Foreign Dependency and Economic Growth Nexus in Kenya

Abstract

Foreign dependency is an economic phenomenon, which is characterized by asymmetrical benefits, favouring specific countries at the expense of others, and impeding the growth potential of dependent economies. The main objective of the study was to determine the relationship between foreign dependency and economic growth in Kenya. To achieve this overarching aim, specific objectives have been delineated to include an evaluation of the effect of import volumes and external debt levels on economic growth in Kenya. The theoretical underpinnings of this study draw from several key economic theories and models, each offering unique insights into the dynamics of foreign dependency. This study employed a descriptive and inferential statistical design and leverages a time series dataset spanning the years 1980 to 2021, meticulously sourced from the World Bank. To facilitate a comprehensive analysis, the Autoregressive Distributed Lag (ARDL) model was applied. The empirical analysis revealed noteworthy relationships between determinants of economic growth in the Kenyan context. Specifically, imports of goods and services and external debt are all identified as having statistically significant impacts on the trajectory of economic growth in Kenya. In conclusion, these findings suggest that factors like imports and external debt contributes positively to economic growth. The study recommends that policymakers should explore strategies to attract productive external debt which will stimulate positive investment spillover effects within the economy. Emphasis should be placed on the need to bolster the import-led growth through regulatory mechanisms that safeguard local producers. Responsible external debt management is underscored as pivotal to fostering sustained and robust economic growth. Additionally, trade policies designed to facilitate import-led growth are posited as potentially beneficial for the Kenyan economy.