Government Sector Spending and Private Investment: Evidence from Kenya

Abstract

The private sector investment plays an integral part in guaranteeing economic soundness of an economy. In Kenya, the recurrent government expenditure increased sharply in the last two decades although this has not been commensurate to the private capital growth rate. Further, past empirical studies on recurrent sectoral expenditure and private investments have yielded mixed results with some in favor of the crowding-in hypothesis and other crowding-out effects (Buiter, 1977). Due to this controversy, the link between private capital formation and sectoral public spending remains unresolved in Kenya. The study used secondary data for 1963 to 2018 from various Statistical abstracts and Economic surveys reports. Both the Autoregressive Distributed Lag (ARDL) model and the Error Correction Model (ECM) estimation method were used to realize the study objective. Generally, this result posed mixed results on how health, education, agriculture, infrastructure and defense recurrent outlays impact private investment. The study components result indicates promotion and demotion of private investment in the country. The recurrent outlays in most public spending were found to crowd-in private investment significantly. These findings will inform the formulation of relevant vibrant fiscal policies to switch government spending in sectors that will spur private investment and hence economic growth in Kenya. Keywords: Recurrent spending, private investment, capital information, crowding-out, sector, Keynesian model. DOI: 10.7176/JESD/13-18-05 Publication date: September 30 th 2022