Short and long run effects of an own-funds scheme

Under an own-funds scheme, individuals receive import licenses without being asked the source of their foreign exchange. Such schemes were introduced in the 1970s and 1980s in a variety of African countries, including Tanzania, Ghana, and the Sudan, usually as part of a gradual movement towards trade liberalization and exchange rate unification. Using a dynamic model of smuggling and currency substitution, this paper argues that while an own-funds scheme does lead to a repatriation of foreign exchange holdings, the induced trade liberalization is only temporary. Moreover, the parallel premium on foreign exchange rises in both the short run and the long run. The latter point implies that an own-funds scheme, viewed in isolation from the rest of macroeconomic policy, is a move away from, rather than towards, exchange rate unification. App., bibliogr., notes, ref.