Impact of Remittances Inflows on Economic Growth in Kenya

Abstract

The purpose of this research paper was to investigate whether or not international remittances enhance economic growth in Kenya. Data for the period 1970-2012 from World Development Indicator and Kenya’s economic surveys was used. To investigate the impact of international remittances, financial development, gross fixed capital formation, human capital, openness to international trade and inflation were also included. The study employed an aggregate Cobb-Douglas production function. Augmented Dickey Fuller tests were used to test for non stationarity of the variables. It was found that all variables were integrated of order one. In addition, Johansen cointegration test was employed to determine whether or not the variables were cointegrated. Error correction model was employed to estimate short – run and long run relationship using ordinary least square technique. The study found that international remittances inflows and human capital (secondary school enrollment) had a positive but insignificant impact on economic growth. Financial development (credit to private sector by commercial bank), gross fixed capital formation and inflation (consumer price index) were found to enhance economic growth significantly. The results show that emphasis should be placed on accumulating capital and improving financial development to accelerate growth. There is also need to sustain stable macroeconomic environment (inflation should be maintained at a certain threshold) for economic growth be achieved in Kenya Openness to international trade was found to have negative and significant impact on economic growth. This was in contrast with the expected result of positive and significance impact on economic growth rate.