Government Size and Economic Growth in Kenya

Abstract

The goal of the study was to establish causal link between the size of the government and economic growth in Kenya. The two variables were represented by the final general government consumption expenditure and gross domestic product respectively. Use was made of annual time series data for Kenya covering the period from 1965 to 2012. Data analysis began with tests for stationarity of each series then proceeded to cointegration tests, lag length determination tests, vector autoregressive modelling, model reliability tests, forecasting and generation of an impulse response function. The study did not find causality between the final general government consumption expenditure and gross domestic product, which, by extension, implied no causality between government size and economic growth, that is, neither economic growth nor government size causes the other in Kenya. The study findings therefore supported neither the Keynesian theory, which states that government expenditure causes economic growth, nor the Wagner’s law, which postulates that an increase in government expenditure is caused by economic growth. A ten step forecast and an impulse response function based on the model reinforce the findings, since very little impact of the variables on each other is established. The findings imply that some common arguments for and against the expansion of the public sector are not factual.