FINANCIAL IMPACT OF DEVOLVED FUNDS ON ECONOMIC GROWTH IN KENYA

Abstract

The Kenya Government has tried to facilitate decentralization through initiatives like LATF, DFRD, CDF and ESP. The biggest challenge remains in the constitutional framework in tackling those inherent problems stemming from weak institutional capacity, poor legal framework, and lack of community involvement and multiplicity of ghost projects continuously undermine the essence of various efforts. The end result is that the strategies take a short term nature, making it hard for them to resist periodical economic shocks. This study aims at assessing the impact of the devolved system of governance on economic growth in Kenya. This research relied heavily on annual secondary data from 1981 to 2012 which was obtained from the Government Printers, Kenya National Bureau of Statistics, The Kenya National Library, The G.o.K Economic Surveys, The World Bank website and the G.o.K Public Expenditure review reports. This tests the competing performance of various decentralization strategies by the Government as to their impact on the economic growth. Analysis was performed using regression techniques. Results for devolved funds indicated that in the long run DFRD, CDF, LATF and ESP were found to be insignificantly related to GDP. The parsimonious long run model also found that total devolved funds allocations and the dummy for ESP was insignificantly related to long-run GDP. Short run DFRD allocations were significantly related to short run GDP. Therefore, increases in short run DFRD allocations lead to an increase in short run GDP. On the other hand, the short run CDF allocations, short-run LATF allocations and ESP was not significantly related to short run GDP. The parsimonious short run model also found that total devolved funds allocations were significantly related to short run-run GDP. This implied that an increase in total devolved funds in the short run led to an increase in short run GDP. It is recommended that the government should increase the total amount of devolved funds as this stimulates growth in the short run. Specifically, more funds should be allocated to the current devolved Government structures as opposed to the traditional DFRD as opposed to LATF, CDF and ESP.