Short-Run Consequences of Trade Liberalization: A Computable General Equilibrium Model of Zimbabwe

Abstract

The elimination of import controls represents a challenging adjustment process for any economy. The mechanisms are investigated by the use of an economy-wide model of Zimbabwe. A benchmark version assumes import rationing and protection of domestic markets in an economy with unemployment of unskilled labor. Rather than modeling trade liberalization as a decrease in tariffs, we view it as a regime shift, requiring a new model closure. Compared with previous computable general equilibrium studies of trade liberalization, the analyses includes two expansionary channels, intermediate imports and savings response. It is shown that a combined consumption boom, short-run contraction, and growing trade deficit are likely, due to drop of savings and demand switching to foreign goods.