The Future of Smallholder Farming in Eastern Africa - Uganda ...

The Macroeconomic closure
Since the number of variables exceeds the number of equations in KEGEM, it is
necessary to have predetermined variables to solve the equations. This involves
determining the closure of the model or determining the economic environment under
which the simulations are made. In closing KEGEM, product and factor prices are
endogenously determined and world prices of exports and imports are exogenous.
There is no restriction on the balance of trade, which is also endogenous in the model.
The different labour types are assumed to be available in unlimited supplies with wages
for different labour categories indexed to the consumer price index with indexation
ranging between zero and one. For example, when the wage indexation parameter is
one an unlimited supply of labour is available at fixed real wages.
Total savings (from domestic and foreign sources) are distributed in fixed value shares
to investment in the three production sectors. Investment is endogenously determined
and adjusts to the level of savings. Foreign savings, unlike domestic savings, are
exogenously determined. There are no direct connections between investment and
capital stock and capital stock is exogenous and sector specific unlike for the labour
categories where labour shifts between categories. In other words, sectoral investment
is endogenous, and does not augment capital stocks. This means that all the results from
the simulations using the model are short run. The exchange rate is also exogenous and
acts as the numeraire, determining the absolute price level.
All the tax parameters for direct, indirect and import taxes are exogenous. The tax
parameters are the fiscal and trade policy instruments available to government.
Government total consumption of goods and services is also exogenously determined
and is treated as a fiscal policy instrument. The level of subsidies in each of the
producing sectors is also exogenously determined. This closure captures the
assumptions underlying the simulations in KEGEM, whose full equations and variables
are listed in the Appendix in Tables A.1 and A.2 while the coefficients used in the
model are listed in Table A.3. Appendix Table A.4 shows the model closure conditions.
6. Analyzing Trade Liberalization in the late 1980s
In the 1980s, the SAPs were instituted by the World Bank and International Monetary
Fund, which together with other bilateral donors made it hard for developing countries
to obtain external credit without undertaking minimum economic and political reforms.
One of the key conditionality was for the developing economies to shift from import
substitution to market liberalization, which would improve the welfare of their
populations by making it possible for more efficiently produced goods to be imported in
these countries. In addition, the inefficiencies in resource allocation associated with the
import substitution were seen to hinder rapid development in these economies. In
addition to the SAPs, pressure for reforms was already coming from the General
Agreements on Trade and Tariff, the predecessor of the World Trade Organization.
Kenya published the Sessional Paper No.1 on Economic Management for Renewed
Growth, discarding the import substitution model because, having experienced
significant internal and external imbalances during the 1970s and the 1980s, the country
felt it needed to open up its economy. One of the significant ways to achieve this was
through trade liberalisation, particularly rationalization and reduction of import tariffs.