Essays on Kenya’s Service Exports

Abstract

Trade in services is a crucial part of international trade in Kenya. About half of the country’s total exports are services. The country has a trade surplus in services and is the fifth largest exporter of services in the African continent after Egypt, South Africa, Morocco, and Tunisia. Kenya also has a comparative advantage in services, specifically financial, government, travel, transport, telecommunications, and computer and information. With the declining percentage of goods in total exports, it is increasingly important to establish how Kenya could leverage the growth of the service exports to boost export and economic growth. This thesis attempts to answer this question in three ways, presented as essays (chapters). The first essay (chapter two) is on the drivers of service exports from Kenya. This was mainly to identify domestic factors that boost exports of services from Kenya. Using time-series data dated 1975 to 2017, the study analysed eight autoregressive distributed lag (ARDL) models for traditional services (transport, travel, and government services), modern services (financial and insurance, and communication), and composite services (total, traditional and modern). The results show that exports of services are influenced by the global demand of services, goods exports, human capital, real exchange rate, institutional quality, financial advancement, and infrastructure. However, these variables had varied effects, in the short-term and long-term, across categories of services except for merchandise exports, whose long-run effect was positive for all the services. The second essay (chapter three) is on the role of differences in time zone on bilateral service exports from Kenya. Using bilateral exports data from Kenya to 176 countries for the period from 1995 to 2019, the study analysed ten models using the Poisson pseudo-maximum likelihood (PPML) estimator of the gravity model. Results reveal that the differences in time zones between Kenya and partner countries is significantly positive in technology-sensitive service exports and significantly negative for construction, financial, and government service exports. Further analysis reveals that the effect of differences in time zones on services is non-linear and sensitive to trade facilitation indicators. Therefore, attracting Foreign Direct Investors in technology-sensitive sectors should be encouraged through appropriate policy. Traders in these sectors can also create networks with foreign firms. In addition, reducing regulations, forming service-specific trade agreements, and enhancing infrastructure that aids in communication should be encouraged. The third essay (chapter four) is on the influence of trade agreements on Kenya’s services export survival. Kenya has actively pursued bilateral and multilateral trade agreements since liberalizing in 1993. This xv

approach expands market access of firms and products from Kenya, but it does not guarantee the sustainability of exports in those markets, which is vital to the growth of exports in the long term. To ascertain the factors that affect the survival of service exports, this study relies bilateral service exports data from Kenya to 176 countries dated 1995 to 2019. Results reveal that about 86% of Kenya’s service exports survive beyond the first year of trading and about 61% of them are traded for 25 years. Probit regression results indicate that the General Agreement on Trade in Services (GATS), a service-specific trade agreement and the variable of interest, reduced the survival of service exports from Kenya by 0.78%. At the category level, GATS only increased the survival of construction and government services. GATS also reduced the survival of Kenya’s exports to Africa. Still, when the quality of institutions is improved and regulations of the service sector are reduced, they affect survival positively and significantly. In terms of policy, boosting trade in goods should be encouraged at the domestic level. Maintaining a stable exchange rate should also be prioritized, but liberalization should be sector-specific. Human capital development, the financial sector, and infrastructure should also be pursued. At the bilateral level, the government can pursue policies that attract Foreign Direct Investors and improve the quality of institutions, particularly regulations that deal with bilateral trade in services. The government should also prioritize improving infrastructure that aids in communication. The survival of service exports can be boosted by pursuing policies that enhance trade in services. Maintaining a stable macroeconomy – especially targeting the Gross Domestic Product (GDP) and exchange rate – and enhancing the capacity of firms to diversify their services and markets and overall experience in foreign markets should also be encouraged.