Macro-Economic Policy, Export Competitiveness and Poverty in Kenya: A General Equilibrium Analysis

A Computable General Equilibrium model based on a Social Accounting Matrix for Kenya is used to simulate the effects of a 10 percent devaluation combined with a more progressive tax regime and elimination of indirect industrial taxes. For each policy simulation two specifications for the labour markets are adopted, the first assuming abundant supplies of labour at given nominal wages and the second assuming fixed supplies so that wages are determined endogenously. These crucially affect the results. The poor are better off under both scenarios; but only under the first (preferred) assumption does the policy also result in a large boost to GDP, to exports, particularly agricultural exports and to a dramatic improvement in the balance of payments, while maintaining real investment and essential government expenditure.