The Optimal Size of Government Expenditure and Economic Growth in Kenya 1963 – 2012
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Date
2015-02
Authors
Magana, Julius Munene
Journal Title
Journal ISSN
Volume Title
Publisher
Kenyatta University
Abstract
The effect of government size on economic growth has given rise to conflicting views among economists. Some view a large government size as harmful to economic growth due to inefficiencies inherent in government. The other group of economists argues that a larger size of government is likely to enhance economic growth. Kenya’s public expenditure has been experiencing rapid growth since 1963, while GDP growth over the same period has not followed the same path. The main objective of this study was to examine the effects of government size on economic growth in Kenya for the period 1963-2012. The specific objectives for the study were to determine the effect of government size on economic growth in Kenya; determine the relationship between government size and economic growth in Kenya, and estimate the optimum size of government expenditure that maximizes economic growth in Kenya. This study adopted the basic growth accounting and used the production function of Solow to relate the rate of economic growth to capital and labour accumulation and total factor productivity. The estimation model examined Armey’s idea of a quadratic curve that explains the level of government expenditure in an economy and the corresponding level of economic growth. Time series data was used for the period under investigation. The regression equation for this study was quadratic or a second-degree polynomial function and since it does not present any special problems Ordinary Least Square (OLS) estimation technique was used. The major findings of this study are that Government size has indeterminate relationship with economic growth. The growth maximizing government expenditure as a percent of GDP was estimated to be 23 percent. Private investment and Trade openness had positive relationship with economic growth in Kenya. On the contrary labour force growth had negative relationship with economic growth. Recommendations drawn from this study are: Government size downsizing to 23 percent of GDP, increasing trade with other countries, privatization to encourage investment and finally government check population growth through family planning programs
Description
A Research Project Submitted to the Department of Economic Theory in Partial Fulfilment of the Requirements for the Award of the Degree of Masters in Economics of Kenyatta University, February, 2015