The Service Sector-led Growth in Kenya

Abstract

In recent years the service sector has emerged as increasingly playing a huge role in both the developed and developing as evidenced by the rising share of this sector in foreign direct investment (FDI), employment, trade and GDP of these countries.This increase has been gradual through time and it corresponds to the decline in agriculture and manufacturing output. The service sector has been viewed as a potential sector for economic transformation and the modern characteristic of present day economies is the expansion of an energetic, more lively and competitive services sector expansion. The study was conducted to point out and empirically estimate the determinants of service sector growth in Kenya and empirically investigate the causal relationship between services and GDPPC in Kenya by analyzing time series data for the period 1980-2020 drawn from the world development indicators, the UNCTAD statistics as well as the Kenya National Bureau of Statistics, and the economic surveys using the ARDL Cointegration test and granger causality wald tests. The results indicated no presence of long run relationship while the short run dynamics results indicated positive short run relationship between service sector share and innovation, expenditure on education, GDPPC and FDI. In addition there was existence of negative short run relationship between trade openness and productivity gap between services and manufacturing however there was no presence of relationship between services and female labor participation in Kenya. The granger causality test results indicated a two-way directional causality between service sector and GDPPC.