The Credibility Problem in Trade Liberalisation: Empirical Evidence form Kenya

Ritva Reinikka

Journal of African Economies, 1996, vol. 5, issue 3, 444-68

Abstract: This paper quantifies the welfare cost created by speculative accumulation of imports in Kenya during four trade reforms between 1976-92. These episodes suffered from a lack of credibility because they were perceived to be either time-inconsistent or incompatible with the exchange rate, fiscal or monetary policy. Kenyan data confirms that the private sector was able to anticipate the fate of the reforms and that it hedged against their reversal by accumulating foreign exchange licenses and bonded and actual imports. There are some indications of deferral of investment and increased liquidity during the abortive reforms. The speculative response seems to be self-fulfilling, as rapidly declining external reserves usually forced the government to abandon the reforms. The 1980 import liberalisation was the most costly attempt. Copyright 1996 by Oxford University Press.

Date: 1996
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