Short and Long-Run Impact of Trade Liberalization on Agricultural Growth in Kenya

Abstract

Purpose: The focus of the study was on establishing the short and long-run impact of trade liberalization on agricultural growth in Kenya. Emphasis was on the influence of tariffs, foreign direct investment and trade openness on agricultural growth in Kenya. Approach/Methodology/Design: The study utilized time-series data from 1980 to 2017. The source was the World Bank Development Indicators. The autoregressive distributive lag bounds test ascertained whether there was cointegration. Findings: The study established that trade openness is critical in enhancing agricultural growth in Kenya. As Kenya opens its borders for smooth movement of agricultural produce, there is a resultant increase in outputs for the domestic and foreign markets. Besides, foreign direct investment contribution to agriculture is negative since it tends to relate to other sectors of the economy other than agriculture. Consequently, farmers are less likely to benefit from technology transfer and the advent of new processes in agriculture. Further, tariffs did not influence agricultural growth in Kenya probably because, despite Kenya making commitments to liberalize its trade, the implementation of the policies on free trade was not forthcoming. Practical Implications: The study contributes to the understanding of how open trade influences growth in the agriculture sector in Kenya. It reflects that trade openness is detrimental to agricultural growth in the short-run but vital in spurring growth in the agricultural sector in the long-run. Originality/Value: The study validates the firm heterogeneity model by establishing that open trade in agriculture, increases the capacity of productive firms to the extent of exporting products in international markets. Also, the negative influence of foreign direct investment on agricultural growth confirms the theory's assertion that investments are channeled to high potential sectors of the economy.