Determinants of Total Factor Productivity in Kenya

Abstract

Neoclassical growth accounting literature has shown that total factor productivity has a positive relationship with output. Based on OLS estimation techniques on data for Kenya between the years 2002 and 2013, this study finds that agglomeration economies, macroeconomic stability and political stability are good contributors of total factor productivity growth, which in turn leads to aggregate output growth. The findings of this study point to a shift from the notion that growth in National Income has to be stimulated by expansionary monetary spending. Other factors such as Population Density and attempts to stabilize the Macro economy can indirectly foster growth of National Income. Accordingly, the findings provide a basis for Policy makers' focus on Monetary Policy that keeps Inflation stable and the preservation of political stability and the absence of violence because this will lead to an increase in Total Factor Productivity and eventually National Output.