An empirical analysis of impact of foreign aid on Economic growth: a case study of Kenya

Abstract

This study empirically analyzed the impact of foreign aid in the economic growth of Kenya for the period 1980 to 2010. In addition the study interacted foreign aid with a set of policies namely inflation, budget deficit and trade closeness which constructed a single policy index. The results showed that the coefficient of foreign aid is positively signed even though it was insignificant. However when foreign aid was interacted with the policy index consisting of unfavorable policies it significantly impacted negatively on growth of real GDP. The study thus concluded that foreign aid that is supported by sound macro-economic policies is beneficial to the economic growth of Kenya for the period under study. In addition domestic savings as a ratio of GDP also had a positive and significant effect on the growth of GDP. The study has prescribed a number of policy interventions geared towards ensuring that foreign aid remains a critical determinant of economic growth in Kenya besides other policy recommendations targeting efforts by government to enhance and increase domestic saving rates in the economy since it was also identified as a key pillar in the economic growth process.