Discussion Paper No. 79 of 2007 on Sources of Economic Growth in Kenya: A Redux

Abstract

Achieving and sustaining high levels of economic growth has been a primary focus for policy makers in post-independent Kenya. However, economic growth has been episodic, and achieving sustainable growth remains elusive. Agriculture and manufacturing have remained the key priority areas for growth, with limited focus on services (trade, tourism, transport, communication and financial services). This study used two Social Accounting Matrices (SAM) at two different points in time (1976 and 2003) to analyse structural change and sources of growth for the Kenyan economy. It was found that the economy has undergone structural transformation from a labour-intensive economy to a capital intensive one. This has had implications on the ability to generate employment, which is one of the pillars of economic recovery. Also, incremental capital output ratio has been increasing implying increased inefficiency. Even though the economy has become more open, there has been increased import dependency and declining export share, which does not support a growth strategy predicted on exports. It was also shown that domestic final demand accounted for about 58.6 per cent of output growth between 1976 and 2003, while intermediate consumption accounted for 49.4 per cent. The large contribution by intermediate consumption indicated the importance of inter-industry linkages for growth in the Kenyan economy. Analysis of linkages reveals that the level of inter-sectoral linkages increased between 1976 and 2003, and demand for inputs was more dispersed. However, priority areas (agriculture and manufacturing) had weak and below average backward linkages, but above average forward linkages. In general, it was shown that these sectors have not played their role in the growth and development of the economy. It was also shown that Kenya has not followed the hypothesized development path, since the service sector is the leading sector in terms of contribution to value added. For the economy to achieve more sustainable growth, there is need to ensure increased value addition in agriculture and manufacturing increased efficiency in use of factors of production (labour and capital) and enhanced inter-sectoral linkages for stimulation of growth.