Africa and the world trading system: a case study of Kenya (стр. 7 )

database for the FDI/GDP data

Kenya is currently in the process of drafting a new investment code that will streamline investment laws and procedures. It is not certain whether the code will reserve investment in some sectors exclusively for Kenyans, though, presently there are no laws that explicitly discriminate against foreign investors. The development plan indicated that "private foreign investment is not expected to seek out opportunities in such strategic areas as basic transport, telecommunications, and hydroelectric power", but this position has changed with economic reforms and privatization and foreign investors have become involved in these sectors. Once the review and harmonization of investment laws and procedures has been completed, there will be a firm basis for negotiating the envisaged Multilateral Investment Agreement.

The GATT/WTO has imposed inhibitions on uses of adverse trade related investment measures (TRIMs) on foreign investment such as local content requirements, minimum export requirements, trade balancing requirements linking use of imports to the ability to export, product mandating for given markets and licensing requirements that may induce more FDI to less developed countries, including Kenya. Developing countries have been allowed five years (and the least developed seven years) to eliminate prohibited TRIMs (Morrissey and Yai, 1995).

Improved market access may also induce investment, both local and foreign. Kenya could, for example, benefit significantly from the winding up of the Multi-Fibre Agreement (MFA). The MFA has been a highly restrictive form of trade discrimination, imposing quotas on the exports of textiles and clothing from less developed to developed countries, with severe losses in export earnings and allocative efficiency for some of the poor countries (Blake et al., 1996). In 1994, for example, the U. S. government sharply limited textile and apparel exports (mainly pillow cases and shirts) from Kenya, accusing Kenya of being a transhipment point for Asian exporters seeking to evade U. S. quotas. In , Kenya enjoyed a sixfold jump in its textile and apparel exports to the United States before the imposition of the quotas. These exports peaked at $37 million in 1994, declining to $28 million in 1995. Kenya would benefit from a reopening of this market (Kenya is the fourth largest textiles and clothing exporter from sub-Saharan Africa after Mauritius, South Africa and Lesotho)[13].

A significant impact of the Uruguay Round may arise from increased credibility of domestic policies by providing a policy locking-in mechanism. This is because Africa is viewed by investors as a high risk area, with the perceived high probability of policy reversals a major deterrent to investment (Collier and Gunning 1994, 1997; Collier, 1996). The high level of perceived risk partly reflects the long history of the use of economic controls in the region. This is compounded by poor dissemination of information to potential investors on the conditions in individual African countries and the region in general. WTO may help reduce these perceived risks by acting as an "agent of restraint" and therefore promote the investment required for building export capabilities.

WTO may offer two alternative ways of achieving lock-in (Collier and Gunning, 1997). First, WTO is by design an external agency of restraint in the sense that a member country binds itself by accepting the GATT/WTO provisions. In some areas, however, it offers weak discipline as policies such as foreign exchange rationing are still legal under the WTO rules. It also offers little defense against developed countries' protectionism, as there is wide scope for anti-dumping, countervailing and safeguard actions under WTO. Second, under the traditional GATT process of reciprocal concessions, African countries have negotiating rights on a substantial component of their exports, for example to EU. Under the GATT "request and offer system", an African country can request an EU member for a reciprocal reduction of a tariff on its export if it is a major exporter of that product. This cannot however provide the African country with the rapid improvement in credibility which it needs.

7. Conclusions

There is a consensus in the Kenyan economic literature that the performance of Kenya's export sector has been quite poor and exports have grown less than the economy. The export performance declined in the 1980s, before rebounding in the 1990s for both traditional and non-traditional exports. Access to developed economies for traditional exports (coffee and tea) has not been a major constraint. A large proportion of these products are exported to the European Union where the applied tariff and non-tariff barriers have been low.

This paper analyses the role of improved market access in enhancing Kenya's non-traditional exports. It specifically investigates the implications for market access from the Uruguay Round of General Agreement of Trade and Tariff (GATT) signed in 1994. Among the major domestic policies that have been implemented to enhance Kenya's capacity to take advantage of the Uruguay Round and WTO arrangements are tariff, QRs, direct export promotion policies and the exchange rate. Other policies important for export performance relate to firms access to finance, prices and wages policies, and infrastructural adequacies.

The European Union has historically been the largest single market followed by Africa, particularly Uganda and Tanzania. The share of exports to Australia and the Far East (mainly Japan, India and China), the United States and Canada, the Middle East and Eastern Europe have been relatively unimportant.

A large proportion of leading non-traditional exports (73.2%) goes to the European Union. Among these exports, we show that, in general, the incidence of tariff barriers is higher for food and live animals (SITC 0) and alcoholic beverages (SITC 112). These products are also, in general, subjected to stricter non-tariff measures (NTMs). The tariffication of NTMs and the reduction of tariffs under the Uruguay Round is therefore likely to be of greater benefit to Kenya's fish industry (SITC 034) and horticultural products (SITC 034-062) compared with the other exports. These exports are however likely to be hurt by the erosion of the general system of preferences (GSP) and those preferences that have been provided to the least Developed countries (LDCs) embodied in the WTO agreements.

The GATT/WTO trade related investment measures (TRIMs) on foreign investment may induce more FDI to less developed countries, including Kenya. Developing countries have been allowed five years (and the least developed seven years) to eliminate prohibited TRIMs. Improved market access may also induce investment, both local and foreign. Kenya could, for example, benefit significantly from the winding-up of the Multi-Fibre Agreement (MFA). A significant impact of the Uruguay Round may arise from increased credibility of domestic policies by providing a policy locking-in mechanism. This is because Africa is viewed by investors as a high risk area, with the perceived high probability of policy reversals a major deterrent to investment.

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APPENDIX

Table A1: Market access conditions of Kenya's leading non-traditional exports to the EU (1996)

SITC	HS (6-digit)	Import share, %	RCA	Total NTM charges % %	National Lines MFN ZER GSP LDC
034	030420 030410 030379 030110 030269 030341 030490	1.48 9.66 1.57 0.38 0.04 0.86 0.03	36.2603 10.11 0.37	11.4 0 1 1 5.3 0 12.5 6 1
054	200559 071290 200551 200490	47 0.35	81.4611 0.2064 0.7996 0.0740	2 1 20.5 0 2
056	070820 070990 070810 070960 071022 121 070 070890 070970 071333 070920 070610 121292 071310	40.91 17.97 33.72 3.03 4.15 1.88 0.81 4.79 7.93 13.24 24.87 0.01 0.08 0.27 5.78 0.01	68.7661 8.3622 31.6882 1.0684 2.2650 1.3768 0.1641 0.5460 1.9148 3.0079 1.7205 0.0 0.0203 0.5349 1.1191	NA 0 11.8 0 10.6 0 5.7 0 16.8 0 0.7 0 11.2 0 NA 0 1 13.1 0 12.1 0 2.0 0 14.1 0 15.9 0 NA 100 2.0 0
057	080440 081090 080290 080132 080450 081010 080300 080232 080430 080719 080410 080720	6.36 1.94 1.79 0.54 0.54 0.58 0.00 0.09 0.03 0.04 0.04 0.16	11.5467 0.6526 5.6824 1.3643 0.8557 0.2978 0.0500 0.1032 0.1942 0.0220 0.0580 0.1065	5.0 0 9.4 0 1.2 0 0.0 0 4.0 0 13.1 0 18.7 0 7.0 0 7.9 0 1.3 0 0.6 0 2.0 0
058	200820 200819 200892 200850 200840 200899 200791	23 003 1.40	27.7154 0.2464 0.1210 0.2877 0.1634 0.0138 0.1785	2 12.7 0 2 2 2 2 2
059	200940 200920 200980	16.11 0.21 0.25	23.1362 0.2897 0.3923	2 2 2
112	220300	0.03	0.1270	18.0 0
265	530410 530490 530521 530529	22.60 12.66 0.59 8.84	72.4891 46.9373 0.7856 1.4462	0.0 0 0.0 0 0.0 0 0.0 0
278	252922 252921 253010 253090	20 0	15.2684 1.2469 0.3910 0.0372	0.0 0 0.0 0 0.0 0 0.0 0
422	151590	0.20	0.1771	9.1 0
431	152190	1.10	2.1357	0.8 0
542	300490 300420 300390	0.01 0.03 0.01	0.2698 0.2763 0.0631	0.0 0 0.0 0 0.0 0
553	330499 330590	0.05 0.17	0.2193 0.0681	2.6 0 2.6 0
611	410612 410422 410512 410410 410439 410619 410431 410900 410519 410620 410520	985 0.67 2.03 0.18 3.56 0.20 0.06 0.02	14.5867 2.3462 1.0818 0.5176 1.5245 3.0736 0.8836 0.0233 0.9501 0.0875 0.1231	2.0 0 3.4 0 2.2 0 4.0 0 6.7 0 2.0 0 6.6 0 3.0 0 2.2 0 3.6 0 3.6 0
661	680299 680229 680192	3.48 0.52 1.13	1.2970 0.3557 0.0547	2.0 0 2.3 0 3.1 0
665	701790	0.06	0.0313	4.1 0
851	640610	0.01	0.1583	3.6 0

Key:

RCA = Kenya's revealed comparative advantage for each product. It is calculated by dividing the share of Kenya's export of a particular product in Kenya's total exports by the share of world exports of that product in total exports. An RCA less that 1 indicates that the share of a particular export in Kenya's export portfolio is smaller than the corresponding world average.

Total charges = Average tariff charges plus additional import charges (excluding internal taxes and other specific taxes).

NTM% = The NTM incidence indicates to what extent the national tariff line within a basic HS item is affected by core non-tariff measures. For each national tariff line, the NTM incidence is taken as:

- 0% if no NTM measure applies to this line

- 50% if an NTM applies to a part of the product specified under the national tariff line

- 100% if an NTM applies to all products under the national tariff line, or if 2 or more NTMS apply to a national tariff line

The NTM incidence at the HS 6-digit level is then calculated by taking the simple average of the incidence for each national tariff line.

The core NTMs are QRs, finance measures (such as terms of payment and transfer delays or queuing) and price controls.

Under National Tariff Lines: MFN = the number of tariff lines within the HS classification; ZER = number of national tariff lines with zero tariff rate within the HS category; GSP = number of lines for which the Generalized System of Preferences are granted; and LDC = number of lines for which GSP is accorded the Least Developed Countries.

[1]. The destinations of coffee and tea and the applied tariff rates in these export markets in 1995 were as follows (%):

	EU	USA	Canada	Egypt	Other
Coffee	68.1	5.6	1.3	0	25.0
Tariff	3.3	0	0	5	N/A
Tea	33.8	1.4	0.8	15.8	48.2
Tariff	0	0	0	30.0	N/A

Source: Kenya, Statistical Abstract and UNCTAD database

[2]. In contrast, the volume of crude vegetables n. e.s (which include cut flowers) increased about two-and-a-half times, from 16,000 metric tons in to 39,616 metric tons in , alongside an increase in prices from $2.1 to $2.8 per kg. Exports of tea and crude vegetables have therefore increased their shares relative to those of coffee and petroleum products in the 1980s through the 1990s.

[3]. This section draws on Mwega (1995, 1998).

[4]. The equilibrium RER is defined as the rate at which the economy would be at internal and external balance for given sustainable levels of the other variables such as taxes, international prices and technology (Edwards, 1989). The equilibrium RER therefore varies continuously in response to changes in actual and expected economic fundamentals.

[5]. There was an upsurge in short-term capital inflows in that caused an appreciation of the real exchange rate.

[6]. In 1996, Kenya's financial system included 51 commercial banks, 23 Non-bank financial intermediaries, 5 building societies, 39 insurance companies, 3 reinsurance companies, 10 development financial institutions, a Capital Markets Authority, 20 securities and brokerage firms, a stock market, 12 investment advisory firms, 57 hire purchase companies, 13 forex bureaus and 2670 saving and credit cooperative societies (Kenya, Development Plan , p 36).

[7]. These are Industrial Development Bank established in 1973; Development Finance Company of Kenya (1963); its subsidiary the Small Enterprises Finance Company of Kenya (1983); Kenya Industrial Estates; and Industrial and Commercial Development Corporation (1954); and Agricultural Finance Corporation.

[8]. Some of these were revoked in February 1997 to permit more imports in anticipation of a drought in the country.

[9]. Kenya was also admitted to the Group of Fifteen (G-15) at its seventh summit held in Kuala Lumpur in November 1997, a group created by the Non-Aligned Movement to promote South-South cooperation.

[10]. Members of the committee in Kenya are the ministers in charge of East Africa and regional cooperation (as chair), trade, and industrial development.

[11]. Financial Times, May 1997

[12]. The comparison reveals the following:

1975-93

Nominal FDI, US$ million 5

Real FDI, US$ million 7

Source: World Bank database

[13]. Information in this paragraph draws from The East African, September 15-21, 1997.