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The Credibility Problem in Trade Liberalisation: Empirical Evidence form Kenya

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  • Reinikka, Ritva

Abstract

This paper quantifies the welfare cost created by speculative accumulation of imports in Kenya during four trade reforms between 1976-92. These episodes suffered from a lack of credibility because they were perceived to be either time-inconsistent or incompatible with the exchange rate, fiscal or monetary policy. Kenyan data confirms that the private sector was able to anticipate the fate of the reforms and that it hedged against their reversal by accumulating foreign exchange licenses and bonded and actual imports. There are some indications of deferral of investment and increased liquidity during the abortive reforms. The speculative response seems to be self-fulfilling, as rapidly declining external reserves usually forced the government to abandon the reforms. The 1980 import liberalisation was the most costly attempt. Copyright 1996 by Oxford University Press.

Suggested Citation

  • Reinikka, Ritva, 1996. "The Credibility Problem in Trade Liberalisation: Empirical Evidence form Kenya," Journal of African Economies, Centre for the Study of African Economies, vol. 5(3), pages 444-468, October.
    • Handle: RePEc:oup:jafrec:v:5:y:1996:i:3:p:444-68
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    Cited by:

    1. Buffie, Edward F., 1999. "Optimal trade liberalization and the welfare costs of imperfect credibility," Journal of International Economics, Elsevier, vol. 47(2), pages 371-398, April.
    2. Jan Willem Gunning & Paul Collier, 1999. "Explaining African Economic Performance," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 64-111, March.
    3. Yago, Milton & Morgan, Wyn, 2008. "The impact of policy reversal on economic performance in Sub-Saharan Africa," European Journal of Political Economy, Elsevier, vol. 24(1), pages 88-106, March.
    4. Richard Mash, 1997. "Reversible reforms with irreversible capital: the investment response to imperfectly credible trade liberalistion," Economics Series Working Papers WPS/1997-06, University of Oxford, Department of Economics.
    5. Peter Wamalwa & Maureen Were, 2019. "Is export-led growth a mirage?: The case of Kenya," WIDER Working Paper Series wp-2019-115, World Institute for Development Economic Research (UNU-WIDER).

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