Analysis of Kenya's Export Performance: an Empirical Evaluation
Discussion Paper No. 22
Abstract
With globalisation, export-led growth strategy has become a major focus for many countries including Kenya. Although there have been efforts towards diversification of the export sector, Kenya’s exports are still dominated by primary agricultural products. This paper broadly examines the factors that have influenced Kenya’s export volumes by disaggregating total exports of goods and services into three categories: traditional agricultural exports (tea and coffee) and ‘other exports of goods and services’.
For each of the three categories of exports, an empirical model is specified along the standard trade models that incorporate real exchange rate (proxy for relative prices) and real foreign income (of major trading partners) as explanatory variables. An additional variable (investment as a proportion of GDP) is included as a proxy to capture the supply constraints.
An error correction formulation is used to distinguish between the long-run and short-run elasticities. In the case of tea, the results were found to be inconsistent—no cointegration and therefore no error correction model. However, in general, real exchange rate has a profound influence on export performance. The supply response to price incentive (real exchange rate depreciation) for exports of goods and services is significant. On the other hand, the other explanatory variables provided mixed results. Investment as a proportion of GDP used as a proxy for supply constraints had a positive and significant impact on the export volumes of coffee but not for exports of other goods and services. Contrarily, income of trading partners was found to be more paramount in explaining export volumes of ‘other exports of goods and services’ than coffee exports. However, it is important to keep in mind that investments as a proportion of GDP have been falling and markets for Kenyan exports are expanding beyond the traditional markets, particularly with advances in economic integration such as COMESA and EAC. With liberalization, some sectors such as the coffee sector appear to have been adversely affected as indicated by the liberalization dummy.
However, like studies of similar nature, this study acknowledges that other non-price factors (cost of inputs, labour costs, access to credit, etc) play a vital role in production and export supply response. That notwithstanding, the results are quite informative and arguably point out several issues of policy concern. Potential for export supply response exists, even for sub-sectors like coffee where performance has been poor. For maximum benefit from an export-led growth strategy, there is need for incentives that boost exports. The positive response to a price incentive (depreciation of real exchange rate) could be taken as an indication that while maintaining a stable exchange rate is important, strategies that maintain a highly overvalued exchange rate could be a disincentive to export. This implies that flexibility in the exchange rate movements, in line with the fundamentals of the economy, might be favourable. However, increased openness is likely to be associated with increased volatility, especially for commodity exports, therefore justifying the need for strategic domestic policies to help those sectors that might not be able to cope with the wave of globalisation. Additionally, there is need for further diversification of export products and markets while at the same time improving their quality.
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