Relationship between Structural Changes and Economic Growth in Kenya

Abstract

The prime objective of this study was to investigate the relationship between structural changes and economic growth in Kenya using panel data for the period 1977-2016, that sought to demystify the unknown and uncertain nexus between structural changes and economic growth in Kenya. Some of the factors pointed out in the study include Balance of Trade Structure (BOTS), Public Education Expenditure Structure (PEES), Energy Expenditure Structure (EES) and Wage Employment Structure (WES). The study used both causal research design and ordinary least squares method while data was collected using a data collection sheet which was cleaned and coded. The data was analyzed   using  multiple  linear regressions method, specifically using the Fixed Effects Model of Panel data analysis and Granger Causality analysis in the causal research design. Using the Fixed Effects Model  in the study, balance of trade structure was found to have a negative relationship with economic growth and at the same time was insignificant  as a variable that can be used to predict economic growth since the coefficient and p-value were -1.63768 and 0.626>0.05 respectively. Public education expenditure structure was found to have had a positive relationship with economic growth though it was established that it was also not significant as a variable in predicting economic growth since its coefficient and p-value were 12.7979 and 0.206>0.05 respectively. Energy expenditure structure  was found to have a  negative relationship with economic growth though it was found that it was the only variable that was significant in predicting economic growth, since it had a coefficient and p-value of -0.5077 and 0.005<0.05 respectively.  Wage employment structure was found to have a positive relationship with economic growth though it was also an insignificant variable in predicting and explaining growth since it had a coefficient and p-value of 1.54817 and 0.197 respectively.  Granger causality test was used to determine causality between structural changes and economic growth. Using Lag 6 as the point of long run reference, balance of trade structure, public education expenditure structure and wage employment structure were found to  have bidirectional causality  with economic growth since at Lag 6, they all had bidirectional p-value of 0.000. Energy expenditure structure was found to have unidirectional granger causality running from energy expenditure structure to economic growth (with p=0.000<0.05) with non-existing causality running from economic growth (p=0.184>0.05). Confidence intervals were constructed at 95% confidence level with the assumption that resulting intervals would bracket the true population parameter in approximately 95 per cent of the cases in Kenya.