Impact of official development assistance on economic growth in Kenya

Abstract

Kenya has been dependent on ODA since its independence in 1963. The significant amount of ODA has been coupled with substantial private resource flows and other loans. ODA is expected to bring forth economic growth, reduce poverty and better living standard. However, the effectiveness of ODA in promoting growth has received much attention from researchers but there is still no solid consensus on whether ODA spurs economic growth. Inspired by the refutable empirical results on aid-growth relationship, dismal economic performance, and the limitations of the country specific studies; this study examined the impact of ODA on economic growth in Kenya. The study applied VECM estimation technique and time series data for the period 1970-2012 to investigate the ODA-Growth relationship. Solow growth model was used to establish a link between theory and empirics. The findings from the study show a long run causality running from ODA, private external resource flows, gross domestic capital formation, final government consumption expenditure, trade openness, broad money, and inflation; to GDP growth per capita. While ODA seems to contribute to economic growth in the short run, its effect is not statistically significant. A statistically significant negative effect in the short run of private external resource flows and trade openness was established. The results also suggest that previous year’s GDP growth per capita, gross domestic capital formation, and broad money (as a measure of financial depth) are the important factors that stimulated economic growth over the study period in the short run. It could be concluded that Kenya should focus on internal factors to induce economic growth rather than depending on external factors especially in the short run.