Government Sector Spending and Private Investment in Kenya

Abstract

The private sector investment plays an integral part in guaranteeing economic soundness of an economy. In Kenya, the government outlay increased sharply in the last two decades although this has not been commensurate to the private capital growth rate. Existing literature analyzed the impact of government expenditure on private investment using aggregated government spending i.e. recurrent and development expenditures only. These researches have yielded mixed results with some in favor of the crowding-in hypothesis and other crowding-out effects. Due to this controversy, the link between private capital and specific public spending components remains unresolved. Limited studies have disaggregated the government outlay into sector expenditures in this thematic area. More so, Kenya has witnessed a tremendous increase in spending on infrastructural projects such as highways, ports, standard gauge railway, and massive investment in health and education sectors. All these efforts are meant to accelerate the realization of the Kenya Vision 2030 as well as the ‘Big Four’ Agenda of the Government. The objective of this study was to establish how various public sector outlay and debt charges impact private investment in the country. This study disaggregated government spending in education, health, agriculture, defense, infrastructure, and debt repayment and examined their separate effect on private investment.The study used secondary data for 1963 to 2018 from Kenya National Bureau of Statistics various Statistical Abstracts and Economic surveys. Both the Autoregressive Distributed Lag (ARDL) model and the Error Correction Model (ECM) were used to realize the outlined objectives. The study yielded mixed results with some components indicating promotion and demotion of private investment in the country. The recurrent outlay in infrastructure and capital outlays in health as well as debt charges were found to crowd-in private investment significantly. Education, agriculture, and infrastructure recurrent expenditures and infrastructure and agriculture capital spending have a positive influence on private investment though insignificantly. Other variables were found to crowd out private investment. This study recommends that the government should consider increasing and sustaining spending in education agriculture and infrastructure sectors to stimulate the economy while downsizing spending in sectors that crowd out private investment in the country.