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GODFREY J. TYLER*
Macro-Economic Policy, Export Competitiveness and Poverty in Kenya: A General
Equilibrium Analysis
Abstract: 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.
INTRODUCTION
Compared to most other sub-Saharan African countries, Kenya has been a success story.
However, it has suffered from a number of problems, many of which have become
accentuated in recent years. Chief among these is the deterioration of its balance of
payments situation, with rising external debt. Moreover, its relatively fast real economic
growth has only been able to keep 1-1.5 percentage points above the rate of growth of
population. Hence, combined with the unequal distribution of wealth and income, there
has been continuing poverty. There has been considerable debate about the extent to which
some of the problems have been self-inflicted, see for example Killick (1981). However,
there is little doubt that the decline in Kenya's terms of trade since the mid-1970s has been
almost entirely outside its control. The extent to which the slower growth of the volume of
exports compared to that of imports is an entirely external problem is more debatable.
The view taken here of Kenya's problems is one very much in line with that
expressed by Killick (1985). He sees one of the main questions as being how to solve the
balance of payments problem without accentuating poverty and without reducing
Government basic needs provision to the poorest. He believes that improved agricultural
performance should help both the balance of payments and poverty alleviation. Structural
changes, brought about partly by maintaining a competitive real exchange rate, should be
backed up by fiscal and monetary restraint, while protecting real investment. This implies
reduction in overall consumption but he argues for progressive taxation (see also World
Bank 1983) to ensure that reduction in expenditure, especially government expenditure on
social services, does not hurt the poor. Whether or not there has to be an actual reduction
in consumption (private and/or government) is, in our view, a moot point. There is no
doubt that to solve a balance of payments problem there has to be a reduction in domestic
absorption for a given level of national income, but it may be possible to increase both the
level of output and the excess of exports over imports, so that domestic absorption is
maintained or even enhanced.
Oxford University, UK.
Macro-Economic Policy, Export Competitiveness and Poverty in Kenya:
A General Equilibrium Analysis
89
We are not in a position to comment on the degree of fiscal and/or monetary restraint
needed. It is, of course, the usual IMF message for most LDC governments facing deficits
on external and internal accounts, inflation or debt problems. The message was echoed
recently for Kenya by Julin and Levin (1992) who believe that excessive increases in
government expenditure have fuelled inflation, such that the 1990 depreciation in the
nominal exchange rate has not resulted in the required real devaluation. In connection with
the latter, Bigsten (1990) believes there is a need for a further lowering of the exchange
rate, with top priority being given to export promotion, the foreign exchange situation still
being a constraint on growth.
In a previous paper (Tyler and Akinboade, 1992), simulation of a 10 percent
devaluation on the Kenyan economy was shown to be, in general, a very successful
policy, particularly in a situation of unemployed or underemployed labour resources.
However, the policy resulted in a small reduction in real investment. In this paper, we
explore through simulation the implications of combining a devaluation with other policy
measures. The first measure considered is the elimination of indirect taxes on industrial
commodities. This is expected to lower the price of industrial commodities needed for
capital investment and hence allow the maintenance of the same level of real investment
with a smaller monetary outlay, and also through the reduction of price distortions is
expected to have a beneficial effect throughout the economy. However, the resulting
reduction in government tax revenue needs to be redressed and this is done by introducing
a more progressive direct tax structure. No serious study of Kenya's tax structure has
been carried out recently but, in view of the known inequitable distribution of primary
incomes, it is difficult not to conclude that further progressive moves would be feasible.
They may, of course, not be politically acceptable at the present time.
THE MODEL AND DATA
The model used is a computable general equilibrium (CGE) model based on a social
accounting matrix (SAM) for the Kenyan economy. Such models are now widely accepted
as being particularly appropriate for the analysis of the impact of macro-policy changes on
the whole economy and on the distribution of income at the household level (Demery and
Addison, 1987; Helleiner, 1987). It is, like most models applied to the problems of
developing countries, concerned purely with the 'real' side of the economy. It is not
designed to take account of the monetary side, such as the money supply, domestic credit,
interest rates, foreign currency reserves, etc. A description of the model and the results of
some previous policy simulations appear in Tyler and Akinboade ( 1992). The approach is
based on that of Drud, Grais and Pyatt (1985).
In essence the CGE model consists of a large set of structural equations (linear and
non-linear) linking productive activities, factor markets, households, government and the
rest of the world - with production, employment, consumption, savings, trade and
market prices being, in general, endogenously determined. As it is based on a SAM the
accounting framework ensures internal consistency. Thus the usual national accounting
identities hold. There are three production activities, agriculture, manufacturing industry
and services. The primary inputs of labour of various categories, capital stock and
'operating surplus' combine in a constant-returns-to-scale Cobb-Douglas production
function to produce value added. The latter is combined with purchased intermediate
90
Godfrey J. Tyler
inputs in fixed Leontief fashion to produce gross output, at producer prices. Imports are
assumed to be available in perfectly elastic supply at fixed world prices. However, the
demand for Kenya's exports is assumed to depend on the price of these relative to the
world market price of comparable goods, with elasticities of demand of 3 .0, 1.5 and 1. 0
for agriculture, industry and services, respectively. Income accruing to the various
household groups from ownership of factors (labour, capital, etc.) is assumed to be
allocated to consumption, savings, remittance transfers and direct taxes in fixed value
shares. Total consumption expenditure is then allocated to commodities in fixed
proportions in quantity terms. Similarly, government income, mainly from direct and
indirect taxation, is allocated to transfers to households, to consumption expenditure and
to savings in fixed value shares, the shares taken from the original SAM. The government
is assumed in the present model not to have any control over this allocation and therefore
not able to run a current budget deficit. However, it can change rates of direct and indirect
taxation. It is important to note that, as there is no separate item for government investment
in this model, government savings represent the budget surplus over current expenditure
only. Total savings in the economy, by government, households, companies and from
foreign capital inflow, are distributed to investment in the three sectors in fixed value
shares. Capital inflow or foreign savings is specified as a residual. It meets the gap
between total savings and total investment. By definition it is identically equal to the
current account deficit.
The SAM refers to the year 1976, which is still the most recent data set. Study of more
recent partial data suggest that the general pattern of the results and the magnitude and
direction of change indicated from the simulations using the 1976 data still have relevance
for policy choice in present-day Kenya.
For example, comparing the most recent figures, for 1988 to 1990, (World Bank,
1991) with 1976, and expressed as a percentage of GDP at market prices, private
consumption has only decreased from 62 percent to 61 percent, government consumption
has increased from 17 percent to 19 percent and domestic savings have decreased
marginally from 21 percent to 20 percent. Net indirect taxes have increased from 12
percent to 14 percent. In 1976 the government had a small current budget surplus; in 1988
there was a small current deficit, after a number of years of large deficits. Taking into
account government capital expenditure there were overall deficits in all years, being 5.8
percent in 1976 and 4.2 percent in 1988.
Population has, of course, grown dramatically, being estimated at 14.3 million in 1976
and 23.3 million in 1989. There have also been structural changes, with agriculture's
share of GDP decreasing from approximately 40 percent to 30 percent and a concomitant
increase in services' share from 40 percent to 50 percent. Industry's share has remained
roughly constant at 20 percent. Employment in manufacturing industry has increased by
about 60 percent, roughly in line with the increase in the overall labour force. At the same
time real earnings have decreased by about 25 percent. The major difference has been in
the external balance. The current account deficit (before official transfers) was about 4.6
percent of GDP in 1976. Since then it has fluctuated widely; disappearing in 1977,
reaching nearly 14 percent in 1978 and 1980, dipping to 2.6 percent in 1986 and reaching
10.5 percent in 1989. External debt has grown, from being about one-and-a-half times
export earnings in 1976 to about five times in 1989.
Macro-Economic Policy, Export Competitiveness and Poverty in Kenya:
A General Equilibrium Analysis
91
RESULTS OF POLICY SIMULATIONS
As previously stated the three policy simulations reported here are: (a) elimination of
domestic indirect taxes in the industrial sector, (b) the elimination of these taxes combined
with increased rates of direct taxation on middle-income and rich households and (c) the
foregoing policy changes combined with a 10 per cent devaluation.
The results are presented in Table 1. A selection only of the important indicators are
reported. The first column contains the actual levels of the variables in millions of Kenyan
pounds in the base year. All prices (including wages) are taken as unity in the base year
solution, hence the physical quantity of production, consumption, employment, etc. are
represented in money terms. The remaining columns of the Table present the results of the
policy experiments, as percentage changes from the base solution, in two blocks. Block A
assumes an unlimited supply of labour in all categories at constant wages. Employment of
each category of labour is thus determined endogenously by the demand for such labour.
Block B assumes fixed total supplies of each category, so that wages are determined
endogenously by demand in a situation of full employment.
As previously intimated a major concern is the impact of macro-policy changes on the
real incomes of the poor. Hence the table includes employment and wages of urban
unskilled and skilled labour and of rural self-employed labour, these being major sources
of income for the urban and rural poor. To give an indication of the changes in income
distribution, the real consumption of the middle-income households is also given. To save
space, that of upper-income households is excluded; changes in their consumption are
however very similar.
Elimination of Industrial Taxes
The elimination of domestic indirect taxes in the industrial sector has a number of farreaching consequences. As would be expected, industrial market prices decrease, by 1315 percent. As industrial commodities are intermediate inputs in all sectors, particularly
agriculture and industry itself, costs of production are greatly reduced, providing a boost
throughout the economy. Under assumption A, production in industry increases by 12
percent and in agriculture by 8 percent. Overall GDP in real terms increases by 6 percent.
Under assumption B production is to a large extent constrained by the fixed supplies of
labour. Hence, though industrial production increases by as much as 8 percent, production
increase in agriculture is only 2 percent. GDP in money terms increases by the same
amount as before (6.5 percent) but this is translated into an increase in real GDP of only
1.8 percent.
Under assumption A there is a 4 percent increase in exports, mainly of industrial origin,
because of the increased competitiveness of Kenyan supplies, both producer and export
prices falling by up to 5 percent. Export revenue, however, decreases somewhat, so that
there is a slight deterioration in the current account balance. Under assumption B the trade
situation hardly changes; the competitiveness of Kenyan exports is eroded by increases in
the cost of primary inputs, especially wages.
The elimination of industrial taxes reduces government revenue from indirect taxes by 50
percent. This is only partly recompensed by an increase of 6 percent in direct taxes, from
the general rise in incomes. Hence government expenditure is drastically reduced in
monetary and real terms, by 17-20 percent. Government savings likewise suffer, so that
\D
N
Table 1 Policy Simulations
Base
solution
(K£m)
GDP at constant factor cost
GDP deflator price index
Exports at constant pricesb
Imports at constant pricesb
Current account deficit
Direct taxes, etc.
Net indirect taxes
Government real
expenditurec
Domestic savings
Total real investment
Urban unskilled
employment
wages
Urban skilled
employment
wages
Rural self-employment
wages (implicit)
Household real consumption
Urban 2oor
Percentage chani.;e from base solution
A"
Eliminate
(1) plus
(2) plus
industrial
increased
10%
taxes
direct taxes
devaluation
(1)
(2)
(3)
B"
Eliminate
industrial
taxes
(1)
(1) plus
increased
direct
taxes
(2)
1.5
4.4
-0.8
-0.7
11.7
33.0
-51.l
-7.5
(2) plus
10%
devaluation
(3)
478.1
461.6
51.9
196.7
181.9
215.2
6.1
0.5
4.4
1.4
17.3
5.9
-50.3
-17.1
5.1
0.4
4.6
0.4
-1.6
32.6
-49.6
-3.7
16.1
1.1
20.9
3.3
-39.7
47.4
-42.6
5.9
1.8
4.7
-2.2
0.4
36.8
5.8
-50.7
-20.5
242.3
294.2
-5.6
2.1
-1.7
1.7
9.9
-0.2
-6.0
3.0
-1.7
2.1
8.5
1.6
65.0
5.4
6.0
14.9
6.4
7.7
18.0
6.2
7.4
17.8
6.2
4.2
15.6
7.0
9.3
11.1
1296.1
162.2
5.2
5.7
14.8
334.3
7.2
4.9
18.9
89.2
9.9
11.8
19.3
4.1
12.3
2.8
-0.l
11.6
46.6
-45.6
-5.7
()
c::i
<§:;
~
'<
~
...~
Table 1 (continued) Policy Simulations
Base solution
(K£m)
Eliminate
industrial
taxes
(1)
Urban middle income
Rural very poor
Rural poor
Rural middle income
Agricultural production
Agricultural producer prices
Industrial production
Industrial producer prices
Service production
Service producer prices
Agricultural market prices
Industrial market prices
Service market Erices
139.1
42.2
62.3
285.3
513.9
599.8
1114.5
12.1
12.6
12.2
12.4
8.3
-0.1
12.4
-5.6
2.7
-3.7
-0.1
-14.8
-3.5
Percentage change from base solution
B"
A"
(1) plus
(1) plus
(2) plus
Eliminate
increased
10%
industrial
increased
direct taxes
direct taxes
devaluation taxes
(2)
(2)
(3)
(1)
6.8
9.4
8.8
15.3
8.1
8.5
11.1
21.3
7.2
8.0
21.0
10.4
-3.0
-0.2
8.2
9.4
0.2
20.3
2.2
4.6
2.2
-0.3
3.8
0.7
7.0
21.4
8.0
10.9
-2.7
-2.9
-3.0
-5.7
-0.4
0.8
11.4
3.9
-2.0
-3.7
0.4
0
3.6
2.1
---0.3
1.0
-13.l
-13.2
-14.9
-10.3
-3.4
-1.3
Notes: " Simulations A assume unlimited supplies of labour; Simulations B assume fixed supplies of labour.
b Excludes net factor payments and transfers.
c Excludes transfers to other institution.
0
0.4
(2) plus 10%
devaluation
(3)
8.3
10.2
9.6
-0.8
3.6
10.2
9.8
4.4
2.4
8.7
10.2
-6.0
8.8
94
Godfrey J. Tyler
though household savings increase in line with increased incomes, overall domestic
savings decline by about 6 percent. This is not translated into decreased real investment,
however, because capital goods, to a significant extent of domestic industrial origin, are
now mt;1ch cheaper. There is, in fact, a small rise in real investment of 2-3 percent.
Turning now to the impact on the poor, the effect of this policy change is favourable.
Either employment or wages of workers in the relevant categories increase by between 5
and 7 percent. Combined with the overall decrease in consumer prices, the poor enjoy
increases in real consumption of 10-12 percent under assumption A and 7-8 percent under
assumption B. However, they suffer to an unknown extent from reduced overall
government expenditure, some of which will inevitably entail cuts in health, education and
other social expenditure.
Elimination of Industrial Taxes Plus Increased Direct Taxes
This policy experiment is designed to restore the state of government finances, while still
benefitting from the removal of the distortionary effects of high indirect taxation. This is
brought about by an increase in the direct tax incidence (including social security
payments) for middle and upper-income households in both urban and rural areas.
Specifically, the rates are increased as follows:
Urban
Rural
Middle
From 9.7 to 14.6%
1.2 to 12%
Upper
From 15.2 to 22.8%
From 1.8 to 18%
Direct tax revenue now rises by a third compared to the base solution. With indirect
taxes largely unaffected total government revenue rises dramatically, so that real
government expenditure now only falls short of its original levels by between 4 and 7
percent. There is a slight dampening effect on real GDP and production increases are
somewhat less. This is almost entirely due to lower domestic demand (exports remaining
largely unaffected) from middle and upper income households. The impact of increased
direct taxes is reduced real consumption of both these groups; however only in the case of
rural households does their real consumption fall below that in the base solution (0.2
percent under assumption A and 3 percent under B).
With enhanced government income, government savings also rise, effectively making
up for the drop in private savings from middle income and rich households, so that
domestic savings are virtually restored to their original level. Total real investment remains
unaffected. The balance of payments position is also hardly affected.
As regards the poor, their real income position remains largely unaffected by the change
in taxation. Employment or wage increases are very similar to those in the first
experiment. As retail price reductions are virtually identical, real consumption is also very
similar.
Indirect and Direct Tax Changes Plus Devaluation
As previously intimated, the objective of this policy experiment was to combine the
benefits of the cost-reducing effects of the previous experiments with the export-enhancing
effects of a devaluation, so that the current account deficit could be reduced or eliminated,
Macro-Economic Policy, Export Competitiveness and Poverty in Kenya:
A General Equilibrium Analysis
95
whilst maintaining real investment and government expenditure. Under assumption A this
objective is successfully realized. With the 10 percent devaluation, virtually unchanged
domestic currency prices translate into lower foreign exchange prices so that demand for
Kenyan exports rises. Overall, exports at constant prices increase by 21 percent, with
agricultural exports rising by 30 percent. With only a small increase in imports, the
balance of payments dramatically improves, with a 40 percent reduction in the current
account deficit. Overall GDP at constant prices increases by 16 percent, with hardly any
inflationary effect. Because of the boost to incomes there is a large increase in revenue
from direct taxes, so that government revenue now surpasses its level in the base solution.
Real government expenditure therefore, helped by lower service sector prices, is now 6
percent above its original level.
A problem experienced in our earlier work with devaluation as the sole policy
instrument was that of lower foreign savings consequent on an improved current account
and hence, in spite of increased domestic savings, increased capital good prices led to a
reduction in total real investment. Combined with the other policy instruments, however,
domestic savings rise by 10 percent, total savings by 1 percent and real investment
remains virtually constant.
Allied to the massive increase in production, employment rises by 15-19 percent over
the base solution. This feeds through to increases of 19-21 percent in the real
consumption of the poor. Even the middle and upper income households now enjoy
greatly increased standards of living, with real consumption of those in urban areas up by
15 percent and those in rural areas up by 9 percent on the base solution.
Under assumption B, the effects of devaluation are much less satisfactory. It has a
largely inflationary impact on the economy and real GDP is only 4 percent above the base
solution. Producer and export prices now are higher than in the base solution, so that the
competitive edge gained by Kenyan exports by the previous policy changes is lost.
Exports and imports at constant prices hardly change, so that with increased costs of
imports in domestic currency the current account deficit is slightly worse than the base
solution. Government taxation revenue is about the same as under assumption A but with
increased service sector costs real government expenditure is now down by 6 percent.
Wages, instead of employment, rise in scenario B, by as much as 18 percent for the
urban unskilled. However, retail prices of agricultural and service sector goods are now
9-10 percent higher than in the base solution, with only industrial goods prices still
benefitting to some extent from the earlier elimination of indirect taxes. Thus real
consumption of the poor rises by much less than their money incomes, but it is still 10-11
percent higher than in the base solution. The only losers even in this scenario are the rural
middle (and upper) income households, who suffer a minuscule 0.8 percent reduction in
real consumption.
CONCLUSIONS
It is probably true to say that for countries relying very much on agricultural exports for
their foreign exchange earnings and their industry dependent to a large degree on imported
capital and intermediate goods, there are many external factors outside their control.
Nevertheless, there are clearly a number of policy actions which governments of such
countries can still take, depending on the particular situations facing them.
96
Godfrey J. Tyler
The results of the policy simulations indicate that elimination of indirect industrial taxes
and a shift to a more progressive direct tax structure, combined with a 10 percent
devaluation could be beneficial for the Kenyan economy and for poverty alleviation.
Under the preferred assumption of abundant supplies of labour (Godfrey 1987), real GDP
increases by 16 percent, overall exports by 21 percent (agricultural exports by 30 percent),
the current account deficit shrinks by 40 percent, real government expenditure increases by
6 percent, real investment remains constant, employment grows by between 15 and 19
percent and, most importantly, the real consumption of poorer households is raised by
between 19 and 21 percent.
The simplifying assumptions (for example those about competitive product and factor
markets) necessary in a model of this type and its aggregative nature must be borne in
mind. Nevertheless, the findings from the policy simulations, particularly on devaluation,
are generally in line with the conclusions of several other studies eg. Balassa ( 1990), Bird
(1983), Gulhati et al. (1986), Heller et al. (1988) and Killick (1984). It is therefore
believed that the general pattern of the results has important implications for policy choice
in Kenya. It suggests that with appropriate macro-economic policy actions there may be no
conflict between improvements in the balance of payments position and the alleviation of
poverty.
REFERENCES
Balassa, B., 1990, 'Incentive Policies and Export Performance in Sub-Saharan Africa', World
Development, Vol. 18, No. 3, pp.383-91.
Bigsten, A., 1990, Kenya, Macroeconomic Studies, No. JO, Swedish International Development Authority,
Stockholm.
Bird, G., 1983, 'Should Developing Countries Use Currency Depreciation as a Tool of Balance of
Payments Adjustment? A Review of the Theory and Evidence, and a Guide for the Policy Maker',
Journal of Development Studies, Vol. 19, No. 4, pp.461-84.
Demery, L. and Addison, T., 1987, 'Stabilization Policy and Income Distribution in Developing
Countries', World Development, Vol. 15, No. 12, pp.1483-98.
Drud, A., Grais, W. and Pyatt, G., 1985, An Approach to Macroeconomic Model Building Based on
Social Accounting Principles, Discussion Paper Report No. ORD 150, Development Research
Department, World Bank, Washington, D.C.
Godfrey, M., 1987, 'Stabilization and Structural Adjustment of the Kenyan Economy, 1975-85: An
Assessment of Performance', Development and Change, Vol. 18, No.4, pp.595-624.
Gulhati, R. et al., 1986, 'Exchange Rate Policies in Africa: How Valid is the Scepticism?', Development
and Change, Vol. 12, No. 3, pp. 399-424.
Helleiner, G.K., 1987, 'Stabilization, Adjustment and the Poor', World Development, Vol. 15, No. 12,
pp.1499-1513.
Heller, P.S., et al., 1988, The Implications of Fund-Supported Adjustment Programmes for Poverty:
Experiences in Selected Countries, Occasional Paper No. 58, International Monetary Fund,
Washington, D.C.
Julin, E. and Levin, J., 1992, Kenya: Macroeconomic Performance 1990, Macroeconomic Studies
No.30/92, Swedish International Development Authority, Stockholm.
Killick, T., 1981, 'The IMF and Economic Management in Kenya', Working Paper No. 4, Overseas
Development Institute, London.
Killick, T., 1985, 'The Influence of Balance of Payments Management on Employment and Basic Needs in
Kenya', Eastern Africa Economic Review (New Series),Vol. I, No. I, pp.57-69.
Tyler, G.J. and Akinboade, 0., 1992, 'Structural Adjustment and Poverty: a Computable General
Equilibrium Model of the Kenyan Economy', Oxford Agrarian Studies, Vol. 20, No. I, pp.51-61.
World Bank, 1983, Kenya: Growth and Structural Change, World Bank, Washington, D.C.
Macro-Economic Policy, Export Competitiveness and Poverty in Kenya:
A General Equilibrium Analysis
97
World Bank, 1991, World Tables 1991, World Bank, Washington, D.C.
DISCUSSION OPENING - P. Lynn Kennedy (Louisiana State University,
USA)
This discussion will proceed by reviewing the paper's methodology and empirical results.
It will then offer criticisms and suggestions for improvements.
The underlying problem addressed by this paper is Kenya's deteriorating balance of
payments situation, coupled with rising external debt. Using a computable general
equilibrium model, based on a 1976 social accounting matrix of the Kenyan economy,
policy simulations are conducted which seek to solve the balance of payments dilemma
without worsening poverty or reducing the ability of the government to provide for the
basic needs of the poor.
Three basic scenarios are used in this policy analysis: (a) the elimination of industrial
taxes, (b) the previous scenario plus increased direct taxes and (c) the previous scenario
plus a 10 percent currency devaluation. The above policy scenarios are simulated, first,
assuming an unlimited supply of labour in all categories at a constant wage and, second,
assuming fixed total supplies of labour in each category.
Under the assumption of unlimited labour the policy change simulating indirect and
direct tax changes plus devaluation successfully meets the previously stated objectives.
This scenario results in a nearly 40 percent decline in the current account deficit, an
increase in real government expenditure and a relatively constant level of total real
investment. In addition, employment and consumption are increased in all sectors.
The results of the simulation using the fixed total labour supply assumption are, as
noted by the author, much less satisfactory in achieving the policy objectives. An increase
in Gross Domestic Product is attained at the expense of high levels of inflation. The
current account deficit increases while real government expenditures decrease. This
scenario results in an increase in wages, ranging from 15.6 percent for rural self-employed
labour to 18.0 percent for urban unskilled labour. However, due to the increase in retail
prices, the increase in real household consumption is not nearly as large as the increase in
wages. In fact, the rural middle income sector suffers a decline in real consumption.
One criticism would be that while abundant total labour may be a reasonable
assumption, the idea that skilled and unskilled labour are both abundant seems to have its
drawbacks. Where labour is not homogeneous, the assumption of an unlimited supply of
skilled labour may be unrealistic. The actual supply and interchangeability of labour will
undoubtedly fall in a range between assumptions A and B. A third assumption could,
therefore, be incorporated in this model to better simulate the actual characteristics of the
available labour force.
Another suggestion relates to a statement that moving towards a more progressive direct
tax structure may prove to be politically unacceptable. By utilizing a CGE framework the
effects of policy options on various segments of the economy are simulated. However,
without a specific objective function, the analyst must use some degree of judgement as to
the importance of solving the balance of payments problem, welfare assistance to the poor
and other relevant political-economic factors. Incorporating some type of policy preference
function into the current model would allow policy alternatives to be analyzed in a manner
98
Godfrey J. Tyler
which seeks to solve the balance of payments problem without worsening the poverty
situation and at the same time prove to be politically acceptable.
In conclusion, the methodology employed in this study can be used to find policy
alternatives which improve the Kenyan current balance of payments problem without
exacerbating the poverty situation under alternative labour force assumptions. Showing
policy alternatives to be politically feasible will greatly enhance the usefulness of this
analysis.