The Determinants of Economic Growth in Kenya

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In Kenya’s new long-term development blue print Vision 2030, the Kenyan government aims at transforming the country from a low income country to a new developed middle income country. However according to World Bank, the current economic growth rate currently stands at 5.8%.This therefore depicts the need to formulate policies that will raise the economic growth and understanding of fundamental determinants of economic growth in Kenya.

In applied economics is a broadly researched macroeconomic issue of trade openness which also affects growth of economies. Grossman and Helpman (1992), Young (1991), and Lee (1993) put forward the link between growth of economies and their openness to trade. From their studies economic growth may experience an upward trend from the trickledown effect arising from improved technology which can accelerate and enhance production, competitive local markets in the global market space and boost earnings from exports.

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Causality relationship between trade openness and economic growth can have positive effect on economic growth Easterly and Levine (2001) and Musila and Yiheyis (2015), negative unidirectional causality from trade openness to economic growth Vlastou (2010), no statistical significant influence on economic growth arising from trade openness Harrison and Hanson (1999), and Tekin (2012).

From economic theories there lacks strong linkages between energy consumption and economic growth. Nevertheless several studies have investigated the causality between economic growth and energy consumption. In recent years studies on the relationship between the two macro variables has attracted enormous focus by scholars because of the policy implications they present to policy makers (Odhiambo 2009).

Over time, carbon dioxide emissions have been increasing over time as a result of continued use of oil coal and natural gas. For Kenya’s economy to be environmentally friendly, adoption of technologies that are anti CO2 is vital. From Environmental Kuznets, these technologies are only applicable if an economy has achieved a certain threshold of per capita income. At this level, people are rich and start valuing the environment more hence prompting effectiveness in implementing environmental standards from the regulatory institutions (Dinda, 2004).

Statement of the Problem

To become a newly industrialized, middle income country providing high quality of life to all citizens by year 2030, Kenya aims to achieve an average GDP growth rate of 10% per annum beginning the year 2012 (GOK,2007). However the current GDP growth rate of 5.8% is far from this desired growth rate as at 2018.

Petroleum use still stands as an economic bulwark in raising the country’s GDP due to nature of Kenya’s commercial and industrial sectors. According to Institute of Economic Affairs (2000), up to about 4% of GDP is spent annually on petroleum products imports. However, the country is not secure in the supply of petroleum products since it depends on imported crude oil and refined products whose prices are erratic due to the dynamics in the global oil market.

The level and intensity of commercial energy use are often regarded as key indicators of economic growth and development in a country (Republic of Kenya. 2003). It is well acknowledged that the power sector plays an important role in the economic activity of developing countries by powering major productive sectors Ng’ang’a. (1990), Onjala (1992), World Bank (2000), Goldemberg et al.( 2000), Kamfor, (2002) Kariuki (2004). Access to electricity by all sectors is therefore crucial, particularly to manufacturing and services, ceteris paribus.

The amount of electricity consumed in Kenya does not correspond with the level of economic growth that has been witnessed over time as evidenced from studies done by Kamfor (2002) and Republic of Kenya (2002 and 2004). Despite a remarkable growth in the electric power industry since independence, the speed has not kept pace with economic growth. This study thus aims at investigating the nature of relationship between electricity consumption and economic growth using latest Kenyan data.

A study by Jadoon, Rashid, and Azeem, (2015) using data range from 1981 to 2012.,for selected Asian countries (India, Indonesia, Japan, Malaysia, Pakistan, Singapore, South Korea and Sri Lanka) investigated the impact of trade liberalization on the human capital and economic growth by using panel data analysis where these countries were grouped as lower income countries (India, Indonesia, Pakistan and Sri Lanka) and higher income countries (Japan, Malaysia, Singapore and South Korea) for comparative analysis.

The study outcome pointed out that both developed and developing countries enjoy the trade led growth for the selected period. The impact of trade openness on human capital was found to be positive for both groups but found significant only for the developed countries due to well-trained human capital. The fruits of trade openness in form of increased productivity of human capital have not been achieved in developing countries due to their less trained and less skilled workers. The investment in human capital is the dire need of the time for the developing countries to enjoy more beneficial effects of trade openness.

For many decades, the demand of fossil fuel energy has attained an exponential growth rate which formed disaster and catastrophic damages on the environment. The emissions of greenhouses gases such carbon dioxide (CO2) are very dangerous aspects that may be considered as the main cause of global warming. Kenya’s total GHG emissions in 2013 were 60.2 million metric tons of carbon dioxide equivalent (MtCO2e), totaling 0.13% of global GHG emissions. The agriculture sector emitted 62.8% of total emissions, followed by the energy sector (31.2%), industrial processes sector (4.6%), and waste sector (1.4%). Kenya’s Intended Nationally Determined Contribution (INDC) commits to reducing GHG emissions by 30% (143 MtCO2e) relative to business as usual levels by 2030.

Most studies in Kenya have examined the effect of trade openness and energy consumption on economic growth. However none of the studies has factored in the effect of CO2 and electricity consumption on economic growth in Kenya. The study will be conducted with the longest time series data approach and with modern time series analysis tools which few previous studies have undertaken.

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