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Foreign Aid, Investment and Economic Growth in Kenya: a Time Series Approach

  • Daniel M'Amanja,
  • Oliver Morrissey
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    Most of the literature on determinants of economic growth in developing countries is basedon cross-country analysis and thus only yields some patterns that hold on average. The aim of this paper is to identify aspects of the determinants of growth in Kenya, in particular if aid played a role. The empirical specifications used in cross-country work do not translate easily into country studies: many of the variables are not available annually or tend to change very slowly over time, and it is not feasible to include all potential determinants. Thus, we focus on one element of growth and use a multivariate approach on time series data for Kenya over the period 1964 – 2002 to investigate the growth effects of foreign aid, investment and a measure of international trade. Our econometric results reveal two long run relations representing the reduced form growth equation and the behavioural function of private investment. We find that shares of private and public investment, and imports in GDP have strong beneficial effects on per capita income in Kenya. However, aid in the form of net external loans is found to have a significant negative impact on long run growth. Private investment relates to government investment and imports negatively, but positively to foreign aid. The implication for policy is that in order for Kenya to foster and sustain growth, closer attention should be given to factors that promote private investment.

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    Paper provided by University of Nottingham, CREDIT in its series Discussion Papers with number 06/05.

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    Handle: RePEc:not:notcre:06/05
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    1. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
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    3. Harrison, Ann, 1991. "Openness and growth : a time series, cross-country analysis for developing countries," Policy Research Working Paper Series 809, The World Bank.
    4. Johansen, Søren & Juselius, Katarina, 1992. "Testing structural hypotheses in a multivariate cointegration analysis of the PPP and the UIP for UK," Journal of Econometrics, Elsevier, vol. 53(1-3), pages 211-244.
    5. Levine, Ross & Renelt, David, 1992. "A Sensitivity Analysis of Cross-Country Growth Regressions," American Economic Review, American Economic Association, vol. 82(4), pages 942-63, September.
    6. Xavier Sala-I-Martin & Gernot Doppelhofer & Ronald I. Miller, 2004. "Determinants of Long-Term Growth: A Bayesian Averaging of Classical Estimates (BACE) Approach," American Economic Review, American Economic Association, vol. 94(4), pages 813-835, September.
    7. Hansen, Henrik & Tarp, Finn, 2001. "Aid and growth regressions," Journal of Development Economics, Elsevier, vol. 64(2), pages 547-570, April.
    8. Bacha, Edmar L., 1990. "A three-gap model of foreign transfers and the GDP growth rate in developing countries," Journal of Development Economics, Elsevier, vol. 32(2), pages 279-296, April.
    9. Rodrik, Dani, 2005. "Growth Strategies," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 14, pages 967-1014 Elsevier.
    10. Mosley, Paul & Hudson, John & Horrell, Sara, 1987. "Aid, the Public Sector and the Market in Less Developed Countries," Economic Journal, Royal Economic Society, vol. 97(387), pages 616-41, September.
    11. Kenny, Charles & Williams, David, 2001. "What Do We Know About Economic Growth? Or, Why Don't We Know Very Much?," World Development, Elsevier, vol. 29(1), pages 1-22, January.
    12. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
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