Effects Of Government Spending On Private Investments In Kenya
Abstract
Government expenditure has been an imperative form of expansionary policy in Kenya since
independence. Studies from diverse parts of the world indicate a mixed result of the effects of
government spending on private investment. Some studies reveal that government expenditure
crowds- in investments while others reveal that it crowds it out. Despite the increase in
government spending in Kenya, the private investment has not been sustainable even though
there have been numerous reforms seeking to enhance this component of GDP. This is a cause to
worry considering that private investment is a crucial component as Kenya endeavor to enhance
its economic growth. This study, therefore, sought to establish whether government spending
crowds- in or out the private investments. To attain this objective, this study adopted VAR and
VECM methodology using the data for the period 1994-2014. The study analyzed the long-run
relationship between private investment and government expenditure through Johansen
cointegration approach. Additionally, the study employed Philip Perrons’ and Augmented
Dickey-Fuller Test to check for unit roots. These statistical tests indicated that all the data in the
model were non-stationary, but they became stationary on the first-difference. The findings
revealed that government expenditure on development projects has both short-run and long-run
effects on private investment. Recurrent spending only indicated a long-run relationship with the
private investments. All the results indicated a positive relationship. This means that government
expenditure significantly crowds- in private investment in Kenya. This study recommends that
the government of Kenya should focus on spending on components that have a positive impact to
private investment and numerous reforms need to be put in place to enhance public finance
management.
Publisher
University of Nairobi