THE SPECIFICATION AND ESTIMATION OF A MACROECONOMETRIC MODEL OF BOTSWANA
This paper presents a macroeconometric model of Botswana. The model is specified to capture the supply side of the Botswana's economy and is based on the concepts of the two-gap models as specified by Chenery et al (1962). The special feature of the model is that it incorporates the elements of the Dutch Disease which characterizes this small open economy on account of the predominance of mining and more specially diamond production which has transformed the economy from a low income one at the time of independence twenty five years ago to a middle income economy today. The model endeavours to show the kind of structural change that has accompanied the spectacular growth of the economy. It is categorized into nine blocks and, in order to capture the effects of the Dutch Disease on the economy, output, labour and capital inputs blocks are modelled at the sectoral level.
The model has been estimated using annual data for the period 1966-1986 for the seven blocks excluding those in respect of money and trade. The former blocks are estimated using annual data for the years 1976-1988. Three techniques of estimation have been applied; namely, the ordinary least squares (OLS), the two-stage least squares (2SLS) and the maximum likelihood (ML) technique. The model consists of 72 behavioural equations and 97 definitional equations.
The model is of significant interest in that Botswana is one of the very few countries in Sub-Saharan Africa whose economies have not been adversely affected by the very poor economic performance of the past two decades. Botswana's economy has fared very well through all the numerous shocks it encountered since the mid-1970s.
The paper describes briefly, in the second section, Botswana's economy. The third section discusses the rationale behind the choice of macroeconomic theory that has been applied for the estimation of the model. The fourth section gives in tabular form a block-by-block specification, and the fifth gives the description of model performance.* Included also is a flow chart indicating the linkage between blocks.
