External Shocks and Adjustment Policies in the Kenyan Economy: A Computable General Equilibrium Analysis with Special Reference to the Agricultural Sector

Abstract

This study is an attempt to explain the performance of the agricultural sector in Kenya by analysing the effects of the macro environment created by external shocks and the various policies that the Kenyan government may have used to address these shocks. A CGE model for the Kenyan economy is developed. The model is used to simulate two external shocks that affected Kenya in the 1970s as a result of the first oil-crisis and the coffee-boom and to evaluate the implications of actual and alternative economic policies in response to these external shocks, on the performance of the agricultural sector. The analyses of the terms of trade shocks indicate that the economy was quite vulnerable to external shocks. Results also indicated that the export boom contributed in a positive way towards ameliorating the negative effects that the Kenyan economy was facing as a result of the oil-price shock. However, contrary to expectations, rural households involved in agricultural production did not experience significantly larger increases in nominal incomes than their urban counterparts.