Effect of Macroeconomic Variables on Economic Growth in Botswana

Abstract

The study tests the effect of macroeconomic variables on economic growth, establishes the key drivers of economic growth and the casual relationship between economic growth and macroeconomic variables. Annual macroeconomic data was used for the period 1975-2012. The study employed the Vector error correction model and Vector Autoregression techniques. Findings suggest that Foreign Direct Investment (FDI) and inflation had a positive effect on economic growth, the key drivers of economic growth was its previous performance and FDI flows explaining 89% and 8% of variations respectively. The study supports the endogenous growth and the model of technology diffusion. Causality was unidirectional moving from economic growth to FDI and from gross fixed capital formation to GDP growth. Maintaining low inflation with the 3-6% target and high levels of FDI are vital for the growth. FDI can be increased by giving tax concessions to investors and removal of protectionist policies. Training of labour force is vital to widen absorptive capacity of new technology.

Keywords: FDI, Economic Growth, Inflation and VECM