Posted: November 27th, 2015
ECON 7021X: Advanced Econometrics Fall 2015, Brooklyn College 20 October 2015 Empirical Assignment
ECON 7021X: Advanced Econometrics
Fall 2015, Brooklyn College
20 October
2015
Empirical Assignment
Due d
ate: 14
December 2015
(
strictly
)
Case study: Public Debt and Economic Growth in Botswana
Objective
The pedagogical objective of this empirical
assignment is to explore the relation between data that are gathered
by a survey for a developing country and the variables that are employed in published studies.
Th
e
assignment
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:
7021X
Empirical
:
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14
D
ece
m
be
r
2015
.
Both the
E
view
s
file (.wf1) and the electronic document copy (.doc) of your assignment should be att
ached
to
your email. Furthermore, a hard copy of your assignment should be handed on 14 December 2015 before the
beginning of the class.
Ther
e will be no extension period
for the empirical assignment.
You are given the following details for Botswana:
Country’s Profile
Government type
: parliamentary republic
Independent
since 1966 (British colony)
Capital
: Gaborone
Population
: 1.949
million
Currency:
Pula
GDP per capita
:$13,100 in 2010
Income:
upper middle
Growth rate
(2009):
–
5,6% (generally positive &high)
Life expectancy:
54 years/ 2nd in the world in cases of HIV (ages between 15
–
49)
Land:
Kalahari desert covers 85% of the cou
ntry
–
only 15% is inhabited
Economy:
diamonds(3rd in the world
–
the world’s most diamond
–
dependent economy), tourism, agricultural
sector accounts for only 4% of GDP (due to droughts)
Infrastructure:
satisfactory
lack of workers
with technical/managerial skills
difficult to diversify the
economy
«Switzerland of Africa» , continuous peace/political stability helped Botswana to be ranked as the country with
the greatest economic development in the world
–
9.2% on average
–
for the p
eriod 1966
–
1997
Source: nationsencyclopedia, 2010
General policies
Between 1966
–
1997: adoption of a conservative investment policy that actively sought foreign capital for I
(investment)
in crop agriculture, tourism and secondary industries.
1997
–
:af
fected by the Asian crisis, thenceforth: high rates of 1)unemployment (20%, 2009)
, 2)
inflation
, 3)
poverty
(
Gini index=0,63)
2003
–
: diversification
/
encouragement of FDI in non
–
mining sectors, including light/pharmaceutical industry,
tourism, financial
services
2008
–
affected by the world crisis
–
reduction of public sector
Source: nationsencyclopedia, 2010
According to the last report of
IMF
(2007), Botswana had done quite well in
:
↓ public sector
maintaining
π
near to
3
–
6%
(Central Bank’s goal)
keeping neutral political stance in the interest rate determination
,
improving public administration,
widening the tax base,
educational reform
In the current report of
World Bank
, it is emphasized the need to further:
1.
Reduce the public sector from
40
% t
o
25%
of GDP
2.
Ameliorate infrastructure
Botswana and IMF
*
Joseph Stiglitz (who used to work for IMF and WB)
in his book Globalization and its Discontents
(2002)
he
points out that Botswana’s success rested on its ability to maintain a political consensus, based on a broader
sense of national unity.
*Government & outside advisers that came from a variety of public institutions and private
foundations, were
the m
ain reason why the country made it on its own way.
*Unlike the IMF these advisers explained their policies to obtain popular support for the
programs and
policies( open seminars /one
–
to
–
one meetings with cabinet ministers and
members of Parliament)
*IMF →
1981: the organization found it very difficult to impose new conditions because
Botswana had already
done so many of the things that they would have insisted upon. Since
then, Botswana has not turned to the
IMF for help.
Following the right path
Botswana’s economic development has been financed by domestic resources rather than
by
capital or aid
inflows from abroad. National saving has been relatively high and has steadily
increased over the years, thanks
to the robust growth in diamond revenue un
til the recent
crisis and to the government’s sustained effort to
build up reserves by running fiscal and
current account surpluses. As a result, national saving h
as not been a
constraint on the
financing of domestic investment.
Evidence from Research
[Filled by you]
–
Please refer to Step 1
Botswana and the recent
world economic crisis
In late 2008, the world crisis triggered an important reduction of diamonds demand and
therefore of diamond
production which caused GDP to fall sharply in the first qua
rter of 2009.
Non
–
mining sectors of the economy
were less affected. Meanwhile, the government starts to
tightening spending to ensure long
–
term fiscal
sustainability. So as not to aggravate the
recession, the government followed moderately anti
–
cyclical fi
scal and
monetary policies. Only
a few development projects were cut or postponed as a result of the tight fiscal situation
To finance its development projects, the government contracted a general budget support loan
of 1.5 billion
US dollars (USD) from th
e African Development Bank (AfDB) in 2009.
Source: Globserver , 2010
Thirty
(30)
observations of time
–
series data (t=1980
–
2009)
are available
for the following variables: y
: real GDP
(at constant prices)
, i
:
investment, l
:
labor force, d01: extern
al
debt. The country that you examine is Botswana.
A
time
–
series model
with the
following linear
functional
form
is created
:
gry
=
β
0
+
β
1
i_y
+
β
2
grl
+
β
3
ratiod
+ u
where gry
: the growth of real GDP (at constant prices)
,
w
here i_y
:
the ratio of the
investment share of real GDP,
w
here grl
:
the growth of labor force, and
ratiod
: the ratio between external debt and real GDP
.
Reminder:
You will need to hand out your results (grap
hs, outputs, etc) in a hardcopy and in an
electronic copy.
Please do the
following
:
1.
Review the paper [Iime, A. 2006, “Did Botswana Escape from the Resource Curse?”, IMF, African
Department, pp. 1
–
33]
and
write a brief summary (maximum 2 pages) addressing the following:
Research Question, Data, Identification Strategy,
Methodology, Results, Conclusions.
This step fills
the section “Evidence from Research”.
2.
An excel data file is available to you (Data.xls). Import the data to Eviews and save the file as
7021X_LastName_FirstName.wf1
. Be sure to specify your data series by
YEAR.
3.
Generate n
ew variables for the growth of the real GDP (at constant prices)
, the growth of labor
force
and the ratio between
external debt and real GDP.
4.
Generate natural logarithms
(log in Eviews calculates the natural logarithms)
of the growth of the
real
GDP (at constant prices), the growth of labor force
, the ratio of the investment share of real GDP
and
the ratio between external debt and real GDP.
5.
Show Descriptive Statistics (obs, mean,
std dev, min, max, etc.) of
your variables
for Individual Sam
ples
.
6.
Show the Histograms for each of the following variables: growth of the real GDP (at constant prices),
the growth of labor force, the ratio of the investment share of real GDP and the ratio between external
debt and real GDP
.
7.
Show the Correlation
Matrix (
from Covariance Analysis) of the following variables:
growth of the real
GDP (at constant prices), the growth of labor force, the ratio of the investment share of real GDP and
the ratio between external debt and real GDP.
8.
Show the Histograms for
each of the following natural
–
log versions of the variables: growth of the real
GDP (at constant prices), the growth of labor force, the ratio of the investment share of real GDP and
the ratio between external debt and real GDP.
9.
Show the Correlation Matrix
(from Covariance Analysis) of the following natural
–
log versions of the
variables:
growth of the real GDP (at constant prices), the growth of labor force, the ratio of the
investment share of real GDP and the ratio between external debt and real GDP.
10.
By c
hecking the histograms that you created, c
omment on the
nature of the
distributions
(symmetry,
asymmetry, tails)
between
the regular variables and their natural
–
log versions.
Based on your answer,
decide between a linear functional form of your model and a
natural
–
log functional form and choose
which one you are going to use.
*
Hint:
Another way to answer this question is to compare between the two models
by model
–
building tools.
The following questions are based on the model you
chose
at
Step 10
.
11.
Graph
the time series plots of each of the following variables: growth of the real GDP (at constant
prices), the growth of labor force, the ratio of the investment share of real GDP and the ratio between
external debt and real GDP.
Comment on each of the plots y
ou graphed. Can you make a connection
of the highs and lows that you observe with historical events?
12.
Graph the scatter plot
between the growth of the real GDP
and the ratio of the investment share of
real GDP
(with fit line: regression line).
13.
Graph the sca
tter plot between the growth of the real GDP and the growth of labor force (with fit
line: regression line)
14.
Graph the scatter plot between the growth of the real GDP and the ratio between external debt and
real GDP (with fit line: regression line).
15.
Commen
t on each of the scatter plots in Steps 12, 13, 14 regarding the correlation between each group
of variables.
16.
Regress the growth of the real GDP (at constant prices) on the ratio of the investment share of real
GDP, the growth of labor force and the ratio
between external debt and real GDP
.
17.
After you regress the model in step 15, plot its actual, fitted, residual graph.
18.
Plot the actual, fitted, residual graph for each of the following variables separately: the growth of labor
force, the ratio of the
investment share of real GDP and the ratio between external debt and real GDP.
19.
Test significance at a 5% significance level of each independent variable on the dependent variable of
your model in Step 15. Comment on the power of the significance of each in
dependent variable on the
dependent.
20.
Test the overall significance at a 5% significance level of independent variables on the dependent of
your model in Step 15.
21.
Detect
if multicollinearity
exists
and if it exists try to remedy it.
22.
Detect Heteroscedasticity
of your model if it exists, by making use of the Park Test, the Breusch
–
Pagan
–
Godfrey Test and the White Test with and without cross terms and comment on your results.
In case Heteroscedasticity exists, try to remedy it either by
using Generalized Least Squares or by using
Weighted Least Squares.
Why do you think heteroscedasticity exists/ not exists in your model?
23.
Detect if autocorrelation of your model exists
and in case it exists try to remedy it.
24.
In case autocorrelation exists
, plot the actual/fitted residuals of your new model and of your new
independent variables separately and compare with the plots in Steps 17 and 18. What do you observe?
Sources
www.nationsencyclopedia.com
http://www.globserver.com/en/press/bostwana
–
and
–
financial
–
crisis
www
.
imf
.
com
http
://
data
.
worldbank
.
org
/
References
Stiglitz, J. 2002
,
Globalization and its Discontents,
WW Norton, New York & London
Iime, A. 2006,
“Did Botswana Escape from the Resource
Curse?”,
IMF, African Department, pp. 1
–
33
Fowewe, B. 2008,
“Financial liberalization policies and Economic Growth: Panel Data Evidence from Sub
–
Saharan Africa”,
African Development Bank, vol.20, no.3, pp. 549
–
574
Psarommati Vasilikoula,
Master Thesis
, 201
1, University of Piraeus
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