Many countries have learnt the lesson that a resource discovery or a boom in export prices does not guarantee economic development. More often, a rapid increase in export revenues gives rise to adverse effects and adjustment problems throughout the rest of the economy. These problems are often referred to as Dutch disease, after the effects on the Dutch economy of the natural gas discoveries in The Netherlands in the 1960s.
In Botswana substantial diamond resources were discovered in the Kalahari desert after the country’s independence in 1966. Large-scale diamond operations started in the early 1970s and ten years later Botswana had emerged as one of the world’s top three diamond producers. However, despite a tremendous increase in export earnings, Botswana seems to have managed to avoid serious adjustment problems and the typical Dutch disease effects. Botswana, which was one of the poorest countries in the world when it became independent, has shown impressive growth levels during the past twenty-five years. Real gross domestic product (GDP) growth between the mid-1960s and mid-1980s averaged at 8.8 per cent per year, an achievement which was not only the highest growth rate in Africa during this period, but one of the highest growth rates in the world (World Bank 1988:222).
The purpose of this paper is to study Botswana’s economic development during the last decade within the framework of a Dutch disease model. The next section shortly describes the theory of Dutch disease and the following section provides a brief overview of Botswana’s recent economic development, and discusses Botswana’s monetary policy, sectorial growth, fiscal development, and the development of the economy in relation to the Dutch disease model. The final section concludes the study by discussing the policies that have been pursued in Botswana.