Institutions and Sectoral Diversification in Botswana

This paper argues that countries with good institutional environments can promote sectoral diversification in an economy by subsidizing firms with positive externalities. The existence of external benefits that can be realized through subsidization is shown with a standard trade model, and an extension of that model shows that good political institutions-specifically, strong constraints on the executive to prevent corruption will lead to more needs being realised from subsidies, that is, all other things being equal. Data from Botswana lends support to this theory. Click here to access the full paper.