Effect of Manufacturing Sector Earnings on Trade Balance in Kenya

Ochola Jason Onyango, Obange Nelson and Odhiambo Scholastica
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Ochola Jason Onyango: Master of Arts in Economics graduate, Maseno University
Obange Nelson: Corresponding Author Holds a PhD in Economics, A senior Lecturer, Department of Economics, Maseno University
Odhiambo Scholastica: N/A

International Journal of Research and Innovation in Social Science, 2023, vol. 7, issue 12, 308-319

Abstract: Trade balance position is a vital component of economic growth and development for any economy. It is expressed in monetary terms over a prescribed time period and measures the variance between the value of what an economy exports and imports. Kenya is a market- based economy and has continued to benefit a lot from key sectors of agriculture, manufacturing and tourism. Persistent and continuous trade deficits is unfavorable to any economic outlook since it negatively impacts level of employment, growth and foreign exchange. Kenya‟s trade balance position is heavily supported by key sectors of agriculture, manufacturing and tourism through their immense contribution in foreign exchange earnings. The manufacturing sector on the other hand enjoyed a significantly high rate of growth between 1964 to 1974 of respectively 4.2% and 31% but continued to experience mixed growth rates in the 90s of 3.6% and 2.7% attributed to trade liberalization, election uncertainties, changing policies on import duty. Literature on how trade balance affects economic growth exists but there is limited evidence relating manufacturing and the sector affects trade balance. This study aimed to investigate the effect of manufacturing earnings on the trade balance in Kenya. This study was anchored on the Absorption theory of trade and used correlation research design and secondary time series data from 1964–2018. The data was collated from Kenya National Bureau of Statistics as contained in Statistical Abstracts. Vector Error Correction findings registered significance at 5% level with coefficients of 0.904 signifying that a 1% increase in net earnings from manufacturing increases trade balance by 0.904%. Trade balance is self-correcting at an annual rate of 43.7%. This study further concluded that in the long-run, earnings from manufacturing sector has a strong relationship with trade balance position in Kenya in the current period. This study recommends a strengthening of the manufacturing sector to help improve the positive gap between earnings from exports and imports in Kenya.

Date: 2023
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