Exports and Economic Growth Relationship in Kenya:causality and Co-integration Analysis (1970 - 2004)

Abstract

The relationship between exports and economic growth has been analysed for a long period. Whether exports expansion cause economic gains or losses, whether economic growth causes exports expansion or reduction, and whether a feedback relationship exists between exports growth and economic growth has been a recurring empirical problem. Empirical evidence linking exports to economic growth has been mixed and inconclusive due to fundamental differences in methodology, analytical techniques, sample period and study countries. This study examines the exports-growth relationship in Kenya using secondary annual time series data for 1970 - 2004. Particularly, the study investigates export-led growth hypothesis for Kenya by testing for Granger causality between exports growth and economic growth. The study also investigates the long-run nature of the export-growth relationship by applying cointegration analysis and error correction mechanism to estimate an augmented simple production function using ordinary least squares method. Inclusion of exports and imports provides an alternative procedure to capture total factor productivity growth. By considering relevant variables omitted in previous studies for Kenya and by covering both imports-substitution and export-promotion eras, including trade liberalization period, help clarify and improve past empirical results and minimizes the existing knowledge gap. The results of this study indicate that there is unidirectional causality from exports growth to economic growth and by disaggregating exports into primary and manufactured exports; the unidirectional causality is from primary exports to economic growth. There is a significant long-run relationship between economic growth, exports, imports and capital formation. The study further reveals significant long-run positive impact of exports, particularly primary exports on economic growth while manufactured exports' impact, though positive is insignificant. On the other hand, the short-run effects of both primary and manufactured exports are negative. Considering that Kenya has been experiencing low, slow and unstable economic growth, coupled with rising poverty and unemployment levels, this study concludes that primary exports-led growth is undesirable for economic development. Therefore, primary exports should not be relied upon further as "engine of growth", since this is unfavourable to Kenya's economic prosperity. Instead, more resources should be directed towards value-addition of primary exports and growth and competitiveness of manufactured exports.