How Does Agricultural Sector Dynamics Influence Economic Growth in Kenya? An Empirical Investigation of Key Drivers

Abstract

Kenya's agricultural sector, renowned for its tea and horticultural exports, is pivotal to the nation's economic development. This study investigates the effects of agricultural sector variables on Kenya's economic growth from 1995 to 2021, with a particular focus on agricultural export-led growth. Findings challenge the conventional support for agricultural exports as a primary driver of economic growth in Kenya, as exports show a positive but statistically insignificant effect on GDP per capita under the FMOLS and CCR models. This weak evidence for export-led growth suggests that potential gains from exports may depend on broader factors such as value addition, export diversification, and better access to international markets. Additionally, agricultural imports had a positive but insignificant impact on economic growth, indicating potential contributions through access to vital inputs and technology. In contrast, agricultural employment exhibited a significant negative relationship with growth, implying an economic shift from agriculture toward industrial and service sectors, which can foster higher productivity. Government spending on agriculture, however, negatively impacted growth, indicating inefficiencies in resource allocation. The study recommends that Kenya enhance export competitiveness, improve government spending efficiency, and focus on value addition in agriculture. Strategic interventions to address structural inefficiencies, support sectoral transformation, and elevate productivity are essential to harness the agricultural sector’s potential for sustained economic growth.

Keywords

• Kenya
• Agriculture
• Economic Growth
• Exports
• CCR
• FMOLS

References

1. Ahmed, R., & Jawaid, S. (2022). Foreign capital inflow and housing prices in a developing country: An advanced econometric enquiry. International Journal of Housing Markets and Analysis, 16(1), 146-166. https://doi.org/10.1108/ijhma-11-2021-0122
2. Akanbi, O., Onuk, E., & Umar, H. (2019). Effect of agricultural sector expenditure on Nigeria’s economic growth. Asian Journal of Agricultural Extension, Economics & Sociology, 1-11. https://doi.org/10.9734/ajaees/2019/v32i330157
3. Alemayehu, S., & Tilahun, S. (2021). Agricultural Export and Economic Growth Nexus: A Case Study of Ethiopia. International Journal of Rural Development, Environment and Health Research, 5(2), 2456–8678. https://doi.org/10.22161/ijreh.5.2
4. Ali, I., Khan, I., Ali, H., Baz, K., Zhang, Q., Khan, A., & Huo, X. (2020). The impact of agriculture trade and exchange rate on economic growth of Pakistan: An nardl and asymmetric analysis approach. Ciencia Rural, 50(4), 1–15. https://doi.org/10.1590/0103-8478CR20190005
5. Altman, M. (2003). Staple theory and export‐led growth: constructing differential growth. Australian Economic History Review, 43(3), 230–255. https://doi.org/10.1046/j.1467-8446.2003.00053.x
6. Andreou, E., & Ghysels, E. (2009). Structural Breaks in Financial Time Series. In Handbook of Financial Time Series (pp. 839–870). Springer Berlin Heidelberg. https://doi.org/10.1007/978-3-540-71297-8_37
7. Anto, B., Priyarsono, D., Sinaga, B., & Sudaryanto, T. (2014). The impacts of regional governments’ expenditures on the agricultural sector and economic performance in Indonesia. IOSR Journal of Economics and Finance, 4(2), 33-40. https://doi.org/10.9790/5933-0423340
8. Arifah, K., & Kim, J. (2022). The importance of agricultural export performance on the economic growth of Indonesia: The impact of the COVID-19 pandemic. Sustainability, 14(24), 16534. https://doi.org/10.3390/su142416534

9. Bakari, S., & Mabrouki, M. (2018). The impact of agricultural trade on economic growth in North Africa: Econometric analysis by static gravity model (MPRA Paper No. 85116). University Library of Munich. https://mpra.ub.uni-muenchen.de/85116/
10. Bakari, S. (2021). Reinvest the relationship between exports and economic growth in African countries: New insights from innovative econometric methods (MPRA Paper No. 108785). University Library of Munich. https://mpra.ub.uni-muenchen.de/108785/
11. Beckman, J., & Countryman, A. (2021). The importance of agriculture in the economy: Impacts from COVID‐19. American Journal of Agricultural Economics, 103(5), 1595-1611. https://doi.org/10.1111/ajae.12212
12. Benchouk, W. (2021). Estimating the causal relationship between renewable energy consumption, tourism and economic growth: evidence from Algeria. Finance and Business Economies Review, 5(2), 331-344. https://doi.org/10.58205/fber.v5i2.1007
13. Busari, A. O., Kehinde, A. L., & Ayanboye, A. O. (2022). Effects of agricultural exports on economic growth in Nigeria: A co -integration analysis (1980-2019). Scientific Papers-Series Management Economic Engineering in Agriculture and Rural Development, 22(1).
14. Chibi, A., Chekouri, S., & Benbouziane, M. (2019). The dynamics of fiscal policy in Algeria: Sustainability and structural change. Journal of Economic Structures, 8(1). https://doi.org/10.1186/s40008-019-0161-3
15. Dincă, G. (2023). Analyzing Eu’s agricultural sector and public spending under climate change. Sustainability, 16(1), 72. https://doi.org/10.3390/su16010072
16. Droller, F., & Fiszbein, M. (2021). Staple Products, Linkages, and Development: Evidence from Argentina. Journal of Economic History, 81(3). https://doi.org/10.1017/S0022050721000383
17. Elie, M. (2024). Contribution of population growth on economic growth in Rwanda (1992-2022). International Journal of Current Science Research and Review, 07(04). https://doi.org/10.47191/ijcsrr/v7-i4-33
18. Emeru, G. (2023). Effect of public expenditure on economic growth in the case of Ethiopia. The Scientific World Journal, 1-14. https://doi.org/10.1155/2023/9305196
19. Evangelista, J., Estrella, N., & Suin, K. (2022). Trade liberalization: Reaping its effects on the agricultural performance of the Philippines. Journal of Economics Finance and Accounting Studies, 4(1), 131-149. https://doi.org/10.32996/jefas.2022.4.1.9
20. Fan, S., Cho, E., & Rue, C. (2018). Returns to public agricultural and rural investments in China. China Agricultural Economic Review, 10(2), 215-223. https://doi.org/10.1108/caer-11-2017-0211
21. Farhad, M., & Jetter, M. (2022). On the relationship between trade openness and government size. World Economy, 46(7), 2102-2133. https://doi.org/10.1111/twec.13374
22. Faridi, M. Z. (2012). Contribution of agricultural exports to economic growth in Pakistan. In Pakistan Journal of Commerce and Social Sciences (Vol. 6, Issue 1). PJCSS. http://hdl.handle.net/10419/188047
23. Food and Agriculture Organization. (2024). Kenya at a glance. Food and Agriculture Organization of the United Nations. https://www.fao.org/kenya/fao-in-kenya/kenya-at-a-glance/en/
24. Ghimire, A., Lin, F., & Zhuang, P. (2021). The impacts of agricultural trade on economic growth and environmental pollution: Evidence from Bangladesh using ARDL in the presence of structural breaks. Sustainability (Switzerland), 13(15). https://doi.org/10.3390/su13158336
25. Jacob, A. (2023). The growth of Nigeria's economy from 1981 to 2019 in relation to the financing of agriculture. Food and Agri Economics Review, 3(2), 32-37. https://doi.org/10.26480/faer.02.2023.32.37
26. Ji, X., Dong, F., Chen, Z., & Bu, N. (2022). The influences of international trade on sustainable economic growth: An economic policy perspective. Sustainability, 14(5), 2781. https://doi.org/10.3390/su14052781
27. Jimenez, G. H., & Razmi, A. (2013). Can Asia sustain an export-led growth strategy in the aftermath of the global crisis? Exploring a neglected aspect. Journal of Asian Economics, 29, 45–61. https://doi.org/10.1016/j.asieco.2013.08.003
28. Kalaitzi, A. S., & Chamberlain, T. W. (2021). The validity of the export-led growth hypothesis: Some evidence from the GCC. Journal of International Trade and Economic Development, 30(2), 224–245. https://doi.org/10.1080/09638199.2020.1813191
29. Kamau, C., Snyder, M., & Scott, R. (2024). Market Fact Sheet: Kenya.
30. Kang, H. (2015). Agricultural exports and economic growth: Empirical evidence from the major rice exporting countries. Agricultural Economics (Czech Republic), 61(2), 81–87. https://doi.org/10.17221/99/2014-AGRICECON
31. Kathula, D. (2023). Factors impacting agricultural production and the role of agricultural extension services in Kenya. Journal of Agriculture, 7(1), 22-44. https://doi.org/10.53819/81018102t4115
32. Kenya National Bureau of Statistics. (2023). Kenya quarterly gross domestic product: Third quarter 2023 [Report]. https://www.knbs.or.ke/wp-content/uploads/2024/06/Kenya-quarterly-gross-domestic-product-third-quarter-2023.pdf
33. Kesar, A., Kamaiah, B., Jena, P., & Yadav, M. (2022). Dynamics of governance, gross capital formation, and growth: Evidence from Brazil, Russia, India, China, and South Africa. Journal of Public Affairs, 23(1). https://doi.org/10.1002/pa.2831
34. Kimolo, D. (2023). A chronological analysis of inflation dynamics in Kenya. Facta Universitatis Series Economics and Organization, 295. https://doi.org/10.22190/fueo230531019k
35. Kipkoech, B. M. (2021). Agricultural exports, selected macroeconomic variables and economic growth nexus in Kenya.
36. Kiptarus, N. S., Chepng’eno, W., & Saina, E. K. (2022). Effect of real exchange rate volatility and selected macroeconomic variables on trade exports performance in Kenya. Journal of Economics Finance and Management Studies, 05(07). https://doi.org/10.47191/jefms/v5-i7-06
37. Kogo, B., Kumar, L., Koech, R., & Hasan, K. (2022). Response to climate change in a rain-fed crop production system: insights from maize farmers of western Kenya. Mitigation and Adaptation Strategies for Global Change, 27(8). https://doi.org/10.1007/s11027-022-10023-8
38. Kollie, G. B. (2020). Retesting the Export-Led Growth Hypothesis: A Panel Data Analysis. In African Journal of Economic Review: Vol. VIII.
39. Kondowe, G. and Osoro, N. (2022). The impact of natural gas revenue on economic growth in Tanzania. Tanzania Journal for Population studies and Development, 29(1), 1-23. https://doi.org/10.56279/tjpsd.v29i1.137
40. Kouakou, P.-A. K. (2020). Effect of agricultural and non-agricultural exports on economic growth in ivory coast. Review of Agricultural and Applied Economics, 23(2), 45–53. https://doi.org/10.15414/raae.2020.23.02.45-53
41. Lee, C.-W., Hasyim, B., & Lin, J.-Y. (2023). The export-led growth hypothesis: Some evidence from the 8-ASEAN. Journal of Applied Finance & Banking, 1–12. https://doi.org/10.47260/jafb/1321
42. Mahmood, K., & Munir, S. (2018). Agricultural exports and economic growth in Pakistan: an econometric reassessment. Quality and Quantity, 52(4), 1561–1574. https://doi.org/10.1007/s11135-017-0534-3
43. Maiga, Y. (2024). The impact of agricultural productivity on economic growth in Africa. Journal of Agricultural Studies, 12(2), 25. https://doi.org/10.5296/jas.v12i2.21680
44. Maina, R. M. (2015). The effect of exports and imports on economic growth: Empirical evidence from Kenya (Master’s thesis, University of Nairobi). University of Nairobi Digital Repository. https://erepository.uonbi.ac.ke/handle/11295/93576
45. Mate, E., Atieno, M., & Kiganda, E. (2022). Effect of foreign exchange rate on financial performance of listed manufacturing companies in Kenya. European Journal of Economic and Financial Research, 6(4). https://doi.org/10.46827/ejefr.v6i4.1356
46. Maurer, A., Magis, C., & Tammelleo, J. (2023, July 24). Kenya and its role in intra-Africa regional trade: The prospects of the EU-Kenya EPA (Briefing No. EXPO BRI(2023)702596). European Parliament. https://www.europarl.europa.eu/thinktank/en/document/EXPO_BRI(2023)702596
47. Merlin, M. L., & Chen, Y. (2021). Analysis of the factors affecting electricity consumption in DR Congo using Fully Modified Ordinary Least Square (FMOLS), dynamic ordinary least square (DOLS) and canonical cointegrating regression (CCR) estimation approach. Energy, 232. https://doi.org/10.1016/j.energy.2021.121025
48. Mohamed, M., & Sayef, B. (2017). The Effect of Agricultural Exports on Economic Growth in South-Eastern Europe: An Empirical Investigation Using Panel Data. https://www.researchgate.net/publication/322636828
49. Mwangi, E., Chen, F., & Njoroge, D. (2020). Agricultural imports, agriculture productivity and economic growth in Sub-Saharan Africa. Journal of African Trade, 7(1-2), 15. https://doi.org/10.2991/jat.k.200902.001
50. Ngong, C., Onyejiaku, C., Fonchamnyo, D., & Onwumere, J. (2022). Has bank credit really impacted agricultural productivity in the central African economic and monetary community? Asian Journal of Economics and Banking, 7(3), 435-453. https://doi.org/10.1108/ajeb-12-2021-0133
51. Nguyen, A. (2019). The relationship between trade openness, economic growth, exchange rate and tariff rate: Evidence from Northeast Asia. Turk Turizm Araştırmaları Dergisi, 1(5), 10-22. https://doi.org/10.26677/tr1010.2019.132
52. Obradović, S., & Lojanica, N. (2018). Does environmental quality reflect on national competitiveness? the evidence from eu-15. Energy & Environment, 30(4), 559-585. https://doi.org/10.1177/0958305x18813596
53. Okello, J., Kirui, O., Njiraini, G., & Gitonga, Z. (2012). Drivers of use of information and communication technologies by farm households: The case of smallholder farmers in Kenya. Journal of Agricultural Science, 4(2). https://doi.org/10.5539/jas.v4n2p111
54. Okemwa, I. K. (2021). Agricultural output and economic growth in Kenya: A causality test (Master’s thesis, University of Nairobi). University of Nairobi Institutional Repository. https://erepository.uonbi.ac.ke/handle/11295/161116
55. Orhan, A., Emikönel, M., Emikönel, M., & Castanho, R. A. (2022). Reflections of the “Export-Led Growth” or “Growth-Led Exports” Hypothesis on the Turkish Economy in the 1999–2021 Period. Economies, 10(11). https://doi.org/10.3390/economies10110269
56. Osano, H., & Koine, P. (2016). Role of foreign direct investment on technology transfer and economic growth in Kenya: a case of the energy sector. Journal of Innovation and Entrepreneurship, 5(1). https://doi.org/10.1186/s13731-016-0059-3
57. Otieno, J. D., Sule, F. O., & Ndwiga, M. J. (2023). The effect of agricultural trade openness on economic growth in the East African Community. Cogent Economics and Finance, 11(2). https://doi.org/10.1080/23322039.2023.2250632
58. Ouma, D., Kimani, T., & Manyasa, E. (2016). Agricultural Trade and Economic Growth in East African Community. In African Journal of Economic Review: Vol. IV (Issue 2).
59. Rostow, w. w. (1960). Development theory Rostow ’ s five-stage model of development and ist relevance in Globalization. School of Social Sciences, Newcastle.
60. Rostow, W. W. (2010). The five stages-of-growth—a summary. In The Stages of Economic Growth. https://doi.org/10.1017/cbo9780511625824.005
61. Salisu, A., & Haladu, A. (2021). Agricultural output, government expenditure and economic growth in Nigeria: A Gregory-Hansen cointegration test with structural breaks. European Scientific Journal, 17(41). https://doi.org/10.19044/esj.2021.v17n41p38
62. Seok, J. H., & Moon, H. (2021). Agricultural exports and agricultural economic growth in developed countries: Evidence from OECD countries. Journal of International Trade and Economic Development, 30(7). https://doi.org/10.1080/09638199.2021.1923780
63. Shankar, S., & Trivedi, P. (2022). Evaluating the long-run sustainability of india’s fiscal management with structural change. Margin the Journal of Applied Economic Research, 16(3-4), 367-391. https://doi.org/10.1177/09738010231157457
64. Shirazi, S. N., & Abdul Manap, T. A. (2005). Export-led growth hypothesis: further econometric evidence from south Asia.
65. Shrestha, M. B., & Bhatta, G. R. (2018). Selecting appropriate methodological framework for time series data analysis. Journal of Finance and Data Science, 4(2), 71–89. https://doi.org/10.1016/j.jfds.2017.11.001
66. Siaw, A., Jiang, Y., Pickson, R. B., & Dunya, R. (2018). Agricultural Exports and Economic Growth: A Disaggregated Analysis for Ghana. Theoretical Economics Letters, 8(11), 2251–2270. https://doi.org/10.4236/tel.[phone]
67. Singh, S. K. (2018). An Analysis of Rostow’s Model of Development. 5(2), 71–76. http://www.krishisanskriti.org/Publication.html
68. The National Treasury & Economic Planning. (2021). THE MWANANCHI GUIDE: Financial Year 2021/22 Budget. The National Treasury Economic Planning. https://www.treasury.go.ke/wp-content/uploads/2021/06/FY-2021-22-The-Mwananchi-Guide-Budget-Highlights.pdf
69. The National Treasury & Economic Planning. (2022). THE MWANANCHI GUIDE: Financial Year 2022/23 Budget. The National Treasury Economic Planning. https://www.treasury.go.ke/wp-content/uploads/2022/04/Mwananchi-Guide-for-FY-2022-23-pdf.pdf
70. The National Treasury & Economic Planning. (2023). THE MWANANCHI GUIDE: Financial Year 2023/24 Budget. The National Treasury Economic Planning. https://www.treasury.go.ke/wp-content/uploads/2023/11/Budget-Highlights-The-Mwananchi-Guide-for-the-FY-2023-24-Budget.pdf
71. Utuk, I. O., Akpan, B. L., Eduno, E. B., & Udo, A. B. (2023). Agricultural Export and Economic Growth in Nigeria: Does Agriculutre Value Added Matter? International Journal of Research and Innovation in Social Science, VII(XI), 880–892. https://doi.org/10.47772/ijriss.2023.7011067
72. Verter, N., & Bečvářová, V. (2016). The impact of agricultural exports on economic growth in Nigeria. Acta Universitatis Agriculturae Et Silviculturae Mendelianae Brunensis, 64(2), 691-700. https://doi.org/10.11118/actaun201664020691
73. Waheed, M., Alam, T., & Ghauri, S. (2006). Structural breaks and unit root: evidence from pakistani macroeconomic time series. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.963958
74. Wamalwa, P. S., & Were, M. (2021). Is it Export- or Import-Led Growth? The Case of Kenya. Journal of African Trade, 8(1), 33. https://doi.org/10.2991/jat.k.210818.001
75. Wamboye, E. F., & Nyaronga, P. J. (2018). The Service Sector and Economic Development in Africa. In The Service Sector and Economic Development in Africa. https://doi.org/10.4324/9781315627373
76. Wankuru, P. C., Dennis, A. C. K., Angelique, U., Chege, P. N., Mutie, C. K., Sanya, S. O., Chengula, L. K., Njagi, T., Pape, U. J., & Haynes, A. P. F. (2019). Transforming Agriculture Sector Productivity and Linkages to Poverty Reduction Unbundling the Slack in Private Sector Investment.
77. Wilson, P., Gerlach, R., & Zurbruegg, R. (2003). Potential diversification benefits in the presence of unknown structural breaks: an australian case study. Australian Economic Papers, 42(4), 442-453. https://doi.org/10.1111/1467-8454.00209
78. World Bank. (2019). Kenya economic update, October 2019: Securing future growth – Policies to support Kenya’s digital transformation (20th ed.). https://hdl.handle.net/10986/32792
79. World Bank. (2024). Data accessed on 20/03/2024. https://data.worldbank.org/country/kenya
80. You, C., Khattak, S. I., & Ahmad, M. (2022). Impact of innovation in renewable energy generation, transmission, or distribution-related technologies on carbon dioxide emission in the USA. Environmental Science and Pollution Research, 29(20), 29756–29777. https://doi.org/10.1007/s11356-021-17938-w
81. Yurdakul, F. (2018). The relationship between energy consumption per capita and growth rate: The case of Turkey. Ekonomik Yaklasim, 29(107), 49. https://doi.org/10.5455/ey.39112