Impact of foreign aid on economic growth in Kenya

Abstract

The traditional rationale for foreign aid in the two gap model is that it fills the trade and savings gaps and through its macroeconomic effects raises a country's economic growth rate. However, despite receiving large quantities of foreign aid for a considerable long period of time, Least Developed Countries (LDCs) have continued to lag behind in terms of economic growth and development. This in turn has continued to cast doubt on to the effectiveness of foreign aid in stimulating economic growth.

This study examines the impact offoreign aid on economic growth in Kenya using time series data for the period 1970 - 2008 using a modified Harrod Domar growth model. It is found that foreign aid has a positive impact on economic growth rate. However, the impact was found to be modest. It was also found that foreign direct investment was more effective in stimulating economic growth rate than foreign aid.