Degree Name

Master of Arts (MA)

Semester of Degree Completion

1993

Thesis Director

Noel Brodsky

Abstract

In International Economics, conventional wisdom suggests that devaluation improves the trade balance for a country. This is possible because, by worsening the terms of trade for a country, devaluation leads to import substitution and enhanced competitiveness in the export sector. The trade balance is expected to improve via the J-curve, where the trade balance worsens first, until a country is able to adjust to the contractual problem.

This project sought to identify the presence of the J-curve or a lack thereof in Malawi, a country in South Central Africa, within the contextual frame work of the IMF's structural adjustment programs. More precisely, it was hypothesized that a series of devaluations between 1982 and 1992 led to a wave-like pattern in the current account and the balance of payments. It was hypothesized that the trade balance was not enhanced because the J-curves never matured.

The project also analyzed some key variables that form the foci of structural adjustment. In addition, the project also estimated Malawi's propensities to import from key trading partners.

The findings suggested that, in some instances, the J-curve was indeed discernible from the data. In other instances, intervening variables precluded the drawing of hard and fast conclusions. The results also showed Malawi's imports to be positively sensitive to income and negatively sensitive to relative prices. However, the exchange rate does not appear to have any significant impact on Malawi's import trade, except for the case of trade with Japan.

The project concluded that Malawi, the IMF and other lenders should focus on correcting structural imbalances and diversification of the export sector if Malawi's financial position is to improve enough to enable her to repay her outstanding debts. Deflationary aggregate demand policies will only sacrifice long run growth and development.

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