Macroeconomic determinants of manufactured exports in Kenya

Abstract

Despite policy efforts to diversify exports, Kenya's export base is still dominated by primary commodities. Trade and commodity concentration has led to export earnings instability, which usually breeds balance of payments problems, budget deficit and does not allow for systematic planning. The general objective is pivoted on the premise that the road to diversification may be smoother if the important macroeconomic determinants of manufactures are isolated. The study sought to ascertain whether trade liberalization efforts were important and whether the small country assumption was valid for the exports of Kenyan manufactures. A structural model with dynamic characteristics is used, The model is estimated using time series data for Kenya, To obtain the structural estimates use was made of two stage least squares. Cointegration and error correction modeling was the approach used. Price turned out to be important for demand. Export demand price elasticity measure was close to -1. Increases in incomes abroad unpredictably lowered demanded quantities suggesting that our goods are inferior The insignificance of the error correction term in the demand equation reveals an unstable relationship. Export supply estimates reveal a stable long run relationship amongst the variables (the error correction term is significant). The real exchange rate, capacity output, past export levels and the relative price measures are important for export supply. The capacity elasticity is small suggesting low capacity use reported in the literature We concluded with the adduced evidence that Kenya is not a small country. The implication is that our supply decisions are important for the prices of our manufactured products. It is possible that reforms have not been decisive due to macro and political instabilities. Indeed shocks like the 1982 failed coup and the hostile macro environment thereabout 1997 produced significant and negative supply effects Policy implications are that we must get prices right and improve on product quality to boost demand. The importance of past export levels and capacity level (for supply) suggests that stability of the macro and political environment is crucial. Ensuring political and macro stability would buttress attempts made at reforms and hence rekindle the waning supply,