The Moderating Role of Government Effectiveness on the Relationship between Selected Macroeconomic Variables and Horticultural Export Performance in Kenya

Abstract

The horticultural sector in Kenya plays a crucial role in driving the country’s economy, making up approximately 1.6% of the country’s GDP in 2019. Despite generating a significant Ksh152.3 billion in 2022, the value of these exports exhibited a decline compared to Ksh157.7 billion in 2021. These decreases in horticultural exports performance warrant further investigation into the underlying factors impacting this important sector. This study examines the role of government effectiveness in the relationship between different macroeconomic factors and Kenya’s horticultural exports performance using time series data from 1990 to 2021. The study’s key findings highlight the significant influence of government effectiveness on the relationship between exchange rates, inflation rates, interest rates, and horticultural export performance. This implies that well-designed government policies have the potential to enhance the positive impacts of these macroeconomic factors. The findings highlight the crucial role of government effectiveness in shaping the impact of macroeconomic factors on Kenya’s horticultural export performance. Considering these findings, the study provides a few policy recommendations. Investments in strengthening government institutions and policies can amplify the benefits of favourable exchange rates, controlled inflation, and stable interest rates on horticultural exports. Additionally, taking steps to enhance market access, decrease trade barriers, and negotiate more favourable trade agreements can amplify the advantages of favourable terms of trade for horticultural exports. Lastly, it is important to consider policies that can help address the negative effects of unfavourable terms of trade. This includes strategies like export diversification and risk management, which can be particularly effective with strong government backing.