Kenya’s Trade Liberalization of the 1980s and 1990s:

Policies, Impacts, and Implications1

Geoffrey Gertz2

As one of the first countries to sign a Structural Adjustment Loan with the World Bank, Kenya
spent much of the 1980s and 1990s liberalizing its economy. This reform program included
significant changes in trade policy, as the country’s post-colonial import substitution policies were
replaced with an outward-looking, export promotion program. Though the country achieved
targeted successes in the horticulture and apparel industries, overall Kenya’s trade liberalization
failed to produce sustained growth, promote decent employment opportunities, or lessen the
incidence of poverty and inequality. As the country shapes its future trade policy, an effort to
coordinate trade with other development strategies, to balance between global and regional trade
integration, and to focus on job creation can help Kenya maximize the benefits from trade.

1
This is a background paper for the recent report The Impact of the Doha Round on Kenya published by the
Carnegie Endowment for International Peace, which can be downloaded at
http://www.carnegieendowment.org/files/impact_doha_kenya.pdf.
2
The author was a Junior Fellow in the Carnegie Endowment for International Peace’s Trade, Equity, and
Development Program from July 2007 to July 2008. He is currently Senior Research Assistant at the
Wolfensohn Center for Development, Brookings Institution.
I. Introduction

In 1980, Kenya became one of the first countries to sign a Structural Adjustment Loan
with the World Bank. Over the next two decades, reluctantly at first but with renewed commitment
from the mid-1980s on, Kenya replaced the import-substitution policies it had pursued since
independence with an open, liberalized trading regime. Tariffs were decreased, controls on
imports were loosened, and the government encouraged trade through a series of export-
promotion platforms.

Broadly speaking, Kenya’s trade liberalization experience was disappointing. Though the
country enjoyed a few targeted successes in industries such as horticulture and apparel exports,
overall Kenya’s trade liberalization policies had little impact and failed to deliver broad
macroeconomic success.

This paper analyzes Kenya’s trade liberalization experience of the late twentieth century.
The next section provides an overview of the policies Kenya enacted during the period, focusing
on trade policy while also touching on the other concurrent policy changes which impacted the
country’s growth. The following section gauges the impact of these policies on Kenya’s trade,
growth, employment, poverty, and inequality. The final section concludes and considers
implications from for Kenya’s future trade policies.

II. Overview of Kenya’s Economic Policies

Trade policy

At independence in 1963, the new Kenyan government inherited a trade and industrial
policy from the colonial rulers that was largely aimed at import substitution. Manufacturing in
Kenya dated from the early twentieth century, but had not developed much beyond processed
agricultural goods; the market remained limited, and there was little local capital or skilled
management. Following independence, the government pursued a policy of attracting foreign
investors to produce for the domestic and regional market. Multinational corporations such as
Union Carbide, Firestone, United Steel, Del Monte, Schweppes, and Lonrho began producing in
Kenya (Bigsten, 2002). Effective rates of protection were very high, and many established firms
enjoyed near monopolies. Between 1964 and 1969, manufacturing value added increased by 44
percent in real terms (World Bank, 2007); leading sectors included textiles and apparel, food,
beverages, and tobacco.

Kenya suffered a balance of payments crisis in 1970–1971, which was exacerbated by

the first oil shock two years later. In response to these challenges the government intensified
import-substitution policies; tariffs increased and import licensing became more severe. Behind
this protection Kenya’s manufacturing sector boomed; annual growth in the sector averaged over
25 percent between 1971 and 1973 (WDI 2007). Throughout the decade import-substituting
manufacturing continued to grow, and diversified to sectors including plastics, pharmaceuticals,
and vehicles.

In the late 1970s Kenyan exports were buoyed by a substantial increase in the price of
coffee, which more than quadrupled between 1975 and 1977 (Bevan, Collier, and Gunning,
1999). The coffee boom also had a strong impact on the price of tea, another key Kenyan export.
The net effect of the coffee boom was a 54 percent increase in Kenya’s terms of trade by 1977,
the peak year of the boom. This spike in the value of Kenya’s commodity exports allowed the
government to temporarily avert a foreign exchange shortage, and thus stayed economic reform
in the short term.

By 1980, however, the price of coffee had subsided and the earlier terms of trade gain
had reversed. By this point Kenya’s import substitution policy had essentially run its course:

2
imports of consumer goods were low, which meant there was little room for future substitution
and thus poor prospects for future growth. Additionally, the few trade links Kenya had—notably
with Tanzania and Uganda as part of the East African Community (EAC)—were evaporating. The
EAC, which had been an important source of demand for Kenyan manufactures, collapsed in
1977, as Tanzania tightened its borders and import demand in Uganda waned due to internal
instability. With the already small export market shrinking, pressure for reform grew as the fault
lines in the economy, which had been masked by the temporary influx of foreign exchange during
the coffee boom, began to reassert themselves.

Kenya signed its first Structural Adjustment Loan with the World Bank in 1980, which was
conditional on the government adopting more liberal trade and interest rate regimes as well as a
more outward-oriented industrial policy. A number of government documents outlined a new
direction toward openness and liberalization in Kenya’s trade policy; however, in practice few of
these changes were actually adopted. Many of the quantitative import restrictions—which had
been the primary means of protection—were replaced with tariffs, but these tariffs often remained
prohibitively high. In 1982 the government turned to the IMF for further funding, vowing once
again to pursue greater liberalization, yet failed to substantially implement promised reforms.
Tariffs on some goods were further liberalized, but for other items import controls were
reintroduced.

Thus in the first half of the 1980s, despite its liberalization rhetoric, the government made
only limited attempts to reform the Kenyan economy. The share of imports not subjected to quota
restrictions did increase from 24 percent in 1980 to 48 percent and average tariffs decreased by
about 8%, but this had little impact on Kenya’s trade (Swamy, 1994). The government only
followed through on policy reforms when it was compelled to do so by outside pressures, and was
quick to abandon liberalization in the face of other economic priorities: in an effort to counter the
foreign exchange crisis of 1982–1984, Kenya uniformly raised all tariffs by a full 10 percent.

In the second half of the decade, however, again under pressure from donors, Kenya
began a more concerted and sustained effort at significant trade liberalization. This involved
shifting import restrictions from quotas to tariffs, and subsequently decreasing tariff levels. In
1987, quantitative restrictions affected 40 percent of all importable items; by July 1991, import
licenses were only used for health or security reasons (Swamy, 1994). The shift from licenses to
tariffs caused an initial increase in some of the higher tariff bands, but over the course of the early
1990s these were lowered substantially (see table 1). By 1997/1998 the trade weighted average
tariff had fallen to 12.8 percent, and all tariffs were below 50 percent. While there were still some
policy reversals during this period (notably when tariffs were raised in 1993 to cover a
government revenue shortfall), the trend throughout the late 1980s and 1990s was clearly toward
import liberalization.

Table 1: Distribution of Goods by Tariff Band (percentage)

Tariff
1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96
rate
0 6.9 7.0 5.8 6.1 3.7 2.9 3.1 3.2 3.3
1-10 0.3 0.9 1.6 1.6 4.0 4.6 5.2 4.9 1.8
11-30 30.7 29.6 37.6 37.4 47.6 47.6 56.5 67.8 71.8
31-50 45.4 43.7 23.8 21.6 17.7 20.9 35.2 24.1 23.1
51-60 3.9 5.6 6.0 6.3 3.0 24.0 -- -- --
61-70 3.8 4.1 -- -- 24.0 -- -- -- --
71+ 9.0 9.1 25.2 27.0 -- -- -- -- --
Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Source: Levin, 1999.

Closely correlated with the decrease in quotas and tariffs Kenya pursued in the late
1980s and early 1990s was the loosening of foreign exchange restrictions. Up until this point, the
government strictly controlled all foreign currency transactions. Foreign exchange restrictions had
been arguably a greater constraint on trade than direct quotas and tariffs, as import demand was

3
dependant on the availability of foreign exchange allocations. In 1991 the government introduced
the tradeable Foreign Exchange Bearer Certificates, known as Forex Cs, which was a first step
toward liberalizing foreign exchange restrictions. Through a series of reforms over the next few
years the restrictions on the foreign exchange market were eased, and by 1994 Kenyans could
freely trade in foreign exchange. This meant the availability (or lack thereof) of foreign exchange
no longer determined the quantity of imports.

In addition to the import liberalization reforms, Kenya introduced a variety of export

promotion platforms to help spur greater trade, all essentially aimed at eliminating the tariffs paid
for the inputs of processed exports.3 The first of such policies was the manufacturing-under-bond
(MUB) program, which began in 1988. This platform allowed for the duty free import of factory
plant and equipment, as well as raw materials, for manufacturers producing for export. The MUB
program had some limited success, as by 1993 there were over 70 bonded manufacturers. By the
late 1997, however, most of these factories had shut down, due primarily to a reduction in
Kenya’s garment quota for the U.S. market and the appreciation of the exchange rate and wages
of the mid-1990s (Glenday and Ndii, 2003).

Export processing zones (EPZs) were introduced in 1990. Kenya provided generous
incentives to attract new firms manufacturing for export, including corporate tax holidays, waivers
for import tariffs, and exemption from numerous business regulations. Despite these incentives,
initially very few firms stepped forward to participate in the EPZ program; in 1997, of the total 70
built-up units available in the country’s five developed EPZ parks, only 22 were occupied by
operational enterprises (Glenday and Ndii, 2003). More recently, however, the program has
shown greater success: today there are over 40 EPZs in Kenya, employing close to 40,000
workers and producing over 10 percent of the country’s exports, up from approximately 3,000 and
1 percent, respectively, in the 1990s (Kenya Export Processing Zones Authority, 2008; Glenday
and Ndii, 2003). The great majority of firms operating within EPZs in Kenya produce garments for
export to the U.S.

In 1993, the Ministry of Finance began a third export promotion policy known as the
Export Promotion Programmes Office (EPPO), a duty drawback scheme which fully refunds
import taxes paid on inputs used in the production of exports. Unlike under the MUB and EPZ
programs, firms do not need to be solely exporters to take advantage of the EPPO system:
companies producing partially for the domestic market and partially for export can also reap the
benefits. Largely attributable to this flexibility, the EPPO program was significantly more
successful than Kenya’s other two export promotion platforms. Over two-thirds of eligible exports
benefited from the EPPO scheme, representing 35 percent of total merchandise exports over the
1993–1998 period (Glenday and Ndii, 2003).

Throughout the 1980s and 1990s, thus, Kenya’s trade policies evolved from import-
substitution toward outward orientation. Though it was by no means a straight forward journey, by
the end of the period the country had a relatively low and harmonized tariff structure and
numerous policies aimed at supporting the growth of exports.

Exchange rate reforms

In 1975, the Kenyan government switched the peg for the shilling exchange rate from the
U.S. dollar to the IMF’s Special Drawing Rights (SDR), which, as it was based on a basket of
currencies, was believed to be more stable than the U.S. dollar. Kenya once again updated its

3
An earlier export compensation scheme, designed to compensate manufacture exporters for the tariffs
paid on their inputs, had actually been in place since 1974. This program suffered from severe bureaucratic
inefficiencies, however, and was underutilized: in the early 1980s, four firms received one-third to two-thirds
of the payments, which covered only about 5 percent of total manufactured exports (Mwega and Ndung’u,
2001).

4
exchange rate policy in 1982, this time adopting a crawling peg based on its own composite
basket of the currencies of its principal trading partners. The country took a first step toward a
market based regime in 1990, when it adopted a dual exchange rate policy. Under this system
the government tracked both the official exchange rate and the rate available in the market. A few
years later, in 1993, Kenya allowed its currency to freely float; just before this move to a market-
determined exchange rate, the government undertook a significant devaluation of the shilling.

Exchange rate policy plays a key role in determining a country’s international

competitiveness, as the real (inflation adjusted) exchange rate is a measure of the relative price
of tradables to non-tradables. If the real exchange rate depreciates, a country’s exports become
more attractive to the rest of the world, while imports become relatively more expensive, thus
favoring domestic production. The reverse occurs when the real exchange rate appreciates.
Figure 1 presents an index of Kenya’s real exchange rate, showing that the real exchange rate
depreciated slowly throughout the late 1980s and very sharply during the one-time devaluation in
1993. Once the shilling was allowed to freely float the real exchange rate quickly appreciated
back up to its early 1980s level, and remained relatively stable through the remainder of the
period.

Figure 1: Kenya’s Real Exchange Rate, 1980–2003 (index, 1980=100)

Source: Pollin and Heintz, 2007.

Liberalizing domestic markets

Trade liberalization was part of a broader push in Kenya to decrease the government’s
role in the economy and give market forces greater influence. Price controls, widespread in the
economy prior to the structural adjustment loans, were largely eliminated throughout the late
1980s and early 1990s. By 1995 even the wheat and oil markets, which had been the strongest
resistors, were decontrolled (Swamy, 1994; Ndung’u, 2003). In conjunction with liberalizing
domestic prices the government also announced it would privatize most of the country’s
numerous parastatal companies, though progress here has been sluggish. Some 200 non-
strategic enterprises were slated for privatization in 1990, yet due to difficulties in finding
interested buyers and reluctance within the government to give up politically-useful appointments
within state-owned enterprises, eight years later only 25 enterprises had been privatized (Were et
al., 2005).

Financial sector and monetary policy reforms

The final contemporaneous policy which will be discussed here is the financial sector
reforms. Kenya’s financial sector had diversified in the 1970s as government policy encouraged
local participation in the sector to compete with the established banks, resulting in the

5
proliferation of non-bank financial institutions (NFBIs). There was very little supervision or
regulation of the industry, which led to a banking crisis in 1986 in which several financial
institutions defaulted (Ngugi and Kabubo, 1998). In 1989 the government enacted a
comprehensive reform of the financial sector, addressing both institutional and policy reforms
aimed at strengthening the regulatory powers of the central bank and liberalizing interest rates.

Leading up to Kenya’s general elections in late 1992, however, the regulatory

environment relaxed considerably, as shaky borrowing (primarily from politically connected
banks) soared to finance the campaigns of the then governing party (Ngugi and Kabubo, 1998).
With the influx of money inflation shot up to over 50 percent, and by late 1993 Kenya was in the
midst of another financial crisis. The government responded by issuing large quantities of
Treasury bills; while this tight monetary policy did ease inflationary pressures, it resulted in
extremely high interest rates on treasury bills. The high interest rates discouraged private
investment and restrained consumer spending, which limited the expansion of the economy.

III. The impact of Kenya’s trade liberalization

Impact on trade

Figure 2 presents Kenya’s merchandise imports and exports in constant dollars for the
period 1976–2000. The overall trends show high levels of both imports and exports in the late
70s, driven in part by global price changes such as the coffee boom and the second oil price
shock. Imports and exports declined sharply in the early 1980s, during Kenya’s first period of half-
hearted structural adjustment. Imports climbed steadily during the late 1980s following the
stronger implementation of liberalization programs, but fell off during the recession of the early
90s. Exports experienced almost no growth up until 1992, very basic evidence that Kenya’s trade
liberalization had not been successful up to that point. Export growth did pick up with the
implementation of the more successful EPPO export promotion scheme in the mid-1990s. Import
growth resumed as Kenya came out of the recession and foreign exchange restrictions were
eliminated in the mid-1990s.

Figure 2: Kenya’s Merchandise Trade, 1976–2000

Imports Exports

4,500

4,000
Constant 2000$ (millions)

3,500

3,000

2,500

2,000

1,500

1,000
76

78

80

82

84

86

88

90

92

94

96

98

00
19

19

19

19

19

19

19

19

19

19

19

19

20

Source: World Bank, 2007.

6
 The trends in total imports mask significant import surges in a few products, notably
secondhand clothing and used vehicles. Prior to import liberalization the textile and apparel
industry had been very important in Kenya, representing 30 percent of manufacturing
employment, and additionally supporting hundreds of thousands of cotton farmers (Omolo, 2006).
Following liberalization, the Kenyan market was flooded with imports of used clothing from the
U.S. and Europe; by 2005 used clothing imports exceeded $23 million, and an estimated 80
percent of Kenyans were wearing used clothing (Njuguna, 2006). Production in cotton, textile,
and apparel firms decreased significantly. A similar experience struck the motor vehicle industry,
as imports of used cars from Japan, Europe, and the Middle East undercut domestic vehicle
production in Kenya; less than 25 percent of registered cars on the road in 2006 were bought
from local dealers (Sambu, 2007).

Impact on growth

After having experienced several years of strong growth during the early years of
independence, Kenya’s economy performed poorly during the trade liberalization era. Figure 3
presents Kenya’s real GDP growth for the period 1976–2000. Growth was quite volatile but
followed a general downward trend; after having averaged over 7 percent in the 1970s, average
annual growth slipped to 4.2 percent in the 1980s, and finally fell to only 2.2 percent during the
1990s. Kenya experienced a depression during the early 1990s, brought on by a severe, drought,
high inflation, and foreign aid suspension, among other causes.

Figure 3: Kenya’s Real GDP Growth, 1976–2000

10.00
GDP Growth (percent)

8.00

6.00

4.00

2.00

0.00

-2.00
1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

GDP Growth Long run trend*

* Long run trend calculated using Hodrick-Prescott filter

Source: World Bank, 2007.

Of course, this sluggish growth cannot be attributed solely to Kenya’s trade policies. As
outlined above, the era of trade liberalization coincided with numerous macroeconomic shocks,
including privatization, exchange rate reform, and domestic trade liberalization. These other
determinants of economic growth undoubtedly had strong impacts on Kenya’s performance, both
independently and in interaction with one another.

Against such a noisy background it is difficult to isolate the impact of trade variables, and
thus it is no surprise that the authors who have attempted to do so have had at best limited
success. Glenday and Ryan (2003) use regression analysis to study the determinants of
economic growth in Kenya during 1970–1998. They find that the only statistically significant
variable that has an impact on growth is the private sector investment rate. None of the trade
variables the authors tested—including dummy variables for periods of trade liberalization and the
opening of the East African market, as well as exports to Tanzania and Uganda as a share of
GDP—had an impact on growth. Though they find no direct relationship between trade and
growth, the authors look for an indirect relationship by studying whether trade impacts the private

7
sector investment rate. In this regression the authors do find some evidence that increased
exports to Tanzania and Uganda as a share of GDP had a positive impact on private investment.
As private investment was found to be the main engine of Kenya’s economic growth, this
suggests that increased access to regional markets likely had a slight positive impact on growth.

In another article seeking to quantify the impact of trade on Kenya’s economy, Karingi
and Siriwardana (2001) use a completely different approach. The authors simulate the impact of
the trade liberalization and fiscal reforms of the late 1980s on the Kenyan economy using a
computable general equilibrium (CGE) model.4 The model is calibrated to 1986, when Kenya’s
strongest push toward liberalization was just beginning, and a series of shocks are simulated
representing potential government policies. The authors test three trade liberalization shocks: one
in which all tariffs are cut to a standardized level of ten percent, a second in which tariffs are cut
and indirect taxes are increased to cover the resulting government shortfall, and a third in which
tariffs are cut and foreign aid is increased to support the reform measure. While all three
simulations had positive impacts on real GDP, only the third simulation produced a gain greater
than one percent (1.79 percent). Additionally, while the first two simulations generated significant
negative impacts for employment and investment, the simulation including greater foreign aid
avoided these losses.

Karingi and Siriwardana’s study provides some evidence that trade liberalization
undertaken in 1986 likely would have had a small positive impact on Kenyan real GDP. However,
the liberalization scenarios the authors simulate—cutting tariffs to a uniform 10 percent—are
steeper than the policies the Kenyan government actually pursued, and thus the real impact of
Kenya’s liberalization on growth was probably even more muted than the small effects the
authors found.

One final method of analyzing trade’s impact on growth is to look for trade’s impact on
productivity. Over the long term sustained economic growth depends on increasing productivity,
and thus evidence that trade has a positive impact on productivity would suggest that trade also
improves long term growth. Joseph Onjala (2002) studies the links between Kenya’s total factor
productivity (TFP) and the country’s trade policies. Onjala measures TFP using traditional growth
accounting equations, in which increases in output are explained by increases in the stock of
factors (labor and capital) and increases in TFP. He then looks at these changes in TFP and
relates them to Kenya’s contemporaneous trade policies. At first glance his results appear
promising, as he finds TFP grew faster during broad periods of liberalizing than it did during
periods of tightening. On further quantitative analysis, however, this relationship breaks down:
using both simple correlations and regressions, Onjala can find no systemic connection between
trade policy variables and productivity growth. Like Glenday and Ryan’s and Karingi and
Siriwardana’s analyses, then, this paper provides some suggestion of a positive impact of
Kenya’s trade liberalization on growth, but falls short of conclusive evidence.

Studies of the impact of Kenya’s trade liberalization on the country’s economic growth fail
to draw any strong causal connections. As noted above, this is not particularly surprising; even in
cases of stable economies undergoing liberalization, it is often difficult to discern any significant
impact of trade on growth. And given that in Kenya’s case trade liberalization was pursued in a
start-stop manner with frequent policy reversals and simultaneously with other significant reforms
and shocks to the economy, the isolated impact of trade was likely quite small. But from the
studies detailed above and the general performance of the economy during the period, it is safe
to say that if trade liberalization did have a positive impact on Kenya’s economy it was not
enough to spur broad, wide-reaching growth.

4
CGE models are typically used as ex-ante tools to study the potential future impact of trade policy
changes, rather than as ex-post tools to draw causal connections between policies and impacts.

8
Impact on employment

The impact of trade liberalization on the level of employment in Kenya appears to be

modest, though slightly negative. Jenkins and Sen (2006) use several different methods to study
the impact of trade on manufacturing employment, including factor-content analysis, industry-
level regressions, and growth accounting techniques. The first two approaches show no real link
between trade and employment, and the third only a minimal one: the authors estimate that
between 1990 and 1998 the net impact of trade on manufacturing employment was a loss of
approximately 18,000 jobs. Jenkins and Sen conclude that trade liberalization has had a
negligible effect on manufacturing employment in Kenya.

The CGE analysis by Karingi and Siriwardana (2001) cited above also considers the
impact of trade liberalization on employment. Under the authors’ first two simulations (tariffs cut to
uniform 10 percent, tariffs cut to 10 percent while indirect taxes simultaneously raised to cover
government revenue shortfall) labor demand decreases for all categories of workers, ranging
from -1.35 percent to -5.37 percent. It is only in the third simulation (tariffs cut to 10 percent and
foreign aid increased to cover government revenue shortfall) that the impact of liberalization on
employment is essentially neutral, with semi-professional, professional and self-employed
workers showing very small gains and unskilled and skilled laborers showing very small losses.
Karingi and Siriwardana’s study suggests trade liberalization had at best no impact on
employment and possibly led to job destruction.

It is important to consider not only trade liberalization’s impact on the overall quantity of
jobs, but also the impact on the quality of jobs. Trade liberalization contributes to job churning, the
simultaneous creation and destruction of jobs. In Kenya, this job churning has resulted in fewer
full time, permanent formal positions, and many more part time, casual, and informal jobs. While
informal jobs do give individuals the opportunity to earn a living, there are significant drawbacks
to working in the informal sector rather than the formal sector. Informal workers are not protected
by the state’s labor laws, and thus face lower wages, longer hours, and no job security, and may
additionally work in unsafe conditions and face greater discrimination.

Almost all employment growth in Kenya over the last two decades has been in the
informal sector. The share of the informal sector in total employment increased from 20 percent
in 1980 to over 70 percent by 2000 (Manda, 2002). This drastic shift is a complex phenomenon
attributable to many factors, but trade liberalization likely played a role. Using manufacturing firm
survey results, Manda and Sen (2004) find that between 1993 and 2000 the average number of
permanent workers per firm in exporting firms decreased sharply, while in non-exporting firms the
figure remained relatively stable. In his extensive review of the impact of globalization on
employment in Kenya’s, Manda (2002) concludes that trade liberalization, along with civil service
reforms and parastatal retrenchment, was an important factor in the informalization of the labor
market.

Impact on poverty and inequality

The incidence of poverty worsened during the structural adjustment era, while there was
little change in the level of income inequality. Assessing changes in poverty rates is difficult due
to differing methodologies in household surveys from year to year, which make poverty estimates
not strictly comparable across years. However, most poverty analyses from the 1970s estimate
the percentage of the Kenyan population living in poverty at around 35 percent, whereas
estimates in the early 1980s climb to about 40 percent , estimates for the early 1990s are around
45 percent, and estimates for the late 1990s are greater than 50 percent (UNDP, 1999; Kimalu et
al, 2002). With respect to income inequality, Kenya has long been one of the most unequal
economies in the world, and no improvement was made during the period of trade liberalization.
Available household survey data shows that inequality (as measured by the Gini coefficient)
decreased slightly between 1992 and 1994, but then increased through the end of the decade. In

9
1999 the top ten percent of households earned 43 percent of total income, whereas the bottom
ten percent earned less than 1 percent of total income; Kenya’s Gini coefficient of 0.57 in 1999
placed it among the ten most unequal countries in the world (Society for International
Development, 2004).

As with growth, it is difficult to precisely assess the relationship between trade

liberalization and the changes in poverty and inequality measures. The evidence which does exist
on the link between trade reforms and poverty in Kenya suggests liberalization has had mixed
impacts on poverty. Odhiambo and Otieno (2006) consider the impact of trade liberalization in
four sectors of the Kenyan economy—sugar, cotton, horticulture, and fisheries—selected due to
their importance to the livelihoods of poor households. The authors find that liberalization in the
sugar and cotton industries increased poverty, as the poor farmers in these sectors are inefficient
producers and unable to compete with cheaper imports (particularly as imports from developed
countries are subsidized). Conversely, the export opportunities available in the horticulture and
fishery sectors have likely reduced poverty. Odhiambo and Otieno conclude that despite success
in certain sectors overall trade liberalization has not succeeded in alleviating poverty in Kenya,
and note that the government failed to adopt the necessary complimentary reforms to fight
poverty, which would include reviewing fiscal, infrastructure, and labor market policies.

Other authors addressing the impact of Kenya’s trade reforms on poverty come to
broadly similar conclusions. In their extensive review of Kenya’s reform experience, Were et al.
(2005) note that small-scale farmers were amongst the losers of trade liberalization, particularly
those who lack credit and technological skills; as it is reasonable to assume many of these
farmers live below or near the poverty line, this suggests liberalization may have worsened rural
poverty. Jenkins (2005) finds that though new export opportunities in the horticulture sector have
alleviated poverty for some rural Kenyans, overall poverty is more likely to have increased due to
trade liberalization than decreased. He concludes by stating that greater integration with the
global economy cannot be a substitute for a strong anti-poverty program.

Differing authors have reached opposing conclusions regarding the impact of trade
reform on inequality in Kenya, though their differences are largely explained by their choice of
inequality measure. Bigsten and Durevall (2006) consider the impact of trade reforms on wage
inequality using the ratio of manufacturing wages to agricultural wages as a measure of
inequality. The measure of openness the authors use is the ratio of Kenyan manufacturing prices
to those in the UK, under the assumption that greater effective openness is reflected in the
convergence of manufacturing prices with major trading partners. Regression analysis shows that
the ratio of domestic to UK manufacturing prices and the ratio of manufacturing to agricultural
wages were indeed cointegrated during the period 1964–2000; in other words, the level of
economic openness (measured as the ratio between manufacturing prices) played a major role in
narrowing the gap between manufacturing wages and agricultural wages. This suggests that
trade integration has lessened wage inequality in Kenya.

In contrast to Bigsten and Durevall, Manda (2002) presents some evidence that
inequality has increased over the reform period. Using household survey data from 1978, 1986,
and 1994, the author compares the evolution of real monthly earnings for individuals living in
urban areas with various education levels. Highly-skilled workers did much better during this
period that semi-skilled and low-skilled workers; the university-educated group was the only
category for which 1994 earnings exceeded 1978 earnings, whereas the uneducated group
suffered the greatest loss. The returns to university education tripled during this time, while the
returns to secondary education decreased by 50 percent. Manda also looks specifically at
manufacturing wages in urban areas, and finds that the same general pattern persists; the highly-
skilled have done much better relative to the unskilled and semi-skilled. While this development
cannot be solely attributed to trade liberalization, the author states that this was one of the major
changes of the reform era. Were et al. (2005) also find that reforms were associated with growing
inequality, noting that “the distributional consequences of reforms deepened the asymmetries in
income and access to resources” (p. 60). While there is mixed evidence on the impact of trade

10
liberalization on inequality, given the extreme inequities which remained in Kenyan society at the
end of the reform period it is safe to say that at a minimum trade reforms failed to sufficiently
redress this challenge.

Success stories: horticulture and apparel

Despite the lackluster impact on the overall economy detailed above, trade liberalization
has produced some important success stories in Kenya. Case studies of the country’s horticulture
and apparel industries provide valuable lessons for Kenya’s future international engagement.

Kenya’s horticulture industry has quickly become an international leader and one of the
most dynamic sectors in the Kenyan economy. The horticulture sector can be difficult for
developing countries to break into, as it requires careful supply chain management and strong
infrastructure in order to ensure just-in-time delivery. Kenyan companies have flourished in this
industry, however, exporting $322 million of fruits and vegetables and $313 million of cut flowers
in 2006, up from $79 million and $13 million, respectively, in 1990. The vast majority of these
exports go the European Union, and particularly to the United Kingdom. In recent years the
industry has evolved to demand greater processing and packaging work, such as chopping and
bagging vegetables. Today the industry is a significant source of employment for both rural farm
laborers and urban packhouse workers.

There is strong evidence that the boom in horticultural exports has contributed to human
development and lessened poverty in Kenya. Three studies—Dolan and Sutherland (2002),
McCulloch and Ota (2002), and Humphrey, McCulloch, and Ota (2004)—which address the
impact of horticultural exports on livelihoods in Kenya have found broadly positive outcomes.
Survey results presented in Dolan and Sutherland (2002) show that a majority of employees in
the horticulture sector believe their living standards have improved since they began working in
the industry, a sentiment which is particularly strong amongst young female workers. McCulloch
and Ota (2002) use regression analysis to show that, even after accounting for other
determinants of household income such as demographic characteristics, education, and ethnicity,
households with workers involved in export horticulture have significantly higher incomes than
those who do not. Packhouse workers had the highest incomes, once again underlying the
importance of the recent market shift toward greater processing and packaging. The authors also
present counterfactual simulations showing that increasing the number of households involved in
the horticulture industry would significantly decrease both rural and urban poverty. Humphrey,
McCulloch, and Ota (2004) estimate that the export horticulture industry directly employed
100,000 Kenyan workers in 2000. They note that prepared vegetable production is 2.5 to 5 times
more labor intensive than unprepared vegetable production. Estimates of the total number of
workers employed both directly and indirectly by the industry are as high as 2 million (McCulloch
and Ota, 2002). The horticulture industry has been one of the driving forces in Kenya’s economy
in recent years, and is the country’s most important non-traditional export.

A second export industry which has achieved some success in Kenya is apparel. As
noted above, the apparel industry was one of the first sectors in the country to be hit by import
competition, as previously inefficient firms were wiped out by cheap imports of used clothing.
More recently, however, Kenya has seen a boom in apparel exports, primarily attributable to the
African Growth and Opportunity Act (AGOA).5 AGOA, adopted by the U.S. government in 2000,
allows duty-free and quota-free access to the American market in certain product lines for most
sub-Saharan African countries, including Kenya. Under AGOA apparel exports to the U.S.

5
The increase in apparel production has not led to a rebuilding of the backward linkages which once
characterized the Kenyan clothing industry; cotton and textile production remains well below pre-
liberalization levels. The Kenyan apparel industry relies on cheap imported inputs, and should changes in
the Rules-of-Origin of trade preference programs force Kenyan firms to use locally-produced textiles their
costs would increase significantly.

11
increased from $44 million to $277 million in just four years, with much of the production taking
place in Kenya’s export processing zones.

Between 2004 and 2007 Kenya’s apparel exports to the U.S. leveled off, not
coincidentally corresponding to the expiration of the Multi-Fibre Agreement which previously
governed global apparel trade and limited competition from China. The apparel industry remains
a strong source of potential growth for Kenya, however, and could expand further if wages begin
to rise in low-cost Asian suppliers while Kenya’s firms are able to decrease costs as they gain
experience and efficiency. Targeted investment in infrastructure and generous preferential access
to developed country markets are also necessary to stimulate further growth in the industry.

Figure 4: Kenyan Apparel Exports to the U.S., 2000–2007

300

250
Millions of Dollars

200

150

100

50
0
2000 2001 2002 2003 2004 2005 2006 2007

Source: U.S. Office of Textiles and Apparel, 2008.

To what extent Kenya’s success in the horticulture and apparel industries can be
attributed to the specific trade liberalization measures the country adopted during the structural
adjustment period is debatable. However, it is extremely unlikely that these export industries
could have thrived under the import substitution trade regime, when firms were restricted by
expensive imported inputs and foreign exchange controls. Thoen et al. (1999) state that foreign
exchange restrictions were a great burden on export horticulture firms in the 1980s, and note that
the industry has thrived since the government adopted a “hands-off” approach during the
liberalization era, including importantly the end of government controls on air freight rates. The
apparel industry has certainly benefited from the use of export processing zones, though the
impact this has had on the working conditions for employees could be considered less positive. In
any case, both industries clearly depend on engaging in trade, and thus the overall move toward
outward oriented development that took place in the structural adjustment was necessary for their
later success.

IV. Conclusions and Implications for Future Trade Policy

While the horticultural and apparel industries have benefited from increased integration
with the global economy, Kenya’s overall experience with trade liberalization during the 1980s
and 90s was disappointing. Though there are few rigorous studies which quantitatively link trade
reforms to economic performance in Kenya, the broad picture is clear: given the poor
performance of the overall economy, the lack of job growth, and increasing poverty, trade
liberalization failed to achieve the country’s development goals. Exports remained constrained by
poor infrastructure and institutions, and did not succeeded in diversifying much beyond a few key
agricultural sectors and other low-value goods. While trade was never going to be a panacea for
the country’s troubles, an enhanced trade policy could have bolstered an economy-wide
development plan.

12
 Going forward, the challenge for Kenya’s policymakers is how to scale-up, replicate, and
diversify the targeted trade successes in horticulture and apparel to the broader economy.
Drawing on the lessons from its past experience with trade liberalization, there are three goals the
Kenyan government should pursue which would help it realize this aim: incorporate trade policy
as part of a comprehensive development strategy, diversify the economy through balancing
regional and global trade liberalization, and focus on the employment outcomes of trade policies.

Incorporating trade in a comprehensive development strategy

As noted above, during the period of trade liberalization Kenya was simultaneously
pursuing multiple other economic reforms and policies. Pursuing reforms on multiple fronts can
be effective when they’re well-coordinated, as successes can build off one another. In Kenya’s
case, however, the simultaneous policy changes sometimes worked at cross-purposes, limiting
the impacts of trade reforms.

For example, in the early 1990s new export promotion programs were designed to
provide exciting opportunities for businesses to grow and partake in the global economy. But
because monetary policies at the time strictly targeted inflation and allowed extremely high
interest rates on treasury bills, credit wasn’t available for the private sector at affordable rates,
and businesses—particularly small and medium businesses—struggled to expand. Similarly, the
country’s exchange rate policies were not well coordinated with trade policies. Pollin and Heintz
(2007) estimate that Kenya’s real exchange rate was undervalued in the period leading up to its
liberalization in 1993, but was regularly overvalued during the 1994–2000 era. Thus during the
second half of the decade, when Kenya was making its strongest push to promote exports, an
overvalued exchange rate was pushing in the opposite direction, making the country’s exports
less competitive.

Rather than pursuing policies in such a disjointed manner, the government must include
trade as part of a broad agenda aimed at spurring sustainable development. Complementary
policies might include improving access to credit, particularly for small and medium enterprises;
strengthening labor market institutions; maintaining a competitive exchange rate; and targeted
public investment in areas such as agriculture and trade facilitation. Additionally, given the
country’s severe inequality and lack of opportunity for many of its poorest citizens, redistributive
and/or cash transfer programs may be necessary to shield the poor from negative impacts of
trade liberalization and allow them to benefit from its opportunities.

The government has taken some important steps toward crafting such a wide-ranging
framework of complementary policies aimed at generating growth and employment and
decreasing poverty. Kenya recently launched Vision 2030, the country’s long term strategic plan,
which has a broad approach linking economic, social, and political goals. Only limited details
have been released so far, however, and getting these right—as well as ensuring successful
implementation—will determine whether the plan will be successful or not. As Kenya’s past
shows, hold-ups and reversals in one policy area can easily spill into problems for another;
successful implementation will require progress on many fronts.

Diversifying the economy through global and regional trade integration

Kenya’s options for further trade liberalization can be classified into two broad groups:
policies that would increase trade between Kenya and advanced industrial countries, such as
signing on to a multilateral agreement at the WTO or deals with the EU or United States, and
policies that would increase trade between Kenya and other developing countries, most notably
regional integration efforts in East and Central Africa. Balancing these two channels will allow
Kenya to at once capitalize on its comparative advantage in agriculture and nurture a promising
manufacturing sector.

13
 Relative to the rest of the world, Kenya’s abundant unskilled labor, very low levels of
capital, and fertile ground situate the country’s comparative advantage primarily in agricultural
and natural resource production. Kenya’s vegetable producers, for example, are efficient firms
which can compete with those of any other country in global markets; its manufacturing firms, on
the other hand, are for the most part ill-equipped to compete in global markets. A significant
report assessing the competitiveness of Kenya’s manufacturing sector concluded that while
Kenyan firms have a slight competitive edge over Tanzania and Uganda, they are significantly
less competitive than manufacturing firms in countries such as China and India (World Bank,
KIPPRA, and CSAE, 2004). Given these initial circumstances, increasing trade with advanced
industrial countries will likely push the structure of the Kenyan economy further toward
agriculture: as found in Zepeda et al. (2009), a completed WTO Doha Round will likely produce
benefits for Kenya’s agricultural sectors but losses for its manufacturing industries.

The challenge for the country thus lies in balancing the goal of benefiting from its
comparative advantage in agricultural production with the target it has been pursuing since the
days of import substitution: the creation of a robust industrial base that can serve as a
springboard for development.

One way Kenya could pursue this balancing act is to counter increased global integration
with even greater regional integration. Kenya’s trade position relative to East Africa is in many
ways the reverse of its trade position relative to the world; within the region, Kenya is primarily a
manufactures exporter, and enjoys a substantial trade surplus. Statistics from the East African
Community (EAC) and the Common Market for Eastern and Southern Africa (COMESA) attest to
the country’s strong position in regional trade.6 Kenya’s trade surplus with other EAC members
was $651 million in 2006, while its surplus within COMESA was $668 million (United Nations,
2008; COMESA, 2008). About 70 percent of Kenya’s exports to the EAC consist of manufactured
goods, chemical products, and machinery and transport equipment. Some of the country’s top
exports in East Africa include plastics, pharmaceuticals, cement, and steel. Food and agricultural
commodities make up only 12 percent of Kenya’s EAC exports (United Nations, 2008). Within
COMESA the pattern is broadly similar, though not quite as pronounced.

Regional trade provides an excellent source of demand for Kenya’s manufactured

exports, which can help balance the push from multilateral liberalization toward greater
agricultural production and exports. Today Kenya’s manufacturing firms would not be competitive
in liberalized global trade; securing preferential access to the regional market will allow Kenyan
manufacturing firms to gain experience and improve efficiency, which should ultimately allow
them to compete in global markets. Deeper regional integration will allow Kenya to expand its
manufacturing exports and thereby encourage sustainable growth in the industrial sector, which
will help offset fears of deindustrialization brought on by multilateral liberalization and increased
trade with developed countries.

Focus on employment

In recent years many economists have underlined the centrality of employment to a

successful development strategy.7 Economic growth without increases in decent employment will
not appreciably improve the quality of life of families, particularly for those in the lower half of the
income distribution. As Kenya crafts its future trade policy, employment must be a principal
concern. The focus must be on not only the quantity of jobs, but also the quality of jobs; recent
analysis shows that almost 50 percent of Kenyans who are employed full time are living in

6
The EAC consists of Burundi, Kenya, Rwanda, Tanzania, and Uganda. COMESA includes Burundi,
Comoros, Democratic Republic of Congo, Djibouti, Egypt, Eritrea, Ethiopia, Kenya, Libya, Madagascar,
Malawi, Mauritius, Rwanda, Seychelles, Sudan, Swaziland, Uganda, Zambia, and Zimbabwe.
7
For a thorough example on Kenya, see Pollin, Githinji, and Heintz, 2007.

14
poverty (Pollin, Githinji, and Heintz, 2007). Creating jobs that allow workers a path out of poverty
must be a top priority for Kenya’s policy makers.

There are numerous trade-related policies Kenya can adopt to encourage the growth of
decent employment. Targeted support to key labor-intensive export industries could help absorb
the country’s excess labor supply. Increasing workers’ productivity will likely lead to higher wages,
allowing more workers to live above the poverty line; this might be accomplished by strategic
imports of capital and machinery, and by efficiency gains from learning-through-exporting.
Greater public spending on trade facilitation infrastructure projects could be an important source
of formal employment. Additionally, defensive trade policies—to protect the livelihoods of poor
farmers from agricultural import surges, for example—may be necessary to shield some of the
most vulnerable Kenyan workers.

A view to the future

The trade and development landscape today is very different from the one which faced
Kenya’s policymakers back in 1980. Inward-looking trade policies, such as those Kenya pursued
in the years after independence, have all but disappeared, as a consensus has emerged that
engaging with the global economy is the best path toward sustainable growth.8 Yet unqualified,
one-size-fits-all liberalization policies have also fallen out of favor; there is a growing recognition
amongst developing country policy makers that they must engage with trade strategically,
tailoring liberalization to the specific conditions of their countries’ circumstances and paying
attention to the pacing and sequencing of reforms.

It is against this landscape that Kenya’s policy makers are now charting the course for
the country’s future trade policy. Kenya was influential during the Doha Round negotiations at the
WTO, and should these negotiations be revived—as has been called for in the wake of the global
financial crisis—the country is likely to once again vocally defend the interests of developing
countries. With the other members of the EAC Kenya is negotiating an Economic Partnership
Agreement with the European Union, and recently the EAC, COMESA, and the South African
Development Community (SADC) announced plans for a regional free trade agreement which will
bring together 26 countries and 527 million citizens.

As Kenya continues to develop its twenty-first century trade policies, the lessons from its
first wave of liberalization should be kept in mind. The country can and must do better than its
economic performance of this earlier era. If Kenya’s policymakers incorporate trade into a
comprehensive development strategy, diversify the economy through balancing regional and
global integration, and focus on employment, there is no reason the successes seen in the
horticulture and apparel industries cannot be expanded to the broader economy.

8
See Commission on Growth and Development (2008).

15
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