Effect of Export Levies on Hides and Skins on Competitiveness of Kenya’s Leather Products Mohamed Ramadhan, Kenneth Malot, Kevin Wanjala and John Karanja Kenya Institute for Public Policy Research and Analysis KIPPRA Discussion Paper 360 2024 ii Effect of export levies on hides and skins on competitiveness of Kenya’s leather products KIPPRA in Brief The Kenya Institute for Public Policy Research and Analysis (KIPPRA) is an autonomous institute whose primary mission is to conduct public policy research leading to policy advice. KIPPRA’s mission is to produce consistently high-quality analysis of key issues of public policy and to contribute to the achievement of national long-term development objectives by positively influencing the decision-making process. These goals are met through effective dissemination of recommendations resulting from analysis and by training policy analysts in the public sector. KIPPRA therefore produces a body of well-researched and documented information on public policy, and in the process assists in formulating long-term strategic perspectives. KIPPRA serves as a centralized source from which the Government and the private sector may obtain information and advice on public policy issues. Published 2024 © Kenya Institute for Public Policy Research and Analysis Bishops Garden Towers, Bishops Road PO Box 56445-00200 Nairobi, Kenya tel: +254 20 2719933/4; fax: +254 20 2719951 email: admin@kippra.or.ke website: http://www.kippra.org ISBN 978 9914 738 87 2 The Discussion Paper Series disseminates results and reflections from ongoing research activities of the Institute’s programmes. The papers are internally refereed and are disseminated to inform and invoke debate on policy issues. Opinions expressed in the papers are entirely those of the authors and do not necessarily reflect the views of the Institute. iii Abstract Kenya’s leather industry is a strategic sub-sector as outlined in Vision 2030 and the Bottom-up Economic Transformation Agenda 2022-2027. Targeted interventions in the industry are aimed at boosting manufacturing and export competitiveness. Through the Miscellaneous Fees and Levies Act No. 29 of 2016, the government introduced an export levy on raw hides and skins to support value addition, local manufacturing, and export competitiveness of leather and leather products. This study assesses the export competitiveness of various categories of leather products and the impact of export levies on their competitiveness. Using data from the World Integrated Trade Solution and International Trade Centre databases, the study focused on raw hides, skins, leather articles, and footwear products falling under HS codes 41, 42, and 64, across distinct export levy regimes of 20 per cent, 40 per cent, 80 per cent, 50 per cent and before the implementation of export levies. The findings show that the Revealed Comparative Advantage (RCAs) for raw hides and skins became strong with the imposition of higher export levies, indicating a strong comparative advantage. RCA for articles of leather remained very low, showing no comparative advantage whereas RCA for footwear products had a weak comparative advantage. Market diversification had fluctuating results where raw hides and skins could not be diversify into more markets except with the imposition of 20 per cent export levy. In addition, articles of leather and footwear products benefited from increased diversification with higher export levies. The Export Market Penetration Index indicated that higher export levies led to a significant increase in market penetration and competitiveness in the international markets. Higher export levies of 50 per cent and 80 per cent contributed to a broader market reach and enhanced competitiveness for Kenya's leather products compared to the period before the implementation of the export levies. This demonstrates that export levies impacted both market diversification and export market penetration positively but not much impact was realized for revealed comparative advantage. To enhance the competitiveness of leather and leather products, the study recommends that: first, there is a need to implement targeted investment strategies to boost the competitiveness of raw hides and skins, articles of leather, and footwear products by investing in processing facilities to upgrade leather processing and tanning. Second, leveraging regional and international trade agreements like the African Continental Free Trade Area and enhancing existing trade relations with key importing countries could improve market diversification and penetration. Third, improving industry infrastructure and technology to enhance the quality and quantity of leather products is crucial. Finally, there is a need to develop domestic manufacturing capabilities by investing in capacity building and skills development programmes to boost the competitiveness of the leather industry. iv Effect of export levies on hides and skins on competitiveness of Kenya’s leather products Abbreviations and Acronyms AGOA African Growth and Opportunity Act CET Common External Tariff DFQF Duty-Free Quota-Free EAC East African Community EPAs Economic Partnership Agreements EU European Union GATT General Agreement on Tariff and Trade GSP Generalized System of Preferences LDCs Least Developed Countries MFN Most Favoured Nation NTBs Non-Tariff Barriers PEM Partial Equilibrium Method SMART Software for Market Analysis and Restrictions on Trade SPS Sanitary and Phytosanitary Standards SSA Sub-Saharan Africa TBT Technical Barriers to Trade WITS World Integrated Trade Solutions WTO World Trade Organization v Table of Contents Abbreviations and Acronyms..................................................................................iv 1. Introduction................................................................................................1 2. Kenya’s Trade in Leather Products............................................................3 2.1 Kenya’s Trade in Raw Hides and Skins.....................................................5 2.2 Kenya’s Trade in Articles of Leather; Saddlery and Harness; Travel Goods, Handbags and Similar Containers; and Articles........................................................................................................6 2.3 Kenya’s Trade in Footwear, Gaiters and Parts of such Articles.................7 3. Literature Review.......................................................................................8 3.1 Theoretical Literature ................................................................................8 3.2 Empirical Literature.................................................................................10 4. Methodology..............................................................................................13 4.1 Theoretical Framework ............................................................................13 4.2 Indices for Measuring Export Competitiveness........................................14 4.3 Model Specification....................................................................................17 4.4 Data and Data Sources...............................................................................18 5. Results and Discussion..............................................................................19 5.1 Revealed Comparative Advantage (RCA).................................................19 5.2 Market Diversification Index....................................................................23 5.3 Export Market Penetration Index.............................................................32 5.4 Effect of Export Levies Across the Export Levy Regimes........................34 5.5 Interrupted Time Series Analysis Regression Results..............................38 6. Conclusion and Policy Recommendations...............................................49 6.1 Conclusion..................................................................................................49 6.2 Policy Recommendations.........................................................................49 References..............................................................................................................51 Annexes..................................................................................................................54 vi Effect of export levies on hides and skins on competitiveness of Kenya’s leather products List of Figures Figure 2.1: Trend for Kenya exports of leather products in US$ millions..............4 Figure 2.2: Top ten export destinations for Kenya’s leather products in 2023......4 Figure 2.3: Trends in the imports of leather products in Kenya.............................5 Figure 2.4: Trade flows on imports and exports of raw hides and skins................6 Figure 2.5: Trade flows on imports and exports for articles of leather, saddlery and harness, travel goods, handbags, and similar containers, and articles made from animal gut (1988- 2023).....................................................................................................6 Figure 2.6: Trade flows on imports and exports for footwear, gaiters, and similar items and parts of such articles (1988- 2023).....................................................................................................7 Figure 5.1: RCA for raw hides and skins................................................................40 Figure 5.2: RCA for articles of leather....................................................................41 Figure 5.3: RCA for footwear and gaiters...............................................................41 Figure 5.4: Market diversification for raw hides and skin.....................................43 Figure 5.5: market diversification for articles of leather.......................................44 Figure 5.6: Market diversification for footwear products.......................................45 Figure 5.7: Export market penetration for raw hides and skins............................47 Figure 5.8: Export market penetration for articles of leather...............................47 Figure 5.9: Export market penetration for footwear and gaiters...........................48 List of Tables Table 4.1: Categorization of Balassa index of RCA.................................................15 Table 5.1: Average RCAs for raw hides and skins and leather products across export levy regimes (20%, 40%, 80% and 50%)................................20 Table 5.2: Average market diversification index for leather group of products across export levy regimes (20%, 40%, 80%, and 50%).....................25 Table 5.3: Top ten rank of importing countries in exported value for raw hides and skins.....................................................................................................27 Table 5.4: Top ten rank of importing countries in exported value for articles of leather.................................................................................................29 Table 5.5: Top ten rank of importing countries in exported value for footwear...31 vii Table 5.6: Export EMPI for hides and skin, articles of leather, and footwear across export levy regimes (20%, 40%, 80% and 50%).................................32 Table 5.7: OLS regression results for RCA on raw hides and skins and leather products across export levy regimes....................................................35 Table 5.8: OLS regression results for market diversification on leather group of products across export levy regimes....................................................36 Table 5.9: OLS regression results for EMPI on hides and skins, articles of leather and footwear across regimes................................................................37 Table 5.10: Interrupted time series analysis results on RCA.................................39 Table 5.11: Interrupted time series analysis results on export market diversification .............................................................................................................42 Table 5.12: Interrupted time series analysis results on export market penetration .. .............................................................................................................46 1 1. Introduction The leather industry in Kenya has evolved into one of the key agricultural sectors, with a strong potential to contribute to economic growth by expanding the export market for semi-processed, finished leather, and leather items. Consequently, the government has introduced an export levy on exports of raw hides and skins by amending the Miscellaneous Fees and Levies Act No. 29 of 2016 to support value addition, local manufacturing, and export competitiveness of leather and leather products. The implementation of this policy tool is expected to benefit the entire leather sector value chain, from farmers to tanneries, manufacturers, and exporters of manufactured leather and leather products. Over the years, Kenya served as a leather footwear hub for East Africa. However, in the recent past, it has become a minor exporter of leather and leather products (only US$140 million, 0.14% of world export in 2013). This has significantly impacted the competitiveness of leather products in the global markets, except for raw material availability and access. In 2019, Kenya's leather sector accounted for barely 0.9 per cent of manufacturing GDP, compared to countries such as Ethiopia (8.5%), Italy (3.1%), and India (1%). Kenya’s leather exports consist of semi-processed tanned “wet blue” leather (89%), raw hides and skins (5%), finished leather (2%), and leather footwear and handbags, travel ware, and other leather products (4%). The competitiveness of leather exports in Kenya is not yet fully realised, resulting in the continued export of raw hides and skins, with the export of manufactured leather articles being limited. For instance, in 2022, Kenya exported leather articles valued at US$2 million, compared to exports of US$19 million in raw hides and skins (ITC, 2022). To enhance the manufacturing and export competitiveness of finished leather and leather products in Kenya, Vision 2030’s economic pillar aims to promote industrialization and value addition in key sectors, including the leather industry, within the manufacturing sector. Moreover, the Bottom- Up Economic Transformation Agenda (BETA) envisions the revitalization of the leather products manufacturing industry by establishing leather industry clusters in Athi-River, Narok, Isiolo, and Wajir, thereby unlocking the leather industry’s potential of approximately Ksh 120 billion, which could create 100,000 jobs. Countries have imposed export levies on primary product exports to address the issues surrounding these exports, emphasize value addition, and enhance the export of competitive products (World Trade Organization, 2004). The WTO regulations regarding export restrictions offer adequate policy space for domestic policy considerations, such as export levies, without contravening WTO rules. Article XI of the General Agreement on Tariffs and Trade (GATT) generally prohibits quantitative restrictions. However, under paragraph 2b, there are general exceptions that permit temporary export restrictions to prevent the exportation of unprocessed key commodities.Thus, WTO members have continued to apply export levies on primary products such as raw agricultural produce and natural resource products. Leveraging the GATT provisions, Kenya has imposed export levies on raw hides and skins to enhance the manufacturing 2 Effect of export levies on hides and skins on competitiveness of Kenya’s leather products of leather and leather products. Consequently, the objective of this paper is to: assess the export competitiveness of various categories of leather products (raw hides and skins, articles of leather, and footwear, and to establish the impact of the implementation of export levies across all the export levy regimes. 3 2. Kenya’s Trade in Leather Products Kenya Vision 2030, the government's long-term development agenda, identifies manufacturing and manufactured products as a key driver of export competitiveness and employment growth. The Medium-Term Plans (MTPs), which implement the Vison 2030, prioritize the leather industry as a sector of interest in achieving the vision. For instance, MTP IV (2023-2027) examines the possibilities for building leather industry clusters to promote collaboration, information sharing, and resource optimization. Statistics from the International Trade Centre at HS 6 classification show that Kenya's leather exports include articles of leather, saddlery, and harness; travel goods, handbags and similar containers; and footwear, gaiters and the like; as well as parts of such articles. However, there has been a significant export of raw hides and skins, which accounted for more than 25 per cent of Kenya's total leather exports until 2007, when an 80 per cent export duty was imposed on raw hides and skins, later reduced to 50 per cent in 2023 to encourage value addition in the leather sector. Figure 2.1 illustrates the export trends for leather products and raw hides and skins from 1988 to 2023. Raw hides and skins experienced fluctuations in export volumes during the pre-levy period (1988-2002), with notable peaks in 1994 and 2001, indicating an initial growth phase in the market. The introduction of a 20 per cent levy from 2003 to 2006 resulted in a 47 per cent rise in exports, reaching US$35.9 million in 2006, demonstrating the market's resilience to absorb the levy without detrimental effects. The levy was subsequently increased to 40 per cent from 2007 to 2011, during which export volumes peaked at US$82.8 million in 2011, possibly due to increased global demand or improved processing capabilities. However, the substantial increase to an 80 per cent levy from 2012 to 2022 led to a substantial decline in exports, with volumes dropping to US$18.5 million by 2021, reflecting the impact of high export levies. In 2023, the levy was reduced to 50 per cent, resulting in a slight decrease in exports to US$18.1 million. The export of leather articles experienced steady growth during the pre-levy period (1988-2002), with a notable increase in 1995 and a peak in 1997. The market remained resilient throughout the 20 per cent levy period (2003-2006), achieving a high of US$1.4 million in exports in 2005. The introduction of a 40 per cent levy from 2007 to 2011 did not significantly affect export volumes, which remained stable and reached a peak of US$1.9 million in 2011. There was a consistent rise in exports during the 80 per cent levy period (2012-2022), peaking at US$2.8 million in 2012, though volumes saw a slight decline afterwards, indicating some effect of the high levy. The footwear export market experienced significant growth during the pre- levy period (1988-2002), particularly in 1994 and 1995, when exports reached over US$13.0 million. Exports increased steadily during the 20 per cent levy period (2003-2006) and peaked at US$31.7 million in 2006, indicating robust market demand despite the levy. The 40 per cent levy period (2007-2011) saw export volumes fluctuate but remained high, peaking at 45.7 million in 2007 and maintaining consistent performance thereafter. The 80 per cent levy period (2012-2022) yielded mixed results, with exports peaking at US$51.3 million in 4 Effect of export levies on hides and skins on competitiveness of Kenya’s leather products 2012 but gradually declining to US$24.9 million by 2022. In 2023, under a 50 per cent levy, exports fell to US$ 20.9 million. Figure 2.1: Trend for Kenya exports of leather products in US$ millions Source: International Trade Centre, ITC Notably, most African countries, including Kenya, primarily export raw hides and skins, as well as wet blue leather and crust, while maintaining a low production capacity for finished leather. Consequently, an emerging imbalance between supply and demand for leather products is evident not only in Kenya but across the region. Nevertheless, Figure 2.2 offers insights into the top destination countries for exports of Kenya’s leather products. The statistics also demonstrate the market availability of Kenyan leather products. Uganda is the leading destination, followed by Rwanda, Tanzania, Burundi, Italy, and the United States of America, among other top export destinations. Figure 2.2: Top ten export destinations for Kenya’s leather products in 2023 Source: International Trade Centre, ITC 5 Kenya's trade in leather products Further, Figure 2.3 illustrates the trend in import values of three categories of leather-related products from Kenya between 1988 and 2023. It shows a steady increase in the import of raw hides and skins, with the peak occurring in 2012, before the imports began to decline. Articles of leather and leather goods exhibit consistent growth, overtaking raw materials in 2013 and experiencing a slight decline after 2020 before starting to grow steadily again until 2023. Finally, footwear imports demonstrate the most significant growth and volatility, peaking in 2021 before commencing a decline towards 2023. Figure 2.3: Trends in the imports of leather products in Kenya Source: International Trade Centre, ITC 2.1 Kenya’s Trade in Raw Hides and Skins Figure 2.4 illustrates the trade flows of imports and exports of raw hides and skins (excluding furskins) and leather for the period from 1988 to 2023. It is evident that the country has been both importing and exporting raw hides and skins. During the period from 1988 to 1999, the country imported more raw hides and skins than it exported. Starting in 2000, the export of these products surpassed imports, which saw a slight increase until 2013, before beginning to decline over time. This decline was further noted in 2016, likely due to the imposition of an 80 per cent export tariff on raw hides and skins. Statistics indicate that exports of raw hides and skins fell to 3.0 per cent of leather exports, while the share of tanned leather product exports grew substantially. This trend in importing raw hides and skins is attributed to a successful revitalization of the entire Kenyan leather sector. As a result, Kenya has benefited from price increases for wet salted hides and goatskins, making the process of purchasing skins, processing them into blue leather, and exporting semi-finished leathers a lucrative business for established tanneries. 6 Effect of export levies on hides and skins on competitiveness of Kenya’s leather products Figure 2.4: Trade flows on imports and exports of raw hides and skins Source: International Trade Centre, ITC 2.2 Kenya’s Trade in Articles of Leather; Saddlery and Harness; Travel Goods, Handbags and Similar Containers; and Articles Figure 2.5 illustrates the trade flows of imports and exports for leather articles, saddlery and harness, travel goods, handbags, and similar containers, and articles made from animal gut for the period from 1988 to 2023. In the early 1990s, the country recorded a trade surplus, with exports significantly exceeding imports between 1993 and 1999. Figure 2.5: Trade flows on imports and exports for articles of leather, saddlery and harness, travel goods, handbags, and similar containers, and articles made from animal gut (1988-2023) Source: International Trade Centre, ITC From 2000 onwards, this trend reversed as imports began to exceed exports. Consequently, this shift resulted in a persistent trade deficit in leather goods, 7 peaking in 2019 when the import-export gap surpassed US$24 million. This trend reflected Kenya's growing dependence on imported leather products, which may be due to increasing domestic demand, challenges affecting the competitiveness of the local leather industry, or a necessity for strategic interventions to enhance export capacity. 2.3 Kenya’s Trade in Footwear, Gaiters and Parts of such Articles The country’s Vision 2030 has established strategies aimed at value addition by accelerating the transition from semi-processed stages to finished leather products to optimize its untapped opportunities and earnings. Figure 2.6 presents the imports and exports of footwear, gaiters, and similar items, as well as parts of such articles, for the period from 1988 to 2023. The exports have fluctuated during the study period, with a recent downward trend observed since 2020. However, imports have increasingly varied over time from 1988 to 2023, with a significant spike noted in 2021. Specifically, between 1988 and 2001, exports exceeded imports, with notable peaks in early 1995 indicating a strong competitive advantage in footwear production. In 2002, imports outweighed exports, a trend that re-emerged in 2014 when imports began to rise sharply, leading to a gradual increase in the trade deficit, which peaked in 2022. This shift underscores a growing dependency on imported footwear, potentially driven by rising domestic demand or challenges in the competitiveness of local manufacturing. Figure 2.6: Trade flows on imports and exports for footwear, gaiters, and similar items and parts of such articles (1988-2023) Source: International Trade Centre, ITC Kenya's trade in leather products 8 Effect of export levies on hides and skins on competitiveness of Kenya’s leather products 3. Literature Review 3.1 Theoretical Literature 3.1.1 Theories of comparative advantage Ricardian and Heckscher-Ohlin (H-O) theories, provide valuable frameworks for understanding the export competitiveness of leather products. The Ricardian theory emphasizes that countries should specialize in producing goods where they have a comparative advantage, which is determined by differences in technology across nations. In the context of leather products, this theory suggests that countries should focus on producing leather goods where they have technological superiority or efficiency compared to other countries. For instance, a country with advanced tanning technology may have a comparative advantage in producing high-quality leather goods. The Heckscher-Ohlin theory adds that a country's comparative advantage in producing leather products is determined by its relative factor endowments, such as labour and capital. According to this theory, a country abundant in cheap labour may specialize in producing labour-intensive leather products, while a country abundant in capital may focus on capital-intensive leather goods. For example, a country with a large workforce skilled in leather crafting may excel in producing handmade leather products, while a country with advanced machinery may specialize in mass-production of leather goods. In the study of the export competitiveness of leather products, these theories assist in analysing why certain countries excel in exporting specific types of leather goods. By examining factors of comparative advantage, this study identifies patterns in international trade and evaluates the export competitiveness within the leather industry. Additionally, understanding these theories can inform policymakers about the importance of investing in technological innovation, workforce training, and infrastructure development to enhance a country's export competitiveness in the leather sector. 3.1.2 Standard new trade theory According to Krugman (1979), the new trade theory broadens the perspective on trade beyond traditional models of comparative advantage, introducing the critical role of increasing returns to scale as a reason for trade. This indicates that trade between developed countries, which specialize in manufacturing goods, and developing countries, which specialize in primary goods, adheres to the concept of comparative advantage. However, trade between advanced countries themselves is grounded in economies of scale (or increasing returns) where manufacturers exchange goods among themselves. Therefore, countries specialize in a limited range of products to capitalize on economies of scale, not solely on inherent 9 resources or technological advantages, but to maximize the benefits of large-scale production. The attraction of economies of scale, as new trade theory suggests, does not merely stop at increased production efficiency. It also caters to consumer preferences for a diverse range of products, thereby enriching the global marketplace with an expanded array of goods. This specialization and scale-driven trade, remarkably, applies even to countries with comparable resource endowments and technological capabilities. The new trade theory provides a compelling framework for examining policies such as export levies, which are perceived to have the potential to influence the scale of operations and specialization patterns within the leather industry. By altering cost structures and competitive dynamics, these levies may impact a country's standing in the global leather market. Specifically, the theory proposes analyzing how such levies affect economies of scale in leather production and whether they contribute to or detract from the industry's ability to compete on the international stage. 3.1.3 Revenue generation theory Taxation is often employed by the government as a primary revenue-generating tool and is deemed highly essential (Naiyeju, 1987). The purpose of taxes is significant because, without the mobilization of funds through savings or taxation, the government may struggle to carry out most of its developmental projects that contribute to economic growth and wealth creation. While providing public goods and services, government expenditure creates an atmosphere conducive to capital formation (CF), which in turn raises economic growth and development, and helps eradicate poverty (Uremadu, 2008; Ogamba, 2003; Dienning, 1981). Thus, taxation can serve as a principal tool for generating revenue for the government to finance various expenditure programmes aimed at improving the living standards of its citizens. However, the purpose of taxation has recently been questioned, given that the government possesses the authority to generate additional funds through deficit financing (Akujobi, 1988). A suggestion contested by Ndulue (2005) proposes that if the government resorts to printing money whenever it needs funds, the financial system would undoubtedly experience inflationary pressures, which may be detrimental to the economy. Uremadu (2008); Okafor 1983) suggest that to prevent inflation, the government should advocate for taxation measures such as imposing export levies and/or borrowing from the capital market and/or money markets through the sale of municipal bonds. This study investigates the effects of export levies on the competitiveness of leather products. Export levies, as a form of taxation, can significantly influence the competitive landscape of the leather industry by affecting production costs, market pricing, and ultimately, its international market positioning. This research explores the balance between using export levies as a revenue source for the Literature review 10 Effect of export levies on hides and skins on competitiveness of Kenya’s leather products government and maintaining the competitiveness of the leather industry, thereby contributing to broader economic growth and development objectives. 3.2 Empirical Literature Gorton and Davidova (2001) define competitiveness as the ability of a country to increase its share of world markets for its products due to comparative advantage at a lower production cost. According to this definition, competitiveness is viewed as a zero-sum game, as one country’s gain comes at the expense of others. The authors suggest that two factors underpin a country’s competitiveness in the international trade market: price competitiveness and improved product quality. Maqbool et al. (2018) investigated Pakistan's competitiveness in leather and leather products using a set of Revealed Comparative Advantage (RCA) and Revealed Competitive Advantage indices for international commerce. The study used the Balassa index, Vollrath index, and Revealed Symmetric Comparative Advantage (RSCA) index to conduct an empirical analysis in Pakistan from 2003 to 2014. The findings revealed that Pakistan had a significant comparative advantage in this industry during the study period, suggesting the potential for leather sector exports to generate foreign exchange earnings. The results also indicate that the leather sector belongs to the "competitive position product group" and the "threatened product group." Similarly, RCA indices were utilized by Maqbool et al. (2020) to analyze the competitiveness in Pakistan's cereal sector. Maqbool et al. (2020) utilized several RCA indices to measure the competitiveness of the top five cotton- exporting economies and concluded that Pakistan achieved competitiveness in this sector. Fitawek (2015) analyzed the effect of export tax on Ethiopia’s raw hides, skins, and the export growth of leather products, as well as their global market situation. The study employed secondary data from various national and international sources spanning the years 1997 to 2014. A linear trend analysis model, the RCA model, and the Constant Market Share (CMS) model were used for the analysis. According to the findings from the linear trend analysis, Ethiopia’s raw hides and skins, and semi-processed leather products, experienced a significant decline in exports due to the heavy export tax imposed by the government to promote the production and export of finished leather products. In contrast, finished leather products and footwear showed a significant and increasing export trend following the imposition of the export tax. The results of the RCA analysis corroborated the findings of the trend analysis. Furthermore, the CMS model results indicated that the competitiveness of Ethiopia’s raw hides and skins, and semi-processed leather, was very low and negative in all selected markets. Sachithra et al. (2014) used the RSCA indices to analyze the comparative advantage of Sri Lankan exports and discovered that the country has a comparative advantage in its exports. Similarly, Ignjatijevic et al. (2014) assessed the competitiveness and comparative advantage of Danube economies, revealing that these countries' competitiveness was increasing. Oduro and Offei (2014) studied Ghana's RCA using a set of RCA metrics and found that Ghana has a comparative advantage in nine agro-processed product groups. 11 Literature review Shahhab and Mahmood (2013) also employed the RCA index to measure the comparative advantage of selected nations in the leather sector. This study used the RCA index to assess competitiveness in China, Iran, India, and Pakistan from 2002 to 2009. According to the empirical results, China, India, and Pakistan exhibited the greatest comparative advantage, whereas Iran displayed a comparative disadvantage in the chosen area. In a related study, Shah et al. (2009) used the RCA index to analyze the competitiveness of exports in the fruit sector and revealed a comparative advantage for Pakistan during the study period. Ghani et al. (2008) focused on the footwear industry to examine Pakistan's competitiveness in the global economy. The study addressed the challenges facing the footwear industry and identified the crucial role of entrepreneurship. The findings indicated that the footwear industry had transitioned from a disadvantaged position to a comparative advantage from 2003 to 2006, in comparison to India and China. Haddad (2000) applied the RCA index and the intra-industry index to trade data from 1985 to 1997 to assess the competitiveness of Middle East and North Africa (MENA) countries in global markets. The results revealed that improvements in export competitiveness were not evident. While investigating the export competitiveness of FIJI over the period from 1998 to 2002, using the RSCA index, Parsad (2004) found that the selected countries had a comparative advantage in a limited range of exports across various commodities. Benkovskis and Worz (2012) utilized data from 1996 to 2011 to develop the export price index and estimated changes in non-price determinants for nine emerging economies worldwide. The results indicated that China gained significantly from non-price factors in its international competitiveness across markets. Similarly, Chile, Brazil, Turkey, and India also demonstrated improvements in their non- price competitiveness. In contrast, Argentina and Indonesia faced declines in non-price competitiveness. The application of the RCA index is also evident in the study by Erkan and Kazim (2014), which highlighted that Turkey had a weaker comparative advantage than the EU +13 countries, as they adjusted their production factors in export goods based on scientific advancements. Chaudhary (2016) also evaluated India's comparative advantage in the textile sector from 2005 to 2014 using the RCA index and found that India maintained a comparative advantage in this sector during this period. In the case of Pakistan, Longmire and Debord (1993) estimated the comparative advantage in the production of major lucrative agricultural crops and the impact of government price intervention. In 2004, Mehmood measured the competitiveness of non-agricultural produce exports through the RCA. In 1999-2000, 34.7 per cent of products from the clothing and textile sector showed ‘competitively positioned products’ status compared to 23.9 per cent from the chemical industry. The RCA index was also utilized by Ilyas et al. (2005), who worked on competitiveness among Asian exporters in the world rice market. They employed both Balassa and White index for empirical analysis by utilizing the data spanning from 1985- 2005. Their results indicated that India, Pakistan, Thailand and Vietnam had the comparative and competitive advantage in the rice exports. Anwar et al. (2005) applied the policy analysis matrix approach to measure Pakistan's competitive advantage in cotton production, followed by Javed et 12 Effect of export levies on hides and skins on competitiveness of Kenya’s leather products al. (2006), who calculated competitive advantage in two provinces of Pakistan (Punjab and Sindh) from 1998/99 to 2002/03. The same approach was also utilized by Hussain et al. (2006 and 2006a) to estimate the competitive advantage and competitiveness of Pakistan in the production of rice and sugarcane, with their study revealing that Pakistan has a comparative advantage in the production of basmati rice. Similarly, Akhter et al. (2009) investigated Pakistan's competitiveness in fruit yield by utilizing data from FAOSTAT (2008) for the period from 1995 to 2005. The findings of the analysis assert that Pakistan has a higher competitiveness and competitive advantage in mango and date production, but less in orange production, in comparison to major competitors. A comprehensive study on the agriculture sector's exports (Riaz, 2009; Riaz et al., 2010; and Riaz and Jansen, 2012) employed Balassa’s measure of RCA to determine the competitiveness of selected agricultural products in overseas export markets. This study calculated the level of competitiveness of Pakistan’s various agricultural products in these markets. The results indicated that the livestock sector had a significant share in value-added agriculture but was unsuccessful in achieving any competitiveness. Competitiveness is evident in rice and fruits; however, when considering specific markets and individual products, the picture becomes gloomy. Gulf states have a close spatial connection with Pakistan, but Pakistani meat could not secure any comparative advantage there. Dairy products from Pakistan competed effectively in other South Asian countries. Processed products, such as cheese, maintained a strong position in Europe and the United States. Due to stringent sanitary and phytosanitary standards in the target markets, alongside inconsistent supplies, poor quality, and ineffective marketing strategies, Pakistan was unable to maintain its position in the export of fresh fruit to high- income countries. Conversely, processed horticultural products have succeeded in these higher-income markets. Pamornmast et al. (2013) empirically analyzed the relationship between exchange rates and export competitiveness in Thailand. The study employed time-series data on exchange rates, overall exports, agricultural exports, and industrial exports, using advanced statistical techniques, including regression analysis and the Johansen Cointegration Test. The regression results indicated a negative relationship between the exchange rate and overall, agricultural, and industrial exports. However, the Johansen Cointegration Test revealed a non-long-term relationship between the exchange rate and any of the three export categories. Consequently, the assertion that the appreciation of the domestic currency negatively impacts export competitiveness, whether for overall, agricultural, or industrial products, is not flawed but rather exemplifies the prevailing discourse. Kordalska et al. (2014) investigated the impact of the manufacturing sector on the export competitiveness of European countries using a spatial panel data model. Analyzing manufacturing data from 19 EU countries over the period 1995-2009, the study concluded that spatial dependencies play a statistically significant role in modelling export competitiveness. The analysis identified various determinants of export competitiveness, which differed based on whether they were measured by export value or net exports. 13 4. Methodology 4.1 Theoretical Framework The concept of competitiveness encompasses various aspects, resulting in several definitions despite extensive theoretical and empirical research conducted. Scott (1985) defines competitiveness as a nation's capacity to produce and distribute service products in the international market to outcompete goods and services from other countries while at the same time ensuring an improvement in living standards. Jan Fagerberg (1988) also defines competitiveness as a country's ability to achieve key economic policy objectives, particularly growth in income and employment, while avoiding balance of payments issues. The study is grounded in revenue generation theory, which considers government tariffs, such as export levies, a primary tool for collecting government revenue. However, this study extends the theory by illustrating that export levies act not only as a source of revenue but also as an incentive for value addition, aimed at boosting domestic production of finished leather products. Export levies discourage the export of raw hides and skins while allowing their import, thereby directing these raw materials to domestic industries for processing into semi-finished and finished products. This value addition improves the quality and market value of leather exports, ultimately enhancing job creation and contributing to long-term economic growth. In this study, competitiveness is defined as a country's ability to produce manufactured leather products that can compete directly or indirectly with those produced by other exporting countries. As defined by the World Bank's 2011 classification, the study utilizes indicators of RCAs, export diversification, and market penetration to measure leather and leather products' export competitiveness. The Balassa Revealed Comparative Advantage Index (Balassa RCA) is employed to calculate the RCA, focusing on establishing country specialization in various groups of leather products. To assess leather products' export diversification, which indicates the degree of geographical concentration, the study uses the Herfindahl-Hirschman Index (HHI). Additionally, the Index of Export Market Penetration (EMPI) is utilized to demonstrate how well the leather product group penetrates both existing and new markets. Collectively, these measures provide a comprehensive understanding of a nation's export competitiveness in terms of leather products. Further, the study considered real exchange rates, and the percentage of manufacturing value added to GDP as control variables. Economic theory posits that the competitiveness of domestic and foreign operators is closely linked to price, which is influenced by the exchange rate (Schembri, 1989; Piana, 2001). According to this principle, a depreciation of the domestic currency is expected to boost exports while reducing imports (Chaiboonsri, 1999; Sakunbongkot, 2001; Kaewmanee, 2007; Patchimnan, 2011). Additionally, a higher percentage of manufacturing value added to GDP indicates a robust manufacturing base, 14 Effect of export levies on hides and skins on competitiveness of Kenya’s leather products which ensures efficient production processes and economies of scale, ultimately enhancing the export competitiveness of leather products. Borrowing from the theoretical framework, the study’s analytical model is illustrated in Equations 4.1, 4.2, and 4.3, where the competitiveness of leather products depends on export levies, manufacturing value added, and exchange rates. Revealed Comparative Advantage=f(Export levies,Manufacturing Value Added,Exchange Rate) 4.1 Market Diversification=f(Export levies,Exchange Rates,Manufacturing Value Added,Exchange Rate) 4.2 Market Penetration=f(Export levies, Manufacturing Value Added, Exchange Rate) 4.3 4.2 Indices for Measuring Export Competitiveness The RCA, the Herfindahl-Hirschman market diversification index, and the market penetration index were employed to measure the export competitiveness of the leather group of products. To calculate the indices, the annual export data was drawn from the International Trade Centre (ITC) and World Integrated Trade Solution (WITS) for the period between 1988 and 2023. 4.2.1 Revealed comparative advantage index The study utilized the Balassa index as a measure of RCA. This technique is based on Ricardo's notion of RCA. The original RCA measure was proposed by Balassa (1965), who defined the export competitiveness of a specific product or industry from a country, as measured by the RCA index, as the relative share of the country's export of the product in the world export of the same product, divided by the country's overall share in global exports. This criteria is commonly used to measure the product competitiveness of a country in the international market (Hasibuan and Sayekti, 2018; Leromain and Orefice, 2014; Mallick and Marques, 2016; Nath, Liu, and Tochkov, 2015; Stângaciu and Harja, 2013; Startienė and Remeikienė, 2014; Wahyudi, 2016). RCA is formulated as follows: RCA=(Xijt/Xjt)/(Wit/Wt ) 4.4 Where Xijt denotes the leather product export value from Kenya to the world market, Xjt is the total value of Kenyan exports to the world market. Wit is the leather export value from the whole world, and Wt is the total export value of the world exports. To examine the power of comparative advantage, the RCA index of Balassa is classified into four categories as shown in Table 4.1. 15 Methodology Table 4.1: Categorization of Balassa index of RCA No. Classification Explanation A 0 < RCA ≥ 1 No comparative advantage B 1 < RCA ≥ 2 Weak comparative advantage C 2 < RCA ≥ 4 Moderate comparative advantage D RCA > 4 Strong comparative advantage Source: Hinloopen, 2001 When calculating the RCA, if the results show that a country's RCA for a specific commodity is greater than one (>1), then that country's product is more competitive than the global average. Conversely, a value of less than one (<1) indicates that the country's product is less competitive than the global average (Tambunan, 2001). 4.2.2 Market diversification index Market diversification contributes to competitiveness when a country aims to be the sole provider of leather products in most importing countries while avoiding the constraints. This leadership is achieved by meeting global demand, expanding manufacturing capacity, and maintaining a robust logistical infrastructure. Consequently, this enhances commercial influence and fosters strong trade ties, while also improving importers' perceptions of reliability. As a result, a country can excel in export volume, a key measure of competitiveness, while also promoting economic development and solidifying its position in the global leather trade. Market diversification is achieved through the penetration of new markets, the development of differentiated products, and the promotion of innovation (Uddin et al., 2022). However, effective and resilient diversification encounters challenges such as the volatility of the international market, tariff and non-tariff barriers, increasing environmental awareness, and demands for quality and food safety standards (Ageyeva et al., 2021), as well as logistical issues in product conservation (Ikegaya et al., 2021). In a highly competitive environment, addressing quality, sustainability, and traceability demands are crucial in attaining international competitiveness (Pascucci, 2018). This goal requires constant innovation in production processes and adaptability to the evolving tastes of consumers and various global regulations (Sokolov, 2023). This method was introduced by Hirschman (1945) and later reinvented by Herfindahl (1950). It represents the sum of squared shares of each product in total exports, where HHI is the Hirschman Herfindahl Index, calculated as follows: 𝐻𝐻𝐻𝐻𝐻𝐻𝑑𝑑𝑑𝑑1 = ∑ (𝑋𝑋𝑑𝑑𝑑𝑑,𝑠𝑠 𝑡𝑡 𝑋𝑋𝑑𝑑𝑑𝑑𝑡𝑡 ) 2 𝑛𝑛𝑛𝑛𝑥𝑥 𝑚𝑚=1 4.5 4.5 Where𝑋𝑋𝑑𝑑𝑑𝑑,𝑠𝑠 𝑡𝑡 is the exports of raw hides and skin, articles of leather, and footwear originating from Kenya (d) to all importing countries for a given year t; 𝑋𝑋𝑑𝑑𝑑𝑑𝑡𝑡 is 16 Effect of export levies on hides and skins on competitiveness of Kenya’s leather products Kenya (d) exports and 𝑋𝑋𝑑𝑑𝑑𝑑,𝑠𝑠 𝑡𝑡 𝑋𝑋𝑑𝑑𝑑𝑑 𝑡𝑡 is the share of market (m) in total exports of Kenya (d) in the leather sector (s). A high HHI score indicates that the country struggles to diversify its leather product exports. Consequently, the country's competitiveness in these exports is adversely affected by this situation (Statistics Canada, 2017). A low HHI score reflects the dispersal of exports across a greater number of markets, thereby reducing a country’s dependency on specific markets and decreasing the risks linked to fluctuations and changes in these markets (Ampuero et. al. 2021). The resulting index values range between 0 and 1; if the index value approaches 0, this signifies a strong export diversification of Kenya’s leather products, indicating a low concentration ratio. Conversely, if the index value approaches 1, the export diversification of the country's leather products is very weak, that is, the concentration ratio. Notably, if the HHI score is below 0.15, the export concentration of leather products is low. If the HHI score falls between 0.15 and 0.25, the country's export concentrations are moderate, and finally, if the score exceeds 0.25, the export concentrations are high. 4.2.3 Export market penetration index Further analysis was conducted using the Export Market Penetration Index (EMPI), an indicator that evaluates the amount to which a country's exports penetrate established markets. It measures the extent to which leather group of exports are absorbed by the global market. The index value obtained from this analysis indicates the strength of a region's export commodities in penetrating the international market. High penetration is achieved when the export share of the leather group product (that is raw hides and skins, articles of leather and footwear) is significant and there are numerous regional export destination countries. It is determined as the number of all the countries to whom Kenya exports a leather product divided by the number of all countries that report importing leather in a specific year from 1988 to 2023. Low export penetration may indicate the presence of trade restrictions by the importing countries that prevent enterprises from increasing their export markets. The index is given by: EMPI=nx,ik/nmk 4.6 Where 𝑛𝑛𝑥𝑥 is the number of all the countries to which Kenya exports raw hides and skins, articles of leather and footwear products, and 𝑛𝑛𝑚𝑚 is the number of all the countries that import raw hides and skins, articles of leather, and footwear products from any other exporting countries globally. The resulting index values range between 0 to 1 where a value of one (1) indicates that Kenya exports to every country that imports leather and leather products. 17 4.3 Model Specification To address the second objective regarding the impact of export levies on the competitiveness of leather products under all export levy regimes, the Ordinary Least Squares (OLS) approach was employed to examine the time effects of the imposition of export levies across the regimes – before the implementation of the export levy, and during the 20 per cent, 40 per cent, 80 per cent, and 50 per cent regimes — to determine whether the methods adopted by the export levy regimes were significant. This analysis served as the foundation for preliminary research and acted as the base model. The estimated models were as follows: RCAt=β0+β1BeforeLevyt+β220percentLevyt+β340percentLevyt+β4 80percentLevyt+β5 50percentLevyt+β7 MVAt+β8 REXRt+ εt 4.7 HHIt=β0+β1BeforeLevyt+β220percentLevyt+β30percentLevyt+β4 80percentLevyt+β5 50percentLevyt+β7 MVAt+β8 REXRt+ εt 4.8 EMPIt=β0+β1BeforeLevyt+β220percentLevyt+β340percentLevyt+β4 80percentLevyt+β5 50percentLevyt+β7 MVAt+β8 REXRt+ εt 4.9 To determine the sensitivity of the export levies across the regimes, Interrupted Time Series analysis (ITS) was applied. This methodology was suitable for comparing export competitiveness during the pre-levy period, the year the levy was imposed, and the post-levy period. This enabled the assessment of temporal changes – both immediate and long-term – in Kenya’s export competitiveness, while also examining potential autocorrelation and seasonality. By incorporating control variables in the model, specifically the real exchange rate and manufacturing value added, potential confounding factors were accounted for, thereby isolating the impact of the policy change (export levies). In modelling this, structural breaks were introduced during 2003-2006 (20% export levy), 2007-2011 (40% export levy), and 2012-2022 (80% export levy) to facilitate regression analysis at distinct time intervals. The year 2023 (50% export levy) was excluded from the ITS regression analysis due to data limitations. The study estimated three different models, which include the RCA index, HHI, and EMPI as outcome variables. These three variables served as proxies for the export competitiveness of leather and leather products. Based on the aforementioned, the general form of the econometric model is: Yt=β0+β 1Tt+β2Levyt+β3LevytTt+β4PostLevy1t+β 5PostLevy2t+β6 PostLevy3t+β7MVAt+β8 REXRt+ εt 4.10 Considering this, Yt represents each of the leather and leather products export competitiveness score at time t, β0 stands for the constant intercept term, indicating the average leather and leather products export competitiveness before the export levy. Tt is the time trend variable, coded as 0 before the imposition of the levies and 1 after the imposition of export levies, with β1 as its coefficient showing the underlying change in leather products export competitiveness over time before the imposition of the export levy. Levyt represents the export levy rate Methodology 18 Effect of export levies on hides and skins on competitiveness of Kenya’s leather products at time t, coded as 0 before the levy and then as 20 per cent, 40 per cent, or 80 per cent, depending on the period, with β2 as its coefficient showing the immediate impact of the levy on leather and leather export competitiveness, assuming a linear relationship. Levyt Tt is the interaction term between the time trend and levy rate, with β3 as its coefficient capturing the differential effect of the levy on leather and leather export competitiveness at different points in time. PostLevy1t, PostLevy2t and PostLevy3t are dummy variables coded as 1 after the first levy increase (20%), second levy increase (40%), and third levy increase (80%), respectively, and 0 otherwise. Since a 50 per cent export levy was introduced in 2023, the model did not account for this levy due to limited data available for analysis. Additionally, the control variables included in the model are MVAt, which is the manufacturing value added as a share of GDP and REXRt is the real exchange rate. β4, β5, and β6 are the coefficients for the 20 per cent, 40 per cent, and 80 per cent export levies imposition, respectively. εt is the stochastic term. Consequently, the specific regression models with three outcome variables are as follows: RCAt=β0+β1Tt+β2Levyt+β3LevytTt+β4PostLevy1t+β5PostLevy2t+β6 PostLevy3t+β7 MVAt+β8REXRt+ εt 4.11 HHIt= β0+ β1Tt+ β2Levyt+β3LevytTt+β4PostLevy1t+β5PostLevy2t+β6 PostLevy3t+β7 MVAt+β8REXRt+ εt 4.12 EMPIt=β0+ β1 Tt+ β2Levyt+β3LevytTt+β4PostLevy1t+β5PostLevy2t+β6 PostLevy3t+β7 MVAt+β8 REXRt+ εt 4.13 4.4 Data and Data Sources Secondary data on global and national exports of leather products was gathered from ITC, WITS, and UNCOMTRADE databases covering the period 1988 to 2023. The data obtained from these databases was then used in the study to calculate the RCA index, HHI, and the EMPI. The study employed 2-digit Harmonized Commodity Description and Coding Systems (HS 2) that grouped the leather products into three categories (that is, categories 41-raw hides and skins (other than fur skins and leather), 42-articles of leather; saddlery and harness; travel goods; handbags and similar containers; and 64-footwear, gaiters, and the like; parts of such articles). Data was further disaggregated to allow an in-depth analysis of leather products where the HS four-digit categorization code was also adopted. 19 5. Results and Discussion The study aimed to respond to two main objectives. First, to assess the export competitiveness of various categories of leather products (raw hides and skins, articles of leather, and footwear) and second, to establish the impact of export levies at different rates (20%, 40%, 80%, and 50%). This analysis was conducted using the Revealed Comparative Advantage, HHI Market Diversification Index, and Export Market Penetration Index. These three indices were calculated, and a trend analysis was used to address the first objective. Additionally, the Ordinary Least Squares (OLS) approach was used as the base analysis supported by interrupted time series analysis to address the second objective, providing policymakers the insights into the impact of export levies imposed on raw hides and skins on the export competitiveness of leather and leather products in the different export levy regimes (before implementation of export levy, 20%, 40%, 80% and 50%). 5.1 Revealed Comparative Advantage (RCA) Table 5.1 shows the average RCAs for the leather group of products that include HS 41 "raw hides and skins (other than furskins) and leather"; HS 42 ''articles of leather; sad- dlery and harness; travel goods, handbags, and similar containers; articles''; and HS 64 ''footwear, gaiters, and the like; parts of such articles'' across the export levies of 20 per cent, 40 per cent, 80 per cent and 50 per cent, respectively. Before the introduction of the export levy, the average RCA for raw hides and skins was 0.932, 0.902 for articles of leather, and o.614 for footwear. From 2003 to 2006 when a 20 per cent export levy was in place, the average RCA for raw hides and skins increased significantly to 3.595, while the RCA for articles of leather dropped to 0.112, and footwear rose to 1.264. With the implementation of 40 per cent of export levy between 2007 and 2011, the average RCA for raw hides and skins rose to 5.500, while that of articles of leather increased marginally to 0.157 and footwear remained steady at 1.264. From 2012 and 2022, following an 80 per cent export levy increment, the RCAs for raw hides and skins increased to 5.804, whereas the RCA for articles of leather reduced to 0.08 and that of footwear decreased to 1.086. With the reduction of the export levy to 50 per cent in 2023, the RCA for raw hides and skins reduced to 3.686 and 0.006 for articles of leather (see Annex 1 for more details). This analysis reveals that despite the imposition of the export levy aimed at curbing the export of primary products, raw hides and skins have remained competitive in the international market. Conversely, articles of leather – which are mostly semi- finished – have remained uncompetitive both before the implementation of the export levy and across all export levy regimes (20%, 40%, 80%, and 50%). This demonstrates that exports of raw hides and skins remain competitive, contrary to the policy's objective of imposing export levies. This indicates the need for strategies to ensure these products are supplied to local industries. The results for footwear, revealed before the imposition of the levy, indicate that these products were not competitive. However, with the introduction of the export levy at 20 per cent and 40 per cent, they became competitive, although they recorded a weak RCA. At 80 per cent, the highest level of the export levy, these 20 Effect of export levies on hides and skins on competitiveness of Kenya’s leather products products' competitiveness began to decline, a trend evident even at the 50 per cent export levy. This demonstrates that the export levy on raw hides and skins has been effective; however, higher levies are counterproductive. Therefore, an optimal export levy of around 40 per cent should be considered, moving forward, to balance competitiveness and policy objectives. Table 5.1: Average RCAs for raw hides and skins and leather products across export levy regimes (20%, 40%, 80% and 50%) HS 41 Raw hides and skins (other than furskins) and leather HS 42 Articles of leather; saddlery and harness; travel goods, handbags and similar containers; articles HS 64 Footwear, gaiters and the like; parts of such articles Average RCA (1988-2002)-Before implementation of export levy 0.932 0.902 0.614 Average RCA (2003- 2006) - 20% export levy 3.595 0.112 1.264 Average RCA (2007- 2011) -40% export levy 5.500 0.157 1.264 Average RCA (2012- 2022) - 80 % export levy 5.804 0.080 1.086 RCA for 2023 50% export levy 3.686 0.060 0.387 Source: International Trade Centre (ITC) 5.1.1 RCA of raw hides and skins The Revealed Comparative Advantages (RCAs) for raw hides and skins other than furskins and leather (product category HS 41 under the 2-digit product classification) averaged 0.932, 3.595, 5.500, 5.804, and 3.686, respectively, across the different export levy regimes (before implementation of the export levy, 20% export levy, 40% export levy, 80% export levy and 50% export levy) as outlined in Table 5.1. This indicates a positive effect on the revealed comparative advantage of raw hides and skins with the implementation of export levies. Under the four-digit product classification, tanned or crust hides and skins of goats or kids, pigs, reptiles, and other animals (product code '4106) have continuously had the highest RCA values as depicted by the average RCAs of 60.93, 90.13, 21 Results and discussion 118.26 and 96.248 across the export levy regimes of 20 per cent, 40 per cent, 80 per cent and 50 per cent, respectively. This shows a continued strong comparative advantage in exporting tanned or dried hides and skins of goats or kids, pigs, reptiles, and other animals that are semi-finished products. This means that the country has specialized knowledge or resources for producing various types of hides and skins. The same can be said for product '4104 (tanned or crust hides and skins of bovine "incl. buffalo" or equine animals), and product '4105 (tanned or crust skins of sheep or lambs, without wool on, whether or not split, which also recorded an increasing RCAs over time as illustrated in Annex 3. Product '4104 for tanned or crust hides and skins of bovine "incl. buffalo" or equine animals, without hair, product '4105, representing tanned or crust skins of sheep or lambs, without wool on, whether or not split and product '4106 for tanned or crust hides and skins of goats or kids, pigs, reptiles and other animals demonstrate that for Kenya, tanned or crust hides and skins, which are semi- finished leather products, are competitively positioned product lines. Conversely, raw hides and skins of bovine "incl. buffalo" or equine animals, fresh, or salted, dried, limed ('4101), raw skins of sheep or lambs, fresh, or salted, dried, limed, pickled or otherwise preserved ('4102) and other raw hides and skins, fresh, or salted, dried, limed, pickled or otherwise preserved, ('4103), while initially competitive under the first regime (20% export levy), have become weaker over time, as demonstrated in the subsequent export regimes of 40 per cent and 80 per cent (See Annex 3). This could be explained by increasing export levy charges, which indicate that the goal of limiting raw hides and skins exports was met. Leather prepared after tanning or crusting "incl. parchment-dressed leather", of goats ('4113), chamois leather, incl. combination chamois leather (excl. glacé- tanned leather) ('4114) and composition leather with a basis of leather or leather fibre, in slabs, sheets or strip ('4115) are weakly positioned product lines and there is need to develop significant turnaround strategies to reverse the trend (See Annex 2 for detailed information) 5.1.2 RCA of articles of leather, saddlery and harness, travel goods, handbags, and similar containers, articles The average RCA for articles of leather (product category HS 42) indicates that there is no comparative advantage across the different export levy regimes, as highlighted in Table 5.1. Before the implementation of the 20 per cent export levy, the RCA was 0.902, suggesting a slight comparative disadvantage. However, after the 20 per cent levy was imposed, the RCA dropped significantly to 0.112. When the export levy was raised to 40 per cent, the RCA averaged 0.157, but it fell again to 0.080 after the 80 per cent levy was applied. Similarly, following the implementation of the 50 per cent export levy, the RCA averaged 0.060, as highlighted in Table 5.1. This trend indicates that the articles of leather category consistently fails to achieve a comparative advantage under varying export levy conditions. Despite fluctuations, the RCAs remain below 1, indicating that Kenya lacks a competitive edge in exporting these products. The continuous decline in 22 Effect of export levies on hides and skins on competitiveness of Kenya’s leather products RCA values after the imposition of higher export levies suggests that these policies have not created an environment conducive to enhancing the competitiveness of leather articles. Instead, the export levies appear to exacerbate the existing constraints, diminishing Kenya's ability to compete in the international market for these products. Saddlery and harness for any animal, including traces, leads, knee pads, muzzles, saddle cloths ('4201), trunks, suitcases, vanity cases, executive cases, briefcases, school satchels, spectacle cases ('4202), articles of apparel and clothing accessories made of leather or composition leather excluding footwear ('4203), articles for technical use, of leather or composition leather ('4204), articles of leather or composition leather (excluding saddlery and harness bags; cases and articles) ('4205) and articles made from gut, goldbeater's skin, bladders or tendons (excluding silkworm gut, sterile catgut) ('4206) all recorded RCAs between 0 and 1, indicating no comparative advantage over the years. This means the country has no competitive advantage for these products. This shows that they are weakly positioned product lines for Kenya, necessitating critical turnaround strategies targeting them if the goal of value addition is to be achieved competitively (see Annex 3 for detailed information). For product coded '4201, representing saddlery and harness for any animal, inclusive of traces, leads, knee pads, muzzles, and saddle cloths, comparative advantages have gradually improved over time, though the RCAs are still below 1. The same is illustrated for '4203, articles of apparel and clothing accessories of leather or composition leather (excluding footwear). Products coded '4202, denoting trunks, suitcases, vanity cases, executive cases, briefcases, school satchels, and spectacle cases, '4205, representing articles of leather or composition leather (excluding saddlery and harness bags, cases) and '4206, articles of gut, goldbeater's skin, bladders or tendons (excluding silkworm gut, sterile catgut) presented fluctuating RCA values, indicating a less consistent comparative advantage in exporting these products. Furthermore, '4204, articles for technical use made of leather, showed no comparative advantage, with RCA values hovering close to zero across most years. 5.1.3 RCA of footwear, gaiters, and the like; parts of such articles Footwear, gaiters, and similar items, parts of such articles (product category HS 64), exhibited varied comparative advantages across different export levy regimes, as highlighted in Table 5.1. Before the introduction of the 20 per cent export levy, the average RCA was 0.614, indicating a comparative disadvantage. However, after the 20 per cent levy was imposed, the RCA increased to 1.264, suggesting a shift to a weak comparative advantage. Similarly, when the 40 per cent export levy was implemented, the RCA averaged 1.264, which then declined to 1.086 after the 80 per cent levy was applied, again indicating a weak comparative advantage. In 2023, when the 50 per cent export levy was implemented, the RCA averaged 0.387, as shown in Table 5.1. These figures demonstrate that while the imposition of export levies has generally enhanced the comparative advantage of footwear, 23 Results and discussion gaiters, and similar items, the advantage remains relatively weak. The RCAs, though consistently above 1 after the levies, indicate only a modest competitive edge in the international market. This suggests that while the levies may have had some positive impact on the competitiveness of these products, further strategies and policies are necessary to strengthen and sustain their comparative advantage. Under the four-digit product classification, product code '6401,' which represents waterproof footwear with rubber or plastic outer soles and uppers, has exhibited the highest RCA values across the 20 per cent, 40 per cent, 80 per cent, and 50 per cent export levy regimes (average RCAs are 10.113, 22.560, 18.895, and 6.041 respectively). This indicates a sustained competitive advantage in exporting such footwear, suggesting that the country possesses specialized expertise or resources in this market. Product '6402, for footwear with outer soles and uppers of rubber or plastics (excluding waterproof footwear of heading), and product '6405', representing footwear with outer soles of rubber or plastics, with uppers other than rubber, plastics, or leather, also demonstrated a comparative advantage, although much lower (see Annex 4 for more detailed information). Footwear with outer soles of rubber, plastics, leather or composition leather and uppers ('6403), footwear with outer soles of rubber, plastics, leather or composition leather and uppers ('6404), and parts of footwear, including uppers whether or not attached to soles other than outer soles; removable ('6406), routinely report lower RCA values, indicating a less competitive position in exporting these specific footwear categories. Overall, the results reveal a clear dominance in the export of waterproof footwear featuring rubber or plastic outer soles and uppers, suggesting that the country has a competitive advantage in this leather product. This illustrates that under category 64, product lines '6401, '6402, and '6405 are more competitive and require continued investment, whereas product lines '6403, '6404, and '6406 are weakly positioned and necessitate a turnaround strategy (see Annex 4 for detailed information). 5.2 Market Diversification Index Table 5.2 presents the average market diversification index for the leather group of products that include HS 41 "raw hides and skins (other than furskins) and leather," HS 42 “articles of leather; saddlery and harness; travel goods, handbags, and similar containers; articles,” and HS 64 “footwear, gaiters, and the like; parts of such articles” across the export levies of 20 per cent, 40 per cent, 80 per cent, and 50 per cent, respectively. Before the introduction of the export levy in 2003, the average market diversification index for raw hides and skins was 0.246, diversifying into 21 markets. For articles of leather, it was 0.190, also diversifying into 21 markets. For footwear, it stood at 0.319, diversifying into 13 markets. This indicated a relatively concentrated market presence. Following the introduction of a 20 per cent export levy, the average market diversification index for raw hides and skins decreased to 0.158, even though the product diversified into more markets (39). For articles of leather, the average market diversification index slightly decreased 24 Effect of export levies on hides and skins on competitiveness of Kenya’s leather products to 0.1623, while this product similarly diversified into more markets (33), and for footwear, the market diversification index fell to 0.141, with the number of markets diversified rising to 48. An increase in the export levy to 40 per cent led to the average market diversification index for raw hides and skins slightly recovering to 0.183 across 25 markets, while the market diversification index for articles of leather further declined to 0.128 across 49 markets. The market diversification index for footwear improved to 0.278 across 43 markets. Following the implementation of an 80 per cent export levy, the average market diversification index for raw hides and skins rose to 0.217 across 25 markets. In contrast, the market diversification index for articles of leather fell to 0.106, despite the number of markets increasing to 62. The market diversification index for footwear increased to 0.385 across 55 markets. The reduction of the export levy to 50 per cent in 2023 further lowered the market diversification index to 0.30, diversifying exports to 23 markets for raw hides and skins (Table 5.2). This analysis reveals that despite the export levy aimed at curbing the export of primary products, raw hides and skins still managed to penetrate 39 markets after the implementation of a 20 per cent levy. However, increasing the export levy to 40, 80, and 50 per cent resulted in decreased market penetration, with the product reaching only 25, 25, and 23 markets, respectively. This indicates that the policy goal of reducing the export market for raw hides and skins was partially achieved, as evidenced by the decrease in the number of importing markets. Nonetheless, the product still maintained a significant presence in the international market. For articles of leather, both before the introduction and after the implementation of the 20 per cent export levy, these products demonstrated moderate export concentration, with market diversification increasing from 21 to 33 markets. This trend of diversification continued, although at a slower pace, reaching 49 markets with a 40 per cent levy, 62 markets with an 80 per cent levy, and finally 58 markets with a 50 per cent levy. This indicates a strong international demand for these products, underscoring the need for strategies that promote innovation and the production of more semi-finished and finished leather products to capitalize on this demand. Finally, concerning footwear, the results revealed that prior to the imposition of the export levy, these products were not competitive; despite having a high diversification index of 0.387, they penetrated only 14 markets. However, with the introduction of a 20 per cent and 40 per cent levy, footwear became more competitive, reaching 48 and 43 markets respectively, although they recorded only a moderate diversification index. At the 80 per cent levy, the number of markets penetrated decreased slightly to 50, despite a higher diversification index, indicating a decline in competitiveness. This suggests that apart from the export levy on raw hides and skins, it is crucial to balance this policy with other strategies to enhance the competitiveness of these products. 25 Table 5.2: Average market diversification index for leather group of products across export levy regimes (20%, 40%, 80%, and 50%) HS 41 Raw hides and skins (other than furskins) and leather HS 42 Articles of leather; saddlery and harness; travel goods, handbags and similar contain- ers; articles HS 64 Footwear, gaiters and the like; parts of such articles HH Market Index Number of Mar- kets HH Market Index Number of Mar- kets HH Market Index Number of Mar- kets Average HHI (1988-2002) - Before imple- mentation of export levy 0.246 21 0.190 21 0.319 13 Average HHI (2003-2006) - 20% export levy 0.158 39 0.163 33 0.141 48 Average HHI (2007-2011) - 40% export levy 0.183 25 0.128 49 0.278 43 Average HHI (2012-2022) - 80% export levy 0.217 25 0.107 62 0.385 55 HHI after the 50% export levy implementation (2023) 0.303 23 0.085 58 0.309 50 Source: International Trade Centre (ITC) 5.2.1 Market diversification index for raw hides and skins On raw hides and skins, the market diversification index fluctuated, with the average Herfindahl-Hirschman market index (HHI) recorded at 0.158, 0.183, 0.217, and 0.303, respectively, corresponding to export levies of 20 per cent, 40 per cent, 80 per cent, and 50 per cent, respectively. Before the introduction of the export levy, the HHI stood at 0.246, reflecting diversification into 21 markets. Following the implementation of the 50 per cent export levy in 2023, the HHI averaged 0.303. However, the subsequent increases in the export levy to 40 per cent and 80 per cent resulted in a reduced number of markets, averaging 25 markets and 23 markets, respectively, with a 50 per cent export levy. These trends, as illustrated in Table 5.2, indicate that while the initial introduction of a 20 per cent export levy significantly increased market diversification, higher levies at 40 and 80 per cent led to a reduction in the number of markets. This suggests Results and discussion 26 Effect of export levies on hides and skins on competitiveness of Kenya’s leather products that while moderate levies can improve market reach, excessively high levies may inversely affect market diversification, possibly due to increased export costs and reduced competitiveness (see Annex 5 for more details). Considering the four-digit product classification, when a 20 per cent export levy charge was in force, the market concentration for raw hides and skins of bovine "incl. buffalo" or equine animals, fresh, or salted, dried, and limed ‘4101, showed a declining trend with fluctuating HHI values. In contrast, the number of markets generally remained stable, peaking in 2006. Following the imposition of a 40 per cent export levy from 2007 to 2011, market concentration for product categories such as other raw hides and skins, fresh, or salted, dried, limed, pickled, or otherwise preserved ‘4103 and tanned or crust hides and skins of bovine "incl. buffalo" or equine animals, without hair on ‘4104 exhibited fluctuations, reflecting diverse levels of geographical concentration. When the 80 per cent export levy was implemented between 2012 and 2022, the indices for tanned or crust hides and skins of bovine "incl. buffalo" or equine animals, ‘4104 and tanned or crust skins of sheep or lambs, without wool on, ‘4105 continued to show fluctuations. A notable trend was the diversification into more markets for certain product categories, particularly in the later years, despite varying levels of concentration. The data suggests an overall trend towards increased market penetration and diversification, especially in the later years, despite periodic fluctuations in market concentration (see Annex 6 for more details). Table 5.3 presents the top ten ranking of importing countries for raw hides and skins, clearly illustrating that China has experienced significant growth over the years. Initially ranked 27th among importing nations in 2002, before the introduction of the export levy, China improved to fourth position when the levy was set at 20 and 40 per cent in 2006 and 2011, respectively. It then ascended to the top position in 2022 and maintained that rank in 2023. Italy has remained stable, holding second position from 2006 to 2023, except in 2002 and 2011 when it was the first. Nigeria, Ethiopia, and Ghana are among the African countries that have demonstrated substantial growth, moving from 27th ranking in 2002 (before the export levy was imposed) to fourth, eighth, sixth, and tenth positions, respectively, by 2023 (50% export levy) (see Annex 7 for more details). 27 T ab le 5.3: T op ten ran k of im p ortin g cou n tries in exp orted valu e for raw h id es an d skin s Im p orters E x- p orted valu e 20 0 2 R an k 20 0 2 (B efore exp ort levy) E xp ort- ed valu e 20 0 6 R an k 20 0 6 (20 % ex- p ort levy) E xp ort- ed valu e 20 11 R an k 20 11 (4 0 % ex- p ort levy) E xp ort- ed valu e 20 2 2 R an k 20 22 (8 0 % ex- p ort levy) E xp ort- ed valu e 20 23 R an k 20 23 (50 % exp ort levy) C hina - 27 4 6,982 5 5,583 1 6,021 1 Italy 2,742 1 2 17,932 1 5,507 2 3,271 2 Indonesia 88 11 8 3,493 6 2,068 4 2,733 3 N igeria - 27 14 874 11 2,134 3 2,256 4 Pakistan 766 5 3,223 5 3,007 7 1,604 5 1,722 5 India 1,146 4 5,581 3 9,148 4 735 7 566 6 B angladesh - 27 19 19 - 34 1,108 6 393 7 E thiopia - 27 - 31 - 34 - 23 341 8 Zim babw e 40 16 2 29 - 34 - 23 157 9 G hana - 27 - 31 2 29 25 16 134 10 Source: International Trade C entre (ITC ) Results and discussion 28 Effect of export levies on hides and skins on competitiveness of Kenya’s leather products 5.2.2 Market diversification index for articles of leather; saddlery and harness; travel goods, handbags and similar containers; articles For articles of leather, the market diversification index also fluctuated, with the average HHI recorded at 0.162, 0.128, and 0.106 with export levies imposed at 20 per cent, 40 per cent, 50 per cent, and 80 per cent, respectively. Before the introduction of the export levy, the HHI stood at 0.190, with diversification into 23 markets. Following the implementation of the 20 per cent export levy, market diversification expanded significantly, as the HHI decreased to 0.122 and the number of markets increased to 33. With a 50 per cent export levy, the HHI averaged 0.085. These trends, as shown in Table 5.4, indicate that the introduction of the 20 per cent export levy significantly improved market diversification for articles of leather. Even with higher levies of 40 and 80 per cent, the number of markets continued to increase, suggesting that despite the increased costs, global demand for these products remained strong, leading to a broader market reach. This consistent increase in market diversification under higher levies underscores the resilience and competitiveness of Kenya's leather products in the international market (see Annex 5 for more details). Under the four-digit product classification, trunks; suits; cameras; jewellery; cutlery cases; travel bags; tool bags; and similar items; wholly or mainly covered by leather, composition leather, plastic sheeting, textile materials, vulcanized fibre, and paperboard (4202), articles of apparel and clothing accessories made of leather or composition leather (4203), leather or composition leather articles (4205), and tanned or crust hides and skins of bovine (including buffalo) or equine animals, without hair, whether or not split, but not further prepared (4104) are among the products that have diversified into more markets. Considering the markets, Italy experienced significant improvement, starting with a value of US$2,000 in 2002, before the imposition of the levy. It ranked 11th and achieved the top rank by 2022 and 2023, with recorded export values of US$429,000 and US$349,000, respectively. The Democratic Republic of the Congo (DRC) has demonstrated a strong performance over the years, ranking second in 2023, except for 2022 when it ranked 38th. Ethiopia showed gradual improvement, reaching third rank in 2023 with an export value of US$225,000. The United States of America exhibited a varied but generally strong performance, ranking first in 2011 and second in 2022, with export values of US$244,000 and US$360,000, respectively. However, it fell to fourth position in 2023, with a value of US$171,000. Rwanda demonstrated consistency, ranking fifth in both 2022 and 2023, with export values of US$145,000 and US$137,000, respectively. The United Kingdom maintained high ranks over the years, achieving its highest rank of second in 2006 and its lowest rank of sixth in 2023 (see Annex 8 for more details). 29 T ab le 5.4 : T op ten ran k of im p ortin g cou n tries in exp orted valu e for articles of leath er Im p orters E xp orted valu e 20 0 2 R an k 20 0 2 (B efore exp ort levy) E xp orted valu e 20 0 6 R an k 20 0 6 (20 % exp ort levy) E xp orted valu e 20 11 R an k 20 11 (4 0 % exp ort levy) E xp orted valu e 20 22 R an k 20 22 (8 0 % exp ort levy) E xp orted valu e 20 23 R an k 20 23 (50 % exp ort levy) Italy 2 11 1 23 26 13 429 1 349 1 D em ocratic R epublic of the C ongo 0 17 401 1 51 8 1 38 254 2 E thiopia 0 17 2 20 6 25 4 29 225 3 U nited States of A m erica 17 7 92 4 244 1 360 2 171 4 R w anda 125 2 4 16 43 9 145 5 137 5 U nited K ing- dom 12 8 188 2 204 5 152 4 133 6 U nited R epub- lic of Tanzania 358 1 158 3 203 6 49 11 90 7 South Sudan 0 17 0 31 0 37 94 7 79 8 Zim babw e 0 17 0 31 1 30 0 45 78 9 U ganda 87 3 55 7 235 2 30 13 52 10 Source: International Trade C entre (ITC ) Results and discussion 30 Effect of export levies on hides and skins on competitiveness of Kenya’s leather products 5.2.3 Market diversification index for footwear, gaiters and the like and parts of such articles For footwear, gaiters, and the like, the market diversification index fluctuated, with the average HHI recorded at 0.141, 0.278, and 0.385 for export levies imposed at 20 per cent, 40 per cent, 80 per cent, and 50 per cent, respectively. Before the imposition of the export levy in 2003, these products were diversified across 14 markets, with an average HHI of 0.387. Following the implementation of the 20 per cent export levy, there was a notable expansion in market diversification to 48 markets, and the HHI decreased to 0.310. However, the subsequent increase in the export levy to 40 per cent resulted in a slight rise in the HHI to 0.360, coupled with a reduction in the number of markets to 43. With a 50 per cent export levy, the HHI averaged 0.309 while penetrating 50 markets, as highlighted in Table 5.5. These trends suggest that while the initial introduction of a 20 per cent export levy significantly increased market diversification for footwear, the effects of higher levies at 40 and 80 per cent exhibited greater variability. The number of diversified markets decreased slightly with the 40 per cent levy and then increased again under the 80 per cent levy. This suggests that while moderate levies can enhance market reach, excessively high levies may lead to fluctuations in market diversification, potentially due to varying degrees of competitiveness and cost impacts. Despite these fluctuations, the overall trend indicates a relatively stable market diversification for footwear products under different levy regimes (see Annex 6 for more details). Under the four-digit product classification, footwear with outer soles made of rubber, plastics, leather, or composition leather and uppers of leather (6403); footwear waterproof, with outer soles and uppers of rubber or plastics (where uppers are not fixed to the sole nor assembled by stitch, rivet, nail, screw, plug, or similar means) (6402); footwear with outer soles made of rubber, plastics, leather, or composition leather and uppers of textile materials (6404); and other footwear in chapter 64 (6405) are among the products that have successfully diversified into more markets. Table 5.5 further illustrates the top-ranking importing countries for footwear, gaiters, and the like, parts of such articles across the export levy regimes (before 20%, 40%, 80% and currently 50% export levy) in different markets for Kenya. The East African Community (EAC) countries, namely Uganda, Rwanda, Tanzania, Burundi, and the Democratic Republic of the Congo (DRC), have consistently held top positions, ranking first, second, third, fourth, and sixth, respectively. Countries such as South Sudan initially ranked 24th, 42nd, and 54th in 2002, 2006, and 2011, respectively. However, it has recently improved to fifth position in 2023 (see Annex 10 for more details). 31 Results and discussion T ab le 5.5: T op ten ran k of im p ortin g cou n tries in exp orted valu e for footw ear Im p orters E xp orted valu e 20 0 2 R an k 20 0 2 (B efore exp ort levy) E xp orted valu e 20 0 6 R an k 20 0 6 (20 % exp ort levy) E xp orted valu e 20 11 R an k 20 11 (4 0 % exp ort levy) E xp ort- ed valu e 20 22 R an k 20 22 (8 0 % exp ort levy) E xp ort- ed valu e 20 23 R an k 20 23 (50 % ex- p ort levy) U ganda 956 2 8,373 1 10,507 1 9,950 1 10,007 1 R w anda 232 4 2,401 4 5,491 4 8,587 2 7,378 2 U nited R epublic of Tanzania 1,193 1 5,483 3 10,026 2 5,368 3 3,158 3 B urundi - 24 714 9 590 8 946 4 525 4 South Sudan 24 - 42 - 54 8 6 23 5 D em ocratic R epublic of the C ongo - 24 7,094 2 7,156 3 12 5 5 6 C zech R epublic 24 - 42 - 54 - 10 1 7 Som alia 100 7 922 8 13 25 1 8 1 7 A fghanistan 24 - 42 - 54 - 10 - 9 A ngola 24 - 42 12 29 - 10 - 9 Source: International Trade C entre (ITC ) 32 Effect of export levies on hides and skins on competitiveness of Kenya’s leather products 5.3 Export Market Penetration Index Table 5.6 shows the average Export Market Penetration Index (EMPI) for the leather group of products that include HS 41 "raw hides and skins (other than furskins) and leather, HS 42 ''articles of leather; saddlery and harness; travel goods, handbags, and similar containers; articles," and HS 64 ''footwear, gaiters, and the like; parts of such articles” across the export levies of 20 per cent, 40 per cent, 80 per cent and 50 per cent, respectively. Before the introduction of the export levy, the average EMPI for all three product categories stood at 1.680, indicating moderate export market penetration. Following the introduction of a 20 per cent export levy, the EMPI increased to 1.988 for raw hides and skins and to 2.000 for both articles of leather and footwear, demonstrating an initial positive effect on export market penetration. This trend persisted with the 40 per cent export levy, as the EMPI rose to 2.244 for raw hides and skins, 2.258 for articles of leather, and 2.238 for footwear, indicating further improvement in market access due to higher levies. Notably, an increase to 80 per cent export levy resulted in a surge in the EMPI to 3.325 for raw hides and skins, 5.375 for articles of leather, and 2.990 for footwear. Finally, the reduction to a 50 per cent export levy showed a further increase in EMPI to 3.480 for raw hides and skins, 6.300 for articles of leather, and 4.100 for footwear. The increase, particularly for leather articles, suggests that the highest levy level significantly enhanced market penetration, likely due to improvements in product quality, which foster competitiveness. Overall, the results indicate that progressively higher export levies have been linked to increased market penetration, with the most substantial gains seen in leather articles. This implies that higher export levies may stimulate local value addition and quality enhancements, leading to greater competitiveness in international markets. Table 5.6: Export EMPI for hides and skin, articles of leather, and footwear across export levy regimes (20%, 40%, 80% and 50%) HS 41 Raw hides and skins (other than furskins) and leather HS 42 Articles of leather; saddlery and harness; travel goods, handbags and similar containers; articles HS 64 Footwear, gaiters and the like; parts of such articles Average HHI (1988-2002)-Before implementation of export levy 1.680 1.680 1.680 33 Average HHI (2003-2006) - 20% export levy 1.988 2.000 2.000 Average HHI (2007-2011) - 40% export levy 2.244 2.258 2.238 Average HHI (2012-2022) - 80% export levy 3.325 5.375 2.990 HHI after the 50% export levy implementation (2023) 3.480 6.300 4.100 Source: International Trade Centre (ITC) 5.3.1 Export market penetration index for raw hides and skin For raw hides and skins, the export market penetration index increased, with the average penetration index recorded at 1.988, 2.244, and 3.325, corresponding to export levies of 20 per cent, 40 per cent, 50 per cent, and 80 per cent, respectively, as highlighted in Table 5.2. Before the implementation of the export levies, the index averaged 1.694. Following the introduction of the 80 per cent export levy, the index rose to an average of 3.48 (see Table 5.6). These findings suggest that as the export levy increases, the export market penetration index – an indicator of market competitiveness – also increases, making exports more competitive in international markets. The progressively higher export levies appear to enhance the market penetration of raw hides, skins, and leather, implying that such levies may incentivize improvements in product quality or other competitive factors that facilitate better access to international markets. Overall, higher export levies seem to positively affect the market penetration of these products, boosting their competitiveness and presence in global trade (see Annex 10 for more details). 5.3.2 Export market penetration index for articles of leather; saddlery and harness; travel goods, handbags and similar containers; and articles For articles of leather, before the introduction of the export levy, the export market penetration index stood at 1.680. Following the imposition of a 20 per cent export levy, the average export market penetration index rose to 2.000, indicating a moderate level of market penetration. An increase in the export levy to 40 per cent led to a further rise in the average export market penetration index to 2.258, suggesting improved market penetration. The most significant change occurred when the export levy was increased to 80 per cent. During this period, the average export market penetration index surged to 5.375, with the export market penetration index in 2022 reaching a peak of 6.3 in 2023 after a reduction of the export levy to 50 per cent. The trend suggests that as export levies increase, the competitiveness of these leather articles in international markets also rises, Results and discussion 34 Effect of export levies on hides and skins on competitiveness of Kenya’s leather products resulting in higher market penetration. The data indicates that progressively higher export levies have been associated with increased market penetration, enhancing the presence and competitiveness of Kenyan leather articles in global trade (see Annex 10 for more details). 5.3.3 Export market penetration index for footwear, gaiters and the like; parts of such articles Regarding footwear, gaiters, and the like, it is demonstrated that before the introduction of the export levy, the export market penetration index averaged 1.680. During the period from 2003 to 2006, following the implementation of a 20 per cent export levy, the average export market penetration index increased to 2.000, indicating a moderate level of market penetration. Between 2007 and 2011, when the export levy rose to 40 per cent, the average export market penetration index increased further to 2.238, suggesting improved market penetration. Lastly, from 2012 to 2022, as the export levy further increased to 80 per cent, the average export market penetration index grew significantly to 2.99. Notably, the market penetration index peaked at 5.99 in 2022 and 4.1 in 2023 with the reduction of the export levy to 50 per cent, reflecting substantial market penetration during this period. Similarly, as export levies increased, the export market penetration index also rose, demonstrating that higher levies contribute to greater market presence and competitiveness for these products (see Annex 10 for more details). 5.4 Effect of Export Levies Across the Export Levy Regimes This section presents regression analysis to determine the effects of export levies across the four regimes (before levy; 20%, 40%, 80%, and 50% export levy) on export competitiveness, focusing on the RCA, HHI, and the EMPI across the three leather products under consideration. (a) Revealed comparative advantage Table 5.7 presents the results of the RCA index for raw hides a