Discussion Paper No. 124 of 2011 on Poverty, Growth and Income Inequality in Kenya: a SAM Perspective

Abstract

This study seeks to highlight the levels of income inequality in Kenya and its implications on various policy options targeted at reducing poverty. The 2003 Kenya SAM is used to develop a multiplier simulation model, which tracks the linkages among the demand-driven shocks on economic growth, income generation and consequently income distribution implications on different economic groups. In the first section of the multiplier analysis, we determine the major sectors that can be used to promote generalized economic development in Kenya. Trade, hotels and restaurants sectors, manufacturing sector and agriculture sector are among the major sectors in Kenya that play the highest role in the development of the domestic economy. The study further decomposed the global multipliers to highlight in microscopic detail the linkages between each household group income and productive sector accounts (agriculture and manufacturing), whose income has been exogenously injected. The empirical results from the multiplier analyses show that due to high inequality in Kenya, stimulation of growth in agriculture and manufacturing sectors mainly benefit the richest urban household deciles, who own most of the factors of production. Kenya will need to focus not only on economic growth, but also on inequality in order to effectively tackle poverty in the country. Based on the major sectors selected for this study, agriculture has higher direct effects on the incomes of rural households, while manufacturing has higher direct effects on the incomes of urban households