The Impact of Financial Development and Economic Growth on Environmental Quality of Kenya

Publisher Summary This chapter discusses the financial development and economic growth in underdeveloped countries. An observed characteristic of the process of economic development over time, in a market-oriented economy using the price mechanism to allocate resources, is an increase in the number and variety of financial institutions and a substantial rise in the proportion not only of money but also of the total of all financial assets relative to GNP and to tangible wealth. Typical statements indicate that the financial system somehow accommodates—or, to the extent that it malfunctions, it restricts—growth of real per capita output. Such an approach places emphasis on the demand side for financial services; as the economy grows it generates additional and new demands for these services, which bring about a supply response in the growth of the financial system. In this view, the lack of financial institutions in underdeveloped countries is simply an indication of the lack of demand for their services.

Purpose: Since independence, the Government of Kenya has pursued many objectives, one being economic growth. Over the previous few many years, government expenditure has been developing faster than the GDP growth. Infrastructure, one of the components of public spending, has also experienced tremendous growth in government spending and development, which has not been directly reflected in the GDP growth rate. Following such situation, it calls for analyzing the impact that government infrastructure expenditure has on economic growth in Kenya with a focal point on three sectors beneath infrastructure that the public sector spends closely on; transport, energy and fuel, and Information Communication and Technology (ICT). The study's overall objective is to find out the effects of government spending on the three sampled sectors of government infrastructure on economic growth in Kenya and then draw policy implications from the findings. The specific objectives were; to investigate the effect of transport infrastructure expenditure on economic growth in Kenya, to examine the effect of energy & fuel infrastructure expenditure on economic growth in Kenya, and to examine the effect of ICT infrastructure expenditure on economic growth in Kenya. Further, Bounds F-test to cointegration as well as the Autoregressive Distributed Lag Model (ARDL) were used to realize the objectives.
 Methodology: The data was collected covered 1990 – 2020 for the three sectors of infrastructure: transport, energy & fuel, and ICT. Several tests on the time series data were carried out on the secondary data obtained, after which (ARDL) was employed in analysing the data.
 Findings: The outcome showed that government expenditure on transport, energy, fuel, and ICT infrastructure sectors affected economic growth either in the short or the long run. Based on the ECM regression findings, the long-run regression outcome revealed that expenditure on energy and fuel promotes economic growth. On the contrast, the findings showed that government expenditure on transport and ICT sectors exhibited a negative effect on GDP growth rate. Public expenditure on transport and ICT infrastructure sectors positively impacted economic growth in the short term, while the energy and fuel sectors exhibited a negative impact on GDP. Other control variables inclusive of trade openness and FDI showed either a positive or negative effect on economic growth either in long or short run. Inflation, particularly, exhibited a negative effect on GDP in the long run, in addition to within the short run.
 Unique Contribution to Theory, Practice and Policy: Based on the empirical findings, this study validates the Keynesian theory which stipulates that public expenditure positively contributes to economic growth. Based on this theory, public expenditure is an exogenous factor capable of being applied as a policy instrument in promoting economic growth.

The relationship between financial sector development and economic growth is a crucial issue for both developing and developed nations. To keep up with the changing world economy, there is need for developing countries like Kenya to develop their financial sectors. Kenya’s financial sector development has had a major role in its economic growth and this study provides a selected review of the literature and the relationship between Kenya’s financial sector and its economic growth. Numerous studies have been done on the effect of the financial sector on economic growth and the general conclusion is that the financial sector plays a central role in economic development and growth of the country. However, there is a limitation of empirical and theoretical work supporting the concept in developing countries. Most of the studies done focus on the direction of causality between finance development and economic growth and their relationship. For this reason, the study set out to analyze the influence of financial sector development on Kenya’s economic growth. The Neo-classical theory of growth was used to inform the study variables; banking sector, export market and economic growth. The study adopted an ex-post facto research design with Ordinary Least Square (OLS) method. The data used was secondary in nature obtained from the Kenya National Bureau of Statistics from the period 2010-2019. The findings revealed that there was a positive influence of financial sector development on economic growth. This implies that financial sector development promotes economic growth in Kenya. In policy terms, the findings, imply that Kenya can accelerate economic growth by improving the financial sector since financial development can be an engine of growth in this country. The study recommended that other major components of the financial sector development apart from the two studied; banking sector and export market, in this paper should be studied and put up in place well -structured policies that will support them and further develop the financial sector with the aspirations under the Kenya Vision 2030. Keywords : Financial sector development, Economic growth DOI: 10.7176/RJFA/12-2-01 Publication date: January 31 st 2021

In Kenya, government expenditure has been changing tremendously in its composition and size. Noticeably, since Kenya’s independence, government expenditure has witnessed great expansion. However, the country has not achieved consistent economic growth for a long duration of time. Despite the increase in allocation of resources through increasing public spending, economic growth has not grown at the same rate. As such, economic growth did not consummate with the increase in allocation of resources through government expenditure. The study sought to determine the effect of education expenditure, defense expenditure, health expenditure and infrastructure expenditure on economic growth. It used an explanatory research design and secondary time-series data for the period between 1985 and 2018. Data on education expenditure, defense expenditure, health expenditure as well as infrastructure expenditure and economic growth was acquired from Kenya National Bureau of Statistics. The quantitative data was collected, edited and coded into Statistical software known as STATA version 14. Analysis of the quantitative data was based on descriptive as well as inferential statistics. Correlation analysis was employed to assess the strength of correlation between independent and dependent variables whereas regression analysis determined the weight of association between independent and dependent variables. Diagnostic test was performed to test for the regression model assumptions before carrying out regression analysis. The research focused on autocorrelation test, stationarity test, autocorrelation test, normality as well as heteroscedasticity test. The study revealed that education expenditure had a positive effect on economic growth in Kenya. The study found that defense expenditure had a positive effect on economic growth in Kenya. The results revealed that health expenditure had a positive effect on economic growth in Kenya. In addition, the study found that infrastructure expenditure had a positive effect on economic growth. The study concludes that government expenditure has a significant effect on economic growth in Kenya. The study policy implication of the study is that Kenyan government as well as policy makers should formulate policies and guidelines geared towards increasing education expenditure. This will help in ensuring adequacy in a trained, qualified and productive labor that is important in ensuring an improvement in economic growth. In addition, the government of Kenya should allocate at least 15 percent of their total expenditure to the healthcare so as to ensure a productive and healthy workforce. The government also needs to increase infrastructure funding as recommended by the World Bank to between 7 and 9 percent.

The purpose of this study is to analyze the causal relationship that exist between economic growth and electricity consumption in Kenya for the sample period 1990 to 2022 using ARDL bound framework. Technically, it entails determining the existence of a short run dynamics, long-run equilibrium relationship and causal link between the two variables. ARDL bound F-test is used to estimate the existence of a long-run equilibrium relationship as well as the short-term dynamics that exists between the variables. At 10% confidence level, the study provides evidence of the existence of a long-run equilibrium relationship between economic growth and electricity consumption as the calculated F statistics is greater than the upper bound I(1). The Error correction model from the ARDL bound F-test which indicates the short run dynamics, has an error correction term that is negative and significant at 5% level. The error term meets the threshold conditions to agree with the long-run equilibrium relationship established. For a shock in the GDP-energy consumption system, there is a 15.6% rate of adjustment to equilibrium. In the short-run, an increase in electricity consumption by 1% induces an increase in GDP growth by 0.69%. In addition, the diagnostics test shows that ECM model residuals have a constant variance, no correlation and normally distributed. In the long-run, electricity consumption has a positive effect on GDP growth. Granger causality test is used to determine the direction of causal link between the variables. The study provides evidence of unidirectional causal flow from GDP to electricity consumption at 10% confidence level. But there exists no causal flow from electricity consumption to GDP. Kenya is confirmed to fall in the conservation hypothesis. This implies that economic growth plays a critical role in electricity consumption growth rate.

This paper investigated the long-run relationship between gross domestic product, access to electricity, and remittances within the multivariate framework in Kenya using the data for the period 1987-2018. The autoregressive distributed lag (ARDL) bounds test was used to investigate the long-run relationship. Causality between variables was investigated by use of the Granger causality method. The bounds test indicated that there is cointegration when gross domestic product, electricity access, and remittances are dependent variables. The long-run estimation of coefficients suggests that electricity access and remittances have significant positive impact on economic growth in Kenya in the sample period. Causality analysis provides evidence that there is unidirectional Granger causality running from gross domestic product to electricity access and not vice versa and from gross domestic product to remittances and not vice versa. There was no causality between remittances and electricity access. The policy implications of the paper suggest that the government and other companies concerned should enhance electricity access and encourage inflows of remittances as these contribute positively to economic growth in Kenya.

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

In the paper, we examine the causal relationship and the direction of causality between stock market development and economic growth in Ghana, Kenya and Nigeria. In examining the causal relationship and the direction of causality, we used the Granger Causality test procedure as developed in Granger. The study regressed five indicators of stock market namely stock market capitalization (MC), stock turnover ratio (STO), stock traded value (TVL), number of listed securities (LS), and stock market index (MI) against the real gross domestic product (GDP) which is used as a proxy for economic growth. Using the 1989 – 2009 data sets, the empirical findings of the study show that there is no causal relationship between stock market development and economic growth in Ghana and Nigeria, but revealed a bidirectional causal relationship between stock market development and economic growth in Kenya. When MC was used as a proxy for stock market development, MC and LS were found to Granger cause economic growth. Bidirectional causality was found between STO and GDP. TVL was found to have a strong negative effect on GDP. Based on the results of the study, we recommend that policy makers and regulatory bodies should formulate and implement policies that will attract investors and avail the real sector of the economy the much needed fund for production and encourage listing of companies that contribute largely to GDP in the nation stock exchange.

Re-examining the financial development and economic growth nexus in Kenya

ABSTRACTIn this paper, we have examined the impact of both bank- and market-based financial development on economic growth in Kenya during the period 1980 to 2012, using the autoregressive distributed lag bounds testing approach. To capture as far as possible the breadth and depth of the Kenyan bank- and market-based financial systems, the study employs the method of means-removed average to construct both bank- and market-based financial development indices from an array of banking sector and stock market variables. The empirical results of this study show that market-based financial development has a positive impact on economic growth in Kenya. However, the results have also shown that bank-based financial development has no impact on economic growth in the study country. These results apply irrespective of whether the regression analysis is conducted in the long run or in the short run. The findings of this study, therefore, lend more support to pro-market-based financial development policies in Kenya.

Purpose – This study aims to evaluate the nexus between foreign exchange rate, foreign capital outflow and economic growth in Kenya. This study focused on analyzing the moderating role of foreign exchange rate on the relationship between foreign capital outflow and economic growth in Kenya. The foreign exchange rate is an important measure in the economic development. Its fluctuations affect the levels of foreign capital outflow. The loss of foreign exchange reserve due to foreign capital outflow translates to great amount of savings lost in the country.
 Design/methodology/approach – This study employed a Panel Data approach and the World Bank’s residual model in the estimation of the magnitude of foreign capital outflow from Kenya during the period between 1986 to 2021.
 Findings – The panel data results revealed that the interaction variable MOD_FER had a coefficient of 0.05 and a significant probability value of 0.0001 which is significant at 5 percent level of significance. This means that foreign exchange rate moderated the relationship between foreign capital outflow and economic growth in Kenya during the period of this study. When the relationship with foreign capital outflow was moderated by 0.05 units then GDP grew by 1 unit. As such, foreign exchange rate is a significant factor in the relationship between foreign capital outflow and economic growth in Kenya.
 Originality/value – This study calculates the magnitude effect of foreign exchange rate in the relationship between foreign capital outflow and economic growth in Kenya for the first time. In addition, the study calculates the magnitude change of foreign capital outflow for MNE’s due to foreign exchange rate oscillations. This study suggests many policy proposals to deal with the challenge of foreign exchange rate, foreign capital outflow and economic growth in Kenya. The results of this study will benefit policy makers by providing them with data-based evidence that will guide them in making appropriate policies that discourage foreign capital outflow and institute proper management of foreign exchange rate to boost economic growth in Kenya.

Kenya’s GDP performance is constrained by high level of fiscal deficits, interest rates, and fluctuating exchange rates. Consequently, the economy has been characterized by sluggish cycles of low economic growth with policymakers revising their policies. Potential increase in economic growth level is central for Kenya to address macroeconomic instability. Supplementary evidence available indicates divergent views on the relationship between selected macroeconomic variables and economic growth. This study sought to determine the effect of selected macroeconomic drivers on economic growth. The study was anchored on Endogenous growth theory. Anchored in the philosophical paradigm of positivism, the study adopted an explanatory research design and relied on secondary data from the Kenya Bureau of statistics with the data spanning from 1990 to 2020. The study employed bound test to test for long run relationship and Autoregressive Distributed Lag model (ARDL) in the empirical analysis to evaluate the relationship among the variables. The data was subjected to stationarity test using Augmented Dickey Fuller (ADF) test . The long run ARDL results indicated that the coefficients of; exchange rate , and lending interest rate significantly affected economic growth. T he findings of this study will be useful in fiscal and monetary policy formulation, it inform the government on ways of finding possible solution to the economic growth challenges. The study submits that policymakers in CBK ought to adopt policies that maintain and keep stability in exchange rate, determine effective lending interest rates and maintain a level of fiscal deficit commensurate to economic growth in Kenya.

One of the significant economic growth problems in Kenya is the income inequality and poverty rate which has made it impossible for among the households to afford clean energy. While the country has experienced some economic growth over the years, it is not yet clear whether the adoption of renewable energy has been the cause of this growth. There have been mixed results on the studies done on renewable energy use and their effect on economic growth and therefore calls for further research. The general objective of the study was to determine the effect of renewable energy consumption on economic growth in the Kenyan economy. Specifically, the study specific objectives were to determine the effect of solar energy consumption, geothermal energy consumption, and hydroelectric energy consumption and wind power energy consumption on economic growth in Kenya. This was made possible through an analysis of 37 years’ data from 1986 to 2022 on an annual time series basis. This study employed the endogenous growth theory as the main theory of the study and triple bottom line theory as the supplementary theory. The study employed an explanatory research design and analyzed data using the Autoregressive Distributed Lag model to establish whether renewable energy consumption had any effect on economic growth of the Kenyan economy. Findings of diagnostic test demonstrated that there was no multicollinearity among the independent variables, residuals were homoscedastic, and there was no autocorrelation among the residuals. The results of the Jarque bera normality test showed that the study's variables were normally distributed. The Augmented dickey fuller unit root test both showed that there was no unit root and that the variables had a short run relationship. Additionally, the model's stability over time was confirmed by the CUSUM test. Findings of the study were: the relationship between hydroelectric energy consumption and economic growth was positive and significant, wind power energy consumption and economic growth was positive and significant and between geo-thermal energy consumption and economic growth was positive and significant. The study concluded that geo-thermal energy consumption, hydroelectric energy consumption and wind power energy consumption significantly affect economic growth positively. The study therefore recommends that the Kenyan government should set ambitious targets for renewable energy consumption such as a specific percentage of electricity generation or overall energy consumption. The Kenyan government should enhance and enforce regulatory frameworks specific to renewable energy in order to provide a stable and predictable investment environment. Finally, the Kenyan government should focus on expanding access to renewable energy solutions in rural areas, where energy access is limited. Implementing off-grid renewable energy systems, such as solar home systems and mini-grids, can provide clean and reliable electricity to rural communities.

Despite Kenya being one of the fastest growing economies in Africa, Kenya continues to face key challenges in economic growth. The government therefore has a key responsibility to instigate consistent and inclusive economic growth if the country is to achieve the economic pillar of the Vision 2030 of attaining an economic growth rate of 10% consistently. The aim of study therefore was to assess the relationship between government expenditure and economic growth in Kenya with the specific objectives being to assess the relationship of the types of government expenditure and economic growth in Kenya while incorporating the moderating effect of inflation on the relationship. The theoretical framework of the study was based on the Wagner’s organic state theory, Keynesian theory (1936), Wise and Peacock theory and the Musgrave theory of public expenditure. The study adopted a quantitative causal research design and a modified Barro (1990) model to assess the causality and the existence of short and long run relationships. The study adopted techniques like the Vector autoregression model (VAR), granger causality test, test for cointegration and the Vector error correction model (VECM) to analyze short run relationships, long run relationships of the variables and causation between the variables. Findings of the study showed that the types of government expenditure collectively granger causes economic growth and more specifically in the short run the study concluded that economic growth has had an insignificant relationship with government consumption expenditure, a negative relationship with government expenditure, a positive relationship with government transfer payments and an insignificant relationship with inflation. Similarly, in the long run the study concluded that economic growth has had a negative relationship with government consumption expenditure, a positive relationship with government investment expenditure, a negative with government transfer payments and the moderating the moderating effect of inflation was noted to be negative relationship. The findings of the study will not only contribute to the existing literature but it will also be used to develop fresh methods and techniques for boosting Kenya's economic growth in relation to government spending by both the government officials and other policy makers in an effort to achieve the economic pillar of vision 2030 and beyond.

The present study is motivated by the need to decouple economic growth from environmental degradation given the new wave of chase for higher economic growth trajectories comes with its environmental cost implications, especially among developing blocs like the Emerging 7 (E7) countries. There is a consistent trade-off between economic growth versus environmental quality. Government apparatus are perpetually on the chase for low-carbon emission policies via the pursuit for green economy. To this end, this present study extends the conventional environmental Kuznets curve (EKC) argument by incorporating the role of institution in emerging industrialized economies (E7) and using second-generation panel analysis methods like mean group (MG), augmented mean group (AMG), common correlated effects mean group (CCEMG), and the Dumitrescu and Hurlin causality test for more robust estimates and inferences. To this end, we explore the long-run and causality relationship between economic growth, quadratic form of economic growth, institutional quality, trade flow, investment in energy sector, and financial development in an EKC environment. Empirical analysis established a long-run equilibrium relationship among the outlined variables over the study period. The long-run regression shows the presence of EKC in the E7. Thus, suggesting the preference for GDP growth over environmental quality at the earlier stage of growth curve. Interestingly, investment in energy, trade flow dynamics across the blocs, and financial development dampens the detrimental effect of environmental pollution as we observed negative relationship with the ecological footprint. On the contrary, quality of institution is weak as institutional quality increase (worsen) the quality of environment in the E7 economies. From a policy perspective, this current study proposed the need for more stringent environmental treaties and regulations and promotion of green economy without compromising economic growth. In the conclusion part of the study, more details and specifics about the policy blueprint are presented.