Effects Of Government Spending On Private Investments In Kenya

Abstract

Government expenditure has been an imperative form of expansionary policy in Kenya since independence. Studies from diverse parts of the world indicate a mixed result of the effects of government spending on private investment. Some studies reveal that government expenditure crowds- in investments while others reveal that it crowds it out. Despite the increase in government spending in Kenya, the private investment has not been sustainable even though there have been numerous reforms seeking to enhance this component of GDP. This is a cause to worry considering that private investment is a crucial component as Kenya endeavor to enhance its economic growth. This study, therefore, sought to establish whether government spending crowds- in or out the private investments. To attain this objective, this study adopted VAR and VECM methodology using the data for the period 1994-2014. The study analyzed the long-run relationship between private investment and government expenditure through Johansen cointegration approach. Additionally, the study employed Philip Perrons’ and Augmented Dickey-Fuller Test to check for unit roots. These statistical tests indicated that all the data in the model were non-stationary, but they became stationary on the first-difference. The findings revealed that government expenditure on development projects has both short-run and long-run effects on private investment. Recurrent spending only indicated a long-run relationship with the private investments. All the results indicated a positive relationship. This means that government expenditure significantly crowds- in private investment in Kenya. This study recommends that the government of Kenya should focus on spending on components that have a positive impact to private investment and numerous reforms need to be put in place to enhance public finance management.