Small econometric model of the Zambian economy

The model is based on annual data from 1967 to 1997 and provides projections for 1998 and 1999. The estimates are derived using the Three Stage Least Squares (3SLS) method for simultaneous equations systems. Despite the fact that some of the estimated relations yield coefficients that are contrary to the theoretical expectations and the data include a long period in which key macroeconomic variables were manipulated by government, the results provide some useful insights regarding the operation of the Zambian economy and its future prospects. First, the model correctly measures the key dimensions of the economic retrogression that has occurred in Zambia. Large budget deficits led to rapid growth of money supply. Inflation accelerated and, because of the fixed exchange rate, debt accumulated rapidly. Second, the full-information estimation method provides a coherent approach for understanding the various interactions among the principal macroeconomic variables. Third, the projection results suggest useful directions for future policy reform, including revival of the mining sector and the promotion of agriculture. Fourth, the overall results point to a highly negative impact of government intervention in the economy. Future policies should carefully weigh potential benefits against adverse effects. Fifth, the model clearly illustrates the complementary dimensions of policy reform. Monetary, fiscal, exchange rate, and debt management policies have to be modified together in ways that promote growth and development. Annex A consists of graphs of key macroeconomic series over the period 1967-97. Annex B defines the variables used in the model and lists the data sources. Annex C presents a brief overview of macroeconomic policy models. Annex D suggests how the econometric model can be embedded in a financial programming framework. Includes references. (Author abstract, modified)