The Effect of Official Development Assistance Aid on Economic Growth and Domestic Savings in Kenya

Omenda Purity Awino, Urbanus Mutuku Kioko
International Journal of Finance, Insurance and Risk Management, Volume 12, Issue 4, 63-77, 2022
DOI: 10.35808/ijfirm/335


Purpose: This study examines the effect of Official Development Assistance (ODA) on Kenya’s economic Growth and Domestic savings from 1960-2019, using a simultaneous equation system in which growth and savings are jointly determined. Design/methodology/approach: The model was estimated using the 2-Stage least square method to address the endogeneity problem. Findings: The results show that government spending has the most positive impact on economic growth, however, the impact of ODA although positive was found to be statistically insignificant. The results further indicate that aid positively affects domestic savings during the study period. Practical implications: Despite many developing countries benefitting from Official Development Assistance (ODA), only a few countries including Kenya have experienced significant positive changes in economic growth and domestic savings. Given that most developing countries have higher growth potential, ODA Aid is expected to affect economic growth and saving rates positively and significantly. Originality/Value: The contribution of ODA in improving economic growth and augmenting domestic savings is still debated in the economics literature. Previous studies have not settled on a conclusive impact of ODA on domestic savings and economic growth, given the existence of conflicting findings.

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