Macroeconomic drivers, government effectiveness and Horticultural Export performance in Kenya

Abstract

Horticultural exports, alongside tea and coffee, are major contributors to Kenya’s agricultural sector, driving economic growth and stability. The Kenyan horticultural sector in 2022 faced some challenges but still played a significant role in the economy. Export value of horticultural products dipped slightly compared to 2021, with Kenya earning roughly 152.3 billion Kenyan shillings, which translates to around 1 billion US dollars, from fresh produce exports. The general objective of this study was to assess the effect of macroeconomic drivers and the moderating role of government effectiveness on Kenya’s horticultural export performance. The study was guided by the following specific objectives; To assess the effect of terms of trade on horticultural export performance in Kenya; to investigate the effect of interest rates on horticultural export performance in Kenya; to investigate the effect of inflation on horticultural export performance in Kenya, to determine the effect of Exchange rate on horticultural export performance in Kenya and lastly to investigate the moderating role of government effectiveness on the relation between exchange rates, terms of trade, inflation, interest rates and horticultural performance in Kenya. The study utilized annual secondary time series data obtained from Kenya National Bureau of Statistics and the World Bank governance indicator spanning the period 1990 to 2021. Comparative advantage theory is the theory that underpinned this study. The Vector Error Correction model was used to test for cointegration and to determine short run and long run relationship with respect to each of the variables in this study. Data was analyzed using STATA software version 14. The findings from this study indicated that exchange rate (𝛽1 = −.487, p<0.05), inflation rate had a negative significant relationship with horticultural export performance while interest rate (𝛽3 = .441, p<0.05) and terms of trade (𝛽4 = 1.024, p<0.05) had a positive significant relationship with horticultural export performance. Government effectiveness had an enhancing moderating relationship between exchange rate (β= 0.630, p<0.05), inflation (β= 1.131, p<0.05) and interest rate (β= .112𝑝 < 0.05) and horticultural export performance. Further, it had a buffering moderating effect on the relationship between terms of trade (β= −.719, p<0.05) and horticultural export performance. The study concludes that there is significant relationship between exchange rate, inflation rate, interest rate and terms of trade and horticultural export performance since the null hypothesis formulated in the study were rejected. The study's conclusions have implications for policy makers and regulators. First, the study recommends that there should be sound and solid macroeconomic policies in place that do not dislodge macroeconomic variables. These include effective fiscal and monetary policies and come up with export promotion and import substitution policies that could see more producers producing more horticultural products for exports and source for new markets for local horticultural products and elimination of tariffs and quotas for local producers that are involved in production of horticultural products. Additionally, the government may promote government effectiveness by promoting inclusive political and economic institutions. Finally, future research should consider doing a comprehensive analysis by expanding the scope to other countries such countries in East Africa or Sub-Saharan Africa.