Abstract
The main objective of this study is to examine whether the long-term economic growth rate of Zambia has been demand-constrained by its balance of payments over the period 1956 to 2017. The study fits the simple version of the balance-of-payments-constrained growth (BPCG) model, which assumes zero capital flows and constant relative prices (Thirlwall, 1979), and the extended version of the model, which considers sustainable debt dynamics, as developed by Moreno-Brid (1998a). The models are fitted over the full sample period (1956 to 2017) and across three different growth regimes (1956 to 1974, 1975 to 2005, and 2006 to 2017). The growth regimes correspond with major structural shifts in Zambia’s trade account-to-GDP ratio. Previous studies on Zambia have fitted the BPCG model over growth regimes when the economy relied heavily on capital inflows to finance the trade deficit on the balance of payments. Inevitably, the existing literature rejects the relevance of the simple version of the BPCG model in Zambia. However, since the BPCG model makes predictions about the long-run growth rate, tests of the model over relatively short regimes are likely to lead to erroneous inferences about the predictive power of the model. Therefore, testing the model across different regimes and over the full sample period reveals the true predictive power of the model and its relevance in explaining Zambia’s growth performance. The study finds that both the simple and extended versions of the model fail to predict the actual growth rate over the period 1975 to 2005 and 2006 to 2017. However, both versions of the BPCG model accurately predict Zambia’s actual growth rate over the sub-period 1956 to 1974, and over the full sample period from 1956 to 2017. The results imply that Zambia’s economic growth over the full sample period has been constrained by its balance of payments. To lift the balance-ofpayments constraint, policy should focus on improving the structural demand features of exports in foreign markets and diversifying the production structure of the economy away from copper.
M.Phil. (Industrial Policy)