Foreign Aid Impact on Economic Growth- a Case Study of Agriculture, Industry and Service Sectors in Kenya

Abstract

Kenya has been receiving foreign assistance and inflows to support government spending especially development expenditure. Foreign aid and national government expenditures in Kenya, however, have raised concern as to whether they are matched by economic outcomes. Despite the huge, and continually increasing foreign aid inflows in the two decades, the economic growth achieved in Kenya over the same period has not been satisfactory. Little research has paid attention into aid effectiveness. This study utilized data on net foreign aid, economic and sectoral growth from World Bank’s Country Economic Indicators to study aid effectiveness in Kenya. The general production function was utilized to determine foreign aid flows effect on economic growth of agriculture, service and industry sectors in Kenya. Results show foreign aid has significant and positive effect on growth of service sector in Kenya. However, aid does not significantly influence growth of agriculture and industry sectors in the country. To facilitate more growth of the economy, the country needs to increase the proportion of aid that is channeled to the service sector. The increments will see a further increase in output which will be reflected in GDP growth. Some of the areas where the country needs to increase the proportion of aid is on ICT and tourism sectors. These sectors have recently proven to contribute highly on growth of GDP. Tourism has particularly been adversely affected by Covid-19, thus channeling more aid to this sector would highly increase its growth and in turn growth in GDP levels.