Insurance - Economic Growth Nexus: Evidence from Botswana

Abstract

The paper investigates the influence of insurance penetration on economic growth in Botswana for the period 1994-2013. Using the autoregressive distributed lag (ARDL) bounds test approach to Cointegration by Pesaran et al. (2001) the study finds a negative long-run relationship between insurance penetration and economic growth. This suggests that the recent rapid expansion of the insurance sector could be hurting the economy’s long-run growth. We contend that this finding could reflect a saving-substitution effect in which insurance assets mobilized locally are invested abroad. However, the effect is economically small and statistically significant only at the 10 percent level. Furthermore, there is no evidence that insurance penetration affects growth in the short-run. Nonetheless we argue that there is a need to pay more attention to the insurance sector in financial sector policy analysis, lest it becomes a significant leakage of funds from the income-expenditure stream.