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Periodical article Periodical article Leiden University catalogue Leiden University catalogue WorldCat catalogue WorldCat
Title:A Nonlinear Multisectoral Simulation Analysis of Devaluation and Import Substitution in Zambia
Author:Applegate, Michael J.
Periodical:Journal of Developing Areas
Geographic term:Zambia
economic models
import substitution
Economics and Trade
External links:https://www.jstor.org/stable/4191907
Abstract:The government of the Republic of Zambia attempted to alleviate the severe problems caused by an overvalued currency by adopting a foreign exchange auction in October 1985. The immediate result was a devaluation of the kwacha, which had a dramatic impact on domestic prices. In this paper, a nonlinear multisectoral model that captures some of the important structural characteristics of the Zambian economy is employed to analyse the impact of devaluation. Two sets of policy simulations were run. First, the sensitivity of real GDP to changes in the exchange rate was explored and, second, the effects of the foreign exchange auction were analysed. The model indicates that stricter controls on credit creation, including government borrowing, would have greatly lessened the impact of the auction on domestic prices. It also indicates that increased substitution of domestically produced inputs for imported inputs and domestic labour for imported capital would reduce the inflationary impact. Furthermore, the results indicate that with the structural characteristics and parameter values existing in 1987, devaluation would have an expansionary impact on the Zambian economy, and that this positive impact is increased as substitution takes place over time. App., notes, ref.