Effect of Government Infrastructure Investment on Economic Growth in Kenya

Elizabeth Wangai Njiru ,Justo Masinde Simiyu ,Aggrey Otieno Bunde

doi:10.7176/jesd/11-4-09

Elizabeth Wangai Njiru , Justo Masinde Simiyu + Show 1 more

Open Access

https://doi.org/10.7176/jesd/11-4-09

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Abstract

Government investment in infrastructure is a precursor to the achievement of sustainable economic growth and poverty reduction goals of any economy. Despite shortage of capital, the Kenyan government has continuously invested in both economic infrastructure and social infrastructure with the aim of raising economic growth. However, the growth rate has stagnated at an average of 5% annually for the last 5 years despite the projection of annual growth rate of 10% from 2012 as per Vision 2030. The main objective of this study was to determine the effect of government infrastructure investment on economic growth in Kenya for the period 1990 to 2017. The study adopted Error Correction Model for estimation and conducted the regression analysis using Ordinary Least Squares. Granger causality test found that economic infrastructure investment causes economic growth in Kenya but social infrastructure investment has neutral causality with economic growth. Further, the study found that government investment in economic infrastructure has a positive and significant effect on economic growth in Kenya with a p-value 0.0000 0.05. Additionally, the study established that private investment and labour force have negative and significant effect on economic growth in Kenya. Since infrastructure spending in Kenya is still inadequate, the study recommends the government to increase funds directed to infrastructure investment in the country to the World Bank’s infrastructure investment threshold of 7-9% of GDP, as this will translate to improved productivity as a result of increased physical and human capital leading to actualization of the 10% economic growth rate. The study also recommends complementary government spending to private sector investment since the marginal capital of private capital will be increased leading to higher productivity. Finally, the government should promote conducive environment for private sector investment so that more jobs can be created that will absorb the underutilized or unemployed labour force in the country. Keywords: Government, Infrastructure, Investment, Economic Growth, Error Correction Model DOI: 10.7176/JESD/11-4-09 Publication date: February 29 th 2020

Highlights

Reliable, adequate and quality infrastructure is a pre-condition for take-off into self-sustained growth (Rostow, 1960)
The study findings indicate that both economic and social infrastructure has a positive and significant effect on economic growth and private investment is crowded in
5.1 Conclusions The study determined the effect of government infrastructure investment on economic growth from the year 1990 to 2017

Summary

Introduction

Adequate and quality infrastructure is a pre-condition for take-off into self-sustained growth (Rostow, 1960). Public infrastructure investment refers to physical capital investments traditionally provided by public sector to private households and businesses (Fox & Smith, 1990). According to Smith (1776) infrastructure is all about the necessity of public establishments and buildings needed for social productions processes but unprofitable for private capital. This could be due to the fact that infrastructure provision and financing exhibit the characteristics of public goods of non-excludability in supply and non-rivalry in consumption. Mudida (2010) argues that free rider problem arises when public goods are provided by private sector These issues suggest that the government has a role to play in efficiently supplying and maintaining infrastructure, especially when it spans across geographic borders. Public investment in infrastructure is highly regarded as a key booster of economic growth since it enhances the productivity of existing infrastructure resources while at the same time it increases the resource base of an economy by adding new infrastructure (Gakuo, 2015). Mburu (2013) points out that public infrastructure investment occurs in three ways namely; capital reinvestment in existing public infrastructure, capital investment in new public infrastructure and operation and maintenance of existing infrastructure

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