Financial development and economic growth in Botswana: A test for causality

Abstract

Botswana has a small financial sector, dominated by the government, with a limited range of financial assets and undeveloped capital markets. Real assets are by far more popular than financial assets. The country was poor until the discovery of diamonds in the 1970s. Economic growth has been rapid even in the non-mining sectors such that the country is now ranked as a lower middle-income country. This study examines the relationship between financial development and economic growth in Botswana. Two indicators are used to examine Gragercausality between real per capita income and financial development. An error-correction method is adopted following the tests for unit roots and cointegration. The study suggests that per capita income in Botswana and the financial development indicators cause one another, supporting the view that economic growth causes and is caused by financial development in Botswana.