Adjustment and private investment in Kenya

Kazi M. Matin and Bernard Wasow

No 878, Policy Research Working Paper Series from The World Bank

Abstract: The authors use an accelerator model to assess the determinants of private investment and to analyze how adjustment policies affect those determinants. Their model emphasizes the effect of resource constraints on private investment behavior, including that arising from foreign exchange rationing. Econometric estimation of the investment model with Kenyan data for 1968-88 suggests that Kenya's failure to implement adjustment policies after the collapse of the coffee boom and the breakup of the East African common market reduced private investment sharply in the 1980s. The authors argue that inadequate fiscal adjustment was a key failure of policy. With direct competition between public and private sectors for limited financial resources, fiscal deficits preempted funds and restricted private investor's access to them. In addition, when cuts in government spending were undertaken to contain deficits, they fell disproportionately on capital expenditure, especially on physical infrastructure. Though real depreciation is found to have a direct negative impact on investment, the authors use simulations to show that it has a positive indirect effect on private investment in the medium term because such depreciation relaxes the foreign exchange constraint on imports. They conclude that efficient fiscal adjustment and liberalization of imports will be critical for the recovery of private investment in Kenya.

Keywords: Trade and Regional Integration; Economic Theory&Research; Economic Stabilization; Environmental Economics&Policies; Macroeconomic Management (search for similar items in EconPapers)
Date: 1992-03-31
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