A commodity exporting economy under “the new reality”: Aggregate and structural changes

Abstract

“The new reality” means a commodity-exporting economy cannot use its accumulated fx-reserves or attract new fx-debt to smooth abrupt import reduction amid slower decline of income flow from commodity export. We use a modified version of the Ramsey—Cass—Koopmans’ model to study aggregate and structural changes in the economy under these conditions in the shorter and longer run. The results show that the potential GDP of the economy which cannot effectively substitute its import should decline both in the shorter and longer run. However, full and effective import substitution does not guarantee households would restore their volume of consumption. The reasons are, first, labor reallocation into the import-substituting sector that reduces availability of labor for other sectors and, second, the need to keep capital intensity of production at a higher level. If the efficiency of import substitution is asymmetric and biased to goods for final consumption relative to goods for investments, the structure of imported goods becomes biased to the later. Moreover, goods for final consumption experience very intensive import substitution in such a case. However, it does not result in the restored level of total consumption. The results may imply higher consumer goods inflation in practice. If import substitution is extremely inefficient in both consumption and investment goods’ production, households cannot avert a huge reduction of their welfare.