Determinants of non-traditional agricultural exports growth in Zambia. A case of cotton and tobacco

Abstract

Exports are a vital component of a nation’s balance of payments as they are source of foreign exchange and economic growth. Much of the economic growth in Zambia has been driven by copper exports, which have suffered from external shocks such as plummeting prices on the world market. It is against this background that the Government of the Republic of Zambia (GRZ) has devised a number of measures to promote export diversification to non-traditional exports with a view to reducing heavy dependency on copper and stabilise foreign exchange earnings. The non-traditional exports have recorded growth averaging about 30 percent during the period. However, the key determinants of the growth of the non-traditional exports are unknown. This study therefore endeavored to determine factors that affect the growth of two major non-traditional exports in Zambia; Cotton and Tobacco. The study employed annual time series data that spans a period of 34 years from 1980 to 2013. The Auto-Regressive Distributed Lagged (ARDL) model approach to co-integration revealed that cotton and tobacco exports are co-integrated with foreign direct investment, real effective exchange rate, real Gross Domestic Product (GDP) of trade partners, real interest rate and world price. The ARDL analysis revealed that cotton exports are affected by the real interest rate, real effective exchange rate, world price and the real income of the trading partner in the short-run. In the long-run, cotton exports are affected by real interest rate, real effective exchange rate and real GDP. Tobacco exports are significantly affected by real effective exchange rate, real income of the trading partner and foreign direct investment in the short-run while only real effective exchange rate and the real income of the trading partner affect the growth of tobacco exports in the long-run. Granger causality tests revealed that cotton and tobacco exports granger cause agricultural share of GDP. Overall, both exports are highly elastic to exchange rate movements and the importer’s GDP. There is need for government to maintain a stable exchange rate and exploit available markets through increased participation in regional integration.