Discussion Paper No. 111 of 2010 on Economic Policy and Total Factor Productivity in Kenya.

Abstract

Policy makers and development experts in many countries have had to deal with a decision on exactly what sources of economic growth they must target to achieve higher growth rates. Most development practitioners and policy makers continue to target physical capital accumulation as the major source of economic growth. Several studies have argued that economic growth does not always come from factor accumulation but total factor productivity (TFP). Due to lack of knowledge on its strong links to economic growth, policy makers in many countries ignore to focus on TFP growth in the policy making and implementation process. If TFP growth is a major source of economic growth in a country, then economic policies must be geared towards encouraging and not restricting TFP growth in order to achieve higher economic growth. In the case of Kenya, however, it is not clear whether economic policy has encouraged or discouraged TFP growth. Economic policies aimed at raising economic growth in Kenya, to a large extent, tend to emphasize too much on factor accumulation than TFP growth. This somewhat leads to a less than optimal growth rates in output. This study aims at determining the place of TFP as a source of economic growth in Kenya with a view to arguing for a re-focus of policy towards TFP growth as one of the major factors that drive economic growth and competitiveness of the economy than just concentrating policy efforts on factor accumulation...