Kenya’s trade diversification policy with the east African community and its impact on economic growth

Abstract

This study sought to examine the relationship between Kenya’s horizontal trade diversification policy with the East African Community (EAC) and its impact on her economic growth for the period 1995 to 2013. The study used the random effects model on a balanced panel dataset to determine the impact of the Herfindahl-Hirschman Index (HHI) on the growth of three dominant EAC countries, i.e. Kenya, Tanzania and Uganda for a nineteen years period. The HHI measures the dispersion of trade value across a country’s exports, and the index itself is bounded between 0 and 1, with a higher index indicating that exports are concentrated in fewer sectors, thus vulnerable to trade shocks and thereby reducing economic growth rates, while a completely diversified product sector will be closer to 0. The research confirmed that the arithmetic mean of Kenya’s GDP, which was the best in the EAC region, was USD27.1 billion while the HHI averaged 0.73; and is significantly influenced by Per-capita GDP and volume of manufacturing exports to total exports. This index indicates a prolonged but declining worsening of Kenya’s trade diversification policy, and posits the need for a structural transformation of her merchandise exports. Overall, the results obtained were consistent with the findings of some trade economists, such as Bebczuk and Berretoni (2006) and Noureen and Mahmood (2014), who opined that the major determinants of HHI includes; Exports to GDP, Manufacturing exports to total exports, Per Capita GDP, Gross Fixed Capital to GDP, Credit to Private Sector to GDP, Net Foreign Direct Investment to GDP and the author’s recent inclusion of the impact of the EAC Treaty on economic growth for the three dominant countries.