The relationship between manufacturing and agriculture sectors in Kenya

Abstract

Agriculture has the potential to transform the economy in a developing country and subsequently other key sectors through forward and backwc1rd linkages. Understanding the nature of the relationship that exists between manufacturing and agriculture is important as Kenya aims to transform its manufacturing sector. The aim of this study ·was to establish the nature of the relationship between the manufacturing and agricultural sector in Kenya and to identify hovv shocks in other factors determines changes in the two sectors. Manufacturing value added, agriculture value added, employment ·within the respective sectors and macroeconomic factors were considered for this study. To meet the first objective, this study employed the Granger causality test and a vector error correction model to establish the nature of the long-runrelationship between the two sectors. Impulse response Functions were used to identify how shocks in employment determines changes in the two sectors. The results of the granger causality identified the presence of a forrvard linkage from agriculture to manufacturing. VECM results found the existence of a positive long-run effect of agriculture on manufacturing. The Impulse response fimctions fitrther identified anegative long-run effect of manufacturing on agriculture. These results identified the need for government to intervene in both sectors as it pursues growth to prevent unforeseen results. Policies employed should encourage the forward linkage from agriculture to manufacturing.