Diaspora Remittances and Economic Growth in Kenya
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Date
2020
Authors
Kigen, Andrew Kipkoech
Journal Title
Journal ISSN
Volume Title
Publisher
Kenyatta University
Abstract
Diaspora remittances have become an imperative source of capital flows for different countries
worldwide. Even though developing countries such as Kenya do not have a significant share of
this capital flow, diaspora remittances is noted to be useful in promoting household income,
stimulating and enhancing investment and economic growth in the country. There are few studies
that have focused on the nexus between diaspora remittances and economic growth. These
studies however do not capture the dynamics affecting diaspora remittances such as changes in
the domestic savings and financial deepening of a country. Empirical studies on nexus between
diaspora remittances and economic growth in Kenya have not used domestic savings and
financial deepening variables exhaustively in exploring the subject under study. This study
estimated short-run and long-run effects of diaspora remittances on growth of economy in Kenya
and took into considerations the two factors of domestic savings and financial deepening as
independent variables. The data was sourced from the World Bank, Central Bank of Kenya,
Kenya National Bureau of Statistics and the National Treasury. The study used time series data
for the period 1970 to 2017. Empirical studies carried in Kenya have not considered the period
from 1970 to 2017. STATA software was used for the analysis and Granger causality test was
used to test the direction of causality between diaspora remittances and economic growth. The
Granger causality tests showed that there was unidirectional causality between Diaspora
remittances and economic growth in Kenya for the period under study (1970-2017). This means
that diaspora remittances accelerates economic growth in Kenya and that economic growth does
not lead to increase in diaspora remittances in Kenya. Based on the maximum rank two of the
cointegration, GDP and diaspora remittances were cointegrated. The study used ordinary least
squares estimation to determine both the short-run and long-run effects of diaspora remittances
on economic growth in Kenya. It was found that there was a short run and long-run relationship
between GDP and diaspora remittance at 10 percent level of significance and similarly between
GDP and domestic savings. The explanatory variables chosen in the ordinary least squares model
explained 48.81 percent of the variation in GDP. Regression results showed that diaspora
remittances has a positive impact on economic growth both in the short-run and long-run at 10
level of significance leading to a 0.45 percent increase in GDP. It is recommended that policy
makers should develop policies which will increase Diaspora remittances, financial deepening,
foreign direct investment and trade openness for economic growth in the country. This can be
achieved through balanced improvement of all the other key macroeconomic variables like
national income, employment, money supply and price levels to attain a sustainable economic
growth and development.
Description
A Research Project Submitted to the Department of Applied
Economics in the School of Economics, in Partial Fulfillment
of the Requirement for Award of Master Degree in Economics
(Co-Operation and Human Development) of Kenyatta University
Keywords
Diaspora Remittances, Economic Growth, Kenya