Total factor productivity in Kenya: The links with trade policy

Abstract

As an objective of development policy, productivity growth has been difficult to achieve in many countries. For this reason, studies on sources of growth are a field of great importance to policy makers. Recent experience, particularly for East Asian countries, has highlighted the potential for achieving rapid and renewed growth in sub-Saharan Africa through appropriate trade policy orientation. In Kenya, however, where the last three decades have seen attempts to foster growth through shifts in trade policy orientation, convincing evidence on the linkage between trade strategies and productivity growth is still lacking. This study explores productivity sources in the manufacturing and agricultural sectors using aggregated data over 1960–1995. Productivity is explained by: growth by factor inputs, and change in total factor productivity. Agriculture is seen as a dynamic sector producing important linkages with the growth of other sectors. The manufacturing sector, on the other hand, is important in growth-oriented analysis, which generally perceives it as crucial for increasing the rate of growth for the whole economy. The study establishes the direction of the links between TFP change in these sectors with trade policy episodes such as imports, export penetration and trade volume. Nevertheless, the impact of trade policy on productivity remains inconclusive. Evidence suggests that more robust results with broader policy consensus could be obtained if the analysis were extended to a disaggregated level for each of the sectors.