A senior economics lecturer at the University of Botswana, Gaotlhobogwe Motlaleng, says the openness of the Botswana economy and her dependence on diamond export earnings suggest that fluctuations in terms of trade are likely to have a significant adverse impact on her output growth as it did in other developing countries.
Addressing the two day 4th African Finance Journal Conference held at Boipuso Hall last week, Motlaleng said that developing countries are generally open to international trade hence terms of trade shocks are likely to have a marked impact on their economic growth and development. These countries are exposed to adverse effects of terms of trade shocks since they are price takers in global markets, he said. Moreover, he pointed out that those terms of trade fluctuations in developing countries are exogenous unlike in development counties.
“It is apparent that each country, particularly in developing countries, must strive to avoid the worsening of its terms of trade in order to tackle the problems of poor economic performance, poverty, unemployment and inequality which normally characterize them,” he said.
According to Motlaleng, this implies that development strategy in Botswana must be geared towards the diversification of their production structure, from raw products to manufacturer, whose price are less volatile, more job and income generating, and also associated with increasing returns. “Over 80 percent of Botswana’s imports are actually RSA’s exports to Botswana, meaning that Botswana exports mostly raw commodities while the RSA exports manufactured goods,” he said.
Compared to Botswana, South Africa has a floating exchange rate policy, while Botswana has a crawling peg system, he stated. The implication is that raw material prices are unstable as compared to those of manufactured goods. Given this, Motlaleng emphasized that the two nations’ output growth would be differently affected by changes in their terms of trade.
He suggested that in choosing an exchange rate regime, a country must consider the effectiveness of such policy in responding to terms of trade shocks.
“The exchange rate policy of any country plays a pivotal role in influencing the level of economic activity and performance due to external shocks such as terms of trade.”
Motlaleng said a flexible exchange rate should operate like an automatic stabilizer through its own changes due to the fluctuations in the terms of trade.
In Botswana, where terms of trade are volatile, Motlaleng pointed out that output growth is not smooth and even. As a result, he said, this can pose a problem for policy makers since such changes in output have an effect on other microeconomic variables such as employment.
He said Botswana’s trade relations with the European Union (EU), have now been complicated by the EUÔÇôSA Trade and Development Corporation Agreement (TDCA). As a signatory to the Cotonou Agreement, Motlaleng pointed out that Botswana has non-reciprocal access to the EU market for most of its products.
“Because of the TDCA and the strong economic ties with South Africa, Botswana ends up participating in a reciprocal FTA with the EU.”
The Cotonou Agreement is a 20-year accord, under which the current Lome trade terms will be extended at least through 2008, he said, pointing out that from 2002 until December 2007, the ACP and the EU will negotiate a WTO compatible and reciprocal free trade agreement to be gradually implemented from 2008 ÔÇô 2020.
Motlaleng said it should be noted that these negotiations are taking place during a period when there are many other parallel negotiations all of which will have inter-related effects.
“For both practical and development reasons, Botswana needs to identify its national development priorities and its regional goals.” Trade policy with the EU, he said, needs to be tailored so that it is compatible with national, regional and multilateral priorities. These should be the foundations on which its multilateral policy must be based.
Botlaleng said that the multiplicity of trading agreements is therefore a necessary condition for Botswana to diversify her export structure to be regionally and globally competitive.
Failure to do so will make the Botswana economy to be marginalized in the era of globalization. He said it must be noted that the exchange rate policy regime of any country affects the impact of terms on trade and output.
“Export diversification in Botswana is necessitated by the forthcoming trading arrangements under the Southern African Development Committee (SADC) Trade Protocol and the Economic Partnership Agreement,” he said.