Structural adjustment and poverty: A computable general equilibrium model of the Kenyan economy

Abstract

Abstract A computable general equilibrium model based on a social accounting matrix for Kenya is used to simulate the effects of 10% devaluation, 10% increased investment and 10% agricultural productivity improvement on the macro‐economy and on the real incomes of the poor. For each policy simulation two specifications for the labour markets are adopted, the first assuming unlimited supplies of labour at given nominal wages and the second fixed supplies so that wages are determined endogenously. These affect the results crucially. Under the first assumption, devaluation provides a 10% boost to real gross domestic product (GDP) and has highly favourable effects on agricultural production, exports, the current account deficit, employment and poverty. Under the second assumption, it has a largely inflationary impact, with attenuated effects on real GDP and no effect on the current account deficit. Agricultural productivity improvement is less affected by the different specifications and compares favourably with devaluation except for its smaller impact on GDP. The increased investment policy is found to be inferior on most counts. All three policies decrease poverty, though income distribution remains stable.