The impact of foreign aid on economic growth in Kenya
Kiumbe, James M
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In economic terms, the justification of giving aid is basically to help push up Gross Domestic Product CGDP) of the recipient nations. In most cases, the beneficiaries are poor countries usually grappling with the twin challenges of low domestic savings and weak foreign exchange revenues. Such deficits mean the countries can hardly meet lheir economic growth goals meaning they have to seek capital resources in the form of donor aid and foreign direct investments to help prop up economic expansion. Over the years, debate has ensued over the effectiveness of aid, with scholars from both poor and rich countries unable to reach consensus over the same. In many Sub Saharan States, most studies have failed to establish a strong statistical link between economic growth and aid. Comparatively, in other regions, aid has directly yielded economic growth. This paper seeks to establish and explain the strong and consistent relationship between aid, investment and economic expansion in Kenya. The study uses a structural growth model involving aid and other control variables for the period 1970-2010. By applying causality tests, the paper establishes that, during the period under study, aid does not trigger a positive push on investment and economic expansion. However, there is a positive relationship between investment and economic growth. After carrying out a regression analysis on the model, the study establishes that aid causes a negative effect on economic expansion. The finding that aid has direct impact on growth in the structural model and that investments drive growth implies that aid is usually not invested but instead it is channeled to other expenses. Since aid is used for other purposes like salary hike payments and purchase of gasguzzler vehicles, this triggers increase in consumption which leads to increase in investments and thus growth. This is usually so when it comes to Kenya where this paper finds there lacked a strong relationship between economic expansion and aid.