The impact of trade instability on economic growth in Kenya

Abstract

Export earnings instability is a major issue today In the economic development of LDCs. Equally important is trade gap instability. The importance is revealed by the growing export sector in LDCs and its role in balance of payments management. This study undertakes to investigate the effect of both export earnings and trade gap instability on the stability of economic growth in Kenya. In doing so, it is hypothesised that export earnings instability and trade gap instability is positively related to instability in the following gross investment, change in stocks, GDP less exports and annual growth in GDP less exports. In the literature there is disagreement on the effect of export earnings instability of economic growth. The "Conventional view" which restson casual empiricism has the belief that export earnings instability is detrimental to economic growth. As it increases uncertainty, instability reduces investment, leads to balance of payments disequilibrium and makes development planning more difficult. An opposing view "the positive view" - resting mainly on empirical evidence, holds that export earnings instability is not detrimental to economic growth statics, the relationship between export earnings and elements of economic growth is derived. Sinecosine cycles illustrate the expected relationships over time among the movements ln export earnings, investment and GDP growth rate. After defining instability as the unpredicatable fluctuations, our methodology utilizes deviations from a calculated trend as instability indices. The instability indices obtained are ranked using Spearman's rank correlation in testing the hypotheses. High positive correlation coefficients are found between both export earnings instability and trade gap instability and the instability in gross investment, in GDP less exports, and in the growth of GDP less exports. These results lead us to conclude that efforts to reduce export earnings instability and trade gap instability are important factors for the stability of eC6nomic growth in Kenya.