Service exports and economic growth in Kenya: a time series analysis 1980-2018

Abstract

The view that strong economic performance can be export led has been explored critically on the merchandise exports front however service exports, whose importance is seen to have increased in the last decade, have received little attention. Understanding the role of service exports in an economy is essential in considering service exports as a possible source of growth. This study was conducted to empirically investigate the link between exports of services and economic growth in Kenya and if such a link exists the causal relationship, analyzing time series data for the period 1980-2018, from World Bank data base and the Kenya Bureau of statistics publications, using Vector Error Correction Model and Toda and Yamamoto augmented Granger causality test. The results indicate presence of a long run relationship between the variables and a short run relationship between, gross capital formation and service exports with GDP per capita while export of goods and compensation of employees did not show any short run association with per capita GDP. The results also indicate that a bidirectional causality exists between gross capital formation, export of goods and compensation of employees with GDP per capita but only a unidirectional causality from service exports to GDP per capita exists. Therefore policies to encourage service exports such as investment in research and development to improve Kenya’s position in world service market, improvement in terms of trade, increase FDI in the service sector and human capital improvement through education and training could be an important drivers of its economic growth.