A CGE Model Analysis of Effects of Adjustment to Terms of Trade Shocks on Agriculture and Income Distribution in Kenya

A simulation analysis using Kenyan economy CGE model is undertaken to look at the effects of two important terms of trade shocks facing Kenya in the mid-1970s. It is evident that the Kenyan economy is very vulnerable to external shocks. Consequently, as these shocks invariably created internal and external imbalances, the policies pursued by the government were important. Some of these policies are analysed in this paper. What seems to be an important outcome is that higher import tariffs and indirect taxes may have reduced the positive impacts of the export boom that were being experienced by the economy at the time, albeit marginally. However, these policies had been introduced as the government tried to grapple with the adverse effects that the oil-price shock seemed to have created in the economy. Hence, the policies may not be seen as an indication of government's mismanagement given that it may not have been aware of the impending windfall from the boom.