The Impact of Domestic Savings and Trade Openness on Kenya’s Economic Growth (1985-2017)

Abstract

The chief objective of this study was to examine and establish the impact of domestic savings on the economic growth of Kenya using annual data for the period 1985 to 2015. The study employed an ordinary least square approach. The Augmented Dickey-Fuller (ADF) and Phillips Perron class of tests was used to infer the presence of unit roots which was corrected for by first differencing; Co-integration test showed a long run relationship between the domestic savings capital formulation, labour, trade openness and economic growth. The error correction model also indicated the existence of a short run relationship between economic growth and the selected explanatory variables. The empirical results depicted that domestic savings had no significant impact on economic growth in the long run and this is possibly attributed to the low and poor saving culture of Kenyans overall. Capital formulation and labour did reveal a positive and significant impact on economic growth, something that resonates well with economic theory as indicated by Solow’s growth model. The short run dynamics indicate that domestic savings and capital formulation positively impact growth. The main policy implications from the study is that the Kenyan government should consider fostering and putting in place policies that augment income since it plays a major role in increasing savings so as to facilitate economic growth. There should be deliberate efforts to empower, skill and make easily available key factor inputs to boost citizen’s productivity so that they can earn more and save more. Low domestic saving increases dependence on foreign financing, fueling a rise in the external current account deficit and jeopardizing the sustainability of growth.