August, 2005

Overlapping Sectors: Botswana's Inoculation against the Dutch Disease?

  • Amy Poteete

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Most countries that rely heavily on a single valuable commodity have difficulty managing the fluctuations in income associated with these goods, typically treating booms as if they were permanent increases in income. The frequent result--known as Dutch Disease--is characterized by overvaluation of the exchange rate, relatively expensive labor costs, and expansion of the service sector. Botswana has not entirely avoided these symptoms, but has kept them in check. Although good policies are a key element in Botswana’s economic success, the origin of such policies is not very clear. In this working paper, Poteete and Marroquin develop a spatial model to demonstrate how an alignment of interests between policy-makers and export interests allowed Botswana to limit the effects of the Dutch Disease and foster high economic growth. In Botswana, the public sector’s involvement in the export of cattle provided incentives to adopt monetary and fiscal policies that maintained a relatively neutral real exchange rate. Indeed, avoiding real appreciation of the exchange rate was an important tool used by civil servants to protect their revenues from cattle exports. The overlap of the public and export sectors created personal benefits for policy-makers that generated substantial and positive spill-over effects for the whole country. The case of Botswana suggests that the extent of overlap between policy-makers and exporting sectors may help account for cross-national variation in economic performance among countries susceptible to the Dutch Disease. The authors also note long-term socio-economic changes and discuss their implications for the survival of anti-appreciation policy.