Effect of Foreign Multilateral Aid and Foreign Bilateral Aid on Capital Formation in Kenya

Abstract

Low capital formation in Kenya, averaging rate 20.13% of GDP over the period 2006-2017 has kept unemployment rate above 39% with more than 65 per cent of people living on less than $ 2 a day. Yet previous studies do not have a clear answer to the question of whether increasing bilateral aid/multilateral aidenhances capital formation or not. This study's purpose was to investigate the effect of multilateral aid and bilateral aid on capital formation in Kenya. The study was anchored by Solow (1956) model. Autoregressive distributed lag estimates for data over 1974-2017 suggested that multilateral aid has positive insignificant effect on capital formation while bilateral aid has negative significant effect after one year. Error correction mechanism model estimates suggest that bilateral aid has positive significant effect on capital formation in the short-run during the programme year but becomes negative thereafter. The results were robust for impulse response analyses. The study concluded that bilateral aid retards capital formation in the long run but enhances it in the short-run during the first year.Soliciting for more bilateral aid was recommended in order accelerate capital formation in Kenya in the short-run.

A conductive effect of aid volatility on health poverty in aid-recipient countries

“…Mallik (2008) revealed that FA negatively impacts national economic growth in the long run by assessing 35 years in six African countries. Wafula, Odondo and Obange (2019) revealed an insignificant contribution to economic development in the short and long run during 1974-2017 in Kenya. These results have been confirmed by Bird and Choi (2020), showing a more ambiguous impact of FA.…”

Bilateral and multilateral aid perspectives of economic growth in sub-Saharan Africa

“…Based on this finding, the formulation of appropriate policy that can encourage more inflows of aid was recommended. In Kenya, Wafula et al (2019) used unconstrained model to study the role of ODA in capital formation and economic growth, during the period 1974-2017. The results revealed Economic growth in sub-Saharan Africa insignificant positive effect in the short-run and long-run, which suggest the need to encourage development aid through appropriate policy measures.…”

“…Based on this finding, the formulation of appropriate policy that can encourage more inflows of aid was recommended. In Kenya, Wafula et al. (2019) used unconstrained model to study the role of ODA in capital formation and economic growth, during the period 1974–2017.…”