Role of Educational Investment on Economic Growth and Development in Kenya

Abstract

The Government of Kenya spends 30% of its budget on education. 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 aimed at exploring the relationships between the amount of investments in education and economic growth. It was an attempt to explore the extent to which education level of the Kenyan labor force affects its economic growth that is its output level. It was guided by the following specific objectives; to examine the impact of physical capital formation on economic growth and to investigate the contribution of labor input on economic growth. This study used time series techniques to investigate the relationship between government education expenditure per worker and economic growth in Kenya during the period 1967 to 2010.The data was collected from Kenya National Bureau of Statistics and the World Bank. The study used the multiplicative Cobb-Douglas production function where human capital was treated as an independent factor of production in the human capital augmented growth model. Unit root and Granger-causality tests were carried out to make adequate allowance for the dynamic relationship, on stationary, and spurious regression problems. The empirical results show that education expenditure per worker has a positive and significant impact on economic growth both in the long run and short run. The cointegration estimates show that an increase of 1% of education per worker raises output by 0.5% in the long run. Similarly, in the long-run, a 1% increase in fixed capital formation raises output by 0.15%. Also, a 1% increase in labor leads to 0.21% 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 justified that it is worth investing in education since it contributes to economic growth. The Government of Kenya and the private sector who are the beneficiaries of this study need to increase the amount of investment in education.

Keywords: Educational Investment, Economic Growth and Error Correction Model