Abstract:
Despite Kenya dominating trade volumes in the East African Community (EAC), it
has been trading below its potential within the region. This is also in spite of the
increased scope of the country’s trade opportunities resulting from the region’s
increased market integration. Empirical evidence has shown that macroeconomic
policies influence international trade flows. However, there is limited empirical
evidence on the effect of macroeconomic policies on trade efficiency. The few
existing studies on this topic have used estimation techniques that depict efficiency
as being drawn from an average level of trade and not the optimal level of trade, as
well as not separating the effects of inefficiencies from the statistical noises. This,
therefore, creates a knowledge gap that this study aims at investigating by using the
stochastic frontier gravity model (SFGM), to determine the effect of Kenya’s
macroeconomic policies on its trade efficiency within the EAC. The study used
annual panel secondary data for the period 2000 to 2021. This study finds that the
GDP of Kenya and that of its EAC trading partners, the geographical distance and
border significantly affect trade volume. It also finds that globalization plays a
significant role in influencing Kenya’s trade. For the inefficiency model variables,
exchange rate depreciation was found to significantly increase trade efficiency, while
increase in tariff rate had an adverse and significant effect. Further, the study included
corruption as a control variable and found that it significantly increases trade
inefficiency. Kenya, though trading at an average efficiency level of 86.91 percent,
was found to have high unexploited trade potentials within the region especially with
Tanzania and Uganda. The study recommends that Kenya’s policymakers closely
monitor the exchange rate while at the same time put in place to progressively reduce
tariff rates
