Abstract
This study uses a multi-sectoral balance-of-payments-constrained growth model, which is a demand-led approach, to explain Kenya’s long-run economic growth for the period 1980 to 2019 using annual data. The model explicitly incorporates two categories of imports (intermediate and final) and two categories of exports (manufactured and non-manufactured). This allows the incorporation of the structural features of Kenya’s external trade in the analysis, a clear departure from all the past studies that have analysed the growth performance of the Kenyan economy using the balance-of-payments-constrained growth (BPCG) model. In line with the multi-sectoral version of the BPCG model, the study estimates the manufactured exports demand function and the import demand functions for intermediate goods and final goods. To estimate the demand functions, the study uses the auto-regressive distributed lag (ARDL) bound-testing approach. Using the estimated long-run coefficients of the demand functions, the study fits the multi-sectoral version of the BPCG model on Kenya. The study finds that the estimated balance-of-payments (BOP)-equilibrium growth rate for Kenya is below the actual growth rate over the sample period (1980-2019). This implies that the Kenyan economy grew at a higher rate than that allowed by its BOP equilibrium. However, this higher growth rate was achieved at the expense of accumulating deficits in the current account that were largely financed by capital inflows in form of external debts, which lifted the demand constraint on Kenya’s economic growth. The study further finds that exports of manufactured goods fuel imports of intermediate goods. Thus, Kenya’s heavy reliance on imports of intermediate inputs to produce its manufactured exports could potentially reduce overall trade gains due to foreign exchange ‘leakage’. Manufactured exports are also found to be highly responsive to GDP growth of the East African Community. From a policy perspective, the results of this study implies that Kenya should focus on implementing policy measures that encourage domestic production of intermediate inputs that are needed in the production of manufactured exports as well as raise income demand elasticity for exports by enhancing the supply characteristics of manufactured exports. Additionally, Kenya should continue to champion for strengthening of the regional integration through its foreign policy agenda.
Key words: Balance-of-payments-constrained growth model, ARDL, Intermediate goods imports, Final goods imports, Manufactured goods exports, Kenya.