Foreign Aid, Debt and Growth in Zambia

Zambia is highly dependent on copper exports, which makes the country very vulnerable to fluctuations in its price. From independence in 1964 until the mid-1970s Zambia had reasonable growth, largely resulting from on good revenues from copper exports, but it remained a highly dualistic economy. In the 1970s the country was hit by oil-crises and by a copper-bust, which dramatically changed the fortunes of the country. Since the government assumed that the fall in copper prices was a temporary setback, they chose to avoid serious adjustment measures, and instead borrowed money on the international financial markets. It is from this period onward that Zambia's large debt was built up. From 1983 the government initiated some stabilisation and structural adjustment measures, with very limited success. This study first discusses the structural problems Zambia and the policies of adjustment that have been tried. It then uses a computable general equilibrium model to analyse the impact of various strategies with regard to external resource transfers. It compares the impacts of foreign loans or grants to the private and the public sectors, as well as the impact of a turnaround of the country's fortunes with regard to its external terms of trade. The results of the policy analysis show that the scope for growth is highly dependent on the tightness of the external resource constraint. Of course, many of the growth constraints are domestic in nature, but a relaxation of the foreign exchange constraint will also make it easier to address the domestic policy problems. With the debt burden that Zambia carries, debt service tends to dominate the policy-making machinery.