The Effect of Trade Liberalization on Economic Growth in Kenya

Abstract

Trade liberalization and its impact on economic growth has been a subject of debate for many years both at international and local level. The debate has been lengthened by the fact that there are no theoretical underpinnings that directly link trade liberalization to economic growth or are there any absolute terms and conditions by which trade liberalization leads to economic growth. Trade liberalization is the removal or reduction of barriers to trade that ensures free movement of goods and services from one nation to another. Kenya liberalized their trade with the hope of having dynamic gains from trade, and that the liberalization will lead to economic growth and, consequently, improve welfare. However, its key development challenges still include poverty, inequality, youth unemployment, continued weak private sector investment, and the vulnerability of the economy to internal and external shocks. This study aimed to examine the effect of trade liberalization on economic growth in Kenya and finding empirical answers to this phenomenon is what motivated this study. The objective of the study was to examine the effect of manufacturing output and foreign direct investment on Kenya’s GDP. Foreign direct investment and manufacturing output were tested to determine their effect on the Kenyan economic growth. This study adopted descriptive research design. Time series data spanning 1990 to 2022 was used for the study. The data was meticulously sourced from the World Bank. A time series diagnostic test was carried out on the data. This study adopted descriptive designs. Vector Autoregressive (VAR) model was applied. Results showed that foreign direct investment inflows and manufacturing output had a significant effect on economic growth in Kenya. In conclusion, these findings imply that although foreign direct investment (FDI) may have negative effect on Kenya's economic growth while manufacturing output support economic growth. In order to sustain long-term economic growth, Kenyan policymakers may want to consider ways to draw in beneficial FDI while simultaneously emphasizing the manufacturing sector which will be beneficial for the economy.