20. Test the overall significance at a 5% significance level of independent variables on the dependent of your model in Step 15.
21. Detect if multicollinearity exists and if it exists try to remedy it.
22. Detect Heteroscedasticity of your model if it exists, by making use of the Park Test, the Breusch- Pagan-Godfrey Test and the White Test with and without cross terms and comment on your results. In case Heteroscedasticity exists, try to remedy it either by using Generalized Least Squares or by using Weighted Least Squares. Why do you think heteroscedasticity exists/ not exists in your model?
23. Detect if autocorrelation of your model exists and in case it exists try to remedy it.
24. In case autocorrelation exists, plot the actual/fitted residuals of your new model and of your new independent variables separately and compare with the plots in Steps 17 and 18. What do you observe?