Negative ‘Dutch Disease’: ‘the Zambian Disease’

Consider a labour-abundant, capital-scarce, developing economy producing two composite goods, tradeables (T) and non-tradeables (NT). Unless otherwise indicated, it is assumed that all production and imports are for final demand: domestic primary factors are the only inputs. Within each composite category, goods prices are assumed constant until further notice. Those in T are determined by given world levels and the structure of protection, while those in NT are endogenous. Tradeables consist of a resource-based subsector such as mining (R), plus agriculture and manufacturing (AM). It is supposed that the economy is initially heavily dependent on a booming R sector, the entire output of which is exported, but that the relevant minerals approach depletion; in comparative statics analysis only the extreme case of actual depletion is considered. That is the direction in which the key (copper) resource sector of Zambia has been moving. How the structure of the economy is likely to react to such depletion, the difficulties it is likely to face, and some policy implications, are examined. Consideration is also given to a problem in many ways similar to resource depletion — that in which there is substantial permanent shift in the terms of international trade against a resource upon which the economy had earlier been heavily dependent. Zambia has also had to face that dilemma in recent decades. Unless otherwise indicated, it is assumed that both before and after the resource sector shocks, some of each good is produced.