Foreign capital inflows and the export-led growth strategy in Zimbabwe

Field: Economics, Econometrics and Finance (Social Sciences)

Immediately after the attainment of independence in 1980 the Zimbabwean economy experienced high growth rates. However, the period of prosperity was short-lived. The limited effect of export incentives under an import substitution regime forced the government to rethink its policies. It had become clear at that stage that unless the factors constraining economic growth were addressed the gains in social welfare were under threat. A reform strategy supported by the Bretton Woods institutions was formulated and finally launched at the end of 1991.As the government embraced reforms targeted at achieving rapid and sustainable growth, export expansion was at the centre of the overall strategy. The expansion of the export sector (contributing 29% of GDP) is expected to come from a more efficient resource allocation system that trade liberalisation entails, improved international competitiveness of domestic production achieved through an increased role of foreign capital. Foreign capital is believed to be the main conduit through which technology is transferred. In addition, foreign capital inflows are usually accompanied by a flow of managerial expertise and provide linkages to external markets. To maximise the benefits to the economy an incentive package to attract foreign capital into high value-added manufacturing export activities was put in place.Trade and industrial policy changes meant to promote growth of the export sector have important implications on investment decisions and sectoral outputs. The general equilibrium implications of the policy changes, therefore, become an important aspect that needs a closer examination. In the absence of any study focusing on the export-led growth strategy in Zimbabwe this thesis begins by developing an economic framework to empirically analyse the exports-FDI-growth nexus using a vector autoregressive model. The primary objective at this stage was to verify causation among the three macroeconomic variables.This thesis finds, as expected from theory, that both FDI and exports cause growth. However, exports have a weak causal effect on growth. This result is explained by the fact that the inward-looking policies that have been in place during the relevant period made export production a residual activity. On the other hand, FDI has a relatively stronger causal effect on growth. Since FDI is part of total domestic investment it has a capacity effect and also generates demand for investment goods. The results also show that significant reverse causation exists between these variables. Having established that the export-led growth hypothesis could not be rejected in the case of Zimbabwe it became even more imperative to analyse the macro- and microeconomic effects of the policies constituting the export strategy.A computable general equilibrium model was developed to analyse the effects of trade and industrial policies meant to promote export growth. Policy simulations using a computable general equilibrium analysis shed some light on how trade liberalisation has the effects of reallocating resources toward the export sector and lead to higher growth and employment. Trade liberalisation also had positive effects on the budget deficit and the balance of trade. Foreign capital inflows, on the other hand, tend to distort the production structure due to an appreciation of the exchange rate making exports become less competitive. It is further observed that targeted investment has the effect of raising fixed costs of production and has the least positive effect on growth and employment. When combined together as a single policy dose it is found that export performance expand and employment improve. In addition, higher economic growth than that achieved from individual policy simulations is realised. This result strongly suggests the importance of policy complementarity.This thesis, therefore, has made a contribution in the economics literature in two ways. First, a unified framework to analyse the exports-FDI-growth nexus was developed. Second, the empirical results from both the vector autoregressive and the general equilibrium analyses provide a framework for implementing the export-led industrialisation strategy. While the limitations of techniques employed in analysing the relevant issues in this thesis are acknowledged, this thesis provides important insights into policy questions. In that way it fills some of the gaps in research on the Zimbabwe economy.