The impact of exports on economic growth in Kenya

Abstract

The Export-Led Growth Hypothesis holds that export growth is one of the main determinants of economic growth in a country. Therefore, with globalization, the export-led strategy has become a focus of most developing countries; Kenya included. This study examines the validity of Export-Led Growth Hypothesis (ELGH) for Kenya using time series data for the period 1975 to 2012. The objective of this study is to determine the impact of exports on economic growth using a two-sector growth model and test the hypothesis that the export sector generates positive externalities to the non-export sector. A conventional neoclassical growth model, including general government consumption, inflation, and secondary school enrolment, is estimated using Ordinary Least Square method. The empirical results show the validity of the ELGH for Kenya and also strongly support the hypothesis that the export sector generates positive externalities to the non-export sector. The key finding is that the marginal factor productivity in the export sector is higher than that of the non-export sector as anticipated, underscoring the fact that export growth is a significant contributor to economic growth in Kenya. Besides, the results indicate that labour force, capital stock, and fiscal policy are significant contributors to Kenya’s economic growth. Therefore, government policies to diversify and promote exports which will eventually improve the quantity and quality of exports in the overall GDP contribution, are recommended in promoting and sustaining economic growth.