Diaspora Remittances And Economic Growth In Kenya

ABSTRACT

Diaspora remittances have become an imperative source of capital flows for different countries worldwide. Even though developing countries such as Kenya do not have a significant share of this capital flow, diaspora remittances is noted to be useful in promoting household income, stimulating and enhancing investment and economic growth in the country. There are few studies that have focused on the nexus between diaspora remittances and economic growth. These studies however do not capture the dynamics affecting diaspora remittances such as changes in the domestic savings and financial deepening of a country. Empirical studies on nexus between diaspora remittances and economic growth in Kenya have not used domestic savings and financial deepening variables exhaustively in exploring the subject under study. This study estimated short-run and long-run effects of diaspora remittances on growth of economy in Kenya and took into considerations the two factors of domestic savings and financial deepening as independent variables. The data was sourced from the World Bank, Central Bank of Kenya, Kenya National Bureau of Statistics and the National Treasury. The study used time series data for the period 1970 to 2017. Empirical studies carried in Kenya have not considered the period from 1970 to 2017. STATA software was used for the analysis and Granger causality test was used to test the direction of causality between diaspora remittances and economic growth. The Granger causality tests showed that there was unidirectional causality between Diaspora remittances and economic growth in Kenya for the period under study (1970-2017). This means that diaspora remittances accelerates economic growth in Kenya and that economic growth does not lead to increase in diaspora remittances in Kenya. Based on the maximum rank two of the cointegration, GDP and diaspora remittances were cointegrated. The study used ordinary least squares estimation to determine both the short-run and long-run effects of diaspora remittances on economic growth in Kenya. It was found that there was a short run and long-run relationship between GDP and diaspora remittance at 10 percent level of significance and similarly between GDP and domestic savings. The explanatory variables chosen in the ordinary least squares model explained 48.81 percent of the variation in GDP. Regression results showed that diaspora remittances has a positive impact on economic growth both in the short-run and long-run at 10 level of significance leading to a 0.45 percent increase in GDP. It is recommended that policy makers should develop policies which will increase Diaspora remittances, financial deepening, foreign direct investment and trade openness for economic growth in the country. This can be achieved through balanced improvement of all the other key macroeconomic variables like national income, employment, money supply and price levels to attain a sustainable economic growth and development.