Economic Reforms and evolution of producer prices in Kenya: an ARCH-M approach

For the last two decades, most countries in sub-Saharan Africa have been liberalizing their economies, and agricultural markets in particular. The reforms were envisaged to improve the agricultural sector terms of trade and prices received by producers as a means of stimulating production and growth. This paper analyses the effects of market reforms on the evolution and volatility of producer prices in Kenya. An autoregressive conditional heteroscedastic in mean (ARCH-M) regression model is applied to analyse monthly producer prices for a 15-year period. The periods 1985-91 and 1992-99 represent the pre-reform and reform periods, respectively. Milk and maize are used to represent food items while coffee and tea represent traded non-food commodities. Real producer prices for coffee, tea and maize significantly declined during the reform period while milk prices increased. Results also indicate that market reforms were generally associated with higher volatility of commodity prices, although there are inter-commodity differences. These price developments could be attributed to sequencing problems and the intermittent nature of market reforms as well as limited private sector participation in agricultural markets. International trends in agricultural commodity prices are also shown to have played a major role, especially for traded products. Policy implications with regard to smallholder agricultural development in a liberalized market environment in Kenya and in the wider context of sub-Saharan Africa are highlighted.