The effects of Public Capital Expenditure on Economic Growth in Kenya

Abstract

The government of Kenya has been spending massive amount of funds to the various Ministries in order to achieve economic development. The education, health, infrastructure and agriculture sectors have been receiving the largest amount of funds. Despite the increased government spending, there are conflicting results on the effects of government spending on economic growth. This research presents a critical analysis on the effects of major public capital expenditure on economic growth in Kenya. The specific objectives of the study were: establishing the effects of public capital expenditure on education, infrastructure, health and agriculture on economic growth in Kenya. The study adopted a causal relationship approach and relied on secondary data from the Ministry of National Treasury and Kenya Bureau of Statistics with the data spanning from 1980 to 2011 for all variables. There were four hypotheses under this study and it was hypothesized that increased expenditure will not increase GDP. The study employed Johansen cointegration test and the Error Correction Method (ECM) in the empirical analysis to evaluate the relationship among the variables. The data was subjected to stationarity test and necessary smoothening was done. The short run and long run relationship with three cointegrating equations revealed that the coefficient of expenditure on infrastructure was statistically significant and positively related to GDP at 5% level of significance. The coefficient of expenditure on agriculture was positively and significantly related to the expenditure on education. The government should therefore increase the percentage amount allocated into these three sectors. Expenditure on health did not spur economic growth over the long run period therefore expenditure in this sector should be rationed. It was also noted that the government programs like Lamu Port and New Transport Corridor Development to Southern Sudan and Ethiopia (LAPSSET) to foster increased investment in infrastructure and hasten delivery of goods and services is strongly recommended.