Savings-investment-growth interactions and micro-economic adjustment in Kenya:An empirical analysis

Abstract

This paper examines inte.ractions among domestic saving, private investment and per capita growth in output, and their response to changes in key macro-economic variables in Kenya during the period of macroeconomic instability (i.e 1972-92). Saving is found to be a highly significant positive determinant of growth performance in Kenya explaining over 50% of the variations; but real growth is not only a positive determinant of desired capital stock but also saving itself, hence the complex positive correlation between these variables. Empirical results obtained using a TSLS estimation shows that macro-economic instability indicators (external debt burden, current and expected inflation rate) and factors "exogenous It to policy control (droughts and population growth) negatively affected saving, investment and real growth. Terms of trade, however, stimulated the economy. The effect interest rate, credit availability, and broader money supply- financial variables determined in a repressed market- was generally weak irrespective of the sign implying ineffectiveness of monetary policy in the then set-up. Implementation of SAPs has not only depressed investment but also not improved the response of savers. Hence the recovery of growth during SAP implementation could be coincidental. Economic policy for the rest of the reform period should then focus on the basic underlying factors coupled with greater saving mobilisation and an enabling environment conducive to private investment activity.