Explaining Kenya’s economic growth performance:An econometric study

Abstract

The development economy that Kenya inherited at independence gradually gave way to negative growth and high inflationary rates reaching its peak of 46 per cent in 1993. The growth problem became so critical that the country embarked on the Economic Recovery and Structural Programmes to arrest the imminent disaster. In the first decade of independence, the gross domestic product grew at an average of 7% per annum. However, this growth rate was not sustained in the subsequent periods. The periods between the late 1970s and the late 1990s were characterized by persistently low growth and limited economic transformation, despite the fact that over that time span, the country maintained a large measure of political stability and pursued a fairly consistent development strategy. This study has tried to explain the mixed economic growth in the period 1963-1999 and highlighted the key findings. Most of the empirical literature, which forms the basis of this study, have concentrated in explaining Africa's economic performance using cross-section data and have assumed that growth processes across countries and over time are similar. Our study supplements the cross-country endogenous growth methodology with a time series analysis. An attempt has been made in this study to econometrically investigate some of the key factors, which explained the growth performance in Kenya. The study has been premised on the concept that the growth process in Kenya transcends the basic neo-classical formulation, which places the onus of economic growth on capital and labour as the key inputs. The variables, which have explained growth in a positive way, include investment, terms of trade, money supply and wet captured by a wet index. The variables, which have explained growth in a negative way, include real exchange rate, external debt and external orientation of the economy captured by the openness of the economy. Others are government expenditure and human capital.