An economic analysis of the impacts of trade liberalization on Kenya’s maize sector

Kenya like most other developing countries has been reforming her staple grain markets since 1986. In these sectors, market reforms were initiated as a key component of the economy-wide structural adjustment programmes (SAPs). The SAPs were later strengthened and made irreversible by Kenya’s commitments at the multilateral trade negotiations. The reforms were envisaged to improve the sectors terms of trade as a means of stimulating food production. However, the impacts of trade reforms on Kenya’s maize sector remain controversial. Thus, there is need for empirical research to inform government interventions in this sector. This study evaluates the impacts of trade liberalization and their distributional effects on stakeholders in Kenya’s maize sector. Specifically, the objectives are threefold: to assess the price responsiveness of producers, wholesalers and consumers, to quantify the market and welfare impacts of trade liberalization and to draw policy recommendations. The study uses recent developments in time series econometrics based on cointegration techniques and error correction models (ECM) to estimate price responses. To quantify the impacts of trade liberalization, a partial equilibrium model (PEM), which accounts for market interrelationships at the farm, wholesale and retail levels is developed. The elasticities of supply and demand were estimated using annual cereal production and consumption data for the period 1963-2005 from Kenya’s statistical office. In all cases, the estimated models performed well on theoretical and statistical grounds. All own-price elasticities had the expected signs and were statistically significant. On the basis of the Marshallian elasticities, cereals can be considered as necessities in Kenya. All long-run own-price acreage elasticities were elastic. Similarly, the long-run ownprice elasticities at the intermediate level were elastic. The elastic price responses imply that cereal producer responses in Kenya are quite high, suggesting a significant potential for the sector’s response to trade liberalization. The results from the trade policy simulations suggest that tariff reductions yield price decreases across the three market levels. The declining prices increase maize consumption but reduce domestic production. Consequently, consumer surplus increases while producer surplus decreases. However, the gain in consumer surplus is not sufficient to compensate the loss in producer surplus. Thus, Kenya’s implementation of the Uruguay Round trade liberalization commitments leaves the maize sector worse off. Any further tariff reductions without compensating maize producers cannot be recommended based on the compensation principle.