Effects Of Trade Openness On Economic Growth And Investment In Kenya

Abstract

The main motivation of this paper was to examine whether trade policy reforms initiated by the Kenyan government from 1980s, was successful in improving economic growth and investments in the economy. The paper aimed to establish the short run and long-run effects of opening up to trade on economic growth as well as on the investment levels in the country. The study analysed annual data from 1980 to 2017 gotten from World Development Indicators (WDI) and Economic Surveys from KNBS. The study adopted the Error Correction Model (ECM) for econometric analysis. It was found that opening up on trade has negative and significant effects on economic growth in both the short run and in the long-run. The study established that both real capital formation as well as human capital enhanced economic growth in Kenya in both short and long run. Concerning the effects of trade on investments, the study established that opening up for trade increases investment in the country. The policy implication and insights that can be drawn from these results is that policymakers ought to initiate policies that would ensure gains from opening up to trade are realized and that the readjustment costs faced by firms occasioned by liberalizing the Kenyan economy are minimized.