The Impact of Trade Liberalization on Household Welfare in Kenya
Economic Outlook
Kenya's economy faces significant challenges in which the policy makers identified that trade will be a major factor in the country's capacity to overcome them. The role of trade liberalization in development has been measured in Kenya to investigate the gains in various economic activities. According to the past studies, the liberalization of trade in goods will boost Kenya's annual GDP by 0.2 percent and if the gains are to be realized, policy makers need to ensure that the negotiations result in a significant reduction of developed countries' subsidies to agriculture and enough room to shelter selected manufacturing activities. There is also a positive impact on human development through the increasing the demand for low skilled workers— Kenya's most abundant resource— in rural and urban areas; reducing the incidence of poverty; and improving income distribution in rural areas (Zepeda, et al., 2009).
Trade Liberalization and Poverty
The trade liberalization and poverty, as well as their connection cannot be measured easily. However, the effects of trade liberalization on poverty and household welfare can be described through: the transmission of prices from the border down to the household; its effects on profits, wages and employment; its effects on government revenue and pro-poor expenditure and its effects on the risk to households’ livelihoods. It is understandable that the effects of trade liberalization on poverty raise some questions in the minds of politicians, policy makers, senior officials, and others and such as what it will mean for the average person’s cost of living, employment, domestic industry, exporters, and the government’s budget (Jayanetti & Tilakaratna, 2005). Although trade liberalization and regional integration offer economic growth opportunities in the long run, in the short run they will result in a cut in the revenue of the country and worsen an already high budgetary deficit (Aka, 2006).
Kenya is a country that specializes even more greatly in agriculture and processed food. This is a positive step, as it will make use of Kenya's abundant low- skilled labor, but the country’s long- term development cannot rest on these two activities alone. Kenya must aim to build comparative advantages in activities with higher value added if it wishes to support higher standards of living. Kenya has also sought to industrialize its economy, experimenting with various policies, but with mixed results. After independence, it made use of import substitution policies and succeeded in creating manufacturing capacity in various sectors. Trade liberalization strategies succeeded in capitalizing, modernizing, and increasing the exports of some manufactured goods, but they failed to maintain, let alone increase, the share of manufacturing in GDP (Zepeda, et al., 2009).
Impact on Household Welfare
The trade liberalization has an effect on household welfare through the price changes of tradable goods. Trade liberalization, i.e. reduction in tariffs, may affect the prices of goods consumed and produced by households. The key issue here is how the changes in the taxes and the border prices are eventually transmitted in terms of effects on wholesale and retail prices, and thereby on household welfare. However, the effects on household welfare will not only depend on the price changes but also on whether these households produce or consume the products concerned, and to what extent. The post-tariff border price of a good is determined with the combination of the exchange rate and the tariff it faces. When adding to this border price the domestic taxes, transportation/distribution costs from the port to major distribution centers (and costs due to various regulations), we get the wholesale price. Then we obtain the retail price by adding other taxes and regulations and the cost of transportation/distribution.
At the retail level, the goods will be distributed to households and individuals. The impact of price change of a particular good (due to changes in tariffs) on the welfare of the household will depend on the relative importance of the good concerned as a source of income to the household and its importance in the household consumption basket. For example, if the price of a good (e.g. rice) increases, then the net producers of rice will benefit while net consumers will lose. However, the extent of gain or loss due to price increase of rice will depend on how much income depends upon the production of rice and how important rice is in the household’s consumption basket. To analyze this, we have to look at the contribution to household income from different income sources and the household expenditure shares for different consumption items (Jayanetti & Tilakaratna, 2005).
References:
Aka, B., (2006) Poverty, Inequality and Welfare Effects of Trade Liberalization in Côte d'Ivoire: A Computable General Equilibrium Model Analysis [Online] Available at: http://www.aercafrica.org/documents/RP160.pdf [Accessed 18 November 2010].
Jayanetti, S., & Tilakaratna, G., (2005) Macroeconomic Policy Choices for Growth and Poverty Reduction, The Impact of Trade Liberalization on Poverty in Sri Lanka [Online] Available at: http://www.nsi-ins.ca/english/pdf/PRSP_Sri_Lanka.pdf [Accessed 18 November 2010].
Zepeda, E., Chemingui, M., Bchir, H., Karingi, S., Onyango, C., & Wanjala, B., (2009) The Impact of the Doha Round on Kenya, Carnegie Endowment for International Peace [Online] Available at: http://www.carnegieendowment.org/files/impact_doha_kenya.pdf [Accessed 18 November 2010]
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