An analysis of the absorption capacity of Official Development Assistance in Kenya from 1981 - 2010 and its relationship with economic development

Abstract

One of the key components of development funds for Kenya is Official Development Assistance (ODA). However, given ODA's general underwhelming nature and overall ineffectiveness in fostering economic development, it would be useful to consider absorption capacity as the best measure of how well aid to Kenya is working, and not just the gross amount of ODA flows to Kenya. That is the basis of this research. The research utilized time series data obtained from the World Bank aggregator, using a time period of 30 years i.e. 1981 to 2010. The dependent variable in this research is GDP growth rate, which indexes economic development. The absorptive capacity was found to display a mean reverting trend, with an average of 87% over the past 30 years. Thereafter, an Auto regressive Distributed Lag model was used to determine the long run relationship between ODA absorption and economic development. The results of the model showed that the absorptive capacity of ODA negatively influences economic development in the current time period, but it has a positive and significant influence on economic development in the next time period. However, in the long run, the relationship between the two variables is statistically insignificant, meaning that the relationship between the two cannot be determined to be a result of anything but mere chance.