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Subject matter of this paper is a comparative examination of development strategies regarding two economic sectors in the countries of Namibia and Botswana, as applied or planned in June 2006. The objective of the underlying study was to source, process and analyze up-to-date-information on development strategies of the two countries of Namibia and Botswana regarding the economic sectors a) diamonds (mining, processing and export) and b) tourism. The purpose was to provide a sound and up-to-date information basis regarding the status quo and the foreseeable future development concerning the above mentioned strategies. The content of this paper is aimed at a readership that is not necessarily highly familiar with the circumstances neither regarding the region nor the economic sectors.
The relevance of the study derives from a need to try to adapt and transfer successful economic concepts. Presumably, there are best practices and lessons learned that developmental latecomers could capitalize on in spite of differing positions at the outset. The economic situation of Sub-Saharan Africa (SSA) is still marked by a relative weak growth compared to other regions of the world (cf. Collier and Gunning 1999). Some researchers even wrote about the “marginalisation of Africa” (cf. Collier 1995). Though, there are at least two countries that have shown an impressive performance since their respective foundation respectively independency. The countries of Botswana and Namibia both distinguished themselves by proving that it was possible to become economically relatively prosperous nations with economically promising future prospects starting from a very unfavourable position (Botswana)respectively developing within a very short time span(Namibia). Botswana as well as Namibia are today classified by the World Bank as middle income developing countries, Namibia as a lower, Botswana even
as an upper one (World Bank, 2006).
In one of the seminal papers on agency theory, Jensen and Meckling (1976) define an agency relationship as “a contract under which one or more persons (the principal(s)) engage another person (the agent) to perform some service on their behalf which involves delegating some decision making authority to the agent.” They also note that since the agent’s goal is to maximize his own utility, we can expect some divergence between the agent’s decisions and those decisions that would maximize the welfare of the principal. This divergence of interests is the ‘agency problem’ that is faced by principals.
In the corporate context, and in the simplest form, the principal is the shareholder and the agent is an employee manager who is compensated with a wage for his managerial services. The manager has discretion over many decisions that will affect both the benefits that flow to the shareholder (i.e. dividends, capital appreciation) and the utility that the manager will derive from his employment. For example, the manager has at least some discretion over the perquisites he will consume, how hard he will work and operational decisions that affect the prestige of his position and the risks that he will face. In order to maximize his own utility, the manager may sacrifice potential profits and shareholder benefits. The dollar cost of these lost shareholder benefits is known as the residual loss and is the type of agency cost that is dealt with in this paper.
Labor income and income from nontraded assets are important sources of wealth for most individuals, cf. Heaton and Lucas (2000) and Campbell (2006), with a potentially large impact on their consumption and portfolio decisions and, consequently, on the equilibrium securities prices. If income risk can be completely hedged by appropriate financial assets, it is straightforward to include income risk in standard models of individual consumption and portfolio choice and in equilibrium asset pricing models. However, a typical individual’s labor income is only weakly correlated with traded financial assets and, thus, it has a large unspanned and unhedgeable component, which complicates these models tremendously. This paper provides the first closed-form solution in the literature for the equilibrium risk-free rate and the equilibrium stock price in a continuous-time economy with heterogeneous investor preferences as well as unspanned income risk.
The equilibrium has the following properties. Lowering the fraction of income risk which is spanned by the market leads to a lower covariance between the dividends of the stock and aggregate consumption and, consequently, a lower stock market Sharpe ratio. The equilibrium risk-free rate decreases due to a higher demand for precautionary savings. If we fix the aggregate consumption dynamics, the Sharpe ratio is the same while the risk-free rate (and the expected stock return) is lower than in an otherwise identical representative agent economy in which all risks are spanned. The reduction in the risk-free rate depends on the magnitude of all investors’ unspanned income risk and their risk aversion. The reduction is highest when the more risk-averse investors face the largest unspanned income risk. Even though our closed-form solution hinges on very specific assumptions about the preferences, the dividend process, and the income processes, our results suggest that unspanned income risk may in more general settings play an important role in explaining the risk-free rate puzzle produced by the standard representative agent models.
