Macroeconomic Constraints and Medium-term Growth in Kenya: a Three-Gap Analysis
"This paper has used a simple analytical framework to study whether it is the saving, fiscal or foreign exchange gap which is the binding constraint on capacity growth in Kenya and how these gaps have evolved since the early 1970s. The three-gap framework applied in the study extends the traditional two-gap model by distinguishing the fiscal constraint as another potential, important, independent impediment to economic growth. We find that, for plausible intermediate import ratios, foreign exchange is the binding resource constraint to potential growth in Kenya. Thus, its increased availability through exports promotion and more concessionary capital inflows and the associated reduction of import compression would alleviate the saving, fiscal, and external gaps that undermine good macro- economic performance. Some sensitivity analysis finds this conclusion quite robust while policies and the forecasted outcomes in the 1989-93 Development Plan are found to be inadequate or inconsistent with a reduction in macroeconomic imbalances in the country. Indeed, they may exacerbate these imbalances."