Official Development Assistance, Domestic Savings and Economic Growth in Kenya

Abstract

Official Development Assistance (ODA) supports and targets the welfare and economic growth of developing nations. The primary argument for aid is to increase the recipient country's GDP. The significance of ODA in funding economic expansion and augmenting domestic savings is still debated on in the economics literature. Researchers haven’t settled on a conclusive impacts of ODA on domestic savings and economic growth, as they have discovered a variety of contradictory findings. Since 1960, Kenya has been reliant on ODA. The country has been getting substantial ODA to help it deal with its economic problems. Despite the donor funding and government initiatives, the country's domestic savings and economic growth have remained poor, and poverty reduction has trailed behind growth. With this in mind, this research investigated whether ODA has any impact on Kenya’s economic development and domestic savings. The research used quantitative design and utilized secondary data from the World Development Indicators 2022, the data spanned from 1960 to 2019. The study employed the Simultaneous equation model, which was analyzed using the 2-Stage least square method. The results showed that ODA affected economic growth of Kenya positively; however, the relationship was discovered to be statistically insignificant. The proxy used for economic growth was GDP per capita. It is computed as the sum of the gross value added by all producers residing in the country, and any appropriate taxes on products, deducting any unaccounted for subsidies excluded in the product values. Additionally, ODA affected Gross Domestic Savings positively and the relation was shown to be statistically significant. The research examined the impact of Trade Openness, GDS, and Government Spending on economic expansion. The results showed that all the three variables had a favorable impact on economic growth, although, only the impact of government spending was found to be statistically significant. Additionally, the research investigated how Trade Openness, Gross Capital Formation and economic expansion, affected GDS. Findings indicated that the variables impacted the dependent variable positively, however, the relationship between trade openness and gross domestic savings was discovered to be insignificant. The research recommends that the donor, the government and private stakeholders should ensure that ODA is only used for the development initiatives for which they were intended, according to the government and the donor community.