Export Potential And Efficiency In Kenya: An Application Of The Stochastic Frontier Gravity Model

Abstract

The primary aim of this study was to provide estimates of the export potential and efficiency of Kenya’s bilateral trade with its top 20 trading partners using a stochastic frontier gravity approach. The paper’s specific study objectives were to analyse factors determining Kenya’s exports and to analyse the impact of region-specific trade agreements on Kenya’s exports. The Stochastic Frontier approach allows prediction of Kenya’s exports at the frontier of the trade gravity function where free and frictionless trade is assumed. The study revealed that GDP growth in both the home and importing countries had a positive effect on Kenya’s exports. Population growth was not found to increase exports, contrary to the trade gravity model, and the effect of distance was statistically insignificant. Trade with members of the European Union and trade within the AGOA framework was found to be statistically significant and trade-enhancing with respect to Kenya’s exports. However, trade within the COMESA framework was not found to be trade-enhancing. The study showed that Kenya had the highest export efficiency when trading with the United States, the United Kingdom, Pakistan, Uganda and Egypt. The study further revealed that Kenya had the highest export potential in non-traditional markets in the Middle East and Europe, and within its neighbouring region; mainly in Rwanda, Burundi and Somalia. These findings call for a review of Kenya’s tactical approach to trade negotiations to put more emphasis on removing barriers to trade within the region, deepening intra-African trade integration and a deliberate campaign to explore underutilized market potential in non-traditional markets in the Middle East and Europe.