A Sectoral analysis of the impact of foreign aid on public investment and economic growth in Kenya

Abstract

The purpose of this study was to find out the effectiveness of foreign aid in boosting economic growth in Kenya and its impact on public investment. This paper uses an Autoregressive Distributed Lag (ARDL) Model to estimate the short run and long run impact of foreign aid on economic growth and public investment both on an aggregate level and a sectoral level. Time series data was used for the period 1980-2014. The study finds a significant positive relationship between aggregate aid and growth as well as public investment in the long run. The sectoral analysis shows that aid to the production, energy and tourism sectors is ineffective while aid to economic infrastructure and education is effective. An important finding of this study is that it is necessary to have a stable macroeconomic environment for aid to be effective.