The Relevance of Educational Investment to Economic Growth in Kenya

Abstract

It is commonly assumed that education has an important positive effect on economic growth, but to date the evidence for this assumption has been surprisingly weak. This study explores the relationship between the role of investment in education and economic growth. The study is guided by two specific objectives; to determine the significance of physical capital formation on economic growth and to establish the contribution of labour input to economic growth. It uses time series techniques to investigate the relationship between government education expenditure per worker and economic growth in Kenya during the period 1963 to 2014.The data were collected from Kenya Government Ministries, Kenya National Bureau of Statistics and from the World Bank. The study has used the multiplicative Cobb-Douglas production function, in which human capital is treated as an independent factor of production, as in the human capital augmented growth model. Unit root and Granger-causality tests are carried out to make allowance for dynamic relationships, non-stationarity, and spurious regression problems. Empirical results show that education expenditure per worker has a positive and significant impact on economic growth, both in the long run and in the short run. Cointegration estimates show that an increase of 1 percent in education per worker raises output by 0.5 percent in the long run. Also, in the long-run, a 1percent increase in fixed capital formation raises output by 0.15 percent, and a 1 percent increase in the use of labour leads to a 0.21 percent decrease in output in the long run.  Correlation tests also show that there is a positive relationship between investment in education and economic growth. These results suggest that it is worth investing in education because it contributes to economic growth. The Government of Kenya and the private sector of Kenya need to consider increasing their investment in education.

Keywords: Educational Investment and Economic Growth