Economic Growth and Infrastructure Expenditure in Kenya: A Granger-Causality Approach

Abstract

The President of Kenya, in January 2014, announced that infrastructure development would be used as the major drive to achieve economic growth during the tenure of his presidency. A notable part of the statement by the President is the requirement that the policy would involve very significant public expenditure on infrastructure. In that context, this study undertook a causality analysis between infrastructure expenditure and economic growth and labor was introduced into the framework as a control variable. The study also undertook to establish if innovations in one variable would influence the future behavior of another. Annual data used in this study was obtained from World Development Indicators for the period 1980 to 2013. Using Granger Causality approach the study reveals that: there is bidirectional flow of causality between economic growth and infrastructure, shocks in economic growth explained the behavior of infrastructure even beyond eight years, and that infrastructure expenditure is explained by innovations in the previous period. The findings suggest that the government should commit more funds towards developing infrastructure in the short term. This should be complemented by improving the quality of institutions and an improvement in the level of regulation to enhance sustainable growth