Stagflation and economic growth in Zambia: A vector error correction model analysis of gross domestic product

Abstract

Stagflation remains one of the most serious macroeconomic challenges facing developing economies because it combines inflationary pressure, weak growth, and structural instability within the same economic environment. This study was guided by the Expectations-Augmented Phillips Curve Theory, complemented by the Structuralist Theory of Inflation and the Resource-Dependence Theory, which together explain how inflation, labour-market weakness, supply-side shocks, and commodity dependence interact to constrain economic growth. This study examines the effect of stagflation on Zambia’s economic growth as measured by Gross Domestic Product (GDP). Zambia provides a compelling case for this analysis because inflation, exchange-rate instability, external debt stress, commodity-price volatility, and labour-market weakness have repeatedly interacted to undermine growth in a copper-dependent economy. Using annual time-series data covering the period 1964 to 2024, the study employs a Vector Error Correction Model (VECM) after conducting unit-root, lag-selection, multicollinearity, and Johansen cointegration tests. The findings confirm the existence of a stable long-run relationship between GDP and the principal stagflation-related drivers. Exchange-rate depreciation, labour-market weakness, copper-supply disruptions, and inefficient government spending are found to constrain long-run growth, while external debt and population growth display positive long-run coefficients, reflecting the growth-supporting role of debt-financed investment and demographic demand under certain conditions. The short-run GDP equation reports a negative error-correction coefficient, indicating a slow adjustment process toward long-run equilibrium following macroeconomic shocks. Further dynamic evidence shows that inflation and exchange-rate volatility account for a meaningful share of GDP fluctuations, while copper-price declines and debt-service pressures generate notable output losses. The study concludes that stagflation in Zambia is not merely a temporary cyclical disturbance, but a structural constraint on economic growth and transformation. It therefore recommends export diversification, stronger exchange-rate resilience, more productive public expenditure, prudent debt management, and labour-market strengthening as essential pillars of a coordinated policy response.