Copper Crisis And Agricultural Renaissance In Zambia: An Economy-Wide Analysis

Zambia's strong dependence on copper exports has suppressed other tradables sectors, indicative of a Dutch disease phenomenon. The current copper crisis will have strong economic effects, possibly reversing such Dutch disease effects. We use a computable general equilibrium model built around a 1995 social accounting matrix to simulate the short- and long-run effects of two scenarios that reflect the current crisis, a 20 percent reduction in world copper prices and a complete collapse of copper mining. Compared to the short run, the long run is characterized by more flexibility in production technology and capital allocation. Both scenarios require a significant reduction in the "non-copper" trade deficit, absorption, and household consumption. The strongest effects occur under the short-run mining-collapse scenario where household consumption falls by 13 percent and the real exchange rate depreciates by 42 percent. In the long run, these effects are approximately half as strong. The short- and long-run impacts of a 20 percent fall in world copper prices include a cut in household consumption by 4-5 percent and real depreciation by 7-10 percent. For all scenarios, the welfare losses for rural households are below the national average. Given that per-capita consumption is lower in rural areas, inequality falls. This distributional outcome is driven by the fact that the agro-food-fiber complex, which produces outputs that are relatively tradable, expands relative to the rest of the economy in terms of value-added, employment, and exports, suggesting that the copper crisis may induce an agricultural renaissance.