Country Study 4

Although Kenya avoided the disastrous plunge in real GNP that many other African countries suffered in the first half of the 1980s, standards of living of nearly all sectors of the population fell because economic growth slowed to less than half of what it had been in the previous decade while population growth remained as high as ever. Inequality in the distribution of incomes also probably widened.The balance of payments deteriorated sharply in the latter part of the 1970s and the early 1980s due to the world recession, falling real prices for coffee and tea exports, the opening of new petroleum refining capacity in the Gulf, in competition with Kenyan refined products, the closure of the border with Tanzania and the chaotic situation in Uganda. By the early 1980s the terms cf trade stood at less than half their level in the early 1960s.Initially, the trade deficit was financed by foreign borrowing but lenders cut back new commitments after the debt crisis broke in 1982. The policies adopted to reduce the deficit relied heavily on import controls as well as devaluation and credit restraint. These policies brought about a precipitous fall in imports but, surprisingly, not in investment.On balance, Kenya maintained its very high rate of investment, but it went largely into construction and other non-tradeable sectors, not into manufacturing industry or into agriculture. Manufactured exports continued to fall.Kenya concluded several arrangements with ~he IMF during this period; the 1983 standby agreement, in particular, which called for devaluation, increased agricultural prices and a reduction in the budget deficit and bank lending, was implemented in full, partly perhaps because the Treasury itself appeared to be converted to a monetarist philosophy.Employment expanded in the government sector, which grew by some 40 per cent during the period, but contracted in agriculture and rose only a little in manufacturing. Real earnings per worker fell heavily in all sectors.It remains puzzling why the high rate of investment failed to spur economic growth. In the view of the authors of this study, this failure is probably due mainly to restrictive policies and the very low levels of capacity utilization. They recommend giving a sharp boost to demand by stimulating public and private spending, together with a massive shift of resources to agriculture (especially small-scale agriculture). Land redistribution is also necessary to offset the growing land pressure and raise food output.