Role Of International Trade On The Economic Growth In Kenya

Abstract

While economies are striving hard to achieve high economic growth, it becomes more important to answer the question of what actually determines their economic growth. International trade has recently been considered as an important determinant of economic growth. The general objective of the study was to examine the role of international trade on economic growth in Kenya. The specific objectives of the study were to establish the role of human capital development, customs duty, foreign direct investment and international trade openness on economic growth in Kenya. Descriptive research design was applied in this study as the study sought to collect data and establish relationships that existed without changing the environment in any way. The study was a case of Kenya. Available data for Kenya 1964 to 2015 was used. The data was collected from World Bank, World Trade Organization, World Customs Organization and Kenya Revenue Authority. The data collected was analyzed using the vector autoregression model. To establish whether the time series relating to international trade cause the time series related to economic growth, the analysis of the data through the model was preceded by tests of unit root and stationarity. Stata statistical package was applied in data analysis. The findings were then presented in figures and tables. The findings established that human capital and international trade openness had significant positive effect on economic growth. Customs duty had significant negative effect on economic growth while FDI had no significant role on economic growth. The results also indicated that human capital development, international trade openness and customs duty granger caused economic growth. FDI did not granger cause economic growth. The study made the following recommendations. First, the country should seek to enhance human capital to ensure that it is competitive in terms of labour productivity in the labour markets. This is expected to make the country more productive and efficient locally as well as making it competitive internationally. Secondly, the country should seek to utilize the customs that are derived from international trade into developing both human and capital infrastructure that is capable to enhance the country’s competitiveness both in the short term as well as in the long term. Third, Kenya should seek to improve the investments climate and business environment in the country to attract mode FDI which can be able to have a significant role on economic growth. Having policies that encourage FDI and marketing the country as a desirable investment destination would be a good starting point. Lastly, the country should continue to be open to international trade but care should be taken to balance the trade so as to ensure that exports rise more than the rise experienced in imports. The country should also have stringent policies on what should be imported so as to protect local industries.