1. MACROECONOMIC POLICY FOR GROWTH
AND POVERTY REDUCTION IN KENYA
ROMEO ODUOR OLUOCH
A RESEARCH SUBMITTED TO THE DEPARTMENT OF APPLIED
ECONOMICS IN THE SCHOOL OF ECONOMICS IN PARTIAL
FULFILMENT OF THE REQUIREMENTS FOR THE AWARD OF
THE DEGREE OF BARCHELOR OF ECONOMICS AND FINANCE
OF KENYATTA UNIVERSITY.
JULY 2016
1
2. DECLARATION
This proposal is my original work and has not been presented for a degree in any other
university or any other award. Therefore this research does not reflect any form of
plagiarism. Instead all sources of reliable secondary data reflected in this study have
been clearly referenced and/or otherwise the rest are original.
Name…………………………………………………………………......................
Signature……………………. Date…………………………….
This proposal has been submitted for examination with our approval as University
supervisors.
Name………………………….......… Signature……………….. Date…………………
Name………………………………... Signature……………….. Date…………………
Abstract
2
3. It was once said that poverty anywhere is a threat to prosperity everywhere. In the world
today poverty still stands as one of the major challenges facing humanity. And this is the
same reason why poverty reduction was one of the eight goals of millennium
development.
Poverty is universally defined as a state of condition in which one lacks the financial
resources and essentials to enjoy a minimum standard of life and wellbeing that is
considered acceptable.
Kenya, and most precisely in the rural areas of Kenya. This is because most of the poor
people living in Kenya dominate the rural areas. The Kenya National Bureau of
Statistics estimates Kenya’s rural population at 74.8% as at 2014. And also estimates
49.1% of those to be living below the poverty line.
Therefore the objective of this particular study is to go through the poverty levels in
Kenya and how the government and the poor people themselves try to detach themselves
from poverty.
Kenya as most African countries has agriculture as the backbone of their economies.
And for this reason, they tend to channel most of their economic solution to the
agricultural path.
In Kenya various methods have been employed to try addressing this situation. Though
most of those have been farm or agriculture oriented and therefore this study does not try
to dispute or undermine these methods, but just try to test their success so far. And
probably bring more approaches which probably are not channeled through the same
direction. By the end of this study, we should have better ways to curb poverty in rural
Kenya. By this the study tries to expose ways that are business oriented or in one way or
the other they are small investments oriented.
Therefore this research will at some point rely on some of the worldly known methods
employed to curb poverty such as the microfinance sector.
This study also looks into the economic growth trends in Kenya over the recent past.
Economic growth is the increase in the inflation-adjusted market value of the goods and
services produced by an economy over time. It is conventionally measured as the percent
rate of increase in real gross domestic product, or real GDP.
Economic growth has somehow also been viewed as another more powerful instrument
for reducing poverty and improving the quality of life in developing countries like
Kenya.
3
4. This study therefore relates Macroeconomic policy with the growth trends in Kenya
together with poverty. Macroeconomic policy is usually implemented through two sets
of tools: fiscal and monetary policy. Both forms of policy are used to stabilize the
economy, which can mean boosting the economy to the level of GDP consistent with full
employment.
Monetary policy often supports fiscal policy through use of the central bank rate to
restrain credit. However, the central bank rate is not always an effective instrument.
Attempts to constrain credit growth may result in dysfunctional high commercial bank
rates that undermine productive investment. To complement a policy of moderately high
interest rates, the central bank can employ instruments that act on the balance sheets of
commercial banks and influence their capacity to expand credit. Regulation of reserves
is a useful approach.
Finally the study will collect more of secondary data on the fields of poverty, growth and
development in Kenya. This will be subjected to statistical analysis for findings and
conclusions later on.
Table of Contents
Chapter 1 1
1.1 Introduction 1
4
5. 1.2 Background 2
1.3 Problem statement 3
1.4 Objectives of the study 4
1.5 Research questions 5
1.6 Scope of the study 5
Chapter 2 6
2.1 Introduction 6
2.2 Theoretical Literature 6
2.3 Empirical Literature 10
2.4 Literature review 17
Chapter 3 18
3.1 Introduction 18
3.2 Research Design 19
3.3 Sources and Methods of Data Collection 19
3.4 Model Specification 20
3.5 Definition and Measurement of Variable 24
3.6 Sampling Frame 24
3.7 Data Collection Procedure 24
3.8 Data processing And Analysis 24
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9. CHAPTER ONE
I.1 Introduction
This chapter introduces all the first aspects of the study.
The World Bank’s 2000 World Development Report defines poverty as an
unacceptable deprivation in human well-being that can comprise both
physiological and social deprivation. Physiological deprivation involves the non-
fulfillment of basic material or biological needs, including inadequate nutrition,
health, education, and shelter.
A person can be considered poor if he or she is unable to secure the goods and
services to meet these basic material needs. The concept of physiological
deprivation is thus closely related to, but can extend beyond, low monetary
income and consumption levels. Social deprivation widens the concept of
deprivation to include risk, vulnerability, lack of autonomy, powerlessness, and
lack of self-respect. Given that countries’ definitions of deprivation often go
beyond physiological deprivation and sometimes give greater weight to social
deprivation, local populations (including poor communities) should be engaged
in the dialogue that leads to the most appropriate definition of poverty in a
country.
Since economic growth is the single most important factor influencing poverty,
and macroeconomic stability is essential for high and sustainable rates of
growth, then macroeconomic stability should be a key component of any poverty
reduction strategy.
This Chapter also gives descriptions of various areas of the chapter and also the
study as a whole. It contains the following
Background
Problem statement
Objectives of the study
Research questions
Scope of the study
1
10. I.2 Background
Poverty is multidimensional and goes beyond economics. It also includes
issues like culture, social welfare and politics, among other factors of
consideration.
Kenya just like most African countries is faced with this problem of poverty.
This therefore means that solutions to poverty and/or problems related to
poverty cannot be solved exclusively to economic policies. And this study
focuses on ways of reducing the enormous poverty levels in Kenya, as well
as observing and boosting its trends of economic growth.
Kenya ranks among top 10 countries in Sub-Saharan Africa with large
populations living in extreme poverty.
Kenya has made significant structural and economic reforms that have
contributed to sustained economic growth in the past decade. Development
challenges though still include poverty and inequality.
Kenya also has been viewed to be one of Africa’s great success stories from
its growing and youthful population, a dynamic private sector, a new
constitution, and its pivotal role in East Africa. Addressing challenges of
poverty, inequality, governance, low investment and low firm productivity to
achieve rapid, sustained growth rates that will transform the lives of ordinary
citizens, will be a major goal for the country.
On the other hand, macroeconomic stability itself does not ensure high rates
of economic growth. In most cases in order to sustain high economic growth,
very key structural measures are put into consideration. And again growth
alone is not sufficient for poverty reduction. Therefore growth is only
necessary condition for poverty reduction but never sufficient. And also for
growth to have an impact on poverty reduction it rather be that associated
with progressive distribution changes.
I.3 Problem Statement
2
11. Economic growth is being considered as the most important factor influencing
poverty. This section therefore seeks to address the problem of poverty and
economic growth, and how macroeconomic policy can really be efficient in
reducing them.
Kenya's prospects for long-term growth are among the most favorable in East
Africa. Sustained by its investments in infrastructure, its location as a regional
business hub, and gradual improvements in governance and public-sector
capacity, it is expected to keep growing steadily, according to projections by the
World Bank and the International Monetary Fund. While Kenya is on the path to
economic growth, however, poverty alleviation remains a challenge. Nearly half
of the country's 43 million people live below the poverty line. A big chunk of
this poor population however lives in the rural areas of Kenya.
Kenya ranks 145th among 187 countries in the United Nations Development
Programme's Human Development Index, which measures development in terms
of life expectancy, educational attainment and standards of living.
First we have to consider how the problem of poverty arises in Kenya. The
causes of poverty in Kenya as revealed through the consultation process are:
Low agricultural production and marketing
Insecurity
Unemployment and low wages
Poor governance
Landlessness
Lack of roads/inadequate roads
Cost sharing policies
Gender imbalance and vulnerability
The above mentioned concerns are so important to the development of a growth
strategy for addressing poverty thus leading to a sustained poverty reduction.
The problem of this project is therefore to outline the priorities and measures
necessary for poverty reduction and economic growth creation in Kenya. And in
this case, Microeconomic Policies are being tested as the main tool to be used to
address poverty and economic growth in Kenya.
At the same time, this project, in this chapter tries to close an information gap by
outlining the link between macroeconomic policy and poverty reduction.
3
12. The connection between Macroeconomics, Poverty and Growth
1. Macroeconomics for Growth.
With a keen observation, it can be said that poverty rates are related to the
general well-being of the economy as a whole. This means that as the economy
grows, so do the opportunities for employment and income growth. It’s been
observed that poverty rates move somehow together with changes in
unemployment rate. Therefore macroeconomic stability is the pivotal point for
any efforts to propel economic growth in a country.
However, macroeconomic stability depends not only on the macroeconomic
management of an economy, but also on the structure of key markets and
sectors. To enhance macroeconomic stability, a country like Kenya needs to
support macroeconomic policy with structural reforms that strengthen and
improve the functioning of these markets and sectors.
In conclusion macroeconomic stability depends on a number of factors like the
structure of key markets and sectors.
2. Macroeconomics with Poverty
Low and sometimes negative growth rate can have a very negative effect on the
lives of poor people in a country, or may act as a factor that steers some lives
into poverty for that matter.
Therefore through this Chapter, this research project tends to close the gap that is
the link between Macroeconomic policies, Growth patterns in a country and
Poverty levels.
1.4 Objectives of the study And Research Questions
As stated earlier the objective of this study is to showcase the relationship
between Macroeconomic policies, Growth patterns in a country and Poverty
levels.
4
13. I.4 Research Questions
i. What is the major cause of poverty in Kenya?
ii. What are some of Kenya’s most favorable and least favorable
macroeconomic policies?
iii. What is the link between macroeconomic policies and poverty
reduction together with growth of the Kenyan economy?
iv. What specific policies can be adopted to improve macroeconomic
performance?
v. What macroeconomic policies can thereafter be used to protect people
from poverty, or uplift the social and economic welfare of the poor?
vi. How does poverty relate to growth strategy?
vii. what specific policies can be adopted to improve macroeconomic
performance
viii. What links macroeconomic policies to growth and poverty levels to a
country like Kenya?
I.5 Scope of the study.
The study is of course on poverty levels and particularly covers the Kenya as the
specific location of interest. Then the study narrows its focus on the rural areas
of Kenya since they are the most poverty stricken. Kenya being a developing
country, most of her population resides in the rural areas.
The scope of this study will define the limitations and boundaries limiting the
research. It will tell the time, geographical locations and knowledge that is
relevant in the formulation of this particular research proposal.
So precisely this research covers a critical topic about poverty reduction but
limits it to Kenya and so all data and knowledge here are confined to the
geographical boundaries of Kenya. Also the study narrows its research to ways
of reducing poverty using non-farm or agricultural means.
CHAPTER TWO
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14. 2.1 Introduction
Different schools of economic have a range of views on poverty and growth in
an economy. From 19th
century classical and neo classical definition through the
Keynesian/neo-liberal shift, this brought poverty to the forefront of the policy
agenda, to the most recent theories.
This chapter is all about reviewing of the relevant literature applied in the
formulation of this research problem.
These will include:
Theoretical literature
Empirical Literature
Critique of the literature
2.2Theoritical Literature
Theoretical literature involves the reviewing of the existing theories in the area
of interest. Theories on the causes of poverty are the foundation upon which
poverty reduction strategies are based.
While in developed nations poverty is often seen as either a personal or
structural defect, in developing countries (like in Kenya) the issue of poverty is
more profound due to the lack of governmental funds.
Some theories on poverty in the developing world focus on cultural
characteristics as a retardant of further development. Other theories focus on
social development. Other theories focus on social and political aspects that
perpetuate poverty: perceptions of the poor have a significant on the design and
execution of programs to alleviate poverty.
Under this theoretical literature also featured are the various theories concerned
with economic growth.
6
15. They include:
Poverty as a structural failing by Rank, Yoon and Herschl
This theory is mostly about the United States so it does not prove that relevant
for this study.
Poverty as cultural characteristics
Since development plays a central role in poverty reduction in third world
countries (like Kenya), some authors feel that the national mindset itself for a
country to develop and to thus reduce poverty.
This theory is strongly supported by the works of Mariano Grodona (2000),
Lawrence E. Harrison (2000), and Stace Lindsay (20000).
Poverty as a label.
Some theorists believe that the way poverty is approached, defined and thus
thought about, plays a role in its perpetuation. Maia Green (2006) explains that
modern development literature tends to view poverty as agency filled.
It further explains that the terms are given to the poor because the poor lack
social and economic capital, and thus have little to no influence on how they are
presented and/or perceived in the larger community.
Poverty as restriction of opportunities
The environment of poverty is one marked with unstable conditions and a lack
of capital (both social and economic) which together create a vulnerability
characteristic of poverty.
This theory is further explained by Arjun Appadurai (2004), who says that the
key to the environment of poverty which causes the poor to enter into this cycle,
is the poor’s lack of capacities. Therefore a person in poverty lacks adequate
voice and exit (capacities) with which they can change their position.
7
16. Other than these some recent scholars such as Paul Ryan have come up with
works on poverty reduction and in his case the work is anti-poverty plan.
Theories of poverty.
Theory One: Poverty Is Individual
This views poverty as an individual phenomenon. It holds that people are in
poverty because they are lazy, uneducated, ignorant, or otherwise inferior in
some manner. And commentary on this theory views that if this is true the n we
could whip poverty by helping the particular 15% of the population to figure
things out and climb out of poverty.
Theory Two: Poverty Is Structural
This views poverty as a structural phenomenon. It holds that people are in
poverty because they find themselves in holes in the economic system that
delivers them inadequate income. Because individuals’ lives are dynamic, people
don’t sit in those holes forever. Though the holes don’t go away they are instead
inevitably inhibited by others since they are a persistent defect in the economic
structure.
Economic Growth Theoretical Literature
Economic growth is the increase in inflated adjusted market value of goods and
services produced by an economy over time. It is always projected as a percent
rate of increase in real GDP, usually in per capita terms. Here we focus on other
factors other than macroeconomic policies that affect growth, and a good
example is political institutions.
Although economic growth is the engine of poverty reduction, it works more
effectively in some situations than in others. The two main factors that appear to
determine the impact of growth on poverty are distributional patterns and the
sectoral composition of growth.
Theories and Models of Economic Growth.
Through the various schools of economics rest a number of growth theories
and models.
8
17. They include:
-Classical Growth Theory.
-Solow-Swan Model.
-Endogenous Model.
-Unified Growth Theory.
Classical (Ricardian) Growth Theory
Production and growth are based on the law of variable proportions,
whereby increasing either of the factors of production while holding the
other constant and assuming no technological change, output increases.
However, this happens at a diminishing rate that will approach zero
eventually.
Critics of this theory however point out that technology, which is the most
important factor in economic growth is held constant and that economies of
scale are ignored.
Solow-Swan Model
It assumes that there are diminishing returns to capital and labor.
Capital accumulates out of saving but its level per worker decreases due to
depreciation and population growth. As a result of diminishing returns to capital
economies eventually reach a point where, absent technological progress, capital
per workers remains constant and economic growth ceases. This point is called a
steady state.
Note: Poor countries have lower steady states.
The model also notes that countries can overcome this steady state and continue
growing by using new technology. In the long run, output per capita depends on
the rate of saving, but the rate of output growth is independent of the saving rate.
The major shortcoming of the approach is that it does not explain the sources of
technological change.
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18. Endogenous growth theory
It basically explains the technological advancements mathematically. Then it
incorporates a new concept of human capital. Unlike physical capital, human
capital has increasing rates of return.
Unified Growth Theory
It majorly addresses the inability of endogenous growth theory to explain key
empirical regularities in the growth process of developed economies over the
years.
2.3 Empirical Literature.
This is the literature on studies that has been conducted by others based on real
life observations.
Poverty in Kenya has been increasing rapidly in the past (PRSP), 2000. There is
a marked increase in the number of people unable to access clean water,
clothing, shelter, health services and education. Unemployment is also a problem
in Kenya. The average unemployment is a 23%
The government of Kenya has tried over the past to come up with poverty
alleviation strategies, some of which have made tremendous progress.
The early efforts geared towards poverty reduction included;
Land resettlement programs
The District Focus For Rural Development Strategy
The Social Dimensions Of Development programs
Some of the efforts employed by Kenya so far were:
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19. 1. The Swynnerton Plan (1952-1954)
The period preceding independence was marked by implementation of
measures to pacify an increasingly restive African population especially
about the expropriations policies pursued by the then colonial government;
that had resulted in alienation of large tracts of African land. The policies
relegated the Africans to the reserve lands, which were congested and less
productive. Besides losing land, unemployment was high among the African
population. To mitigate the ill feelings, the colonial government decided to
draw up a plan for accelerated agricultural development of the Native Land
Units in Kenya. The task was assigned to the Assistant Director of
Agriculture, R.J.M. Swynnerton, and became known as the Swynnerton Plan
(Heyer et. al., 1976). The Swynnerton Plan recognized that a sound
agricultural development is dependent upon a system of land tenure that
would guarantee the African farmer a unit of land and a system of farming
whose production would make the African self-sufficient in food and raise
their level of income through sale
of excess produce.
The major aspects were:
i) Security for the African farmer in the form of land title deeds;
ii) Consolidation and registration of all holdings in any given area;
iii) Access to agricultural credit through the creation of a Loan (or Land)
Bank for African farmers;
iv) Provision of extension services to the African farmers; and
v) Allowing farmers to grow cash crops such as tea, coffee and keep dairy
cows which were hitherto prohibited.
Even though the plan was meant to assuage the agitated African farmers and
reduce poverty levels, the Swynnerton Plan, like all other colonial policies
“were specifically designed for the protection of the European mixed farm
settlers…the policies initiated to develop African agriculture were formulated
in such a way that they mainly assisted the more prosperous farmers to the
exclusion of the majority smallholders” (Heyer, et. al.1976: 147).
The independent government inherited some colonial policies on agriculture.
For instance, the Maize Marketing Board, the precursor of the National
11
20. Cereals and Produce Board was set up in 1967 after an amalgamation of
provincial marketing boards established in the 1950s. These were poverty
reduction efforts intended to provide markets for farm produce for both the
large and small-scale farmers. The KANU Manifesto borrowed extensively
from the Swynnerton Plan and other colonial agricultural policies. Indeed “it
still form(ed) the basis of much of agricultural development policy in
Kenya’s small farm
areas in the 1970s” (Heyer, et. al. 1976: 11). The continuous revision of
agricultural policies shifting emphasis to the small-scale farmers has tended
to improve their economic status, which by implication reduces the incidence
of poverty. However, the basis of the later policies on poverty alleviation
through increased agricultural production was the Swynnerton plan of 1952-
54.
2. The KANU Manifesto
The Kenya African National Union (KANU) was the political party that
formed the first post-independences government and continues to rule to
date. Its philosophy revolved around its objective: “to achieve the fastest
economic independence for Kenya…to attain
the fastest rate of economic growth and to secure a just distribution of the
national income both between different areas of the country and between
individuals” (KANU Manifesto, p.2).
In addition the manifesto intended to reduce the burden of taxation among the
low income groups and to give priority to rural development by raising
agricultural and nonagricultural infrastructure.
The policies enunciated in the manifesto focused more on economic growth,
which on its own has not guaranteed poverty alleviation. Though economic
independence by implication would mean reducing poverty levels
countrywide, this was not explicitly brought out in the manifesto. Much as it
recognized the role of the voluntary sector in helping achieve the desired
ends, the manifesto failed to outline a realistic strategy and framework for
implementing poverty alleviation activities. This is an indication that the
genesis of weak poverty alleviation strategies or a lack of specificity in
poverty based reduction programs began with the manifesto.
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21. 3. Sessional Paper No. 1 of 1965 on African Socialism and Its
Application to Planning in Kenya.
The policy document was prepared against a backdrop of ideological debates
and differences within the ruling party, with one group advocating for a
command economy while the other extolling the virtues of capitalism and
free enterprise. The document was to establish a system for political, social
and economic progress that is embedded in pragmatism and a free market
economy. It recognized the importance of both the public and private sectors
in accelerating economic growth and development. The paper envisaged a
growing economy providing for basic needs to the citizenry. Some of its
striking features (Goldsworthy, 1975: 235) included emphasizing growth first
and distribution later; foreign investments to boost growth; a limited ambit
for state intervention and nationalization; and incentives for private enterprise
development.
Though the policy document intended to rejuvenate economic development,
some of its critics argued that it was neither African nor socialist but merely
introduced to close further debate within the party on patterns of
development. This could be the truth for, in the introduction, it was indicated
that the document “should bring to an end all conflicting theories and
academic arguments that have been going on” (Republic of Kenya, 1965).
In the intervening period, the government was to continue producing regular
policy documents aimed at poverty alleviation though not directly.
4. Decentralization in Development Planning: District Focus for Rural
Development (DRFD) – 1983
Though officially launched in 1983, the roots of DFRD could be traced to the
late 1960s when the government launched the District Development
Committees (DDC) to involve district staff and stakeholders in planning for
their development. This was followed in 1971 with the establishment of a
Grant Fund and the Rural Works Programme Fund in the mid 1970s with the
goal of stimulating the DDCs into active participation in development
planning (Oyugi, 1985). In another effort, the 1974/78 Development Plan
endorsed the idea of making the district the focus for rural development to
raise the level of economic growth at the household and improve level of
economic development countrywide.
13
22. In 1983, the DFRD began shifting the planning and implementation of
policies from the central government to the districts. The shift was to
stimulate rural development and encourage local initiatives to complement
the government’s effort in problem identification, prioritization, resource
mobilization, and project implementation at local level. It also aimed at
guiding the allocation of national resources on a more geographically
equitable basis.
More funds were to be allocated to the less developed regions to encourage
and support local development initiatives. This was to raise income levels of
the people at community level and by extension reduce poverty levels.
5. Sessional Paper No. 1 of 1986 on Economic Management for Renewed
Growth.
This document marked a transition in the economic management from an
inward looking structure to a more altruistic approach. It was prepared
against a backdrop of poor economic performance spanning a decade, and a
worsening poverty situation. The economic shocks triggered by the 1973 oil
crisis virtually ended the honeymoon of sustained economic growth of the
first decade after independence, as measured by GDP growth rate which
averaged about 6.5 percent. The paper outlined measures to tackle the
problem of economic
stagnation on three policy fronts: promoting the private sector, managing
high budget deficits, and correcting restrictive or distortionary foreign trade
policies.
Economic growth became the major objective of national development
policy. In a sense, it gave tacit approval for the Structural Adjustment
Programmes (SAPs) which were implemented without a human face and
ended up impoverishing Kenyans more. It was to become increasingly clear
in the subsequent years that the implementation of SAPs (including
liberalization) made many Kenyans poorer, with increases in prices of
commodities and services including education and health particularly due to
cost sharing. The implementation of the Policy Paper drifted the government
away from its sustained efforts towards poverty alleviation to release the
14
23. population to the jaws of poverty through withdrawal of subsidies to social
services.
6. National Poverty Eradication Plan.
The National Poverty Eradication Plan provides a national policy and
institutional framework for action against poverty. The vision is to halt the
current increase in the incidence of poverty through implementation of well-
planned poverty alleviation programs. This approach is resorted to after
failing to combat poverty through national development plans and other
specially designated programs. Based on this realization the plan intends to
bridge the gap between national development plans and address the needs of
the poor; come up with a charter for social integration setting out pro-poor
policies and planning; improve access to essential services by low income
households that currently lack basic health, education and safe drinking
water; develop a strategy for broad based economic growth; increase access
to education for children of low income groups; eliminate shortfalls in the
poor household’s access to mother and child health care services; and
enhance the
assets and income streams of the poor to build and maintain group
corporation.
Once put in place, the productive capacities of the households would be
improved for sustained economic growth, which is equitably distributed.
Through NPEP, the GoK recognizes the need for balanced economic growth
and poverty reduction. This could be achieved through facilitation capacities
needed at local government levels; support from national level agencies
delivering productive services; and balanced development for rural urban
areas.
The specific goals and targets for the NPEP are:
1. Reduce the number of the poor in the total population by 20 percent by
2004; and by a further 30 percent by 2010.
2. Increase enrolment rates by fifteen percent over the first six years of the
plan.
3. Increase completion rates by 19 percent, especially for girls in the six-year
period.
15
24. 4. Universal Primary Education (UPE) to be achieved by 2015.
5. Universal access to Primary Health Care to within 5 km of all rural
households or
within one hour of local transport by 2010.
6. Increase by 8 percent each year until 2004, access to safe drinking water
by poor
households and create universal access to safe water by 2001.
7. Reduce time spent by women on fuel (wood) and water collection.
8. Publish “best practice” guidelines for rural and urban social development
by 2000.
9. 20 percent of communities to draw up action plans by 2004.
10. Ensure that forty percent of all extension messages are relevant to very
poor farmers
(Republic of Kenya 1999).
7. Poverty Reduction Strategy Paper, 2000-2003
The Poverty Reduction Strategy Paper (PRSP) outlines the priorities and
measures
necessary for poverty reduction and economic growth. This document
recognizes that the primary development goal for Kenya is to achieve a broad
based sustainable improvement in the standard of welfare for all Kenyans, and
that the role of the government should be to spearhead action and create a
positive framework for poverty reduction measures.
Other key features of the paper include recognition of other non-state actors as
key stakeholders in poverty reduction efforts; a re-statement that economic
growth that outpaces population growth is a prerequisite for poverty reduction
and that economic growth on its own cannot ensure poverty reduction; and,
identification of a number of targeted short-term measures to directly address
some critical causes and manifestations of poverty.
The paper outlines four basic components and policy objectives in the fight
against poverty, to facilitate a sustained, rapid economic growth; improve
governance and security; increase the ability of the poor to raise their incomes;
and improve the quality of life of all citizenry, especially the poor.
Before then, poverty eradication efforts remained in the hands of the civil
society such as NGOs, welfare associations (women, youth and religious
16
25. organizations). So far, PRSP is the most comprehensive and most focused
policy document in the fight against poverty since independence. This is
because, it draws from the failures of the past policies and the consultative
process that marked its preparation, and the involvement of stakeholders –
government, the donors, civil society, the private sector and the citizens.
Second, the government is going through a budgeted expenditure within the
MTEF which addresses short term, medium term, and long-term strategies of
alleviating poverty. This particularly highlights projects which could be initiated
and implemented to realize sustained development within clear time frame and
budgeted resources.
In June 2000 Kenya adopted the interim PRSP. The objectives were to:
Facilitate sustained and rapid economic growth
Improve governance and security
Raise poor people’s ability to earn a living
Improve quality life
Improve equity and participation.
2.4 Literature Review
The failure of traditional poverty reduction programs in achieving deeper
outreach to the very poor is a growing concern, as evidenced by the United
Nation’s Millennium Development Goals (MDGs) which envision extreme
poverty to be halved by 2015.
Designing services to help the very poor often means taking into account the
historic and socio-political factors that contribute to the persistence of poverty.
The very poor often lack even the most basics of services such as food,
healthcare, sanitation and access to clean water. In addition to economic
development programs aimed at the very poor need to focus on livelihood
security and social protection, including micro grants, subsidies, cash transfers,
etc.
Financial services of the very poor include microloans, savings programs and
micro insurance: while non-financial services can range from social
intermediation for functional literacy and social capital development, and
17
26. business development services (BDSs)to develop entrepreneurship through
business training, information and market linkages.
Programs tailored for the extreme poor may include provision of basic services
such as health, nutrition, education and empowerment.
CHAPTER THREE
18
27. 3.1 Introduction
This final chapter of this research proposal brings out mostly the methodology of
this study. It contains the following:
1. Research design
2. Theoretical framework
3. Sources and Methods of Data Collection
4. Model Specification
3.2 Research design
Research design is a blueprint which guides the researcher in his scientific
inquiry, investigation and analysis.
This study mostly covers Kenyan macroeconomic policies with relation to
growth and poverty reduction in the country. Therefore this particular study is a
basic and applied type of research. This type of research came into choice
mostly through the passion of the researcher in matters of macroeconomics
together with development economics and poverty happened to be a real site of
interest.
Hopefully this study therefore can justify itself as a very important addition to
the fight against poverty globally, but first in Kenya and more precisely in the
rural areas. And also prove essential in pointing out the importance of
macroeconomic policies on growth.
This research brings out how poverty can be reduced in rural Kenya through
better macroeconomics policies in Kenya. This is also expected to propel growth
of the economy. Most people in the rural areas as stated before in this study do
not have that full opportunity to reduce their own levels of poverty.
The willingness is obviously there but they do not have all it takes to curb
poverty. This is stated comparing the poor people in the rural areas and those in
the urban areas. By lack of opportunity the study tries to bring out certain factors
such as the lack of proper information may be due to inadequate education, or
lack of proper financial systems to motivate and support their projects; talk
about microfinance for lending and even savings platforms.
19
28. A successful strategy of poverty reduction must have at its core measures to
promote rapid and sustained economic growth. The challenge for policy is to
combine growth-promoting policies with policies that allow the poor to
participate fully in the opportunities unleashed and so contribute to that growth.
This includes policies to make labour markets work better, remove gender
inequalities and increase financial inclusion.
Therefore in this study the final design is adopted in obtaining, analyzing and
interpreting data relating to the objectives of the study.
3.3 Sources and Methods of Data Collection
Data were collected from secondary sources. These include relevant textbooks,
journals, internet, Kenya National Bureau of Statistics (KNBS) bulletin, Central
Bank of Kenya (CBK) publications and World Bank publications.
3.4 Model Specification
This study specifies a functional relationship between Macroeconomic policies,
growth in Kenyan economy and poverty reduction ways in Kenya. The study
will use a set of variables to actually outline this.
In developing poverty reduction strategies for a country like Kenya,
policymakers would benefit from a quantitative framework that they could use
to assess the distributional impact of the macroeconomic policy options under
consideration.
These variables include;
1. The Fiscal Policies (Taxes)
The tax system in particular should not in any way attempt to affect savings and
investments.
The tax system should be assessed with respect to its direct and indirect impact
on the poor. It is difficult to have a tax system that is both efficient and
progressive, particularly in those countries without a well-developed tax
administration. Therefore, governments should seek to determine a distribution
20
29. of tax burdens seen as broadly fair rather than use the tax system to achieve
drastic income redistribution.
The best tax systems typically include most or all of the following elements:
A broad-based consumption tax, such as a VAT, preferably with a single
rate, minimal exemptions, and a threshold to exclude smaller enterprises
from taxation.
Excise taxes should apply to petroleum products, alcohol, and tobacco;
should be collected at the point of production or import; and should apply
equally to domestic production and imports.
Taxes on international trade should play a minimal role. Import tariffs
should have a low average rate and a limited dispersion of rates, to reduce
arbitrary and excessive rates of protection.
The personal income tax should be characterized by only a few brackets
and a moderate top marginal rate, by limited personal exemptions and
deductions, by a standard exemption that excludes persons with low
incomes, and by extensive use of final withholding.
The corporate income tax should be levied at one moderate rate.
Depreciation allowances should be uniform across sectors, and there
should be minimal use of tax incentives other than permitting net
operating losses to be carried forward for some reasonable period of time.
The use of a simplified regime for small businesses and the informal sector may
complement these major taxes. Real property taxes may also be used if they can
be administered appropriately, though this may be difficult in developing
countries.
21
30. 2. The Monetary Policies
Inflation
Inflation hurts the poor because it acts as a regressive tax and curbs
growth
Output
Fluctuations in output clearly have a direct impact upon the incomes of the poor
3. Exchange Rate Policies (the specific exchange rates)
Exchange rate policies affect these fluctuations in two ways: first, changes in the
money supply can have a short-run effect on real variables such as the real
interest rate, which in turn affect output
4. Kenya’s GDP over time
The level and rate of economic growth in Kenya with time.
5. Kenya’s poverty levels over time.
This projects therefore precisely shows the relationship between
Taxes and growth, then interest rates and growth and finally exchange rates and
growth. It then tries to relate Growth and poverty levels in Kenya.
Taxes and growth
Interest rates and growth growth and Poverty levels
Exchange rates and growth
22
31. This research is trying to get the relationship between growth and poverty levels,
with specific macroeconomic policies as intermediaries. Therefore it has two sub
models that eventually form the final model of specification.
G = f (e, r, t)
Where; G is economic growth.
e is exchange rates.
r is the interest rates.
t is the taxes (income taxes)
The second model is;
P = f (G)
Where; P is the poverty levels observed
G is economic growth.
Thus the model;
P = f {(G) = f (e, r, t)}
This follows that the final statistical model of this particular project is
P = f (Gx1+ ex2+ rx3+tx4)
Where; P is the poverty levels observed
G is economic growth.
e is exchange rates.
r is the interest rates.
t is the taxes (income taxes)
23
32. x1, x2, x3 and x4 are the coefficients or multipliers that describe the size of the
effect the independent variables (G, e, r, t) are having on the dependent variable
P (poverty levels)
3.5 Definition and Measurement of Variable.
This model assumes that the main factor affecting poverty levels is levels of
economic growth in an economy like Kenya.
From this model poverty levels are going to be described depending on the data
analysis of the given variables on which it depends.
Taxes to be considered in this case are those imposed on income of individuals.
3.6 Sampling Frame
This research is heavily analyzing Kenya as a whole though the data may only
consider a definite scope of time. Preferably 5 to 10 years. The scope of this
research was to analyze various elements of macroeconomic policy formulation
such as taxes and interest rates. It also narrows only to growth in terms of GDP.
3.7 Data Collection Procedure
This research is an applied and explanatory research in nature. Therefore this
research relies heavily on secondary data collected from relevant textbooks,
journals, internet, Kenya National Bureau of Statistics (KNBS) bulletin, Central
Bank of Kenya (CBK) publications and World Bank publications, among others.
3.8 Data processing And Analysis
The data information collected from different sources was organized into tables.
Data analysis comprises examining, categorizing and tabulating the data sets
obtained from various sources, and or developed by the researcher.
24
33. The secondary data collected was then compared to each sets of data thus
helping realize the relationship between any two or three give sets of variables.
This was done through summation and averaging of a wide set of data.
The final data set was then later tabulated into one final table and a regression
analysis was run on the data thus outlining further the relationship between the
dependent variable (growth) an the independent variables (inflation rates,
exchange rates and growth rates)
CHAPTER 4
25
34. 4.1 Introduction
This is the chapter that collected the relevant data to support the study. The data
was analyzed and processed using various mathematical and statistical tools.
This chapter then reports the findings from these analyses.
This chapter therefore includes:
Empirical Findings
The Regression Analysis
4.2 Empirical Findings
This project majorly relied on secondary data obtained from various relevant
sources.
Table 4.1
Kenya Growth Rate Trends
Year GDP Growth (%)
2005 5.8
2006 6.1
2007 7.1
2008 1.7
2009 2.7
2010 8.4
2011 6.1
2012 4.6
2013 5.7
2014 5.3
2015 5.5
Source: Developed by data from the Kenya National Bureau of Statistics
26
35. The table 4.1 shows the growth trends in Kenya over the years since 2005 to
2015. It specifically shows the annual growth rate in terms of percentages over
the years.
Table 4.2
Annual (Average) Exchange Rates
Year Average Exchange
Rates
(Kshs./USD)
Average Exchange Rates
(Kshs./Sterling Pound)
2005 75.30 136.49
2006 72.05 133.43
2007 67.21 134.61
2008 69.64 127.48
2009 77.30 121.16
2010 79.47 122.63
2011 88.72 142.43
2012 84.65 134.78
2013 86.21 135.00
2014 88.08 144.82
2015 98.67 150.64
Source: Developed by data from The Central Bank of Kenya
The table 4.2 shows the mean exchange rates that were experienced in Kenya
over the past period of between 2005 and 2015.
The averages are found from the monthly interest for every year in the period as
provided by the Kenya National Bureau of Statistics.
Table 4.3
27
36. Annual (Average) Inflation Rates in Kenya
Year Inflation Rates
2005 10.12
2006 6.41
2007 4.26
2008 16.23
2009 9.385
2010 3.97
2011 13.97
2012 9.64
2013 5.71
2014 6.88
2015 6.57
Source (Table 4.3): Developed by data from the Kenya National Bureau of
Statistics
Table 4.3 shows the mean inflation rates experienced in the country during the
period given monthly rates of inflation experienced in every year.
Poverty Trends in Kenya
Poverty trends in Kenya however have been rather more consistent. Ever since
the British granted independence until around the 1980s, Kenya has had a
consistent percentage of 51% of her population live below the poverty line.
Since the dawn of the 21st
century, the percentage has rather been going down
over the years even though not progressively.
Different researches o poverty have been conducted in random time frames over
the years. This has estimated poverty levels at 45.9% in 2005, 51% in 2008,
43.4% in 2012 and 46% in 2015.
This research will therefore use the mean average of these percentage and use it
to estimate the poverty levels in Kenya over the past ten years, i.e. 2005 to 2015.
Table 4.4
28
37. Percentage of Kenyan population living under the national poverty line
Year Estimated % of population living below
the national poverty line.
2005 45.9
2008 51
2012 43.4
2015 46
Table 4.4 shows the estimated percentage of Kenya that might be living below
the national l poverty line in Kenya over the years.
The relationship between macroeconomic (policy) and growth.
Graph 4.1: GDP Growth (%) and Inflation rates Inflation Rates
0
5
10
15
20
25
30
Inflation Rates
GDP Growth (%)
As observed from the chart derived from data obtained over the period of 2005
to 2015, there exists a very interesting relationship between inflation rates and
growth rates in a country.
From the above graph there is an inverse relationship between inflation rates and
growth.
Whenever the inflation rates rise, the growth rate in the country seems to
decline.
Graph 4.2: GDP Growth (%) and Exchange Rates
29
38. 0
20
40
60
80
100
120
140
Average Interest Rates
GDP Growth (%)
The above graph 4.2 represents a snapshot of how exchange rates over the
period between 2005 and 2015.
This research has developed this graph to outline the relationship between
exchange rates over time and the level of growth rate in a country. From the
above graph it is seen that the exchange rates relate directly to the growth rate
4.3 The Regression Analysis
30
39. The Model
P = f (Gx1+ ex2+ rx3+tx4)
Where; P is the poverty levels observed
G is economic growth.
e is exchange rates.
r is the inflation rates.
t is the taxes (income taxes)
x1, x2, x3 and x4 are the coefficients or multipliers that describe the size of the
effect the independent variables (G, e, r, t) are having on the dependent variable
P
Note:
In this regression analysis, under the variable ‘exchange rate’ only the
(Kshs./USD) will be used hence ignoring the (Kshs./Sterling Pound).
Table 4.5
Year G E r
2005 5.8 75.3 10.12
2006 6.1 72.05 6.41
2007 7.1 67.21 4.26
2008 1.7 69.64 16.23
2009 2.7 77.3 9.385
2010 8.4 79.47 3.97
2011 6.1 88.72 13.97
2012 4.6 84.65 9.64
2013 5.7 86.21 5.71
2014 5.3 88.08 6.88
2015 5.5 98.67 6.57
Viewed representations
Estimation Command:
31
40. =========================
LS G E R
Estimation Equation:
=========================
G = C(1)*E + C(2)*R
Substituted Coefficients:
=========================
G = 0.0933348653056*E - 0.26532390061*R
Viewed estimation Output
Dependent Variable: G
Method: Least Squares
Date: 07/26/16 Time: 12:26
Sample: 1 11
Included observations: 11
Variable Coefficient Std. Error t-Statistic Prob.
E 0.093335 0.014442 6.462950 0.0001
R -0.265324 0.126807 -2.092352 0.0659
R-squared 0.302428 Mean dependent var 5.363636
Adjusted R-squared 0.224920 S.D. dependent var 1.864013
S.E. of regression 1.641052 Akaike info criterion 3.991518
Sum squared resid 24.23747 Schwarz criterion 4.063863
Log likelihood -19.95335 Hannan-Quinn criter. 3.945915
Durbin-Watson stat 1.320539
The "t'' statistic is computed by dividing the estimated value of the
parameter by its standard error. This statistic is a measure of the
likelihood that the actual value of the parameter is not zero. The larger the
absolute value of t, the less likely that the actual value of the parameter
could be zero.
F: Statistic tests the hypothesis that all of the slope coefficients are zero.
32
41. R: Coefficient of determination is the fraction of the variance of the
dependent variable explained by the independent variable.
CHAPTER 5
33
42. SUMMARY, CONCLUSIONS AND POLICY IMPLICATIONS
5.1 Introduction
This is the final chapter of this project and therefore it gives the last of
everything about the project done by the researcher.
This chapter will give a view of the whole project in a brief summary. It will also
draw the conclusions that are very evident from the project carried out by the
researcher.
Finally about this particular project, this chapter will come up with necessary
policy implications.
5.2 Summary
This research project was project was carried out as part of fulfilling the
researcher’s interest in matters macroeconomics and development economics.
This field of research had and still will have vast open areas to research on.
This project is all about poverty, macroeconomic policies and growth. This is of
course on a smaller scope with is limited to Kenya as a country. Poverty is
viewed as an obvious problem and discussed to greater lengths in terms of its
causes, its level in the country the ways the government views poverty in Kenya
and almost all the possible measures the government has taken towards trying to
curb the extreme poverty conditions in Kenya.
Poverty is one of the main reasons why the country is classified as a developing
country.
This research also addresses the growth trends of Kenya in the past and tries to
draw a pattern from the results obtained from various sources.
This research touches on the macroeconomic policies in brief and tries also tries
to draw a trend from the policies over the years. Especially the ones picked.
Finally this research project clearly outlines the relationship between
macroeconomic policies and growth together with poverty levels in Kenya.
5.3 Conclusions
34
43. From the research conducted it’s very evident that there is a very strong
relationship between any two of the variables, or even among all of them
together.
Consider graph 4.1 showing clearly the relationship between GDP growth (%)
and inflation rates inflation rates, which turns out to be inverse. Whenever
inflation rates rise, the level of growth in Kenya tends to declines. Graph 4.2
also shows the relationship between GDP Growth (%) and Exchange Rates.
As a developing Kenya has tried to have some of the most favorable
macroeconomic policies in the region. This is evident since the population of
Kenya is at least less poor than those of her surrounding neighbors.
Therefore this research concludes that Macroeconomic policies, poverty levels
and the level of growth in a country are very much related. So if one was to
formulate good policies for poverty reduction in Kenya, then greater
consideration should be given to the macroeconomic policies within the given
economy or country.
Monetary policies would revitalize the financial sector, avert inflationary hikes
and stimulate private sector investment. Exchange rate policies would focus on
maintaining international competitiveness.
With good macroeconomic policies, comes improved economic growth thus
reducing the level of poverty.
5.4 Policy Implications
As the concept of sustainable development has been refined and developed,
many new perspectives on economic theory and policy have been introduced. An
overview of work on sustainable development recently published by the Global
Development and Environment
Institute (Harris et al. 2000) includes significant contributions on the topics of:
natural capital, current and inter-generational equity, “green” accounting,
“green” tax reform, growth and the environmental Kuznets curve debate, trade
and structural adjustment, globalization, and 5cchykinternational institutional
reform. It seems evident that these multi- faceted theoretical and practical issues
arising out of the overlap between environmental, social, and economic analysis
should have major implications for macroeconomic policy. But there is as yet
little work on reforming macroeconomic theory and policy to take account of
sustainability.
35
44. There has been discussion of a variety of microeconomic policies which can
promote environmental sustainability (e.g. Panayotou 1998)
Since Herman Daly first called for an environmental macroeconomicsa decade
ago (Daly 1991), there has been relatively little forward progress on this issue
certainly none that has penetrated the mainstream of macroeconomic theory,
practice, and teaching. There have been new approaches to macroeconomic
measurement, taking into account economic and social factors (World Bank
1997a).
Some of the basic functions of macroeconomic policy, broadly conceived are;
Economic stabilization, avoiding excessive inflation or recession, the best
known function, which has often but mistakenly been viewed as the only
appropriate goal for macroeconomic policy.
Distributional equity: This played an important role in early Keynesian
analysis.
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Cashin, Paul. P. Mauro, C. Patillo., R. Sahay (2001). “Macroeconomic Policies
and Poverty
Reduction: Stylized Facts and an Overview of Research,” IMF Working Paper,
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36
45. Cooley, Thomas F. and Stephen F. LeRoy (1985) “A theoretical
Macroeconomics: A
Critique,” Journal of Monetary Economics, November, 283-308.
Development Programme (UNDP), New York.
Economies: The Role of Economic Policies”. Policy and Programme Document,
Discussion Paper, United Nations.
Foster, J., J. Greer, and E. Thorbecke. 1984. A Class of Decomposable Poverty
Measures. Econometrica 52.
Hailu, Degol, Sara Rendtorff-Smith, Cosmas Ochieng, and Uyanga Gankhuyag
(2011). “Conflict Prevention in Extractive
Literature Review on Poverty Reduction Strategies Aimed at the Poor by Zahra
Campell-Avenell in 2009.
Literature Review on Poverty Reduction Strategies Aimed at the Poor by Zahra
Campell-Avenell in 2009.
Myles, G. D., 2009. “Economic Growth and the Role of Taxation ‐ Aggregate
Data”, OECD
Economics Department Working Papers, No. 714.
Poverty Reduction Strategy Sourcebook, published by the World Bank
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