Adverse changes in terms of trade are generally viewed as an external cause of economic decline in Africa. However, in some instances export price shocks are not exogenous to domestic policy. When the entry of synthetic substitute producers is a function of the price of the natural product, raw material export levels can induce entry and cause shifts in demand. This paper examines the market for Kenyan pyrethrum (a natural insecticide) and develops a dynamic programming model for determining export strategy when the current export price induces structural changes in demand. Analysis of the pyrethrum market over the 1963-90 period suggests that the use of this analytical method could have mitigated the loss of market share to synthetics after 1980. The policy prescribed by the dynamic model would increase the exporter's net revenues by almost 30% compared with the policy indicated by analysis that treats demand as exogenous. In fact, the value of Kenyan pyrethrum exports from 1981-86 averaged 36% below the 1976-80 value.
|Original language||English (US)|
|Number of pages||28|
|Journal||Journal of African Economies|
|State||Published - Oct 1996|
ASJC Scopus subject areas
- Economics and Econometrics