Zimbabwe’s Trade Performance Under Alternative Trade Policy Regimes

Published date01 May 2017
DOI10.1177/0015732516663316
Date01 May 2017
Subject MatterArticles
Zimbabwe’s Trade
Performance Under
Alternative Trade Policy
Regimes: An Error-
correction Model Approach
Phocenah Nyatanga1
Abstract
This study examines Zimbabwe’s export and import performance under alterna-
tive trade policy regimes, from 1976 to 2014. Taking into account export and
import volumes, gross domestic product (GDP), price of exports and imports,
foreign income, real effective exchange rate and policy changes, log-linear error-
correction models were adopted to estimate export supply and import demand
elasticities. The study concludes that the relationship of exports and imports
to GDP is significantly positive, while foreign income has no significant effect. A
devaluation is estimated to have a significantly negative effect on imports in the
short-term. Though highly inelastic, the effect of prices of imports on import
demand is estimated to be significantly negative in the short- and long-term, and
that of exports on export supply is positively significant in the short-term. The
adoption of outward-oriented strategies was estimated to result in a 13.86 per
cent increase in exports in the long-term, and a 32.3 per cent increase in imports
in the short-term between 1990 and 1995 alone, and an additional 33.62 per cent
between 1996 and 2000. The analysis also reveals that adopting a multi-foreign
currency regime will only significantly influence export supply in the long-term.
JEL: C32, E65, F13, F43, O11
Keywords
Error-correction model, export-supply, import-demand, import-substitution,
outward-orientation
Foreign Trade Review
52(2) 90–105
2017 Indian Institute of
Foreign Trade
SAGE Publications
sagepub.in/home.nav
DOI: 10.1177/0015732516663316
http://ftr.sagepub.com
Corresponding author:
Phocenah Nyatanga, University of KwaZulu-Natal, School of Accounting, Economics and Finance,
College of Law and Management Studies, New Arts Building #325A, King Edward avenue, Scottsville,
Pietermaritzburg 3209, South Africa.
E-mail: nyatanga@ukzn.ac.za
1 University of KwaZulu-Natal, School of Accounting, Economics and Finance, College of Law and
Management Studies, Scottsville, Pietermaritzburg, South Africa.
Article
Nyatanga 91
Introduction
The importance of trade as an engine of economic development is well recognized
and has become a key consideration in most economic policy decision making.
Balassa (1971), Krugman and Taylor (1978), Krueger (1980) and Bhagwati
(1981), among others, demonstrated that the trade policies that a government
chooses to adopt, and the way in which these policies are implemented, have a
substantial impact on the process of structural change and development. Over the
last few decades, two distinct trade strategies, namely import-substitution and
outward-orientation, have been presented as important policies to alter the pattern
and pace of industrialization and economic development. Advocates of import-
substitution, among them Corden (1971), Sheahan (1972), Krugman and Taylor
(1978), Bruton (1989), Thirlwall (1994), as well as Deraniyagala and Fine (2001),
argue that some degree of protection is desirable in order for domestic industries
to develop to competitive levels on the international market. The adoption of
import-substitution instruments is defended on the theoretical grounds of protect-
ing infant industry development, saving foreign currency, raising revenue from
tariffs and international dependency reduction. On the other hand, proponents of
outward-orientation, among them Bhagwati and Krueger (1973), Balassa (1989)
and Krueger (1998) support the proposition that it is better and more efficient for
nations to specialize in the production of goods they have a comparative advan-
tage in, then trade with one another so as to enhance their standard of living. The
adoption of outward-oriented instruments is defended on the theoretical grounds
that it produces efficient outcomes and optimal resource allocation, attracts a
higher volume of foreign direct investment (FDI) and technology transfer, widens
market access, ensures a better distribution of wealth and improves a country’s
balance of payments. While the strong linkage between trade policy options and
economic performance is well documented, it remains controversial among econ-
omists as to which trade policy will better serve the long-term development needs
of developing countries.
Prior to the wave of trade liberalization in the 1980s and 1990s, import-substitution
policies had laid the basis for industrialization and development for most develop-
ing countries. However, low-to-negative growth rates, hyperinflation, worsening
terms of trade and high debt levels began to haunt developing countries, prompting
the need to change to more liberal trade policies (Whalley, 1989). East Asian
countries such as Hong Kong, the Republic of Korea, Singapore and Taiwan were
among the first to switch to outward-orientation and appeared to enjoy spectacular
results. The impressive economic performance of these countries has been fre-
quently held up as the prime example of how outward-orientation is super ior to
import-substitution in spurring growth, and it was therefore proposed as the cen-
tral tenet of virtually every successful development strategy (Lall, 1996; Whalley,
1989). However, in Africa, trade liberalization has not been as successful in
addressing its developmental concerns, resulting in a substantial backlash against
this strategy.
Zimbabwe is one country that has followed both restrictive and liberal trade
policies during different periods, and the country’s export and import performance

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