Connecticut College Digital Commons @ Connecticut College Economics Honors Papers Economics Department 2016 Impact of German Sources of Capital on the Namibian Economy Vladimir Chlouba Connecticut College Follow this and additional works at: http://digitalcommons.conncoll.edu/econhp Part of the African Studies Commons, and the Growth and Development Commons Recommended Citation Chlouba, Vladimir, "Impact of German Sources of Capital on the Namibian Economy" (2016). Economics Honors Papers. 25. http://digitalcommons.conncoll.edu/econhp/25 This Honors Paper is brought to you for free and open access by the Economics Department at Digital Commons @ Connecticut College. It has been accepted for inclusion in Economics Honors Papers by an authorized administrator of Digital Commons @ Connecticut College. For more information, please contact [email protected]. The views expressed in this paper are solely those of the author. Vladimir Chlouba Connecticut College Impact of German Sources of Capital on the Namibian Economy May 2016 I would like to extend my utmost gratitude to professor Ahmad Alachkar for his guidance and mentorship, acute observations, and willingness to share his broad knowledge of economic theory. I am also indebted to professor Purba Mukerji, who read an earlier manuscript. Without their help, this work would not be nearly as good. All remaining imperfections are entirely my own. I dedicate my thesis to Inonge, who has taught me things that no book of science can possibly explain. Vladimir Chlouba Connecticut College Impact of German Sources of Capital on the Namibian Economy Abstract: This work examines the impact of German sources of capital on the Namibian economy. Two sets of equations are tested. The first set tests the effect that German development assistance and German capital goods have had on domestic GDP. The second set tests the effect of German development assistance on the Namibian government’s capital formation outlays. The German independent variables are subsequently compared to global sources of capital in order to determine whether the German sources demonstrate a comparatively higher significance. Furthermore, the effects of official development assistance are disaggregated by type to test for aid’s fungibility. This analysis enables us not only to determine the direct impact of German sources of capital on the Namibian economy but also the extent to which official development assistance impacts the government’s investment behavior. We find that German development assistance has practically no effect on Namibian GDP. However, German development aid does have a statistically significant effect on the Namibian government’s level of annual expenditure on capital formation. Our results lead to the conclusion that German development aid has the potential, through public investment, to exert a positive influence over the Namibian economy. Further research will need to explore the conditions under which this potential can be fulfilled. INTRODUCTION The southern African country of enacted a resolution that underlined Namibia was once a colony of the German Germany’s historical and political Empire and the history of the dire responsibility towards Namibia. After 1990, exploitation that was German colonialism in the countries’ relationship has been Namibia has been thoroughly documented. solidified by a number of high-profile visits. As a result of the famous “Scramble for In 1995, German chancellor Helmut Kohl Africa,” the Germans sought to control paid the former colony a visit and in March Namibia in a struggle that ended with 1998, German president Roman Herzog several cases of genocide.1 Today, Germany followed suit. The tide of official visits from is Namibia’s second greatest donor of Germany continued with the president of the development aid and the countries’ relations, Bundestag Wolfgang Thierse and foreign at least on the official level, are said to be minister Joschka Fischer, both of which flourishing.2 In 1989, the German Bundestag visited Namibia in 2003. Namibian officials, if the number of official visits can be 1 See, for instance, JONASSOHN, Kurt & Karin interpreted as a reliable indicator, accorded SOLVEIG BJÖRNSON. Genocide and Gross to the bilateral relationship equally high Human Rights Violations in: In Comparative importance. Namibian president Sam Perspective. New Brunswick: Transaction Publishers, Nujoma visited Germany three times (1996, 1998. 2 2000, and 2002), Namibian prime ministers Namibia. Federal Foreign Office [online], 2016. did so on four occasions (Geingob: 1997, [cit. 2016-01-01]. Available at: http://www.auswaertiges- amt.de/EN/Aussenpolitik/Laender/Laenderinfos/01- Nodes/Namibia_node.html 1 Vladimir Chlouba Connecticut College 2000, and 2000, Angula: 2011).3 To list the Germany to an African country.5 other official visits would no doubt Importantly, German development aid to underscore the point that the German- Namibia has been devoted to a number of Namibian political relationship enjoys areas; resources are being utilized in careful attention on both sides but it would construction of educational and cultural also reach beyond the scope of this paper. facilities, too. Currently, three priorities However, let us mention that when it comes have been identified: management of natural to the delegations accompanying official resources, transport, and sustainable visits, the economic ministers (trade and economic development.6 industry, tourism, economic cooperation and Despite voluminous literature on the development) usually occupy the front seats. topic, a consensus regarding development Both countries seem to be interested in aid’s effectiveness has not been reached. In deepening of their economic ties and the case of the German-Namibian exchanges of visits by officials responsible relationship however, such consensus is for economic policy continued as recently as unavailable not necessarily because July 2015. This illustrates the fact that the academics present differing results, but German-Namibian ties have, and, as will be rather because too few studies on the topic evidenced later, have always had, an of German development aid to Namibia important economic dimension. In 2014, have been written. Even though this is bilateral trade between Germany and partially explained by the fact that Namibia Namibia amounted to approximately 274 remains a young country,7 the degree to million euros. In aggregate terms, German which this relationship remains foreign direct investment in Namibia nears underresearched is striking. Namibia’s data 90 million euros.4 An investment promotion have by now reached both the necessary and protection agreement as well as a double volume as well as considerable reliability taxation accord are in force. Official and their analysis is long overdue. development assistance (ODA) has, most Therefore, this study will consider prominently after 1990, played a crucial role the extent to which German development aid in the governments’ relationship. The exerts influence on the Namibian economy. German foreign office’s official data claim However, we will focus on German sources that over 800 million euros have been of capital in a broader sense of the word and provided to Namibia for the purpose of the analysis of German official development development cooperation since 1990. This assistance will be supplemented by that of represents the highest per capita rate paid by German exports of capital goods to Namibia or, conversely, Namibian imports of German capital goods. An adjusted Cobb-Douglas 3 KATJAVIVI, Peter H. Namibia’s bilateral relations with Germany: A crucial relationship in BÖSL, production function will be employed to Anton, André DU PISANI a Dennis U. quantify the effect of the two ZAIRE. Namibia's Foreign Relations: Historic aforementioned variables (German ODA contexts, current dimensions, and perspectives for and German capital goods) on Namibia’s the 21st century. Windhoek, Namibia: Macmillan GDP. To provide a comparative measure of Education Namibia, 2014. ISBN 9789991626109, pp. 143 - 145 4 Namibia. Federal Foreign Office [online], 2016. 5 ibid., p. 1 [cit. 2016-01-01]. Available at: 6 ibid., p. 1 http://www.auswaertiges- amt.de/EN/Aussenpolitik/Laender/Laenderinfos/01- 7 In 2015, Namibia celebrated its 25th Independence Nodes/Namibia_node.html Day. 2 Vladimir Chlouba Connecticut College the relative importance of German sources of capital, an analogical analysis will be Literature Review conducted for aggregate (world) ODA to Namibia and aggregate imports of capital Though this study is primarily goods. Furthermore, official development concerned with the impact of German assistance will be disaggregated by type to sources of capital on the Namibian test for aid’s fungibility. Subsequently, we economy, it is imperative that we see our will develop a simple model for the research from a broader perspective. Namibian government’s annual outlays Namely, we attempt to diversify and towards capital formation to test the role of broaden previous literature by adding new German ODA in its determination. The variables to established models as well as by comparison between the effect exerted by suggesting a simplified model of our own. ODA on the entire economy and that exerted Therefore, this section clarifies the novelty on the government’s spending behavior will of our research with respect to previously not only enhance our understanding of published literature. German ODA’s various effects, it will also shed some