MST-Department of Applied Economics

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Foreign aid and economic growth in Kenya: (1970-2013)
(Kenyatta University, 2015-11) Kamau, Geoffrey Eric Muchiri
In the literature on aid-growth relationship, there is an on-going debate among economists and other development practitioners. On one hand there are views that foreign aid has a negative impact on growth while others argue that foreign aid has a positive impact on growth. With these mixed results from different studies and different donor policies and regulations, this study set to find out if foreign aid can promote growth in Kenya. The empirical analysis rested on the neoclassical modeling analytical framework and combined several estimation techniques. A stationarity test was done in the study to test for the existence of unit roots using the Augmented Dickey-Fuller (ADF). A co-integration test was conducted to show the relationships between time series variables. An Error Correction Model (EMC) was applied to find out the speed of adjustment the variables follow towards the long-run equilibrium path in response to any divergence that may occur in the short-run. The results of the study presented a negative relationship between aid and economic growth in Kenya. These negative results between foreign aid and economic growth showed that the economy should reduce the amount of aid it gets and instead focus on investment which has a positive relationship with economic growth in Kenya.