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Abstract

A computable general equilibrium model based on a social accounting matrix for Kenya is used to simulate the effects of 10-percent devaluation, 10-percent increased.investment, and 10-percent agricultural productivity improvement on the macroeconomy 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 assuming fixed supplies so that wages are determined endogenously. These crucially affect the results. Under the first assumption, devaluation provides a 10-percent boost to real 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 other variables 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.

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